More evidence of Chinese bubble

Yesterday Stratfor, alias Strategic Forecasting, Inc., announced that its sources, combined with its own internal analysis, provided evidence for a new money supply tightening policy from the Chinese government.

To stave off the effects of the global recession the Chinese government pumped billions of dollars into its economy.  This policy succeeded in providing very cheap, practically free, money to investors and speculators in China.  Any person or business with a screwball idea could get a loan.  Certainly economic stimulus followed and the recession was held at bay.  But now what?

Starting last year the Chinese realized that they had created an out of control monster that began to look like (not surprisingly) an asset bubble.  Pop!  Therefore the government of China implemented a severe cut back in the total amount of money that could be lent to the public by the state-owned banking sector.

Unfortunately for the Chinese government, it didn’t take too long for banks to begin making off balance sheet loans.  Off balance sheet simply means that the loans were not accounted for by the banks in their official financial statements.  Consequently, they pumped even more money into the overheated economy.

Now Stratfor is reporting that the banks in China must bring all of their off balance sheet loans back onto their financial statements by the end of 2011 (or 2012 depending on which source is correct).

My point is that this is clearly further evidence of the difficult the Chinese are going to have in gently letting the air out of their asset bubble.  If they are unable to let the air out gently then ultimately the Chinese economy will continue to take these excess funds and continue to invest in un-profitable ideas and businesses.  This is the opposite of the real economic growth I talk about so frequently on the blog.

Jason