China Faces A Price Bubble Formation

Daily Forex Fundamentals | Written by ecPulse.com | Sep 11 09 07:46 GMT |

As Chinese economy is making steady steps towards a full economic recovery; risks of a price bubble formation are mounting, due to the massive liquidity that exists in markets, which could demolish what was built so far in the third largest economy in the world. New loans in China rose unexpectedly during the month of August to 410.4 billion Yuan; compared with the previous reading of 355.9 billion Yuan, while it was expected to fall to 320.0 billion Yuan. China also released the annual money supply M2 for August, which rose by 28.5% compared with the previous rise by 28.4%. This data is considered to be a double-edged sword for the Chinese economy; on the one hand the increase in money supply and loans do help support the economic growth and stimulate many sectors like the housing and real estate sectors, which heavily rely on the crediting; thus helping China avoid the negative impact of the economic crisis so far. Yet, this rapid increase in liquidity available in the financial markets may result in a new economic bubble, expressed by a sharp rise above its fair value in China's house prices and stocks, especially after the huge expansion in loans given by Chinese banks. China's stocks index rose by 1.57% today at 04:00 GMT, after the release of some positive data from the industrial sector and retail sales. These fundamentals may increase foreign demand on the Chinese stocks, since the outlook of several sectors is improving; especially since it fell by 23% during last month, after fears of an excess rise in value, in which it does not reflect the real conditions of companies. China's Prime Minister Wen Jiabao, indicated in a speech yesterday, expressed fears of inflation and an excess rise in shares and asset prices. On the other hand, he pointed out that the government will leave its monetary policy at a moderate level, yet it will continue stimulating domestic consumption until the economy is fully recovered. It is worth mentioning that the Chinese economy has achieved a growth rate of 7.9%, during the second quarter of this year; compared with a growth rate during the first quarter of 6.1%. The Prime Minister pointed out that the Government was able to provide 6.6 million jobs during the period from January through July, thereby helping to achieve social stability. Ecpulse disclaimer: The content of ecPulse.com and any page in the website contain information for investors/traders and is not a recommendation to buy or sell currencies, stocks, gold, silver & energies, nor an offer to buy or sell currencies, stocks, gold, silver & energies. The information provided reflects the writers' opinions that deemed reliable but is not guaranteed as to accuracy or completeness. ecPulse is not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trades currencies, stocks, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, stocks gold, silver &energies presented should be considered speculative with a high degree of volatility and risk