Wednesday, July 17, 2013

Malinvestment Crisis in China

The collected voices share a great fear about what lies directly ahead for China. China’s central bank responded aggressively to the financial crisis of 2008. It responded with liquidity and easy money. And this flood of easy money has helped produce an incredible array of malinvestment. (Austrian School economists developed the concept of malinvestment to explain the consequences of a central bank providing too much monetary stimulus.)
As applied to China, the story goes something like this…

Big Trouble in… Big China
Governments and firms were required to keep the economy growing at all costs, which led them to poorly allocate the excess funds. This flood of artificially cheap money paid for projects which require huge debt service payments, but provide little economic value.

http://www.capitolhilldaily.com/2013/07/malinvestment-china/ 

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