If you follow us on twitter and read all of our blogs, article board articles and reports on our website, you will have a sense of what we feel about the Chinese economy.  We took down our report about the Chinese stock market after it had crossed the 200-day moving average, a few months back.  In the mean time, in the economy, the government has been pouring back money into the economy, some of which has been loosening up of lending standards.

Since that time, credit card loan bad debt has risen to highs.  The stock has increased about 90 percent, and we have been seeing the same inexperienced friends jumping on that bandwagon, recently, like they did during the crescendo to the last stock market bubble, and real estate prices are rising again.  Moreover, in the past few weeks, there have been many IPO’s, which also skyrocketed on debut, which is another classic sign of a market top, as people tend to go public when they think the market is nearing a top because they can sell out their interests to other investors at the maximum.  Also, we have written about how much saber rattling and barking the scared dogs have been doing lately, which is another sign of fear on the part of the barkers.

Exports, which have driven the economy, are dead.  Over 21 million people lost their jobs, by the beginning of the year, about one million businesses, in Guangdong, the engine of export growth closed their doors, many of our friends who had thriving export businesses have closed up shop and gone home, and 60 percent of current college graduates cannot get jobs.  So, the government has been trying to pump money into the domestic economy, which it can do because it also controls a lot of the economy.  Recently we read that about one-third of China’s GDP will come from new loose loans, which is not a good sign.  The central bank has been raising caution for over a month, but, here, in China, the government controls the economy.  All of this points to the possibility of bad news for the economy, including stock markets, real estate, banks, and the entire economy.

It’s always tricky to time bubbles.  In fact, we began advising people to get out of the Chinese stock market well over a year before the last bubble burst.  Now, many companies are doing IPO's, which companies tend to do when they think the market is high (you don't lay off your stake in a company when you think the market is low).  Since the vast majority of companies listed on the exchange are government owned or affiliated (out of the approximately 1,500 lasted Chinese companies, less than 50 are private sector companies) the government may be waiting until those IPO's are out of the pipeline before the tigthening comes.  Although we cannot be sure of the timing, again, especially since the government is not exactly transparent with their economic figures, we believe that the handwriting is on the wall.  The bubbles are coming, and they will burst in many places.  So, don’t be foolish like many of our friends have been, last time and this.  Remeber what the Baron de Rothschilde said when asked how he got so rich: "I sold too soon."

We list some additional refernces for further reading:

1. Asia Sentinal "Cracks in China's Foundation" http://tiny.cc/7tFJO 
2. Foreign Policy "Insider's View to Washington's China War" http://tiny.cc/aFXSq
3.  http://tiny.cc/wJIKa
4. Debt sales for Augusthttp://tiny.cc/mFVcP
5. MS Analyst believes China will cut loans H2 http://tiny.cc/E1NR9
6. MIT professors viewpoint http://bit.ly/uKOes
7. China Central bank says it will use market tools http://tiny.cc/99QPJ
8. Overnight MM rates up http://tiny.cc/59T38
9. FP article about loose loans/bubble http://bit.ly/vy3by
10. Remind me when will the Asian Century begin http://xi.gs/06oz
11. 1.63 million new securities accounts opened, in China, in July http://tiny.cc/jaot9
12. Everbright Securities IPO priced about 30% above analysts expectations http://tiny.cc/d0iTr 
13. Oppenheimer alanyst predicting 18% drop in Chinese stocks next 3 months http://tiny.cc/hPMBq

© C. L. Mattoli, CEO Red Hill Capital 2009