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Socgen Crafts Strategy For China Hard-Landing

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The French bank has told clients to hedge against the danger of a blow-off spike in Chinese growth over coming months that will push commodity prices much higher, followed by a sudden reversal as China slams on the brakes.

In a report entitled The Dragon which played with fire, the bank's global team said China had carried out its own version of "quantitative easing", cranking up credit by 20 trillion (£1.9 trillion) or 50pc of GDP over the past two years. It has waited too long to drain excess stimulus.

"Policy makers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points," said the report, by Alain Bokobza, Glenn Maguire and Wei Yao.

The Politiburo may be tempted to put off hard decisions until the leadership transition in 2012 is safe. "The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation," it said.

Under the bank's "risk scenario" - a 30pc probability - inflation will hit 10pc by the summer. "This would cause tremendous pain and fuel widespread social discontent," and risks a "pernicious wage-price spiral".

More at the link.

Is China starting to spiral out of control, running a country of over 1bn people is going to be very difficult and if people have nothing and are starving then they are more likely to revolt. Difficult problems are appearing all over the globe, I wonder how much of the Chinese economy is fake?

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For the second year running, Chinese banks loaned out more money than the UK’s entire public debt. Their extraordinary largesse helped the Chinese economy maintain the near 10pc growth it has recorded each year, on average, for the last two decades.

In London, the FTSE 100 fell 108.79 points – 1.82pc – to 5867.91 after falls in the Far East.

Despite a global economic malaise, the National Bureau of Statistics said China’s gross domestic product (GDP) had expanded by 10.3pc compared with the 9.2pc it grew in 2009.

“It is not difficult to grow at double digits if you are pumping money into the economy like there is no tomorrow,” said Alistair Thornton, an economist at IHS Global Insight in Beijing.

“The banks are lending more than twice as much as they were before the financial crisis and they are also printing new money - money supply is up 50pc from a couple of years ago."

Officially, Chinese banks loaned 7.95 trillion yuan (£757bn) last year. However, the banks also made at least 3 trillion yuan of loans off the balance sheet, according to Fitch, the credit-rating agency. That near 11 trillion yuan (£1 trillion) total far exceeds the UK’s entire public debt of £863bn as of November 2010.

However, Chinese banks must bring all of their hidden liabilities back on to their books this year, the regulator warned on Thursday as Beijing tried to exert some control.

China turned on the flow of easy credit in the wake of the financial crisis, when banks were ordered by the Communist party to lend as much money as possible.

A controlled bubble or a bubble that's going to implode? I wonder how much of this borrowed money has been malinvested and will lead to losses. In theory China has the currency reserves to absorb these losses but the political fallout may hinder containing the problem.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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