China

China may seem to have defied the recession and the laws of economics. It hasn't. When China's bubble bursts, the global impact will be severe, spiking US interest rates.

The credit rating agencies have given both China and the U.S. credit warnings. How can the U.S. prevent a downgrading? Hint: it won't be from a reduction in spending.

Not like this wasn't telegraphed from a mile away: Reuters is reporting that Google users in Beijing have been reporting erratic service. This is most likely a preamble to a complete shutdown of all Google access to mainland China. "Users of Google Inc.'s search engines across Beijing reported erratic service on Wednesday, with the site sometimes failing to open, and some searches for even non-sensitive terms like "hello" returning error messages."

Well, title is the teaser, read on and find out...

In the aftermath of the credit crunch, the outlook for most developed economies appears pretty bleak. Households need to deleverage. Western governments will have to tighten their purse strings. Faced with such grim prospects at home, many investors are turning their attention toward China. It’s easy to see why they are excited. China combines size – 1.3 billion inhabitants – with tremendous growth prospects. Current income per capita is roughly one-tenth of U.S. levels.
The People’s Republic also has a great track record. Over the past thirty years, China’s Gross Domestic Product has
increased sixteen-fold. So what’s the catch? The trouble is that China today exhibits many of the characteristics of great speculative manias. The aim of this paper is to describe the common features of some of the great historical bubbles and outline China’s current vulnerability. - Edward Chancellor

Xinhua reports that Google has "violated its written promise" and is "totally wrong" by stopping censoring its Chinese language searching results and blaming China for alleged hacker attacks, a government official said early Tuesday morning. The official in charge of the Internet bureau under the State Council Information Office made the comments hours after the online search service provider announced it has stopped censoring its Chinese-language search engine Google.cn and is redirecting Chinese mainland users to a site in Hong Kong.

www.google.cn is now officially redirecting to http://www.google.com.hk/

Sure explains the rip in GOOG stock over the past few minutes: Goldman is still learning how to let a piece of bad news go without inciting a historic short squeeze in the process.

Update: Google advises this is merely a way to provide legal, uncensored data access. The company warns that China's government can now cut access to Google at any minute. Which should be, indeed, any minute.

Say goodbye to China's "export economy" paradigm. In a stunning development for trade hawks, and pretty much anyone who follows the biggest liquidity bubble in history, China Daily has announced China is about to announce a record trade deficit (yes, not surplus, deficit) for March. This makes the whole CNY undervaluation debate pretty much moot, as even China now moves into the ranks of net importers. From China's official daily newspaper: "The country will probably see a "record
trade deficit" in March thanks to surging imports" and "will "fight
back" if Washington labels China a currency manipulator." Perhaps this finally explains where all the excess liquidity has gone: with China now not exporting to the US consumer, it has instead refocused on its own "middle" class. This means that Chinese administrators are much more focused on maintaining a stable economy, and will be much more concerned about economic overheating, which goes in line with the recent indications of material liquidity tightening out of Beijing. Market News reports that the actual deficit will come in at $8 billion for March, the first deficit since April 2004, when the gap was $2.26 billion. Maybe Albert Edwards will just have the last laugh with his iconoclastic prediction of a CNY devaluation.

China: When you build roads so fast, sometimes you never know what you may run into at the end of the road. A very short story for your Sunday reading.

As promised, here is the complete article, "China's Fragile Economy, Its Housing Bubble, and What It Means To Us," in a downloadable PDF. You can download it, print it out, and read the entire piece at your leisure. The conclusions aren't encouraging, for them or us.

We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the third part of a three-part series on this topic: The Consequences.

We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the second part of a three-part series on this topic.

Looks like this is going to get done.

SCHUMER: CHINA FX'ONE OF THE CAUSES' OF GLOBAL RECESSION
SCHUMER: CHINA CONTINUES TO 'GAME THE SYS' ON CURRENCY
SCHUMER: CHINA FX'HAMPERING'GLOBAL ECONOMIC RECOVERY
SCHUMER: 'GROWING CONSENSUS'ON CAP HILL RE CHINA FX MANIPULATION
SCHUMER: WILL TRY TO ADD CHINA FX BILL TO'MUST PASS' LEG

We are now taking bets what China's re-re-retaliation to this next step will be.

Well that didn't take long. China just escalated the verbal quarrel with D.C. by retaliating right back. The Chinese Ministry of Commerce stated earlier that the "US should not seek to boost its exports by forcing other countries to appreciate their currencies." The spokesman for the Chinese Ministry of Commerce Yao Jian also told reporters that the US shouldn't be seeking to "develop its own economy" by forcing other countries to strengthen their currencies. We are holding out breath to see what China's reaction is when Geithner forwards them the petition signed by 130 very much erudite congressmen demanding that Beijing float the CNY immediately (or else America will be more than happy tolive with a 7% 30 year mortgage).

We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the first part of a three-part series on this topic.