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Professor Rogoff right to warn about the Chinese bubble

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Harvard University Professor Kenneth Rogoff is the latest expert to warn on a bubble building in the Chinese economy, one he says will produce 18 months of almost zero growth within a decade.

Such decennial forecasts are a bit of a cop-out. A little more precision is needed for trading financial markets. This is no more than saying what has gone up must eventually come down.

Bubble trouble

Surely there is far more powerful evidence that China’s nemesis is near than the author of the latest book about bubbles in financial history would care to admit.

He does refer to price spikes in Beijing and Shanghai house prices as a worrying development. But what about the whole issue of the quality of growth now coming inside the Great Wall?

Last year’s record growth was down to a massive stimulus plan and low-quality bank lending and inventory building. It certainly had nothing to do with exports – which crashed 16 per cent – and that in an economy where almost two-fifths of GDP is from exports.

Indeed, the whole China rescue package of 2009 is best seen as an emergency rescue plan – not some kind of magic formula for economic success. Ken Rogoff knows that this bubble pattern has been repeated throughout history.

To ArabianMoney the recent economic performance of China and its stimulus looks like the last spike before the implosion of the bubble. Actually if you look back at the stock market in China over the past two years this is very evident, and stock markets usually anticipate downturns in the real economy.

Quick recovery?

Rogoff is convinced that the Chinese economy will quickly bounce back. Yet that is not really the historical precedent of burst investment bubbles. The bubble usually moves elsewhere and the unfortunate victims face a very tough recovery phase.

But this will not be news to readers of ArabianMoney who will have followed the shorting call of Jim Chanos with interest (see this article). We remain convinced that the China short ETFs are likely to be excellent plays on the global stock market correction that is about to take place.

What has gone up most has to suffer the biggest fall, and that has to be China. The US consumer confidence collapse this week is another warning as the buyers of Chinese junk are not coming back any time soon.

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Written by Peter Cooper

February 24, 2010 at 6:50 pm

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