Chinese Depression: Will Its Massive Foreign Reserve Hoard Save the Country's Economy?

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As the United
States and Europe deal with economic contraction resulting from
excessive credit expansion that many believe has lead to another
Great Depression, China’s future remains hazy. Some argue that
China has replaced the US as the global engine of growth because
of increased internal consumption, export capacity and massive reserves.
And for these reasons, China will avoid the same fate as the US
and Europe.

Not everyone
is convinced, however.

Trend Forecaster
Gerald
Celente believes that the depression is global
and a contraction
across the entire planet cannot be avoided, and that includes China.
Economist Harry
Dent holds a similar view
, recently saying that, “China
will see their bubble collapse strongly when the U.S.-led stimulus
program fails due to rising defaults and foreclosures later in 2010,
at the same time that the world is looking for China to pull it
out of this global downturn.”

Michael Pettis,
of China
Financial Markets
, says that the conditions in China are eerily
similar to conditions in the United States right before the 1930’s
Great Depression and Japan’s depression which started in the
1990’s and continues even today. According to Pettis, there
are a multitude of reasons why China’s massive $2 trillion
plus in reserve may not save them from an economic collapse:

Twice
before in history a country has, under similar circumstances,
run up foreign reserves of the same magnitude.

The first
time occurred in the late 1920s when, after a decade of record-beating
trade and capital account surpluses, the United States had accumulated
what John Maynard Keynes worriedly described as “all the
bullion in the world”. At the time, total reserves accumulated
by the US were more than 5-6% of global GDP. My back-of-the-envelope
calculations suggest that this was probably the greatest hoard
of central bank reserves ever accumulated as a share of global
GDP, but please check before you accept this claim.

The second
time occurred in the late 1980s, when it was Japan’s turn
to combine huge trade surpluses, along with more moderate surpluses
on the capital account, to accumulate a stockpile of foreign reserves
only a little less than the equivalent of 5-6% of global GDP.
By the late 1980s, Japan’s accumulation of reserves drew
the sort of same breathless description – much of it incorrect,
of course – that China’s does today.

Read
the rest of the article

February
10, 2010

Mac
Slavo [send him mail] is a
small business owner and independent investor.

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