China behaving as yesterday's US

An unrestrained bull in a China shop can do a lot of damage. An out-of-control China can do even greater damage to a global bull shop! That is one factor that, whenever it happens, can bring any enthusiasm in stock markets to a Humpty-Dumptyish halt. The question is, when?
In an article ‘China''s Great Depression'' (www.financialsense.com/editorials/2004/0902.html) author Krassimir Petrov likens the present day economy of China to that of America in the 20s.The conditions are eerily similar, frighteningly so. Just as in the 20s, Great Britain was the superpower and the US was the rising giant, so also, now, the US is the superpower and China the rising giant.
China is following the same economic policies as the US followed, and which led to the subsequent Great Depression. It is running trade surpluses with America, is keeping its currency undervalued so as to provide employment through manufacturing exports and is a creditor nation financing the US with a view to boosting demand for its own products.
Just as Britain was in 20s, America is today militarily overextended, has a negative savings rate. As and when the financial plug is pulled by those financing it, it could collapse.
China has a growth in money supply that is about three times faster than the growth in money supply in the US in the 20s. This is causing asset price inflation, not only in stocks but also in real estate. The money supply coupled with high savings rate, leads to lower interest rates, financing a consumption boom has led to a rise in global commodity prices.
There are several weaknesses in the Chinese economic model but one of the most serious is its financial sector. India, by contrast, has and its banking sector is far healthier. Recently, however, there have been strange moves to curb the banking sector.
Government policies are often perverse, seeking to protect their own companies. In telecom, for example, it is trying to protect state-owned BSNL by asking cellcos to pay an access deficit charge ostensibly to allow BSNL to provide telephony in unviable rural areas.
Cellcos are, rightly, protesting that the Rs 5,000 crore annual subsidy they so give is used by BSNL to undercut them.
Cellcos, on their own are lapsing in customer service. They are also resisting number portability, the one thing that will put pressure to maintain customer service.
Last week, the Sensex added 87 points to close at 5,305. Excess liquidity, a dearth of alternate investment opportunities, and the tax benefits conferred on equity investment, is driving the rally. There is, yet, steam in the rally, for another couple of hundred points. Hang on, dude.