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Monday, 26 September 2011

Europe, China, Credit and Debt

At the time when markets in the west are tentatively welcoming a putative resolution of the Greek crisis, which is also relaxing the demand for gold, reports from China feature the statistic that sales of second-hand homes in parts of Beijing are fetching prices 73.7% below the peak. Superficially this can seem to mean that China faces a prospect of massive market volatility, which doomsayers recklessly compare with the collapse of the Japanese property boom that triggered a twenty-year period of supposed depression in Japan.
Looking behind the headline statistics the facts are very different.
Greek debt can sink the entire European banking system: by contrast Chinese borrowing to fund house purchases is such a a tiny proportion of the Chinese economy that it is immaterial to the balance of the economy when a credit squeeze [carefully orchestrated by the government] temporarily checks the housing bubble. It has no material impact on economic growth, or on the living standards of the vast majority of the population.
The Japanese squeeze on finance for property lasted right through the 'nineties and it meant that Japan had no reckless boom in property prices in this century, while it retained a strong balance of payments surplus. Japanese national debt is very high in proportion to the strong national income, but it is overwhelmingly composed of savings by Japanese residents: it is not a piggy-bank for international speculators who can just whisk their deposits away and create a panic.
The realities behind the statistics matter more than the numbers; and Economists have failed to explain this to the politicians whom they lulled into the cloud-cuckoo land of the credit bubble.

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