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Simon Black Digs Through The Black Box That Is China's Economy, Doesn't Like The Results

Tyler Durden's picture


From Simon Black of Sovereign Man

All booms bust. The only question is when.

Somewhere in China, an economist lost his job today... it was the poor guy who had been predicting manageable levels of inflation despite rapid headline GDP growth and even more rapid monetary expansion.

Yet, staring at reports which show inflation at a 28-month high, officials at the People's Bank of China realized that they need to do something about inflation. Now. Especially in light of what's going on in the world... hence today's 25 basis point rate hike.

Inflation in China is coming from all sides. Certainly there is the country's speedy economic growth, commonly reported in the press as 'overheating'. Then there is the constant battle against America's #1 export (inflation) as many of Bernanke's trillions of new dollars have found their way into China's economy.

Moreover, what a lot of people forget is that China has heavily engaged in its own stimulus programs, which, as a percentage of GDP, dwarf the stimulus packages in most developed countries (including the United States).

Given these genuine inflation fears and the brakes that Chinese policymakers are applying in terms of interest rates and property taxes, it is now almost a "consensus view" in the financial markets that China will face an economic crisis sometime in the next few years.

A recent survey of market participants published by Bloomberg indicated that 45% of those surveyed believe it's inevitable that China's boom will turn to bust sometime in the next 5 years.  Another 40% said they expect it to happen sometime after 2016.

The arguments for why China's economy is a train-wreck waiting to happen are not new.  Prominent short-sellers such as Jim Chanos cite forests of empty apartment towers, deserted shopping malls with no stores or customers, and the empty city of Ordos as proof that China has massively overbuilt. 

They argue that the economy is built on a foundation of quicksand, as construction accounts for the biggest single slice of GDP, and at some stage there simply won't be a need to build anymore. 

I can't disagree.  At some point, perhaps in the not-too-distant future, building in China will slow, and subsequent rate hikes will curtail new expansion.  

The way I view it, China has compressed 100 years of economic growth into 30 or 40 years, so naturally the annual growth rate has been fast. One thing that history has taught us, though, is that the free market cannot be continually outperformed by a central planning authority that inflates its money supply.

Rapid credit expansions can definitely give the appearance of strong economic growth, but no credit expansion has ever lasted permanently. In the long run, an economy can only continue to move forward at strong growth rates via increases in savings, productivity, technology, and innovation.

China's technology sector is advancing rapidly-- the country has developed the world's fastest supercomputer and churns out three times as many engineers as the United States. China's manufacturing sector has also shifted away from unskilled production to high tech manufacturing based on homegrown designs.

Knowledge is cumulative, however, so it will still take some time for China to be the genesis of the next generation of technological breakthroughs... and hence justify its huge growth rates based on innovation and technological advances.

For now, we can continue to marvel at the rapid pace of economic development in China.  But, let's not make the same mistake people made with Japan in the 1980s and assume that the Chinese have stumbled across some superior economic perpetual motion machine.

The truth is, nobody knows what China's real growth rate is. I remember spending time in the country's gray markets-- huge roadside, makeshift shopping malls with tens of thousands of people engaging in off-the-books transactions-- thinking to myself 'no way GDP numbers account for this...'

The fundamentals for growth are definitely there... but we would be foolish to not consider the disastrous effects of a cleverly disguised credit bubble masquerading as 'the Chinese miracle', or the consequences of an unsustainable exchange rate policy.

Nothing goes up or down in a straight line, and in the words of one of my most influential mentors, "All booms bust. The only question is 'When?'"

The reality is, nobody knows when... and more importantly, what happens next.


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Tue, 02/08/2011 - 14:58 | Link to Comment Zero Govt
Zero Govt's picture

'the Chinese miracle' is what happens when Govt gets out of the f'n way ....the Chinese Govt was stone cold insolvent with a totally debilitated economy 40 years ago.

Then the Imperial crones got out of the way (in most part) and the private sector flourished... there's a lesson here somewhere for suffocated by Big Govt America and Europe

Tue, 02/08/2011 - 15:07 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Yes, IF you can get by on $6,000-$7,000 per year.  Good luck with that.

Tue, 02/08/2011 - 15:15 | Link to Comment Zero Govt
Zero Govt's picture

it's better than not a bean to eat isn't it?

One step at a time up the industrial ladder to (private) progress and (private) wealth creation , the trickle-down theory that works, unlike the Govt socialism that destroys progress (see Detroit, Chicago etc) and lifts nobody (see healthcare, property and banking)

Tue, 02/08/2011 - 15:22 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Go live in China and then lets talk.  I spent 2 years there.  It is a socialist country where everything is controlled, owned, operated and overseen by the state.  If they don't like the advertisement for your business, the state can modify it at their will.  You are completely retarded if you think there is any real freedom in the Chinese system.

The truth is, they are focused (by force) on the welfare of the state and will work for peanuts (in part by force and propaganda).

Tue, 02/08/2011 - 22:37 | Link to Comment MrSteve
MrSteve's picture

I don't know if the progress that has been destroyed in Chicago is in the same league as the destruction in Detroit,or even the same galaxy. A friend sent me pictures of Hiroshima today to compare to pictures of Detroit today and I admit, it looks like Detroit has been nuked and never recovered, just the opposite of reality. Perhaps Detroit has been nuked by socialism and the radiation is yet undetected, though the death of a city is unmistakable.

Tue, 02/08/2011 - 15:28 | Link to Comment Non Passaran
Non Passaran's picture

I am for the small government, but that is absolutely not what is going on in China...
1. Mercantilism
2. Huge state-owned enterprises
3. Planned economy with state control over key sectors, products, prices
4. etc.

And in fact taxes are not low either.

Tue, 02/08/2011 - 15:39 | Link to Comment theXman
theXman's picture

But the truth was that the Chinese government was never out of the way. The change was from 99% control of the economy to about 50% control. China has a mixed market economy, just like US or Japan or Europe. The difference is only in size.

There is nothing new under the sun or in China. 

Tue, 02/08/2011 - 15:51 | Link to Comment Zero Govt
Zero Govt's picture

yes Gentlemen, there's still much in China that does not work, mis-alocation of resources, towns built that are both empty and will fall down, roads to nowhere, unsustainable train networks, systemic corruption etc ...that'll be the Chinese Govt then!

...sounds like the US and European Govts too when you think about it, there must be a common theme running through this wealth destruction and systemic incompetence, can you spot it?

Tue, 02/08/2011 - 17:42 | Link to Comment newworldorder
newworldorder's picture

Why do people confuse centrally planned economies with those of Western open markets? I will grant you there has been increased market interferance by Western governments during the last 20 and most of us dont like.

Answer me this. What citizen of a Westnern economy wants  to live under a Chinese style government. No constitution, no protection under the law, a controlled court system.

Who wants to put all or most of theri invetment dollars into such a system?

Who is willing to submit themselves to world peace and a peacefull lifestyle under the protection of the Chinese military?

We do have our problems in the West and in most cases we may be past the point of no return on our original Constitutional liberties, but I for one do not want to live under the protection of Chinese hegemony.


Wed, 02/09/2011 - 01:31 | Link to Comment StychoKiller
StychoKiller's picture

All those Chinese ghost cities are startin' ta look like Moai:

In a sufficiently advanced economy, it's impossible to see the difference between a Cargo Cult and insanity!

Tue, 02/08/2011 - 15:04 | Link to Comment SparkyvonBellagio
SparkyvonBellagio's picture

No one can truly verify ANY Economic figures from any country, any organization, etc.


They all tend to LIE, aka fudge the data to suit their own agendas.



It's all a PONZI on every level.




Tue, 02/08/2011 - 15:17 | Link to Comment Dr. Acula
Dr. Acula's picture

Capitalist China will continue to grow faster than socialist USSA.

Think of how much of the economy the USSA government owns. E.g. 50% of the mortgages.

Think of how many laws and how much red tape USSA has. How gigantic our tax code is. How gigantic our military expenditures are.

Hell, you can't even take a dump without the government getting involved:

"Many of the customers at that Chinese takeout probably blame the owners, who themselves are probably mystified as to why toilets in communist China probably worked just fine but in capitalist America are throwing filth all over their restaurant."

Land of the Free my ass.

Tue, 02/08/2011 - 15:17 | Link to Comment LawsofPhysics
LawsofPhysics's picture

By all means, move to China.  Perhaps Americans would be better off working for Chinese wages?  Good luck with that.

Tue, 02/08/2011 - 15:25 | Link to Comment Zero Govt
Zero Govt's picture

LawsofPhysics  -  who have the largest and fastest growing unemployment cues, China or America/Europe? ...that's the reverse of their declining stagnant economies. As Govt gets bigger the economy declines, as the Chinese Govt got out the f'n way, their private sector flourished.... you learning anything here???

Tue, 02/08/2011 - 15:33 | Link to Comment Non Passaran
Non Passaran's picture

There aren't queues (or "cues", if you so prefer) - perhaps because there aren't such nice benefits to be had.

The county is now growing fine, true, but from a very low base and it's not nearly as great as you might think.

Tue, 02/08/2011 - 15:22 | Link to Comment Zero Govt
Zero Govt's picture

Dr Acula  -  the Marxist Govt of the USSA is now micro-managing the size of salt shakers and telling Cafes they're not allowed to offer free munchies on their bar... Europe and America is a Communist controllers wet dream, Stalin and Mao had nothing on micro-mangling jack boot Western 'democratic' Govts'

Tue, 02/08/2011 - 19:08 | Link to Comment BKbroiler
BKbroiler's picture

I junked ya. If want partisan hackery and Tea Party metaphors, I'll look elsewhere, thanks.  Try commenting when you have something to add, instead of shtting on every. single. post.  One enlightened soul on here told one of your counterparts to go live in the Sudan if you don't like government.  Not that your logo isn't super cute, your viewpoint is just childish, which only works when you're really smart and eccentric.  which you're not.

Tue, 02/08/2011 - 21:24 | Link to Comment Zero Govt
Zero Govt's picture

unfortunately you have to ignore the facts to get to your opinion my view is "partisan, hackery... childish".

Govt is an abject failure wherever it is practised, any country at any time in history past or present. The best form of Govt is self-government (free society and markets) with zero Govt (parasites). And you don't need to go to Sudan for zero Govt examples either:

..there's a whole host of US towns whose local Govts have done what all Govts ultimately do, gone completely bankrupt in their own ignorance, mis-management, corruption and parasitical greed. These US towns are now enjoying the freedom relieved of State Police, education and other 'services' these town dwellers will not miss one jot. 

In fact US towns with zero Govt will enjoy increased freedom, wealth and less hassle from the State Police bullying the local populace with petty fines and windbags (politicians) mangling in every imaginable detail of their lives. 

As China is discovering (see also the history of Hong Kong and Singapore) the more you remove Govt the wealthier and freer society becomes. That's because you remove the "partisan, hackery, childish" parasites. But do get your pea shooter out and try to evidence where you think Govt is anything but a pile of crap (good luck, you and your pea shooter are going to need it!)




Tue, 02/08/2011 - 15:13 | Link to Comment oddjob
oddjob's picture

Howard Balloch, founder of Beijing-based boutique investment banking firm Balloch Group, recently acquired by Canaccord Genuity.

Tue, 02/08/2011 - 15:18 | Link to Comment Cleanclog
Cleanclog's picture

Others will bust before China.  And bust won't just be markets, but governments etc.  

Basic necessities will drive this more than empty buildings.  The 'ol inflation of everthing "we" need and deflation of everything "we" have.  China, short term anyway, will be able to feed its people, despite the recent FAO warning on wheat.  Others?  Maybe not so much.

Tue, 02/08/2011 - 15:48 | Link to Comment ThirdCoastSurfer
ThirdCoastSurfer's picture

Last week, at the height of the holiday season a 750 foot high rise hotel burns down and causes the Sheraton next door to be evacuated and the only reported evacuations were of staff at the Sheraton.

The concept of empty "caretaker" cities is beyond fascinating and worthy of science-fiction .  The picture in the link is as scary as the "The Towering Inferno" except Steve McQueen is identified with China more for his role in "Sand Pebbles".

Tue, 02/08/2011 - 17:56 | Link to Comment squexx
squexx's picture

I bet that 750 ft tower fire was started by "Jewish  lightening!"

Tue, 02/08/2011 - 16:19 | Link to Comment ivars
ivars's picture

Chinese will stretch it to the end, using cash to destabilize the West with inflation and lying to people so eager to listen that their investments in China are safe. That has already been seen in Soviet Union in 1929, just as Great Depression started. Middle class were sent to gulags, private property nationalized, Western technology overtaken, plans for expansion into the Western Europe and set up of Chinese CP reactivated.

And Soviets succeeded on all counts, as the West was weak during and after the crisis. After "little" bloodletting, Soviet Union and CCP and Soviet block in 1949 became a superpower - in 20 years, starting as nothing.

The key is to grasp the moment of weakness in the West, that is , a crisis. This time, the biggest one since 1929, so a HUGE opportunity for China. In 20-30 years, they think they may become the sole superpower again, as in most of its history. They would probably sacrifice few hundred millions of own citizens to achieve that, that is nothing new for them.

Tue, 02/08/2011 - 17:10 | Link to Comment Stuck on Zero
Stuck on Zero's picture

I don't get it.  China has pegged its currency to the dollar.  In China, the government declares that inflation is roaring and must be handled.  In the United States our government declares inflation to be non-existent.  How can this be with a peg to the Chinese currency?

Tue, 02/08/2011 - 17:27 | Link to Comment Rogerwilco
Rogerwilco's picture


"The power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them....To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth.”

George Orwell, "Nineteen Eighty Four"

Tue, 02/08/2011 - 20:27 | Link to Comment Diogenes
Diogenes's picture

Also known as being a sociopath, or pathological liar.

William Mitchell expressed it best back in the Watergate days: "That statement is no longer operative".

Tue, 02/08/2011 - 17:14 | Link to Comment defencev
defencev's picture

Judging from the accuracy of previous predictions of Mr. Black (the last "pearl"

was the endorsement of Doug Casey recommendation of buying real estate in Egypt),

we need to expect continuing boom in China. This is the only way to use Mr. Black "investment tips":just do opposite to what he recommends.

Tue, 02/08/2011 - 20:22 | Link to Comment PulauHantu29
PulauHantu29's picture

HOusing prices were out of control even two years ago when the CEO of SOHO siad they are unloading properties except for those near Wan Fu tourist area. The CEO said it is no longer possible to rent the properties profitably.

Tue, 02/08/2011 - 20:24 | Link to Comment PulauHantu29
PulauHantu29's picture

BTW, talking about Real Estae Bubbles, take a look at Australia. The median residential house price there is about $560,000 in USD. INcomes don't come close. This is once more due to No Doc loans (Aussie Style) and a $16,000 tax credit incentive from the Gubberment.

Wed, 02/09/2011 - 04:04 | Link to Comment qmhedging
qmhedging's picture

Shorting China really takes guts. The central planners are the tertiary predators. Even great short happen,no much share would be left for free market investors.


Wed, 02/09/2011 - 07:05 | Link to Comment oh_bama
oh_bama's picture

china has been "about to crash" since when? 2001?

A bunch of pessimistic losers.

Wed, 02/09/2011 - 07:41 | Link to Comment Coldfire
Coldfire's picture

...the free market cannot be continually outperformed by a central planning authority that inflates its money supply.

I believe so but to verify that claim we need a free market and a central planning authority that doesn't inflate "its" money supply. We have neither.

China is correctly described as a mixed economy. But it has been getting dramatically freer over the last 40 years, in diametric opposition to the US economy.

There are lies, damn lies and statistics. Then there are government statistics. But for a quick and dirty barometer of economic progress, watch the growth of the middle class in China (and India).

China makes, the world takes. (And the Frauderal Reserve fakes).

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