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China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You Don’t Get Something (Growth Through Stimulus) For Nothing (No Economic Consequences)
I have not had a chance to revisit my China thesis in a while, but it
is coming once I round off the European recap and finish up my US
technology thesis. China will most likely play a key portion in global financial and economic contagion that is simmering over in Europe. A commenter on another popular blog had this to say of my most recent post regarding Ireland (Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???):
Mr. Middleton,
Although I have no connection with
financial investing or services, I read your analyses, and those of
others, to be informed of events and topics of great economic
importance. What strikes me as odd, is that in all the stories on
European Contagion I find no mention of China’s position. Given
China’s significant economic connection via trade with the European
Union, it is puzzling we don’t see more overt action from China to
protect/affect the health of it’s export recipient’s economies. Am I
to infer there is covert action (via GS, Central Banks, IMF for
example), China is simply not concerned about the economic stability of
the European Union, or it’s just waiting for the appropriate time for
action/influence?
We definitely know where China stands on U.S. trade and Fed’s policies, and it’s relations with the other BRIC countries.
Is there a story here that I’ve missed?
I replied:
I believe China’s ability to alter
its own course is grossly exaggerated. As a net exporter with
relatively minimal internal consumption as a source of economic
activity, it is basically at the mercy of importing nation’s ability to
buy their goods. Any attempt to stoke the ability of these nations
importing will be ancillary at best. The “reported” success of their
bubble blowing is showing only one side of the equation – the bubble
blowing. Signs of a traditional bubble (such as the one whose bursting
the US and Europe are struggling to escape from) are everywhere, yet
the mainstream media has not focused nearly as much attention on such.
Unless the laws of basic human nature has changed, expect to see China
suffering from the effects of profligate excesses just as the others
that tried to inflate their economies the quick and easy way did.
its own course is grossly exaggerated. As a net exporter with
relatively minimal internal consumption as a source of economic
activity, it is basically at the mercy of importing nation’s ability to
buy their goods. Any attempt to stoke the ability of these nations
importing will be ancillary at best. The “reported” success of their
bubble blowing is showing only one side of the equation – the bubble
blowing. Signs of a traditional bubble (such as the one whose bursting
the US and Europe are struggling to escape from) are everywhere, yet
the mainstream media has not focused nearly as much attention on such.
Unless the laws of basic human nature has changed, expect to see China
suffering from the effects of profligate excesses just as the others
that tried to inflate their economies the quick and easy way did.
Less than an hour after typing said reply, Bloomberg reports: China Inflation May Be Too Hot for Controls Amid Cash Glut
Standing near his 12-table noodle shop on Beijing’s Yonghegong Avenue, owner Liu Heliang says meat and vegetable prices have climbed 10 percent in a year and staff wages are up 40 percent.
“I’m struggling to make ends meet with costs going up like this,”
said Liu, a native of Sichuan province who pays his workers as much as
1,800 yuan ($271) a month, or 88 percent more than the Beijing minimum
wage, to serve up a staple Chinese meal. “Raising prices is the only way
out,” he said, predicting he won’t be able to hold out beyond two
months.
Premier Wen Jiabao’s
cabinet last week announced it will sell grain, cooking-oil and sugar
reserves, ordered an end to tolls on trucks carrying produce and
threatened price controls to rein in a 10 percent inflation rate for food. Because the measures would do nothing to counter the 54 percent surge in money supply over the past two years, the risk is they will prove insufficient to cope with the challenge.
“They are just not addressing the fundamental problem at all,” said Patrick Chovanec,
an associate professor at Beijing’s Tsinghua University. With the
expansion of credit and cash in the economy stemming from China’s
response to the global crisis, “you’re sitting on a volcano,” said
Chovanec.
Now, it didn’t take a genius to figure out this would happen. As a
matter of fact a slight dose of common sense (when was the last time you
got something for nothing, really?), a little historical perspective or
a BoomBustBlog subscription would have sufficed.
BoomBustBlog China Focus: Inflation? Thursday, May 20th, 2010
Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts Wednesday, February 3rd, 2010
What Are the Odds That China Will Follow 1920’s US and 1980’s Japan? Wednesday, March 10th, 2010
BoomBustBlog China Focus: Interest Rates Thursday, May 20th, 2010
My China Ruminations Have Come to Pass As the Country Enters a Bear Market Tuesday, May 11th, 2010
From Bloomberg: China Inflation Accelerates as Loans Surge, Property Prices Rise by Record
May 11 (Bloomberg) — China’s
inflation accelerated, bank lending exceeded estimates and property
prices jumped by a record, increasing pressure on the government to
raise interest rates and let the currency appreciate.
Consumer prices rose 2.8 percent in
April from a year earlier, the fastest pace in 18 months, and property
prices jumped 12.8 percent, the statistics bureau said in statements
today. New lending of 774 billion yuan ($113 billion), announced by the
central bank, was more than any of 24 economists forecast.
Chubble
(The Unmistakeable, Yet Thoroughly Argued Chinese Bubble),
Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other
News Thursday, April 15th, 2010
Now That the MSM and Chinese Officials Admit There Is a Bubble In China…Tuesday, July 20th, 2010
Will the Emerging Markets Lead the World to New Growth? Wednesday, July 7th, 2010, Excerpts from the HSBC forensic analysis featured in this post:
Below are the full forensic reports available for download to subscribers (click here to subscribe):
HSBC 170610 Professional & Institutional (554.65 kB 2010-07-07 06:23:52)
HSBC 170610 Retail (388.56 kB 2010-07-07 06:22:25)
We have performed a decent amount of
analysis on HSBC in the past as well, and it has served as a very
profitable short position in 2008. I have decided to release the dated analysis to the public for free, it is available by clicking here: HSBC_Holdings_Report_04August2008 – pro (138.89 kB 2008-11-06 10:11:09)
For anyone interested in the myriad risks
and opportunities abound in the HSBC market’s macro environment, I
strongly suggest you review our sovereign contagion models (subscribers
only):
Sovereign Contagion Model – Pro & Institutional (1003.48 kB 2010-05-04 12:30:48)
Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46)
And as China goes, Australia will most likely follow…
Aussi Bubble Video to Go With You Aussie Bubble Speculation? Saturday, June 12th, 2010
In Australia, Tax as a Contagion
Australia: The Land Down Under(water in mortgage debt)
As an extension of the Chinese
macroeconomic discussion at BoomBustBlog throughout 2010, there may be
an “Asian Contagion” spreading as a result of a Chinese investment
slowdown. Those at risk are the countries and regions that have
supplied China with the commodities necessary to build empty cities. While
the (comparatively, in terms of GDP) enormous Chinese stimulus
package from the first part of the financial meltdown in 2008 has
generated incredible growth in GDP and asset prices, the game appears
to be over for flipping 1000 square foot apartments in Shanghai.
After the direct hit taken to China, the picture looks very grim for
Australia, where a bursting Chinese housing bubble could drive
industrial commodities lower, sparking higher unemployment in one of
the nation’s largest sectors, and in turn pop their domestic housing and property bubble. In the near to medium term, Australia is showing some major red flags.
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What does it matter if a loan created through an accounting entry (fractional reserve lending) is not paid? Upon loan default, one simply erases the accounting entry. Any additional money put into the system by the loan is now withdrawn, no harm, no foul.
If you are a Western private banker and you have loan collateral, then you have the force of law to collect on the defaulted debt collateral to preserve your "assets."
But public (government) China banking is the opposite of private Western banking.
Since debt can be forgiven, debt does not matter to the Chinese government. There is no concept of debt overhang. The Chinese, inspired by Abraham Lincoln's Greenbacks, control the amount of money released and to whom the loans are made (that is for manufacture and services). Bad loans (of which there are many) are repurchased by the government and forgotten.
This simple little principle is why the Chinese will dominate the world's economy if we (the USA) do not get our act together and, at a minimum, enforce transparency into our banking system. At a maximum, bring back Lincoln's Greenbacks.
What really astounds is that anyone, any where, could think that a corrupt dictatorship could actually manage a competant economy over time. Such regimes are capable of bursts of action, but as it is all directed by non-economic factors (in this case, the need to bribe the Chinese people to social peace, thus allowing the corrupt oligarchs to remain in power), it never can end well.
Our job is to cut the ties - figure out some way to pay off our entire debt to China in just a few years while at the same time breaking economic relations with them. No free nation should trade with a trannical regime, ever.
Mr. Middleton,
Thank you for taking the time to acknowledge my question. I had hoped China would not repeat Japan's 1970s to 1990s boom-bust pattern -- which appears, is a foregone conclusion. I wondered if China, breaking from the pattern, would see an economic and political advantage of siphoning some of their excess foreign reserves back into the European Union, even if it was thowing money down the deficit drain. From the anaylses I have read, it appeared China's plan was to increase internal consumption and ignite consumption in undeveloped markets in exchange for their resources and labor -- which is our pattern.
They will try, but this is a multi-decade ordeal, not a multi-year ordeal. The bubble will bust before they accomplish this.
As usual, Reggie has it all laid out and will likely be proven correct.
(even if China can keep it hidden for another 6 months or a year)
How can you people have the balls to talk any shit about China when they have lent the US almost every red cent (pun intended) we have ever had since who knows when. The Chinese have been our banker since at least the 1700's. How else did we defeat England? How did England beat Spain in 1588? How is America functioning at all at this point? China. So to sit here and talk about their economy as if we are the lords of finance is the ultimate in hypocracy and idiocy.
Chinese fishing boat hostilities with Japan and now China's puppet pit bull North Korea shelling South Korea shows China is playing the foreign devils card to smother internal unrest. Their over-reaction to the Nobel Prize is another tell on PLA sensitivity to criticism and their hyper-active response.
Reggie's analysis qualifies for genius status in that the rest of the MSM economists continue in their stupifying ignorance of the basics.
It appears the Fed's BEP pressure on China is getting results of an unpleasant nature in Asia as well as here in the USA for those on fixed income. Netflix just raised prices 11%.
The only thing you really buy with printed money, is time.