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China faces a slowdown, risk of a crash, says Marc FaberA fragile economy could hurt industrial commodities in the near termBloomberg12 February 2010(SINGAPORE) China’s economy will slow down and may even be at risk of a crash because of the nation’s excess capacity and as loan growth slows, investor Marc Faber said.China’s fragile economy may undermine industrial commodities in the near term, the publisher of the Gloom, Boom and Doom report said.Mr. Faber added that he’s pessimistic on the euro as a possible bailout of Greece by other European countries will increase deficits in the region.Gross domestic product expanded 10.7 per cent in China last quarter from a year earlier, the fastest pace since 2007. Lending in January exceeded the total for the preceding three months while property prices climbed the most in 21 months, even after the central bank raised banks’ reserve requirements last month, reports released yesterday show.‘The economy, for sure, will slow down meaningfully this year,’ Mr. Faber said in an interview with Bloomberg Television in Hong Kong.‘It has the potential to crash because of the over-capacities that have developed, and when loan growth slows down, we don’t know how the economy will react.’Consumer prices advanced 1.5 per cent in January from a year before, a third straight gain, the central bank said yesterday. The median estimate was for a 2.1 per cent increase. Lending surged to 1.39 trillion yuan (S$287 billion) last month while property prices in 70 cities rose 9.5 per cent from a year earlier.Central bank governor Zhou Xiaochuan said in Sydney this week that policymakers need to ‘closely watch’ inflation, which was still ‘relatively low’. Concerns that the central bank will seek to cool rising consumer and asset prices have dragged the nation’s stock market lower this year. The Shanghai Composite Index has slipped 8.9 per cent, the 10th worst performer among 94 benchmark gauges tracked by Bloomberg globally.China may raise interest rates before the end of March as accelerating economic growth prompts the central bank to tighten monetary policy, Royal Bank of Canada’s emerging market strategist Brian Jackson said in a Bloomberg Television in Hong Kong yesterday.A possible crash in China’s economy will be ‘disastrous’ for raw materials used in industrial production, Mr. Faber said. He instead favours commodities including wheat, corn and soya beans and also said he does not see a ‘huge downside risk’ for gold.‘Other commodities haven’t gone up yet, such as the grains,’ Mr. Faber said. ‘It may take time until they start to go up substantially but if you have time, you should be long on wheat, corn, soya beans or own a farm, which is one way to participate in future food price increases.’Mr. Faber advised investors to buy US stocks on March 9, when the S&P 500 reached its lowest level since 1996. The measure subsequently rallied as much as 70 per cent. He also predicted in May 2005 that stocks would make little headway that year, with the S&P 500 gaining 3 per cent.Mr. Faber was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 climbed 10 per cent between then and its record of 1,565.15 seven months later.The investor said yesterday the euro may rebound to 1.40 against the US dollar because the currency is currently ‘oversold’ amid concerns over Greece’s deficit, the largest in the European Union. The region, along with the European Central Bank, will probably bailout the country, in turn creating more deficits, he added.The euro traded at US$1.3752 as of 9.16am in Tokyo from US$1.3737 in New York yesterday. It reached a nine-month low of US$1.3586 on Feb 5.
‘When Greece is bailed out, it’s a further indication that paper money is losing its purchasing power because it’s diluted through larger and larger bailouts and more and more deficits,’ Mr. Faber said. ‘Now it can rebound to around US$1.40 but more than that, you shouldn’t expect.’
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