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Gary Shilling On The Chinese Excess Capacity "House Of Cards", Sees Yuan Dropping If China Relaxes Controls

Tyler Durden's picture


Gary Shilling is now firmly in the anti-China contrarian bandwagon. In this interview with Bloomberg's Erik Schtazker the legendary investor, who called Japan's lost decade when everyone was just as bullish on Japan as Goldman is now on China, Shilling shares the same view on Chinese record excess capacity as Hugh Hendry did some months ago: "You can't trust the [Chinese] numbers... They have kickstarted their economy in the last year  - it's a stop go economy, they can do it fast, they don't have to worry about EPA audits, they just let the bulldozers roll when they want to build a new road or whatever. The point is they build an awful lot of excess capacity and the question is how are they going to use it because American consumers aren't buying their exports the way they used to and their domestic economy isn't that strong... Chinese consumer spending is 36% of GDP and is a declining share over the last two decades. They don't have a a big enough middle class. In China there were 110 million people with over $5k per capita income, enough to give them discretionary spending but that was only 8% of the population. In this country it is 80% of the population." And on the yuan: "If they took off all the controls and Chinese could invest abroad, the yuan would probably go down because people would want to diversify... I think the political leaders are aware of that possibility they sure don't want to be pushed around, and Obama made a huge in trying to push them again. Remember China was dominated by European in the last century and they want to run their own country." While we completely agree with Schilling, we believe that the current transformation in US society, which is in the last throws of contract abrogation, in not paying mortgage and credit card bills, we may well see a last push in Chinese imports, after which any disposable income in the US middle class will plunge and will take the US economy down with it as well. The problem, as we have repeatedly pointed out, the cash return on such "assets" as iPads and Kindles is zero, not nearly enough to pay down 39.95% APR credit cards.


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Tue, 04/13/2010 - 12:01 | Link to Comment TraderMark
TraderMark's picture

Hey, it's A. Gary Schilling ;)

Anyhow, 1 in 10 US mortgages now deliquent.  This is great for the US economy since banks are bulletproof and Fed subsidizes all losses.  Americans are shopping again, free of the shackle of having to pay for roof over head.  If we can get this figure up to 1 in 4 homes delinquent there might be a mall building boom in Cramerica.

Tue, 04/13/2010 - 14:20 | Link to Comment Missing_Link
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Tue, 04/13/2010 - 14:49 | Link to Comment onelight
onelight's picture

Here ya go: The Cramer Sound Machine (not like Miami at all; no conga..)


Now no one has to watch the show anymore :)

Tue, 04/13/2010 - 12:14 | Link to Comment bugs_
bugs_'s picture

So we've actually got a bandwagon now??

Cool! ...wait where was the bandwagon made?

Tue, 04/13/2010 - 12:17 | Link to Comment excellent
excellent's picture

People don't really get that the only thing that really matters is having the materials to make the things that people then wantonly consume...



Feels good doesn't it.




Tue, 04/13/2010 - 12:22 | Link to Comment Segestan
Segestan's picture

A. Gary Schilling is spot on; and yes Europeans did dominate for the last century but like every other event there was a good reason for this. The Marxist revolution and latter needing technological knowhow from the west. Once they are again left to there own devices,  they will return to a top heavy monarchy.

Tue, 04/13/2010 - 12:27 | Link to Comment knukles
knukles's picture

The yuan may very well surprise folks with a fade at some point if allowed to freely float.  A veritable boatload of capital has been moved into China over the past decade, 15 years or so, and some of it just might want to come back home.  Might be something of an interim lesson in the Law of Unintended Consequences.


Tue, 04/13/2010 - 12:34 | Link to Comment rawsienna
rawsienna's picture

Shilling is one of the better economist out there.

Tue, 04/13/2010 - 12:37 | Link to Comment yabs
yabs's picture

China is the Us in 1929 , anyone can see that
Its a bubble built upon the biggest bubble in history
Just a matter of time before it makes a huge mess.
Before the end of the year is my bet

Tue, 04/13/2010 - 14:50 | Link to Comment GFORCE
GFORCE's picture

I'm with you there, yabs. End of the year we'll see the cracks and by 2012, dreams of superpower status will have faded for a bit.

Aussies banana economy will have collapsed also.

Tue, 04/13/2010 - 12:42 | Link to Comment yabs
yabs's picture

China is also still a centralized controlled economy and history proves that does not work, only true free markets work.

Tue, 04/13/2010 - 13:03 | Link to Comment tmosley
tmosley's picture

China is less centralized than the US, and therefore they will rise relative to them.

Economic free zones are pretty amazing growth engines.  If we had some here, there might be hope for this country.  But no, we're "free" everywhere.  "Free" as in encumbered by the chains of regulation, unless we choose to fire our employees, and choked by the yoke of taxes, unless we choose to stop producing and simply consume.

Tue, 04/13/2010 - 13:06 | Link to Comment curbyourrisk
curbyourrisk's picture

Yeah but show me a TRUE free market economy.......thats the hard part.

Tue, 04/13/2010 - 13:00 | Link to Comment Hephasteus
Hephasteus's picture

The eastern hemisphere didn't dip as bad and is recovering. India barely even blipped the whole recession. You can't trust the chinese numbers but you can't trust any numbers from any government because too many governments think ponzi'ing is gdp.

Tue, 04/13/2010 - 13:00 | Link to Comment tmosley
tmosley's picture

If they stop printing money, their currency will lose value!?


Tue, 04/13/2010 - 13:07 | Link to Comment Gigem77
Gigem77's picture

 Here's another point of view from  John Ross,Visiting Professor,Jiao Tong University, Shanghai, China

"China’s domestic GDP growth in 2009 was 12.6 per cent – among the highest recorded in a major economy."

"Consequently, despite a reduction of net exports of 3.9 per cent of GDP, China achieved 8.7 per cent economic growth. Such rapid substitution of domestic for external growth drivers shows China's high, not limited, ability to respond to changes in its external environment."

"China’s trade surplus in 2009 fell by 35 per cent. This reduction meant China transmitted a net $99bn boost in demand to other exporting economies – the fact that Asia has recovered more quickly than other regions of the world economy from the financial crisis is in significant part due to the stimulus created by the rise in China's net imports."

Pundits have been predicting the demise of the Chinese growth story for at least a decade.   Keep an eye on their imports of raw materials:  Coal and oil, copper and iron ore, as support for their growth numbers.  The Yuan will be revalued as a tool to fight imported inflation. 

China faces shrinking exports.  But the U.S. faces a trading partner with fewer dollars to buy an avalanche of treasuries.    Which problem would you rather have?

Tue, 04/13/2010 - 13:30 | Link to Comment anony
anony's picture

 "....They don't have a a big enough middle class. In China there were 110 million people with over $5k per capita income, enough to give them discretionary spending but that was only 8% of the population. In this country it is 80% of the population."

The last time the Middle class comprised 80% of the pop was a decade ago, and it has been steadily declining ever since.  At the next decade at the current rate of decline, the middles could be at 50% especially if the incumbents in office now are there then. 


Tue, 04/13/2010 - 13:34 | Link to Comment sheeple
sheeple's picture

How come everyone's a China experts now?

Tue, 04/13/2010 - 13:47 | Link to Comment RossInvestor
RossInvestor's picture

Shilling chastises China for "gining up" up their GDP numbers because they come out with their numbers in 21 days whereas the "we (the USA) have better data collectiion and it takes us 29 days".  One suggests Shilling get a subscription to to see how much the US data is manipulated. 

Tue, 04/13/2010 - 14:02 | Link to Comment yabs
yabs's picture

the Us may now be in the stranglehold of the banks but it is still less centralized than China. In the US the banks
run the show but In China the government runs everything and when they told the banks to lend they did. There is no way that these loans in the last year or two will not go bad
or at least some of them
This is not rocket science. China boomed on the back of the western consumer. That consumer is now on his death bed.
They then used their stimulus and the banks lent for "investments" which were all geared to to more production
expecting demand to come back. When it doesn't then the bubble bursts and with all that spare capacity, its very , VERY deflationary.

Tue, 04/13/2010 - 15:26 | Link to Comment huckman
huckman's picture

Time for a little history lesson Mr. Schilling:


A must read !!!

Tue, 04/13/2010 - 17:11 | Link to Comment anonnn
anonnn's picture

...Remember China was dominated by European in the last century and they want to run their own country."

Oh! You forgot?

The US, nearly alone, armed, fed and financed the despot Chiang Kai-shek in his ruthless suppression of starving millions.


Tue, 04/13/2010 - 19:46 | Link to Comment nevket240
nevket240's picture

You are full of crap.

Mao and his Marxist scum thugs butchered tens of millions and left the country in a state of agrarian anarchy.

Yours is just another example of left wing wankerism. China went backwards under the Maoists, not forwards.



Tue, 04/13/2010 - 17:56 | Link to Comment virgilcaine
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Japan is actually the lost 2.1 decades, they peaked in 1989..only in the MSM could 21 years equal a decade.

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