Guest Post: The Boom And Bust Of China's Rise

Tyler Durden's picture

Submitted by Dee Woo


In 1994, Management guru Peter Drucker told Japanese retail tycoon Isao Nakauchi that even though the Chinese market is very attractive, it still has more systemic risks than others and China will eventually face very serious inflation. And “the bubble is both much bigger and more extended than the bubble that burst in Japan a few years ago.”

This prophecy sounded very sensational back then when the Chinese miracle started taking off and the Japanese one went bust, but now its shocking precision has beckoned.“ 'Made in China’ has subsidized many countries’ economical living but not China’s itself. Today from Shanghai to Shenzhen, Many mainland Chinese harbor a passion for bulk shopping trip to Hong Kong to save their gyrating living cost. “buy soy sauce in Hong Kong” becomes a trendy slogan to many informed mainland urbanites. China’s GDP per capita is still 10 times less than Hong Kong’s, but its price level has surpassed Hong Kong’s in many areas. The underlining worry is the high inflation and hot money is always a hotbed of rampant speculative activities. The average Chinese consumer still has relatively low disposable income, which leaves little room to manage under the high inflation. Through China’s history, unbearable living cost is always the blasting fuse of severe social upheaval. That’s something the government fears the most.

For many years, to achieve fast economic growth, China has faithfully followed the loose monetary, fiscal and credit policies.The world’s factory has over-relied on export and investment to create GDP and jobs for way too long. According to Xinhua News agency, over the past ten years, China’s M2 money supply has increased by 450% and arrived at 2.6 times of its GDP in Sep 2010. In emerging markets, M2 usually is 1 to 1.5 times of the GDP and  2.6 times of that is unusual by any standards. China also has a habit of using colossal fiscal spending and overhead investment to push the economic growth when it’s slowing down, a classic example of which is central government’s 4 trillion Yuan stimulus package in 2008. Also to double guarantee the fast economic growth in an economic-crisis-stricken world, the central government uses policy tools to guide the banking system to issue more than 10 trillion Yuan of loans in 2009 and 8 trillion Yuan in 2010. Adding fuel to the fire, China’s ever bulging trade surplus will force M2 to leapfrog through Funds outstanding for foreign exchange(FOFE). According to General Administration of Customs, China’s trade surplus in 2009 is $196.07 billion, which means the central bank will be forced to issue 1.3 trillion Yuan of RMB through FOFE. Chased by too much liquidity, the price starts to skyrocket without much suspense.

Another reason for runaway inflation is that China’s pro-growth economic policy pays little attention to the quality of growth and that creates
serious capacity surplus and liquidity surplus. As a result the rate of return in the manufacturing sector will be severely comprised. To chase better profit, capital and resource will flee from manufacturing sector to speculative activities. Armed with such a pretext, Manufacturing giant Haier, Food giant COFCO, and electrical appliance retail giant Suning among many others have invested heavily on the biggest beneficiary of current economic-bubble---Property Market. According to the "Housing Green Paper" from Chinese Academy of Social Sciences (CASS) on Dec 8th 2010, the Gross margin percentage in property market in 2009 is 55.72% which far outstrips the performance in manufacturing and retail sectors. And these sectors will be even more undercut while cost-push inflation further eats away their already thin profit margin. Chasing the bubble and profiteering from it has become the norm. Right now the government’s rate hike among other tightening policies seems too little to late. Because even though the government is rolling back the credit line, the speculators can still seek finance from overseas channels, shadow banks and other alternative channels. They can employ proxy agents to circumvent government’s policy shackles.

Talking about speculation financing, we can’t avoid mutual funds and hedge funds. To understand the movement of international hot money, we must keep close tabs on them. Lately on many big occasions, Soros has expressed many sentiments of “Short America and Long China”, such as “China wields more power than the US.Today China has not only a more vigorous economy, but actually a better functioning government than the United States .” How come George Soros, the world famous anti-communist speculator, becomes the biggest cheerleader for Beijing Consensus all of sudden? If we decipher his praises heaped on China, we can tell he is very certain that China’s inflation and economic bubbles will grow so big that they will run out of the current policy scope of Beijing and force Beijing to employ the “nuclear weapon” they are so afraid to use so far: drastic RMB revaluation. He can profit from the Chinese asset speculation first and then win a windfall from “foreign exchange casino.” Will Beijing play into Soros’s hands? We won’t know for sure but the sure thing is George Soros opened his fund office in Hong Kong After many years of absence and many other funds followed into around the Great China region. The sharks are circling for the kill. Beijing Consensus says China’s financial market is much less open than Wall Street and hot money will have its work cut out while trying to get into China. Not so! With Shadow banking system and the channels applied by money laundering, hot money can circumvent Beijing’s Macro-regulation and Central bank’s radar. They will become invisible to central bank’s reserve pool.  Yes, International money laundering has developed such a sophisticated network that not only the criminal proceeds can come and go as they pleased but also the hot money.

China's economic polices have long been self-indulgent. Beijing Consensus can buck the trend with much fiscal and monetary stimulation but there always gonna be a payback time. In April 2010 State-owned Assets Supervision and Administration Commission of the State Council ordered central enterprises to withdraw from property market. This just reveals how heavily the government and its state enterprises are involved in profiteering from fueling the property frenzy and economic bubble. Since the state is the policy maker and market maker at the same time, we shouldn't be too confident of China economy's soft landing. If China lost its current battle against the high inflation, a serious economic crisis will strike the middle kingdom around 5 years.

These are serious challenges Beijing’s now facing and seems to lack adequate policy tools to tackle. But there are some other profound challenges even more daring than all these:

After so many years of fast growth the bubbles are not only busting on the economic level but also on the Chinese mindset up from the corporation leaders to the average citizens. Recently Liu Chuanzhi, the Chairman of Lenovo and the iconic figure of Chinese manufacturing, faced a serious dilemma while asked why of Lenovo Group’s profit in 2009 60% came from asset investment and only 40% came from manufacturing. He said “when the typhoons come, even a pig can fly in the sky. Everybody is profiteering from this. Why can’t we?”  The typhoons refers to the property frenzy and the easy ways to make money. The strategic marriage between Lenovo and China Oceanwide Holdings Group, a private investment firm heavily involved in the property market, can attest to that sentiment. That sentiment manifested in ordinary people’s logic is a common saying by many: “ buying house rather than saving; buying house rather than stock trading.” That sentiment is also manifested on many other levels: from inflated municipal officials' performance to the fate of a young Chinese man’s marriage. These mindset bubbles are impossible to regulate but will have profound implications on National economy, the fate of macro-regulation and the foundation of the government’s rule: what percentage do the vested interest groups account of the overall population? How firmly they will defend the regime against the alienated farmers depleted of lands by urbanization and the desperate marginalized ant tribe in the cities when the bubble bursts and crisis strikes.  

Hedge funds and Fed’s QE2 are not all to blame for all these. The Chinese economy already stands close to the edge. What speculators do is to push it over and profiteer handsomely from the chaos. While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency(the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.

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Spalding_Smailes's picture


June 03 2011 

China's local government-backed financing vehicles had total debt of 14 trillion yuan ($2.16 trillion) at the end of last year, higher than market estimations, but fears over the effect that defaults could have are exaggerated, observers said on Thursday.

"Loans to local government financing vehicles (LGFVs) accounted for less than 30 percent of total outstanding loans at the end of 2010," the People's Bank of China said in a financial review report published Wednesday night. Many LGFVs are city-level investment companies that invest for local governments. Based on that figure, LGFV debt would amount to a maximum of 14 trillion yuan out of total outstanding loans of 47.92 trillion yuan at the end of last year. That would be equivalent to 35 percent of China's 2010 GDP and higher than previous estimations of about 10 trillion yuan. Debt has risen since China started its massive economic stimulus package in 2008 and embarked on a lending spree over the last two years.

Local governments, barred from selling bonds or borrowing directly from banks, had set up more than 10,000 financing vehicles by the end of 2010 to raise funds, mostly for infrastructure, the central bank said. However, "LGFV defaults could cause liquidity problems for banks but won't actually bankrupt them," Liu Ligang, head of China economics with ANZ Banking Group, said.

LGFV non-performing loans (NPLs) could push up the Chinese banking sector's overall NPL ratio to 6-8 percent from its current level of less than 2 percent, but wouldn't lead to risks of system failure, Liu said.


Spalding_Smailes's picture

A common understanding is that the problem with LGFP loans is that land and property are used as collateral for borrowing from banks to finance infrastructure projects, which are problematic because the cash flow of these projects are not enough to pay the debt. Based on our earlier understanding and as corroborated by the recent PBC report, this is actually not the biggest issues with local government debt. Actually, infrastructure projects usually generate long-term economic returns that can be appropriated by the government in the form of higher long-term business taxes (because of increased business activity) and higher property and land values, even if the project itself may not generate sufficient cash flow in the form of ticket sales. The bigger issues, as we inferred from the PBC reports, are that (i) some local government borrowing was not collateralized at all, but was obtained on government “credit” or “guarantee”; (ii) some of the LGFP loans were not used to build urban upgrading or infrastructure projects, but was misused or used for shoring up governments’ land reserve; (iii) Some regions have over-committed their future fiscal revenue for multiple projects.

No, no hurry at all. But the idea of up to Rmb 3,000bn worth of uncollateralised, cash flow-less local government loans sitting on banks’ balance sheets does not make for comforting reading.

zaknick's picture

You've been betrayed by your masters, the banksters. China is allied with the banksters against your country:

I also read somewhere that one of China's major oil Corp announced a joint project with one of banksters' big oil companies.

What an idiot.

jdrose1985's picture

China has been hyperinflating for decades.

Oquities's picture

a grey swan event

Monedas's picture

In WWII we played the Russians and the Germans like a violin ! Liberals like to think we lost the race to Berlin ! After what the Russians went through, it wouldn't have been very sporting to swoop in at the last minute and take the prize ! We're still in Germany and the Russians have gone !............We've played the whole world and the naive, eager new Capitalists in China like a violin, too ! It's our Ponzi scheme after all ! Enjoy your earned them ! Monedas 2011 Humour is exagerating the misfortune of others !

zaknick's picture

Yes, International money laundering has developed such a sophisticated network that not only the criminal proceeds can come and go as they pleased but also the hot money

Of course, "offshore" black holes that belong to the British Commonwealth are the same ones the banksters use to launder a trillion a year in drug money which ends up in Wall St & the City.

See Dope Inc, the book that drove Henry Kissinger crazy on:

ElvisDog's picture

I find the idea that a centrally-planned, command-and-control economy will be successful over the long term laughable. Even though it's never been proven to do so before, somehow the Chinese will make it work. I think the lesson of history (the USSR specfically) show that it works well initially but then the growth stalls and the centrally-planned economy stagnates due to mis-allocation of resources and cronyism.

Bananamerican's picture

"I think the lesson of history (the U.S. specfically) show that it works well initially but then the growth stalls and the centrally-planned economy stagnates due to mis-allocation of resources and cronyism." (fixed)

ElvisDog's picture

Well, it's hard to argue that the U.S. isn't (or hasn't already) morphing into a centrally-planned economy....

Bananamerican's picture

out of "necessity" of course....

Both constituencies seem to get what they want, in turn.

Oligarchs run an economy toward greater heights of monopoly/embezzlement until all systems shudder and collapse at which point the political/economic system must be "rationed" by the enabling pols to the populace lest everything come crashing down

Monedas's picture

The dream of a Socialist paradise dies hard ! Socialism is the product of flawed human beings and it needs a lot of suckers to keep the Revival tent full of red necks ! When Socialism at last comes to's end is near !

Orly's picture

And that hapened in 1990...

Jus' sayin'.

malikai's picture

News Flash: Socialism has been in Arkansas for many generations now. I believe it was around the time of the first postal office opening up that ushered in the evil clenches of the socialistic state.

Caviar Emptor's picture

China and the US have been accusing each other of imminent collapse for years. What happened was a big convergence known as Chimerica. Both economic systems individually are hardly recognizable compared with the time when Chimerica was first set up in 1971, at the time of Nixon and Kissinger's visit with Mao and Chow. At that time China was a faltering Marxist state and the US was a faltering capitalist one. The US needed to export inflation urgently in the Vietnam war aftermath. Inflation was aggravating political turmoil and price controls had to be put in place. China needed economic growth urgently in the Cultural revolution aftermath. It's economy was mostly agrarian. It needed to export it's one giant resource: labor. The match was made in economic heaven. 

I've been predicting that the convergence won't stop here. It's inevitable that China will drift more toward a liberalized economy and the US toward more central planning. The events of 2008-11 have perfectly demonstrated my theory as central planning aka crony capitalism has run wild. If the convergence stops then each economy will implode. 

cosmictrainwreck's picture

great analysis, Caviar. what i'm wondering is whether it's gonna be a straight-up merger, or a LBO......... ha

Bananamerican's picture

it's gonna be "what rough beast..."

Monedas's picture

We were faltering because we drank too much of the Socialist "Kool Aid" ! We snatched defeat from the jaws of victory ! Yankee traders won the war only to let our Liberals squander the peace !

Seer's picture

Mr. Party Pussy (mynhair), is that you?

Smokey1's picture

Ignorant screed. Alarmist nonsense. America bankrupt, Japan bankrupt, Europe bankrupt, but fools write about all the dire "trouble" China is in.

The worst possible outcome for China is a few speedbumps on their way to economic world dominance.

chumbawamba's picture

When someone presents themselves as an "economist", ask them to recite the definition of money.  If their response does not include the word "gold" then they are a fraud and should be mocked and ridiculed until they skulk away in embarrassment.

I am Chumbawamba.

thriftymost's picture

Can you imagine a planet (or galaxy, or whatever) that doesn't have gold, but does have intelligent life? 

I'd elaborate, but why bother.

StychoKiller's picture

We got Gold, intelligent life...not so much.

Vlad Tepid's picture

Can you imagine a planet (or galaxy, or whatever) with intelligent life, but people (or internet posters, or whatever) who don't understand the periodic table of elements and and the appearance of those elements in natural systems?

I'd elaborate, but why bother?

Seer's picture

And just who is China going to SELL to?  As noted in the article they don't have enough internal capacity to absorb their production (not like producing and consuming internally is any way to produce increased wealth [which occurs only when there are external transactions]).

China's rate of growth is fueling the fire of their own demise.  People just don't get it that this has been the goal of the anti-communists all along (slit their throats with capitalism).  China's faultering will first impact Canada, then Australia, then the US.  The music will then stop and we'll discover that we're more than one chair light.

Monedas's picture

Not gonna happen because the Chinese people will want their long overdue freedom ! How would it sit with the Chinese if Libyans had more civil rights than them ? I'm not sure this Arab Spring is going anywhere positive ! At least the Turkish will have to put their stupid Flotilla to Gaza on hold ! When evil people suffer....I get so giddy, I want to stick my dick in Barney Frank's mouth ! Monedas 2011 Whoa, that's pretty giddy !

thriftymost's picture

Dude, the Chinese people do have their freedom.

I'm an American-born exile/expat here in China by choice.  I enjoy living in a country where the cops are unarmed, and where I'm free to decide when and where to smoke, drink, wear a seatbelt, interact with the opposite sex, make money, save or spend money, travel, etc., etc.

Boarding the bullet train out of Nanchang the other day--hate to rub it in, man, the bullet train, yes, 21st century transport, when will it come to America?--I was questioned about the bottles in my travel bag.  Four bottles of Smirnoff, four of Famous Grouse, one of Pernod.  (I'd been shopping, heh heh.)  The guards were hugely apologetic when I opened the bag and they saw that it was just booze, not bombs.  Great big smiles and lots of apologies.  You don't get groped here.  There's no TSA.  China is free.

And when Americans get their long overdue freedom, I may consider going back home.  Till then, ha ha.

Vlad Tepid's picture

Pardon my French but you're a completely ignorant fuck - or a member of the elite "China" team of trollers.  Have you ever heard of the PAP?  You live in China and say it's free?  I was there less than one month in 2001 (all my time in Asia is spent in Japan) and I saw with my own eyes:

1.  A religious freedom protester have his teeth bashed in by two plain clothes officers with nightsticks in Tienanmen Square and then thrown in a waiting paddy wagon bleeding and unconscious.

2.  Two members of the same group immolate themselve in the Square a week later.  One later died of the injuries.

3.  A cordon of police dragging women out of a large residential house by their hair through a gauntlet of police.

4.  Three young Buddhist monks in cultural Tibet (Xiahe area) who told me that they feared for their lives and planned to escape to India as soon as they felt it would not endager those left behind.

So you can take your ass-backwards ill-informed opinions and shove them up your ass.  The US is turning into a fascist state but that doesn't mean China is all roses.  They are a corrupt police state and anyone with any knowledge will admit that, as should you. The Chinese people are horribly oppressed and that you deny that makes you, in the rarified dictionary of ZH, an ignorant fuck.

chumbawamba's picture

Notwithstanding China's problems, they are in the enviable position of having the most physical assets and commodities at its disposal, thanks to its huge pile of US dollars and Treasuries that its been throwing around the world with reckless abandon to buy up agricultural land, mines, and other productive assets; entering into development agreements with countries in Africa and other parts around the globe (as opposed to the US idea of "business negotiation" that involves aircraft carriers, Tomahawk missiles, and men in camoflauge business suits); becoming the world's largest gold producer and continually adding to its gold reserves (simultaneously flushing out its lame US dollar reserves) to create a basis for a gold-backed currency; and putting precious metals into the hands of its citizens to cushion them from the coming global shock.

Yeah, China has its problems and will go through some serious upheavel, but just as the US came out of WWII smelling like a rose thanks to its huge pile of gold reserves and a hard-working people who knew the value of money, so, too, China will prevail on the world scene.  Count on it.

This author is a fucking idiot.

I am Chumbawamba.

Seer's picture

China is hugely dependent on energy imports (follow Australia's economy to understand this).  While they are locking on to future imports keep in mind that contracts are known to be violated, and much of what they are transacting these futures with is the USD.

China's glow is due to its overheating, growth that can not and will not continue.

P.S. The US came out of WWII smelling like roses because of pent up spending and tis overseas competition being pretty much destroyed from the war: plus it still was a major exporter (read "postive cash flow") of oil.  Waging wars based on the last battle can be problematic...

Bottom line: there's not enough global resources in which to support/sustain China's growth (nor anyone else's).

chumbawamba's picture

I don't necessarily disagree with what you're saying, but the world's wealth has moved to Asia and it's not coming back, if ever, for a long time.

Yes, the US had pent up spending demand after WWII, but we also had most of the world's wealth along with the intact infrastructure to which you allude.  Unless China suffers mass destruction of its factories and infrastructure as a result of the next world war then history will work out differently for them than it did for us, but the fact remains that China has the wealth, and the connections, and the accumulating good will.

I'm not sure why the Chinese let their development go unchecked to the extent it has.  It could just be a situation of growing for growth's sake while the resources are available.  It could be incompetent social management.  But one advantage of all this growth is that they have modern infrastructure, while those of the US and other long industrialized nations is aged and decaying (bridges in Minnesota and gas pipelines in California, anyone?)

China will recede as necessary, just like other nations will be forced to do so.  But China and Asia in general (and maybe Africa for that matter, no longer having the Western monkey on its back as Whitey turns his attentions inward to deal with extreme poverty and social unrest) will come out on top for the next round.

But first, we all have to make it through 2012.

I am Chumbawamba.

Freddie's picture

The US has two things they could bring a lot of wealth back if the USA wasn't such a marxist sh*thole.  Nat gas plus other energy and food.  We have tons of onshore energy - a lot on Fed Land.  

China will have a lot of nat gas from horz drilling too.


Vlad Tepid's picture

I wouldn't rely on the large-scale food much longer.  The aquifers are in serious depletion mode throughout all the major food growing areas, and most natural topsoil has been reduced to dependency on chemical fertilizer to maintain its yield.

potatomafia's picture

^this is the correct answer, well said chumba.

PulauHantu29's picture

"House prices only go up."

That's what the average Chinese still thinks right now. Wiat until history teaches them differently. What happens when a few hundred million house owners head for the exit and want to sell?

It will make the subprime crisis in the USA look like a party.

KickIce's picture

Yep, the "finite amount of land" argument can be quickly countered by there's also a finite number of qualified buyers.

LowProfile's picture

More like these please!

TexDenim's picture

Shorter term, I think that China has behaved more responsibly than either the Fed or the ECB. Who has been hiking rates recently? Not the Western economies. Just China. I'd be leery of counting out another year or two of boom before real inflation sets in.

Seer's picture

"Another reason for runaway inflation is that China’s pro-growth economic policy pays little attention to the quality of growth and that creates
serious capacity surplus and liquidity surplus."

There is NO "quality of growth" that can defy the consequences of trying to maintain perpetual growth on a finite planet!  Can't you flat-earthers EVER get this through your thick skulls?

China was one of the last at the table of the Great Ponzi.  They're fucked!  And, while all the anti-communists take glee over this (failing to note that billions of REAL people living there could really care less about ideologies) know that it will mark the end of the Ponzi, meaning, it'll pretty much be the end of the entire capitalist structure as we now know it (welcome back to the local barter/trade days).

Monedas's picture

If we would have spent our Ponzi lucre more intelligently.....we'd own the world already ! The plan had a fatal flaw....we voted for brain dead Liberals to spend it ! Empire lost ! Sigh ! Monedas 2011 Comedy of Errors World Empire !

Seer's picture

Spending the "Ponzi lucre" is STILL playing the Ponzi.  FAIL!

Flat-earth thinking is flat-earth thinking, no matter whether one thinks of oneself as "liberal" or "conservative" (isn't this shit getting a bit long/stupid by now?).

Allowing others to rule you and expect things to go well- FAIL!

Monedas's picture

Ponzi was a "red blooded" American "Wop" from Barney Frankachussets ! He was the best we could come up with.....then the damn Brits upstaged us with Keynes ! Keynes lent dignity and credibility to Ponzi's idea ! They plagiarized our invention ! I'm pissed ! Monedas 2011 "Give credit when credit is due !"....Monedas' definition of a rollover !

Seer's picture

But... constantly pointing fingers does NOTHING for improving things, for education.  And, isn't it the real goal of TPTB to keep everyone dumb and calm?  From what I'm seeing/reading it's working rather well...

The Answer Is 42's picture

Sorry, this belongs to the same trashcan as the prediction of China reaching wage parity with US in a few years. But it's an easy problem to fix, though. Just actually go there and take a look around.

China does face a multitude of problems, and instability is always there -- as in any human society, but I'm not sure it's greater in China's case.But China has a favorable demographic structure and that will be in place for another 10 years at least.

Let's check back on your China short in a year.

Zeilschip's picture

And in Chanos' case, check back in a year on his short that he put on 2 years ago.

Monedas's picture

We'll know things are better in China......when they take down the suicide safety nets at the worker's dormitories ! Monedas 2011 Every thing the Socialists touch turns to shit ! Kind of an "Anti-Midas" effect ! The real fun begins when they try to explain what went wrong !!!! The average Socialist peon barely has "three fingers" of forehead !

Sudden Debt's picture

2 weeks ago I've seen this Bank of China branch in Brussels.

And it kind of got my attention because it wasn't all Chinese walking in and out of the building. Mostly Europeans actually.

So I did some research and found out that a lot of Europeans are opening Chinese checking accounts to protect themselves against inflation but are also betting on the rise of the Yuan.

Nothing hard, you just walk in and open a account just like in any other bank.

Maybe after the summer, I will open a account just to see and put some spare money on it.


Monedas's picture

Those Europeon lemmings will imitate anybody ! They think they're being cool ! The Chinese are buying Gold ! Monedas 2011 Chances of finding an "American Original" a la Monedas in Europe....somewhere between Zero and Nil ! I'm thinking about marketing canned "Cat" food for dogs......eerr, that should read canned "Cat meat" for dogs !