While there is much talk now about a potential China bubble, few people have asked the same question about India. Ed Harrison, over at Creditwritedowns, posted a “bubblemeter“, or “Ten Signposts of Manias and Financial Crises” by Edward Chancellor applied to China.
According to Harrison, China is 10 for 10 and concludes (paraphrasing)
China is in a bubble blow of top like post-Plaza accord Japan and that it will all end very badly. How does India fair on the same scale?
Chancellor’s 10 signposts applied to India:
- “Great investment debacles generally start out with a compelling growth story.”100% yes. Check for India
- “Blind faith in the competence of the authorities. In India’s case, there appears to rather being skepticism in the abilities of the authorities.
- “A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear.” While investment is increasing in India, capital is constrained relative to need and there is no widespread capital misallocation, certainly no on the scale we are seeing in China.
- “Great booms are invariably accompanied by a surge in corruption.” The level of corruption in India is high, but there is no evidence of a surge; in fact, modern communication and a free press are helping to expose corrupt practices.
- “Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.” Indian money supply growth is about 17% (vs. 30% for China)…high but not in bubble territory yet. The RBI has entered a tightening cycle, so the results of those efforts bear watching.
- “Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.”Think Latvia or Argentina. And we know China’s peg is creating problems because that’s a bone of contention right now. The Indian Rupee is not pegged and I don’t think you could characterize India as an inappropriately low interest rate environment.
- “Crises generally follow a period of rampant credit growth.” “Enron-Esque Characteristics” Hiding An Even More Explosive Credit Growth In China. Not so thus far in India (although, prior to the Global Financial Crisis, there were a few businesses having money thrown at them based solely on business plans (Reliance).
- “Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned.” There is little doubt that the Indian government would step in to bail out the financial system should the need arise. During the GFC it may not have had to directly bail out banks, but it did bail out farmers through loan forgiveness.
- “A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious.” There are few signs that financial speculation is rampant; Indian banks are generally on solid footing and it would take a few years worth of relatively unrestrained lending to change this dynamic for the worse.
- “Dodgy loans are generally secured against collateral, most commonly real estate.”I don’t believe (9) above applies to India, so neither does this signpost. There was a run up in real estate prices prior to the GFC, but that has cooled significantly and at this point appears to have been checked.
Conclusion: India hits about 3 of these signposts, so there does not appear to be an India bubble at this point. Stay tuned. Bears watching. Comments are welcome – what is your take?
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Filed under: Bubble Trouble, China, Economy, India Tagged: | China, China bubble, china collapse, china economy, China story, China versus India, China vs India, chinese economy, economics, edward chancellor, edward harrison, financial crisis, global financial crisis, India, India economy, India GDP, India recovery