Why China Is Not A Bubble

A reader asked me if I believed that China is the next big bubble. The answer to that question is in short "no".

Why? Well, clearly China has recently had excessive credit- and money supply growth, something that has created a lot of malinvestments. This could cause some local problems in some parts of China, and could even cause the Chinese economy as a whole to suffer a short-term setback.

However, the thing to remember about China is that the structural fundamentals are so good that they will, at least for the coming two decades or so, overcome the problems created by a too inflationary monetary policy.

While the working age population will soon start to stagnate and then decline due to the "one child policy", the fact is that a substantial part of their workers are still tied to rural low productivity jobs. As more and more are employed in more productive urban jobs, the momentum will remain for the Chinese economy in terms of labor supply.

Furthermore, while a all too large percentage of investments are malinvestments, the overall investment rate is so high that "nonmalinvestments", or sound investments, is still high enough to expand productive capacity.

So while temporary slowdowns are likely, the long-term outlook remains good for China at least during the coming two decades-