Shenzhen

The great American manufacturing renaissance? Maybe not. But China is losing the low-wage edge.

China is in the midst of an urban revolution, with hundreds of millions of migrants moving into cities every year.  Since 2011, for the first time in history, more than half of China’s 1.3 billion citizens (690 million people) are living in cities.  Another 300-400 million are expected to be added to China's cities in the next 15-20 years.  New Premier Li Keqiang recently proposed accelerating urbanization in China, and said urbanization is a “huge engine” of China’s future economic growth. Yet, China’s urban dream may be derailed by the lack of affordable housing in cities for the massive influx of urban residents.  

By definition, exports from country A have to equal imports from country B. Unless country A is China. Then, central planning magic happens, as can be seen in the chart below showing the misreporting of Chinese exports to HK compared to HK's reported imports from China, which is just the latest nail in the coffin of Chinese economic data "integrity."

All Chinese economic data is manipulated: that much is known. So is its trade data. However, the manipulation has become so grossly evident, some wonder if there is a far bigger problem behind the scenes. Turns out there is: a $60 billion per month "hot capital" inflow problem, and an economy on the very of bursting at the inflationary seams.

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At least Chinese retirement funds don't have to worry about a cash outflow crunch any time soon. Tangentially, perhaps BlackRock can create a 3x levered ETF tracking the profitability of Chinese fake birth certificate and driver license fabricators?

This is precisely the formula that resulted in the Arab Spring in the Middle East: increased costs of living and a corrupt Government. Could China be heading for a similar development? It sure looks like it.

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First it was Walmart letting the truth finally slip last Friday when a leaked memo showed recent sales are a "total disaster." Today, as anyone who has looked at AAPL premarket quotes will surmise, it's Apple's turn, following a report in the FT that FoxConn, the world's largest contract electronics manufacturer, "has imposed a recruitment freeze across almost all of its factories in China 5th as it slows production of Apple's iPhone." It is not an internal memo, but in this particular case actions speak even louder than leaked words: 'The suspension in hiring by China's largest private sector employer, and the biggest assembler of Apple products, is the first search countrywide move since the 2009 downturn, prompted by the financial crisis. It underscores the weakening demand for some Apple products, Which has put pressure on the American company's battered share price. "Currently, none of the plants in mainland China have hiring plans," said Liu Kun, a company spokesman at Foxconn's largest manufacturing facility in the southern Chinese city of Shenzhen." So first Walmart, the world's largest private sector employer with over 2 million workers, and now FoxConn, the world's largest tech-focused employer with 1.2 million workers, is also realizing what a cashless, consumerless "recovery" means, regardless whether it is due to Apple or not. And the markets still continues to wave it off as one off events.

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That China openly manipulates its economic data, especially around key political phase shifts, such as one communist regime taking over for another, is no secret. That China is also the marginal economic power (creating trillions in new loans and deposits each year) in a stagflating world, and as such must be represented by the media as growing at key inflection points (such as Q4 when Europe officially entered a double dip recession, and the US will report its first sub 1% GDP in years) as mysteriously reporting growth even without open monetary stimulus (something we have said the PBOC will not engage in due to fears of importing US, European and now Japanese inflation) is critical for preserving hope and faith in the future of the stock market, is also very well known. Which is why recent market optimism driven by "hope" from Alcoa that China is recovering and will avoid yet another hard landing, and Chinese reports of a surge in Exports last week, are very much suspect. But no longer is it just the blogosphere that is openly taking Chinese data to task - as Bloomberg reports, even the major banks: Goldman, UBS and ANZ - are now openly questioning the validity and credibility of the goalseek function resulting from C:\China\central_planning\economic_model.xls.

Something is going on that reeks of the dreaded phrase, “this time, it’s different”: secret discussions in Germany.

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