Bubbles Forming in Chinese Economy?

Last December, there was a post “High Potential in China“ on Long & Short Investment discussing several high potential ETFs from Chinese stock market. Since then, I learned of new statistics regarding Chinese Economy that reveals potential bubbles.  I found
that two major areas accounts for China’s GDP: Chinese domestic consumption and Chinese investment. An article from the businessweek on January 5, 2010 states,

"Domestic consumption today still only accounts for about one-third of GDP so investment remains a key driver… China’s massive lending boom of more than $1.3 trillion in new loans last year has helped keep mainland economic growth strong… The worry is that asset bubbles too could raise the risk of bad loans cropping up in China’s banks…"

If domestic consumption accounts for one-third of GDP, then we can use a simple math to determine two-third of GDP is accounted from investment where there has been $1.3 trillion in new loans. We now know that these new loans have been providing a strong economic growth in China thus far.
Chinese officials have been taking actions.

“When overcapacity was detected in certain industries or regions, we issued directives to alert banks to the potential risks associated with relevant project financing. Similarly, when we found bank loans were channeled into the property or stock markets for speculative trading, we stepped in to stop that”

However, will this be enough from preventing the bubbles from bursting?  We all know what happened around the world when there are bubbles surrounding stocks and real estate. Will similar problems occur in China 2010? No one knows for sure but with this enlightenment, maybe we should be more cautious before jumping into Chinese Market.

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