“Economics of 9%,” Does the stock market know? U.S. is an “uneasy factor,” China is a “stable factor(?)”
“Economics of 9%,” Does the stock market know? U.S. is an “uneasy factor,” China is a “stable factor(?)”
  • Jeon Byeong-seo, Professor of China MBA in Kyunghe
  • 승인 2011.06.22 11:33
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Jeon Byeong-seo, Professor of China MBA in Kyunghee University

As the U.S. economy showed signs of a double dip recession, global stock prices plunged. When the problem about the U.S. credit status emerged, the U.S. media started to report about the possibility of the year-end crisis competitively. With the announcement of the Chinese economic indicator in May however, the market is regaining stability.

Is the U.S. an uneasy factor of the market

Is China a stabilizer quelling uneasiness

Since the U.S. failed in its role as the "market of the world," China is being hailed as the new "market of the world." China has emerged as the country consuming global products and leading global economic growth while the U.S. and Europe are in an economic slump.

The stock market is very clever. This is because the enormous power of information and analytical competence are the background of money. Accordingly, there is no way to win in the market every time. It is difficult to make a hit continuously while making investments against the market, though fortunately you can make a hit often enough to be profitable.

The stock market, which was startled by the U.S. and relieved by China, knows exactly the economics of 9%. The whole world is now facing a revolution owing to the aftermath of the financial crisis. The capitalism of lost capital due to the financial crisis and the government, is nationalizing enterprises, banks and even individuals' debts, to become socialization as a result.

Ironically, the socialist state of China opened more capital markets, including CHASDAQ, and is privatizing more companies, causing it to become "capitalized." Despite an economic recession in 2010, China listed 490 companies on the domestic stock exchange and listed 143 of those firms on the overseas markets, securing $106.9 billion (118 trillion won).

At present, the polarization through the economics of 9% has been progressing throughout the world. The U.S., the godfather of capitalism, is worrying about the 9% unemployment rate, low housing prices, sluggish consumption, and deflation. Meanwhile, China, which was concerned about an overheated economy last year with the 9% economic growth, is now worrying about high inflation.

Headache of the Chinese economy, consumer price index (CPI)

In 2010, the problem with the Chinese economy was an overheated economy and in 2011 it is high inflation. A massive amount of U.S. dollars released by the U.S. government to tide over the financial crisis jacked up international raw material prices and prices of agricultural products in China soared due to a long-lasting draught.

The Chinese CPI in May stood at 5.5%, renewing the previous record high in 34 months. The producer price index reached 6.8%.

Considering the GDP growth of 9-10%, the 5% inflation rate is tolerable. However, food & beverage account for some 40% of the CPI and real estate takes up 10% in China. Considering this, commodity prices felt by Chinese people are actually much higher than those in Korea and the U.S.

China raises key interest rate by 0.5%p again.
The People's Bank of China raised the key interest rate twice this year and announced a fifth hike of the rate, this time due to a massive inflow of "hot money," which is serving as the main factor to jacking up commodity prices.

To prevent this, China raised the key interest rate by 0.5% points every month and its central bank floated monetary stabilization bonds

Will Chinese inflation regain its stable trend after hitting a peak in June or July

As the economic situations in the U.S. and Europe are worsening further, the matter of whether or not China will achive a soft landing is an important issue. Thanks to the Chinese government's retrenchment policy, the M2 growth rate fell from 30% in November 2009 to 15% in May of this year, making a return to the average level of the past.

According to the Chinese central bank, new bank loans amounted to 551.6 billion yuan in May this year and the M2 growth rate stood at 15.07% year-on-year thanks to the government's stable monetary policy. The growth pace of new bank loans is also returing to a normal level. Accordingly, the inflation in China is expected to turn into a declining trend after hitting a peak in June or July this year.

Massive investment in China...the reason of failure ... It is no wonder as it is a socialist country.

Prof. Nouriel Roubini of New York University, a pessimist representative of the global economy, forecast that China would collapse in 2013 due to real estate bubbles.

George Soros, the godfather of hedge funds, said that China has lost its ability to control inflation and is likely to face inflation thanks to a hike in workers' wages. There is also a groundless rumor that Soros put $10 billion in Hong Kong and is pouring the money into mainland China.

However, China can cool down the real estate bubble through land expropriation if a specific region is engulfed in trouble as land is possessed by the state.

The core policy goal of the Chinese 12th five-year economic plan over the coming five years is the "expansion of domestic sales and an increase of the portion of consumption." It is desirable for China to slow down the economic growth pace. The Chinese government's retrenchement policy is designed to curb excessive lendings.

We should avoid unconditional optimism about China, but we also need to carefully watch progressing developments as excessive pessimism might lead to the mistake of losing a good investment opportunity.

The forecasts of economic experts in advanced countries are often wrong because they see China from a viewpoint based on the past experiences of the Western world.

Will a debt crisis of the Chinese provincial governments occur

There is an assertion that China will face a debt crisis owing to the aftermath of the 4 trillion yuan investment to boost the economy and a surge in the debts of provincial governments.

Will a debt crisis of the Chinese government occur Considering the size of the assets held by the government and the national savings rate, the possibility seems to be low. 

The debt ratio of the Chinese government stands at 50-60% of the GDP and that of the provincial governments reaches 30%. Chinese fiscal deficit remains at 3% of the GDP and the domestic savings rate surpasses 50%.Taking into account these figures, there is little possibility that China will face a debt crisis within two or three years due to the debts of its provincial governments.



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