The Chinese Are Just Like Us

Over the past few decades, the U.S. market has become a symbol of irrational expectations and unsustainable returns. From the tech bubble in the late 90s to the real estate bubble we're still cleaning up, foreign investors have become warier of putting their money to work in the U.S. One of the countries hoping to pick up some of those global investments is up-and-coming world superpower China. But according to some of their own economists, China might be making the same kind of mistakes we did.

The Associated Press reports through BusinessWeek:

China risks frittering away its stimulus spending on speculation in stocks and real estate, reports said Monday, citing economists who say surging bank loans risk inflating risky asset bubbles.

I guess Matt Taibbi must have a theory for this involving Goldman Sachs, but it sounds to me like Chinese investors have the same irrational exuberance that once gripped U.S. markets. No one likes to stand in the way of a runaway train.

On some level, China's situation could end up being worse than ours: generally our investors bet on bubbles with their own money. In China, that money is coming from government stimulus and loans. According to AP:

While recent gains in shares and property prices are a welcome respite for investors, putting funds meant for stimulus projects into speculative investments could undermine the government's effort to boost growth and reduce the economy's heavy reliance on exports.

About 20 percent of bank lending is going into stock speculation, and another 30 percent or so is going into the property market, state-run newspapers cited Wei Jianing, an economist with a Cabinet-level think tank, as saying.

Much like we saw here, China's banks are also lending entirely too much. Year-to-date, Chinese banks have loaned the equivalent of over a trillion U.S. dollars -- more than the annual lending for any entire year in China's history.

Yet, China is a controlled economy -- why doesn't their government stop the madness? Well, it's trying. The state-controlled media is attempting to warn investors and consumers to stop taking so much risk. It isn't working.

My guess is that, eventually, the Chinese government will step in and use some brute force, instead of mere propaganda, to stop this speculative investing. Until then, however, foreign investors should tread carefully in the Chinese market. This could bode well for the U.S., where banks have a newfound conservative attitude towards lending, and many believe stock prices are still a bargain.