China and India Economic Performance Still Strong While Europe is Weighed down by their Debt

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Asia is besting Europe in economic performance.  But is the growth real?  Or is somewhat artificial with monetary policy inflating their economies?  Time will tell.  But in the mean time, their manufacturing is showing resilience (see India, China Economies Show Asia Resilient as Europe Falters by Unni Krishnan posted 1/3/2012 on Bloomberg Businessweek).

Manufacturing in India and China improved in December, a sign the world’s fastest-growing major economies are withstanding Europe’s debt crisis…

In another positive sign, a Chinese index for non- manufacturing industries rose today. Europe’s crisis may still cap demand for goods from Asia with an index for Chinese export orders indicating a third month of contraction in December. India’s economic growth will be constrained by higher borrowing costs and global economic weakness, HSBC and Markit said.

High debt is a problem for Europe.  And India.  For they, too, have high borrowing costs.  Something the Chinese don’t have a problem with at the present moment.  But they do share something else with India.

In China, the “festival effects” of western and Chinese New Year celebrations helped to boost the manufacturing PMI, said the logistics federation, which releases the data with the statistics bureau. China has also unwound some tightening measures to spur growth, cutting banks’ reserve requirements in November for the first time since 2008.

The Shanghai Composite Index tumbled 22 percent last year, the most since 2008, on concern that monetary tightening and efforts to rein in property prices in big cities will limit growth.

The Chinese were battling inflation pressures.  Hence the monetary tightening last year.  Now they’re lowered the reserve requirements for their banks.  In the world of fractional reserve banking that means inflationary growth.  By pumping more money into the economy.  By letting the banks lend out more of their deposits.  And now that thing they have in common with India.

India’s benchmark wholesale-price inflation slowed to a one-year low of 9.11 percent in November from 9.73 percent in October.

Inflation.  Nearly double digit at the wholesale level.  So the Indians have economic growth.  But they’re paying a pretty high price for it.  Or will.  Because the way the market fixes high inflation is with nasty recessions.  To adjust prices to reflect real demand.  Not the inflated one created by easy monetary policy.

So China and India are currently outperforming Europe.  But so did Japan once upon a time.  But their bubble burst.  As bubbles are wont to do.  And if China and India are just blowing bubbles, they, too, will burst.  Because that’s what bubbles do.


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