John Ransom

They are all about to burst.

Forget about the U.S. government. The biggest reckless spenders today are the Chinese.

They've built the world's largest shopping mall, which now stands empty.

They build vacant cities. 

The Wall Street Journal notes that China is engaged in another investment scheme that aims at keeping prices of copper artificially high, as a type of arbitrage:

China is the world’s largest consumer of copper, much of it imported. But not all of its copper imports are driven by final demand. With credit conditions tight, importing copper has become a way for businesses to circumvent the government’s lending controls.

A letter of credit—easier to obtain and cheaper than a bank loan—finances the purchase of copper on the London Metal Exchange. If copper prices are higher in Shanghai than they are in London, the importer can cover transport and storage costs, sell their copper at a profit on the mainland and enjoy the use of the yuan proceeds until the letter of credit expires—typically three months to a year later.

While the Chinese enjoy huge currency reserves and the economy steams along, this type of malinvestment will work. But they are going to get hammered when the economy slows.

Then that bubble will burst, causing others to follow.

In a separate article the Wall Street Journal reports that China- and India- have been going on a tear buying up gold. 

"China's investment demand for gold more than doubled to 90.9 metric tons in the first three months of the year, outpacing India's modest rise to 85.6 tons, the World Gold Council said in its quarterly report on Thursday. China now accounts for 25% of gold investment demand, compared with India's 23%."

So 50 percent of an investment demand in gold is coming from economies that make up 10 percent of world GDP?

If that ain't a bubble that's going to burst, I don't know what is. 

Maybe Ron Paul has a point.  Maybe we should sell China all of our gold?   

One commodity bubble has already burst.

On Wednesday Bloomberg reported that Chinese watermelons were literally bursting in the fields due to the "use of a chemical that prompts plant growth." 

"The bursting watermelons are the latest in a series of food-safety scares in China that have included tainted pork, chemicals in steamed buns and milk tainted with the chemical melamine. China has increased inspections and made food safety a metric for grading the performance of local government officials in an effort to prevent the scandals from fueling social unrest."

The demand to produce and invest at any cost will eventually lead to unrest, and severe corrections to the China economy.
 
I always thought Communism was the worst idea.

I hate to burst their bubble, but now we know Communists running a capitalist system comes in second place.  


John Ransom

John Ransom’s writings on politics and finance have appeared in the Los Angeles Business Journal, the Colorado Statesman, Pajamas Media and Registered Rep Magazine amongst others. Until 9/11, Ransom worked primarily in finance as an investment executive for NYSE member firm Raymond James and Associates, JW Charles and as a new business development executive at Mutual Service Corporation. He lives in San Diego. You can follow him on twitter @bamransom.