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...
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.