When the crisis hit in
2008, China�s reaction was very communist-like : instead of turning to
money printing in the hope that credit and investment would pick up ( which
is still the dream of Western central banks), both the central power and the
regional ones have launched gigantic infrastructure plans while forcing banks
to lend them money. Credit, as a result, has effectively picked up : orders from Beijing! While credit was going down
in Europe and the United States, China�s total credit went from 100% of GDP
in 2008 to 125% of GDP in 2010. Large infrastructure works have been started
in China and growth has maintained its rythm in
2009 and 2010.
Of course, the problem
with this kind of socialist policy is investing without any return on
investment. Whole suburbs and cities are empty, the
high-speed train network is oversized etc. At the end, all of that affects
growth, which is far from the 10% it used to be, while generating
unrecoverable debts, thus fragilizing the whole
financial system. A dangerous situation.
In the end, China is
ending up with almost the same problems as those who have chosen to print
but, at least, it�s left with a fine network of high-speed trains instead of
a stock market bubble. We know the railroads will remain, but what about Wall
Street�s records?
But, furthermost, the
Chinese were smart enough not to bet everything on monetary and banking
policies. While all of this is happening, China is buying important
quantities of gold. China�s central bank is buying gold, and citizens are encouraged
to do the same. Official numbers are not available, they remain State
secrets, but it can be estimated that, between their internal production (400
tonnes) and imports (800 tonnes),
China holds around 4,000 tonnes of gold (one of the
highest holdings in the world), and maybe much more. In 2009, a group of
bureaucrats and economists got together to discuss necessary measures to
increase the country�s gold reserves, and they suggested that they should
reach 6,000 tonnes within three to five years, and
maybe 10,000 tonnes within eight to ten years.
A little known fact is
that the world�s oldest paper money was created in China by Gengis Khan�s grand-son, Kubilai
Khan (1215-1294), whom Marco Polo, incidentally, met during his voyages. That
first experience ended in bankruptcy, just as John Law�s would
in France, many centuries later. China did experience other monetary
bankruptcies in its history, notably in the 20th century (when the Communists
took power), so it knows about it (as does Germany, by the way).
In any case, China knows
it has created a credit bubble. But its effects are subsiding and, contrary
to the Western governments who keep printing and printing, China has put in
place an emergency strategy that is the exact opposite of the actual bubble-creating
policies. All bubbles can explode, in China and elsewhere, and of course the
economy will suffer, but Beijing will be able to hang on to the ultimate
asset, the one asset that is unalterable and trusted worldwide. Not too many
will be in the same situation...
