Times Series

1. How do you view the increasing growth of house price in China? The Great Wall... is evidence of a historical inability of people in this part of the planet to communicate, to confer and jointly determine how best to deploy enormous reserves of human energy and intellect.” Ryszard Kapuscinski China was one of the first foreign assignments for the great journalist Ryszard Kapuscinski. It was not a success. He bemoaned in his last book, Travels with Herodotus, that he failed to penetrate the country, and never slipped the control of his minders. But he did make a trip to the Great Wall, where he marvelled at the Chinese propensity to build walls. Over history, “hundreds upon hundreds of millions hours” were “spent building walls” that could have been spent more productively. For him, the Great Wall was a metaphor for the way China's society was organised and its relationship with the rest of the world. The Wall, and the sense of incomprehension that goes with it, also stands as a metaphor for global investors' current worries. Bubbles in China’s Economy 2. How much do you know about the bubbles in economy?

Economic decisions made in China now have effects far beyond the Wall. That is because China's economy accounts for virtually all of the world's growth. According to Barclays Capital, Chinese gross domestic product grew at an annual rate of 14.6 per cent in the second quarter. Including China, global growth was 1.6 per cent; without it, it was flat to slightly down. Thus commodity prices started to rise as China embarked on buying raw materials at low prices. The dollar started to gain against almost all currencies last summer when China decided to peg its currency to the US currency once more. And, as events on Wednesday showed, the Chinese stock market is under close international scrutiny. So China's growth is impressive but it has left many analysts baffled. Until China launched a “stimulus” spending plan in the depths of the crisis last year, it appeared to be slowing down. Electricity generation was down, as were exports. Bubbles in China’s Economy

Exports and imports are still falling, and yet retail sales were up 15 per cent in June, while bank loans were up 34.5 per cent. Many western observers are reluctant to believe these numbers. This may be due to western incomprehension that the Chinese way of doing things can work. Tim Bond, of Barclays Capital, suggests they are “unwilling to believe that the region is capable of endogenous growth”. But the sceptics have an important case. They allege that China is staging its own crude repeat of the mistakes made by the US earlier in this decade, when cheap money led to the credit bubble. They argue that new loans are unsustainable and cannot have been spent productively in such a short time. Instead, logic suggests the money must have gone into assets such as stocks or property. Since the stimulus, the Shanghai Composite index has doubled, while real estate prices have risen. Bubbles in China’s Economy

But Shanghai has only just suffered the bursting of a stock bubble. Starting from the summer of 2005, it gained 500 per cent, then crashed by 72 per cent. The chart shows the striking similarity with the 1990s Nasdaq bubble. Both were driven by new retail investors. With this recent history, it is remarkable for stocks to pick up again so quickly. This is why the events of Wednesday aroused concern. Press reports suggested that Chinese banks would be required to rein in their lending. A large initial public offering came to market, after nine months in which there had been a ban on equity issues. So it seemed that a government limit on the supply of shares was being lifted, while government support for demand (through bank loans) was being removed. In the space of an hour, the Shanghai market fell more than 7 per cent, showing real fears of a bubble. Bubbles in China’s Economy