The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is not a forecast that China will default, but merely an insurance policy to protect against a hard landing, with ramifications across Asia.
The Chinese government needs to figure out how to deflate the credit bubble before inflation reaches levels that threaten social stability. Officially, inflation was 4.45 in October, but in reality it is much higher than that. For example, the prices of vegetables has risen by about 20% in the last. Price inflation is a much bigger deal in emerging countries because the price of food makes up a bigger percentage of household spending. Remember, inflation has proved a catalyst for social unrest in China, including in 1989, the year of the Tiananmen Square massacre, and it remains a sensitive political pressure point.
Albert Edwards from Societe General said the OECD’s leading indicators are signaling a "downturn" for Asia’s big five (Japan, Korea, China, India, and Indonesia). The China indicator composed by Beijing’s National Bureau of Statistics has fallen almost as far as it did at the onset of the 2008 crash. "I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s. Ignore these indicators at your peril," he said. Read the full story here.
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