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Is China Heading For Its Own Arab Spring? Pt 2

Phoenix Capital Research's picture





 

 

This is a continuation of a series of article regarding China’s “miracle.” To read the first two parts, click here and here.

 

China’s “recovery” is largely the result of a massive expansion of its bank system and shadow banking system.

 

From the beginning of 2009 to the end of June this year, Chinese banks have issued roughly 35 trillion yuan ($5.4 trillion) in new loans, equal to 73 percent of China's GDP in 2011. About two-thirds of these loans were made in 2009 and 2010, as part of Beijing's stimulus package.  Unlike deficit-financed stimulus packages in the West, China's colossal stimulus package of 2009 was funded mainly by bank credit (at least 60 percent, to be exact), not government borrowing.

 

http://thediplomat.com/2012/09/10/are-chinese-banks-hiding-the-mother-of-all-debt-bombs/

 

If you’re looking for the reason China’s economy continues to explode, look no further. To put this data into perspective, the above bank expansion would be the equivalent of US banks lending over $10 trillion into the US economy from 2009 onwards.

 

That is the equivalent of what China has done in the post-2008 Crash period.

 

Mind you, the above statistic is only for China’s official lending numbers (the ones Chinese banks official reveal). Indeed, China’s non-regulated financial system, also called its shadow banking system, has expanded to over $18 TRILLION, more than twice the size of China’s economy. Just last year (2012) the Chinese shadow banking system expanded by $1.3 trillion (that’s the equivalent of 20% of China’s GDP).

 

THIS is where China’s wealth and corruption and alleged economic “recovery” have come from: not real economic growth, but a massive credit fueled debt binge. And as anyone can tell you, there is a major consequence for this kind of financial expansion: INFLATION.

 

The massive expansion of the Chinese banking system has unleashed a much higher cost of living in China. And your average Chinese civilian, struggling to meet these increased costs, is going to be none to please to find that the very banking expansion that was supposed to grant him or her a higher quality of life has:

 

  1. Benefitted corrupt Government officials much more than the Chinese population
  2. Resulted in the very same increased cost of living that is eating up his or her paycheck.

 

This is precisely the formula that resulted in the Arab Spring in the Middle East: increased costs of living and a corrupt Government. China’s Government knows this and so is doing three things to try to mollify the Chinese population:

 

  1. Launching a very public campaign to crack down on corruption (to mollify the populace).
  2. Taking steps to tame inflation (slowing financial speculation and importing massive quantities of commodities to attempt to control prices).
  3. Curbing its stimulus efforts.

 

The first of these items is mainly political posturing. True, there will be some sacrifices made (Bo Xilai for instance), but it’s worth remembering that Premiere Wen Jiabao made dozens of speeches and announced numerous campaigns to crack down on corruption for years. So this new campaign against Government corruption likely will likely not add up to any real change (when in history have corrupt officials living high on the hog reformed themselves in China or anywhere for that matter?).

 

Regarding #2, China is now actively moving to curb inflation in the real estate sector by increasing down payments and loan rates:

 

China's cabinet announced late on Friday an increase in down payments and loan rates for buyers of second homes in cities where prices are rising too quickly. The announcement came ahead of the start of China's annual parliamentary meetings.

 

A gauge of property developers listed in Shanghai dived 9.3 percent, its biggest daily loss since June 2008.

 

http://www.cnbc.com/id/100516074

 

It’s also increasing its importation of politically important commodities (food in particular) in an attempt to control prices.

 

Recently published figures from Ministry of Agriculture show that China's grain imports increased to 29.81 billion yuan from January to July this year, increasing by 75 percent on a year base.

 

Among all the products, beans and corns increase more sharply. Imports of beans were 34.92 million tons, increasing by 20.1 percent, while corns have been imported 15 times of the quantity of last year, reaching to 3.127 million tons.

 

http://www.morningwhistle.com/html/2012/Company_Industry_0906/213873.html

 

Many Western analysts believe that as China’s economy weakened, it would slow its imports of commodities. The truth is quite the opposite. Remember, the single most important issue for the Chinese Government in assuaging the Chinese population is to control inflation. This means importing even more commodities when the Chinese economy slows so as to control prices.

 

Finally, China’s Government has begun sending very explicit signals that it will not looking towards stimulus to grow its economy. The first signs of this came soon after the elections in November 2012:

 

This may sound like an oxymoron, but China‘s new Communist government is turning away from financial stimulus to help its slow-moving economy.

 

During the party’s two-day Central Economic Work Conference this weekend, party leader Xi Jinping said the country would essentially not be pursuing high growth rates through stimulus. That doesn’t mean that Beijing has turned sour on fixed asset investments on things like roads, bridges and subways. They’re still going through with major urbanization projects. But whenever the economy is slowing, the new leaders say they will be less likely to prime the pump.

 

http://www.forbes.com/sites/kenrapoza/2012/12/17/reform-minded-china-shuns-stimulus/

 

This is not just idle talk. As I noted in last issue, China has begun actually withdrawing liquidity from its banking system:

 

Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months.

 

The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices.

 

The People's Bank of China used a liquidity-draining tool in the interbank market that enables the central bank to borrow money from commercial lenders. It withdrew 30 billion yuan ($4.81 billion) by offering 28-day repurchase agreements, alternatively known as repos. The PBOC hadn't offered repos since June.

 

"The central bank is trying to send a message that it will not tolerate too-easy liquidity conditions," Dariusz Kowalczyk, a senior economist at Crédit Agricole, ACA.FR +0.99% wrote in a research note.

 

http://online.wsj.com/article/SB10001424127887323495104578313541983212134.html

 

This process continues today:

 

Chinese policy makers sent signals that Beijing is preparing to rein in lending, as a recovering economy has reignited concerns about inflation.

 

At the annual meeting of the country's legislature on Tuesday, Chinese Premier Wen Jiabao set a lower target for money-supply growth, in a clear sign that authorities want to contain liquidity in the financial system.

 

http://online.wsj.com/article/SB10001424127887324034804578343881644066580.html

 

To recap, the primary themes we’ve addressed so far are:

 

  1. The recovery post-2008 in China has been the result of a massive expansion of China’s banking sector.
  2. This expansion has benefitted China’s political elite and their cronies far more than your average Chinese civilian.
  3. This expansion has dramatically increased inflation/costs of living in China to the point that civil unrest is rising dramatically.
  4. The Chinese Government is now trying to curb bank lending and liquidity to lower inflation expectations and mollify the Chinese population.

 

This concludes this article. To help investors avoid some of the biggest pitfalls concerning inflation globally, we recently published a NEW FREE Special Report titled, The Inflation Secrets Your Broker Won’t Tell You and it outlines three HUGE secrets that 99% of the investment community don’t know about inflation.

 

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  • Why U.S. Treasury Inflation-Protected Securities (or TIPS) don't work — and what investment could be your best alternative.

 

This Report is a $79 value, but we’re giving it away for free to investors today. To pick up your free copy, swing by:

 

http://gainspainscapital.com/the-inflation-secrets-your-broker-wont-tell-you/

 

Best Regards,

Graham Summers

 

PS. We also On that note, feature a FREE report concerning the threat of a European Banking Collapse. It’s called What Europe’s Collapse Means For You and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

 

This report is 100% FREE. You can pick up a copy today at:

 

http://gainspainscapital.com/eu-report/

 

 

 

 

 


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Sun, 03/24/2013 - 11:33 | Link to Comment laomei
laomei's picture

Yawn... in a word, no.  Dream on though, it's pretty amusing to watch you flail about like you know what you're talking about.

Sun, 03/24/2013 - 09:52 | Link to Comment torak
torak's picture

Launching a very public campaign to crack down on corruption (to mollify the populace).

Something that will never, ever happen in the U.S. or any other Western nation (Iceland the obvious exception to the rule.  I'm sure the EU will attempt to extract revenge in the future).

 

 

Sun, 03/24/2013 - 09:51 | Link to Comment tony bonn
tony bonn's picture
  1. Benefitted corrupt Government officials much more than the Chinese population
  2. Resulted in the very same increased cost of living that is eating up his or her paycheck.

just like the usa

Sun, 03/24/2013 - 08:57 | Link to Comment Barneyiknow
Barneyiknow's picture

At least China is trying to manage inflation through monetary policy versus Uncle Ben who is trying to inflate the US debt away despite public assurances to the contrary.

Oh, and lol at references to cnbc in your research. Too funny.

Sun, 03/24/2013 - 08:46 | Link to Comment Icantstopthinki...
IcantstopthinkingaboutNINJAs's picture

Uhhhh

 

THis is from 2006:

 

http://english.peopledaily.com.cn/200601/20/eng20060120_236813.html

 

86000 public disturbances.

 

Arab Spring, what is the CIA going to air drop weapons and spec. ops. to train the Tibetans, Uiygurs and other ethnicitices against the Han Chinese?  How can you even compare the Arab Spring to China?

Sun, 03/24/2013 - 08:47 | Link to Comment Icantstopthinki...
IcantstopthinkingaboutNINJAs's picture

A few years later and we're up to 80000 - 100000 events:

 

http://www.ft.com/cms/s/0/9ee6fa64-25b5-11df-9bd3-00144feab49a.html#axzz...

 

 

 

Sun, 03/24/2013 - 08:17 | Link to Comment JamesBond
JamesBond's picture

..... a $79 value, but giving it away for free today....

===

That's what my thai girlfriend always says...

 

jb

Sun, 03/24/2013 - 03:32 | Link to Comment ebworthen
ebworthen's picture

No doubt the average Chinese person is a slave to the collective, and has little to zero property rights or individual liberties.

They should revolt, however, the culture is very hierarchical, ordered, and obedient.  If regional civil unrest were to manifest itself, the government (the military) would foment nationalism via conflict with an external force/nation.

Look at how quickly some of the people were whipped into a lather over the Sendaku islands.  Not that China doesn't have valid gripes with Japan over wars from the past, but the response was rapid and violent.

It is the modus operandi of nations to foment nationalism and start a conflict when internal trouble arises; ship the young men off to war or training for war so they can't cause trouble at home, and distract attention from domestic strife.

If we hadn't sold out to China by off-shoring nearly all our production and career employment and sold them so many trillions of debt to fund their rise as a world power they might have had a revolution.

As it is we gave them the money to create an empire of crony-capitalism and socialistic serfdom.

Is it any wonder the U.S. is on a parallel path yet approaching it from the opposite direction?

Sun, 03/24/2013 - 02:41 | Link to Comment TheLooza
TheLooza's picture

Jokes on us. Theyre using that money to buy prime us and european real estate. But then jokes on then, but jokes still on us. Jokes all around.

Yet its not funny. .

Sun, 03/24/2013 - 01:13 | Link to Comment Handful of Dust
Handful of Dust's picture

I read corruption and embezzelement are rampant there. Eveyr week I read about another low lever gubbermint offical who has bought 10 to 20 million doallr aprtments which is odd since his salary is somewhere around $750 a month. Unless and until they crack down on this things won't change there.

Sun, 03/24/2013 - 01:04 | Link to Comment Joe moneybags
Joe moneybags's picture

Phil, I made so much money from your earlier predictions on the break-up of the Eurozone, that I would feel guilty making another fortune from your expert analysis of the Chinese economy.

Sun, 03/24/2013 - 00:02 | Link to Comment Stockmonger
Stockmonger's picture

Paul Krugman would say that this is merely evidence that China's debt-driven stimulus wasn't big enough.

Sat, 03/23/2013 - 22:16 | Link to Comment Tango in the Blight
Tango in the Blight's picture

Zzzzzzzzzzzzzzzzzzzzzzz

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