Thursday, July 30, 2009

Stimulus Doesn't Work

Despite a 28% increase in the money supply and massive government spending, Chinese markets are shaky:

July 29 (Bloomberg) -- Chinese stocks plunged the most in eight months, dragging emerging markets lower, on speculation the government will curb investment to prevent a bubble. Oil led a drop in commodities.

The Shanghai Composite Index fell 5 percent, its biggest decline since Nov. 18, snapping a five-day, 7 percent advance. The MSCI Emerging Markets Index sank 1.6 percent to 823.04 at 3:12 p.m. in London, the biggest decline since July 6. Oil and copper fell the most in three weeks. The dollar rose as investors shunned higher-yielding currencies.

“Speculation the central bank may take steps to rein in liquidity worried the market,” said Gabriel Gondard, deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7.2 billion in assets. “A lot of people were looking to take profits” in China, he said.

Stimulus doesn't work. It creates bubbles. The CBoC (Central Bank of China) now realizes what it has created and that it must stop expanding the money supply or risk the complete destruction of the yuan.

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