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It was announced today that China’s GDP grew 10.7% last quarter over a year ago, its fastest pace since 2007. There is now speculation that China’s central bank will start raising their benchmark interest rate in order to tighten debt lending in the country. In fact, China’s central bank last week raised reserve requirements and Chinese authorities have ordered some of China’s largest banks to curb lending for the rest of January.

NIA believes China’s moves to tighten bank lending will strengthen the long-term future of their economy. In the short-term, interest rates will inevitably rise and their GDP growth will decline, but we won’t see a collapse in asset prices in China.
Certain pockets of the Chinese economy may have mini-bubbles, such as the Real Estate markets in Hong Kong and Shanghai. However, even if Real Estate prices in certain major Chinese cities were to decline substantially, it won’t be enough to send China’s economy into a tailspin like Dubai. Dubai’s economy was built on Real Estate speculation, while China’s economy has been built on a solid foundation of manufacturing and savings.

There are some claims being made by people like James S. Chanos that China is in danger of producing huge quantities of goods that it will be unable to sell. NIA believes China’s population of 1.3 billion people will be perfectly capable of purchasing their own goods that they produce, if the Chinese government abandons their currency peg to the U.S. dollar and allows the yuan to appreciate. China’s currency peg is responsible for most of the global economic imbalances that exist today. It is forcing the Chinese to acquire U.S. treasuries, fueling the ‘dollar bubble’ in the U.S. and artificially suppressing the standard of living of Chinese citizens.

When China first chose to peg their currency to the U.S. dollar in 1994, China had a much smaller, less-mature economy. Due to a lack of population centers and distribution networks, China was dependent on the strength of its exports. Today, China is investing heavily into its infrastructure by building high-speed rail lines, dozens of new airports, and high-tech power distribution systems and electricity grids. At the same time, our infrastructure in the U.S. is decaying and we don’t have any savings to repair it.

China is not trapped into maintaining its currency peg to the U.S. dollar. China’s exports to the U.S. and Europe now account for less than 1/2 of their total exports. China has been rapidly increasing exports to countries like Australia, that can purchase their goods by trading valuable commodities instead of printed money.

SOURCE National Inflation Association

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