China wise to warn on bubbles as jobs data disappoints

Posted on 03 April 2010 with 2 comments from readers

It is a little ironic to read a report posted on the Chinese central bank website yesterday warning about the dangers of asset bubbles now emerging in some parts of the world, and that these bubbles will burst unless a real economic recovery follows.

After all this is the pot calling the kettle black. It was the Chinese economic stimulus equivalent to half of GDP in the first half of 2009 that is most to blame.

Rapid price increases in major financial markets ‘don’t mean real economies have recovered or will recover strongly’ warned the People’s Bank of China. ‘Unless they receive sufficient support from macroeconomic fundamentals such gains may lead to a new round of asset bubbles that may burst.’

Historic stimulus package

Reckless lending and wild monetary expansion mean that Chinese GDP could expand 16 per cent in 2010 unless policymakers withdraw their stimulus measures, according to the Chinese Academy of Social Sciences.

Asian bubbles are a big contrast to the reality down on the ground in the United States. Yesterday unemployment data showed jobless claimants unchanged at 9.7 per cent, while a 162,000 increase in nonfarm payrolls was below expectations, albeit the best for three years.

This chart puts that decline into perspective by comparing job losses following the beginning of the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-1999 (dashed blue line). It shows that the current US job market has suffered losses that are three times bigger than the average recession/job loss cycle.

That is more consistent with the US economy having fallen into a depressed condition that will be hard to exit. It is light years away from a V-shaped recovery that the US stock market is predicting with its massive rally.

Stimulus fuelled rally

Indeed that rally is also due to the ‘ultra loose monetary policies around the world’ that the Chinese central bank chooses to criticize. It notes that governments face difficulty in coordinating exit strategies because of this ‘unbalanced global recovery’.

Yes, China cannot really motor ahead while the rest of the world is in a depressed condition. And you see this artificial explosion in commodity prices as well as stock markets.

How sustainable is $85 oil? Was it not the explosion of oil prices to $147 in July 2008 that finally sank the global economy? What of the 30 per cent hike in steel prices last week?

China is blowing up bubbles in commodities markets that imperil the extremely fragile, and for many countries still practically non-existent recovery. A double dip recession is coming one way or another: either from a crash in financial markets or credit tightening by the Chinese central bank or both.