Concerning China’s economic stability

China's economic infrastructure is built on a fault line

by Jason

There is some possibly troubling news coming from China’s financial and economic sectors. The practice of bad loans and easy credit has led to toxic assets that has greatly strained China’s financial system. Sound familiar?

CNBC | China Regulator Warns Bank Lending May Be Overheating

China’s top banking regulator on Sunday warned of the risks from surging bank lending, singling out the dangers of unhealthy growth in the property market.

“(We) must control the risk of real estate loans,” said Liu Mingkang, the head of the China Banking Regulatory Commission, adding that measures must be taken to better evaluate the creditworthiness of borrowers.

Liu said bank lending had helped stabilize the economy so far but made one of his strongest calls yet to banks to guard against taking excessive risks.

“In the first half of the year, our country’s banking loans expanded rapidly and helped play an important role in stabilizing the economy, but the loans growth has led to accumulated risks also increasing,” he was quoted as saying in a statement on the China Banking Regulatory Commission website.

If that was not bad enough in and of it self, China’s stock market is teetering on collapse. That is according to a new econophysics forecast. (H/T Outside the Beltway)

Technology Review | Econophysicist Predicts Date of Chinese Stock Market Collapse

The boom and bust nature of economics is one of the most puzzling aspects of the modern world. In the last year or so, many people have learned to their cost that when bubbles burst, businesses, jobs, and livelihoods can go with them.

So an obvious question arises: can we spot bubbles when they occur and predict when they are about to burst? One group of theorists say that they can and have used their techniques to make an extraordinary prediction.

First, they say that they’ve found the telltale signs of a bubble in the growth rate of the Shanghai Composite stock-market index. And second, they say that this bubble will burst between July 17 and 27.

That’s a brave move, so let’s look at it in more detail. The theorist behind this prediction is Didier Sornette at the Swiss Federal Institute of Technology, in Zurich, who has pioneered the study of market bubbles. Last year, he used his method for spotting bubbles to reveal that oil prices where dangerously inflated.

The telltale sign of a bubble, he says, is a faster than exponential growth rate caused by a positive feedback mechanism that generates this nonlinear growth.

The faster than exponential growth rate is relatively easy to spot. According to the analysis done by Sornette and a few mates, the Shanghai Composite Index certainly seems to have had a faster than exponential growth–a 69 percent rise since October of last year.

Just a little addition and free of charge, I put together something on China’s coming economic bust back in January, China’s Decline and its Dangers in 09.

 It is much easier for a poor country who has no where else to go but up to focus its efforts in a less diversified system such an autocracy. However, when economic downturns come it takes economic diversity, and the ability to generate capital formation from the private sector to pull a country’s economy out of a decline. Since autocracies can put all of its eggs in one basket, you can get anything from a miracle to a complete disaster.

China’s autocratic rule and production over sound policies have left China susceptible to a severe economic downturn. Factor a global recession and those bad polices become amplified. The big question will be how will this effect the U.S. and the world’s already weakened economic situation?

The Epoch Times states not only will a big economic upheaval take place in China but that it will be the reason for the fall of the CCP.