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Having prevented the bubble from bursting – Its now opportune to invest in China

July 26, 2010

As an aftermath of large stimulus spending to revive the domestic economy and keep it afloat during the financial crisis, it is now feared that Chinese banks,  the world’s most profitable in 2009,  might drown in debt.  According to a knowledgable source interviewed by Bloomberg, Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan (US$1.1 trillion) they’ve lent to finance local government infrastructure projects. The money is expected to be written off, as non-performing project loans by the end of this year as the ventures are unable to generate sufficient revenues.

“Unfortunately this smells just like déjà vu of China’s last banking crisis a decade ago,” Shen Minggao, Hong Kong-based head of China research at Citigroup Inc told Bloomberg. “Non- performing loans will increase as a result of last year’s lending spree, which to a certain extent was a delayed form of fiscal spending, and eventually the central government will step in and share the costs.”

This is exactly what analysts and economy watchers have been fearing over the last few months. As China’s economy slows and Beijing looses its zeal to support domestic growth and development,  industrial output, production, retail sales and property prices have all fallen. The world’s fastest growing economy is pulling the stops just short of overheating. Over the last few months Beijing has taken strategic steps including drastically cutting bank lending to reign in the economy and keep the bubble from bursting. In other words, Web Jiabao has done it again, in showing that the government is still in control of both the macro and micro economy,  he has managed to steadily control growth while maintaining high GDP figures.

As a result, in managing the economy and balancing growth and development, analysts now feel this is again the apt time to invest back in the Chinese economy Vs the Indian economy as valuations as expected to raise over the next few quarters.


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