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Is China an economic miracle, or one massive Government-­sponsored fraud?

Phoenix Capital Research's picture




 

Is China an economic miracle, or one massive Government-­?sponsored fraud?

History has shown us countless times that centrally-­?planned, command style economies do not produce long-­?term economic growth. We’ve seen this will the Soviet Union, the UK, the US-­?since the Tech Crash, and today in China.

I realize that many would argue China has adopted free market policies with its “free market zones.” However, even this terminology reveals China is nowhere near a free, dynamic market (a free market is simply a free market, not a “zone.”).

Instead, China should be viewed through the lens of rampant corruption, fraud, and insider dealing that has seen a select handful get rich (usually those with close ties to the ruling party) via paper wealth (real estate and stock prices).

First and foremost, no Chinese economic data is even close to accurate. The reason for this, is that unlike the US in which GDP is measured using final sales, China simply counts any and all economic production as economic growth.

So, let’s say that China built a city. Regardless of whether any of the buildings are ever purchased or leased, China will count the entire city in its GDP growth. As one can imagine, this has highly incentivized China’s government to build “bridges to nowhere” or economic projects that are never actually used.

As a result the country is replete with ghost towns...

China's ghost towns and phantom malls

"In Chenggong, there are more than 100,000 new apartments with no occupants," according to the World Bank's Holly Krambeck.

Designed as an overspill point for nearby Kunming, a city of nearly six-­?and-­?a-­? half million, Chenggong began to take shape in 2003.

High-­?rise apartment blocks have mushroomed but today it is still largely deserted after failed attempts by the authorities to attract new residents.

Matteo Damiani, an Italian journalist who worked for seven years in Kunming, has visited Chenggong several times, photographing empty tower blocks that loom over gigantic plazas, peopled only by enormous works of art.

He found a small community of students, workers and security guards but nobody else.

"The suburbs and even the city centre are empty," he says. "You can find a big stadium, shopping malls and hundreds of buildings finished but abandoned."

There is even an area for luxury villas that is totally abandoned, he adds. It is said to be one of the biggest ghost cities in Asia. http://www.bbc.co.uk/news/magazine-­?19049254

...as well as widespread economic fraud and counterfeiting:

Fraud, Culture and the Law: Can China Change?

Counterfeit goods and scams are used to defraud millions of Chinese daily.

This week alone, the country’s state media have reported the arrests of two men for fraud: one a high-­?profile real estate financier suspected of manipulating bids, the other a sales manager at milk producer Mengniu who reportedly tampered with production dates on milk and yogurt labels.

Those cases follow the announcement earlier this month by police that they had seized more than $182 million in counterfeit pharmaceuticals, including drugs used to treat diabetes and high blood pressure, as part of a nationwide crackdown on fake food and drugs. Drug counterfeiters “are coming up with new schemes, becoming craftier and better able to deceive” police warned in a statement accompanying the news.

The persistence and extent of fraud in China, despite a near constant string of crackdowns and arrests, raises fundamental questions about cultural forces in Chinese society that limit the reach of law...

...The production of counterfeit cigarettes, for example, has been estimated to reach 400 billion cigarettes, although cigarette manufacturing and distribution is supposed to be exclusively state-­? owned and controlled. One manufacturer reportedly went so far as build a counterfeit cigarette factory in Fujian designed to look like a military compound, including laborers dressed in second-­?hand military uniforms who conducted false military drills to complement the masquerade. In Sichuan, meanwhile, police are said to have raided a black-­? market cigarette factory that had been disguised as the “Number 1 Block” of a provincial prison.

http://blogs.wsj.com/chinarealtime/2012/08/24/fraud-­?culture-­?and-­...? law-­?can-­?china-­?change/

Some more striking evidence of fraud, corruption, and counterfeiting in China:

  1. In 2010, 30 animals died in the Chinese zoo of Shenyang due to malnutrition.
  2. China built the world’s largest mall in 2005. Of the over 2,300 spaces ?available for lease only 47 were rented.
  3. China alone accounted for 73 % of $1.69 billion in counterfeit goods seized in ?the EU in 2011.
  4. Chinese officials have seized over 50 TONS of counterfeit pharmaceuticals.
  5. Raids have seized more than 350,000 counterfeit golf products.

These sorts of issues don’t come out of a free market with a stable regulatory bodies, sound accounting principles, and a legitimate legal structure: they come out of control style economy that are based on fraud and corruption. Indeed, as noted in previous articles:

1)  In 2010 alone, 146,000 cases of corruption were launched in China (that’s 400 PER DAY).

2)  How much these officials stole is unknown. But... of the 14 cases that were actually reported in the Chinese media, the average amount stolen was 18 MILLION RMB (for perspective, the average college graduate in China earns 2,500 RMB per year).

Between 1991-­?2011, it’s estimated that between 16,000-­?18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP was just 2.1 trillion RMB in 1991.

So I fully believe that China is heading for a full-­?scale economic collapse a la the Soviet Union, not just a hard landing.

Indeed, if you need evidence of just how desperate the Chinese Government has become to maintain control, you should consider that it has launched $1 trillion in stimulus projects:

China's More Than $1 Trillion Stimulus Will Disappoint, Barclays Says

From the central government and the PBoC to regional governments, spending plans worth approximately more than 11 trillion RMB ($1.74 trillion) have been announced, according to Barclays and Nomura. Analysts at the Japanese bank expect Chinese GDP to hit 7.7% in the third quarter and then rebound strongly to 8.8% in the fourth.

There are reasons to be skeptical of these growth expectations, as China is going through both structural and cyclical changes that will limit the impact, and the breadth, of the coming stimulus, Barclays’ team argues. “This time is different,” they wrote, noting that both in the Asian crisis and in the 2008-­?9 financial crisis, China suffered massive job losses and deflation. http://www.forbes.com/sites/afontevecchia/2012/09/17/chinas-­?more-­? than-­?1-­?trillion-­?stimulus-­?will-­?disappoint-­?barclays-­?says/

To put this number into perspective, China’s entire economy is only $7.3 trillion. So China just unveiled stimulus measures equal to 23% of its entire GDP. This is more than TWICE the size of the 2008 stimulus plan.

Imagine if the US announced a QE program equal to over $3 trillion. That’s the equivalent scale of the recent stimulus programs announced in China. And the Chinese stock market barely reacted to this.

Again, China is beyond a hard landing at this point. Combine this with growing food inflation and it’s possible China may in fact break into several smaller countries in the coming years.

On that note, smart investors are taking advantage of the time before this happens to prepare. At Phoenix Capital Research, we’re taking steps to insure our clients are among the winners from this debacle. We have a host of FREE Special Reports devoted to helping readers prepare for the coming Collapse in China.

All of this is available 100% FREE at www.gainspainscapital.com

Best Regards,

Phoenix Capital Research

 

 

 

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Sun, 10/14/2012 - 02:44 | 2886249 e-recep
e-recep's picture

a chinese got the job that was once in america and an american is now jobless. guess whose government is the real fraud?

Sat, 10/06/2012 - 19:41 | 2863654 Zero Govt
Zero Govt's picture

"..a free market is simply a free market, not a “zone.”

that's the most profound thing you've ever written Graham

"..These sorts of issues don’t come out of a free market with a stable regulatory bodies, sound accounting principles, and a legitimate legal structure..."

then you go and fuck it all up Graham

a free market is built on B2B or B2C relationships Graham. It does not and never has required reems of pompous, pius and anal red tape (ie. the Law) to operate

if a B2B or B2C relationship refers to Law for enforcing that relationship, the relationship is (cue highly technical terminology) fucked

if you need a lawyer or a Juducial system you haven't got a relationship (market), it's broken old bean and no amount of pissing your money away on lawyers and judges is going to bring it back

Sat, 10/06/2012 - 14:24 | 2863055 jonjon831983
jonjon831983's picture

In China, some times when you go shopping you can get "inivited" to their special back rooms where you can get the good stuff... AAA fakes which are basically the same thing as what you'd buy retail in America. Especially when some of these are probably just taken off the production line of existing legit factories :)  Well that was back in the day, not sure about now.  Though, I've never had the guts to go when some shady guy asks you to follow him into a back alley and go up into an apartment with other foreigners looking for good fakes.

Heard stories of non-chinese gov't officials going in to buy golf products.

 

Not the same stuff you'd find in the street level stalls... which will fall apart after a couple years and appear to be fully usable, but some little pieces are just for show and don't perform.  (though with fashion and such, not like you'd keep things for over a couple months).

 

Sat, 10/06/2012 - 13:52 | 2862976 KTV Escort
KTV Escort's picture

for fucksakes, this article is 99% nonsense ~ China is a fully functioning wonder in progress, certainly with many holes to fill, but won't be derailed... come have a visit (yeah, it's my blog, and I don't earn a penny by promoting it here):

http://www.chinapositive.blogspot.com/2011/03/nanning-zoo-more.html

http://www.chinapositive.blogspot.com/2011/05/guangzhou-yuan-xuan-taoist-temple.html

http://www.chinapositive.blogspot.com/2011/01/shanghai-chinas-museum.html

http://www.chinapositive.blogspot.com/2011/01/changsha-every-nightlife.html

cheers

Sat, 10/06/2012 - 12:41 | 2862860 reader2010
reader2010's picture

Foxconn near-slaves are on strike again due to shitty workload.

Sat, 10/06/2012 - 11:57 | 2862787 Son of Loki
Son of Loki's picture
Is (insert your country here) an economic miracle, or one massive Government-­sponsored fraud?
Sun, 10/07/2012 - 19:21 | 2863671 Zero Govt
Zero Govt's picture

i can assure you the words miracle and Govt should never exist in the same sentance no matter which nation we insert

all economic miracles are created in the private sector ...regularly

Sat, 10/06/2012 - 11:46 | 2862764 Ancaeus
Ancaeus's picture

What history really has shown us is that generalizations such as yours are rarely true. Yet it still seems worhwhile to consider your hypothesis that China is "beyond a hard landing."

What you have presented is, at best, anecdodal evidence.

What about those empty appartments?  The capacity of 100,000 apartments is 300,000 people.  Compare to your stated population of 6.5 million for Kunming.  It seems that this massive empty city represents a less than 5% vacancy rate increment for the greater Kunming area.  Certainly not desirable, but hardly earth shattering.

You have also cited examples and statistics on various forms of lawlessness.  Well, lets look at history again -- your own flawed starting point.  The U.S. and western territories were, to a great extent, lawless through most of the 1800's, by modern standards.  They didn't call the captains of industry "robber barrons" for nothing.  And, we suffered several massive economic collapses, as well, but, nothing approaching an existential threat.  In fact, some of that lawlessness (I am not condoning it) contributed to economic growth. 

So, China may be heading for a meltdown.  However, you fail to convince me of that with this weak argument.

Sat, 10/06/2012 - 18:15 | 2863548 azzhatter
azzhatter's picture

A big problem is young chinese don't want to buy a used apartment. They lose "face" if they don't buy new. So 100,000 empty is not a problem in and of itself but the fact that people moving up can't sell their old aprtments. At last check there were 64.5 million vacant units in China. That a lot of non producing asset. I've personally seen 5 year old building vacant, never been occupied and already crumbling. In some cities in the north they are knocking down buildings that have never been occupied. Saw this in Shenyang and Qindao.

Sat, 10/06/2012 - 11:41 | 2862756 azzhatter
azzhatter's picture

The average Chinese college grad earns 2500 RMB per year? Bullocks     I ran a business in China for 6 years and we paid $40-60,000 RMB per year and I've been gone for a couple of years. You can't even get factory workers for less than $10,000 RMB per year.

 

That said, I largely agree with the article. I saw as far back as 2005 that all this building of empty infrastructure was going to collapse and some has literally collapsed. The level of corruption we had to deal with was staggering. Almost every govt official I dealt with was on the take and these weren't $50 dollar bribes they were asking for.

 

I always knew it would collapse and the sooner the better. This is purely a slave wage state with the owners getting wealthy off the slaves. And people love to justify it by saying the slaves are better off than they were before. The same thing was said about african slaves being better off than they were before. The scumbags at the top need to be hanging from lamp posts

Sat, 10/06/2012 - 14:32 | 2863067 jonjon831983
jonjon831983's picture

lol back in the day (around 2004) a friend working for a Hong Kong power company was handling coal shipments in China via rail...

I don't recall the rough figures now, but for a $100Million shipment at substantial portion was used in kickbacks along the way of the railway.

Sat, 10/06/2012 - 11:33 | 2862738 Colonel Walter ...
Colonel Walter E Kurtz's picture

"Imagine if the US announced a QE program equal to over $3 trillion."

Wait...didn't we announce QEInfinity?

Long live the "Bernank"!

Sat, 10/06/2012 - 11:12 | 2862693 beatus12
beatus12's picture

just a few more t.bits,

China has put tarriffs in place against US parts of auto industry

something like 35pc,

blocked all foreign mining licences

(stole everything don't need you anymore)

Free markets, free speech,

egalitarian open pluralistic

societies are the future

 

Sat, 10/06/2012 - 10:47 | 2862641 etresoi
etresoi's picture

 

On that note, smart investors are taking advantage of the time before this happens to prepare. At Phoenix Capital Research, we’re taking steps to insure our clients are among the winners from this debacle.

How much do you pay ZH to promote the "Ann Landers" of financial blogs, which takes any event in the world to promote its worthless subscriptions.

Sat, 10/06/2012 - 11:12 | 2862691 RSBriggs
RSBriggs's picture

You'd have to ask the owners of the ABC broadcasting network, that owns ZH...

Sat, 10/06/2012 - 13:43 | 2862931 Bob
Bob's picture

And, in that inimitable Fight Club spirit, here's a law suit filed 9 months ago that makes interesting reading, particularly from page 25 . . .

http://gross-law.com/dalrymple.pdf

Apparently it's not the broadcast network.

Sat, 10/06/2012 - 10:48 | 2862640 dumpster
dumpster's picture

again phoenix capitol speaking of a history of china it has no knowledge of .  and trying to sound impressive

much like their drum like beat of no Q-3

 

minus 10

Sat, 10/06/2012 - 10:55 | 2862629 mjcOH1
mjcOH1's picture

"China will never break up like the Soviet Union. It has been one country for thousands of years."

 

In addition to 23 provinces (historically 'Chinese) China includes five of what they describe as 'Autonomous Regions" (Tibet, Inner Mongolia, Guangxi, Ningxia, Xinjiang) .... all with tortured histories of recent independence and occupation (Tibet) or having been swapped back and forth since the 12th century between China and the Mongul Empire/Mongolia (Inner Mongolia, Ningxia).  

Several would probably walk or merge with other neighbors given the opportunity.   Someday they'll get that opportunity.  

Sun, 10/14/2012 - 02:48 | 2886250 e-recep
e-recep's picture

will texas get that opportunity?

Sat, 10/06/2012 - 10:33 | 2862615 Vendetta
Vendetta's picture

I happen to agree about the china 'miracle', the only thing china offers manufacturing that flees the US is slave wage labor and economic arbitrage with the US and some other markets that enable the swindle of workers in the respective nations that 'trade' with China.  All else is smoke and mirrors ..

Sun, 10/14/2012 - 02:52 | 2886255 e-recep
e-recep's picture

slave wages, eh? then why do i see more and more flocks of chinese tourists all over the world?

those slave wages in china must be sumtin', ha?

Sat, 10/06/2012 - 10:30 | 2862609 Peter Pan
Peter Pan's picture

When a man has not eaten for days let lone weeks he is bound to gorge himself to the point of becoming sick. Likewise the Chinese went from a subsistence existence to being given the opportunity of tasting capitalism and all it entails. In such a situation you are bound to have opportunists, gullible people as well as corrupt officials and inexperienced bureaucrats stuffing up the process.

The Chinese government has paid more attention to policing the internet and fringe groups that stamping out economic corruption of the worst kind. The proof is that the members of the Chinese Politburo have many more billionaires than the US congress.

In its desire to avoid any form of social security net it simply has given out trillions of yuan of loans to enterprises to create employment. The end result is malinvestment, poor returns and in many cases not even a return of the capital.

Sat, 10/06/2012 - 10:20 | 2862588 Hey Assholes
Hey Assholes's picture

I was always skeptical of the China Miracle Market. Central planning is a failure, no matter who does the planning. I admit Chinese students are smart, but they cannot be smart enough to plan an economy.

Sat, 10/06/2012 - 19:25 | 2863641 Zero Govt
Zero Govt's picture

ask Barrack Obumma or Paul Krugman what they think will be the leading compound for car brake discs in 2015

you can bet your arse they'll come up a total blank

ditto another 157,000 products and services that make up 'the economy'

then you realise what a bunch of fucking charlatans politcians, economists and academics are to think they know what they're jibbering on about

 

Sat, 10/06/2012 - 10:10 | 2862555 Manthong
Manthong's picture

I'll take fraud for 200, Alex.

 

Sat, 10/06/2012 - 09:46 | 2862518 Tango in the Blight
Tango in the Blight's picture

China will never break up like the Soviet Union. It has been one country for thousands of years.

Sat, 10/06/2012 - 11:30 | 2862734 ultraticum
ultraticum's picture

A prevalent mis-perception. One of the communists most challenging issues was unifying so many different languages and cultures, even among a relatively homogenious Han race. Same issue down through China's history. That's also why they simplified the written language, which is different in Taiwan and Hong Kong.

Sat, 10/06/2012 - 09:34 | 2862504 Tombstone
Tombstone's picture

I guess Kommies offer some of the best free markets, look at the US.

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