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China's Great Wall of Credit Begins to Crumble
China’s credit-fueled bubble economy is falling to pieces before our very eyes.
Between 2008 and 2013, China’s credit market increased from $9 trillion to an incredible $23 trillion.
To give this number some perspective, China’s GDP is a little over $7 trillion. So China today has a credit market well north of 300% of its GDP.
There is simply no other way to view this than as a bubble. Indeed, we see all of the clear signs of a bubble in the real estate markets today with countless ghost cities, massive empty malls, and other excess capacity.
What’s truly stunning to witness however, is the fact that in spite of all of this expansion in credit, China’s GDP growth continues to fall.
Indeed, GDP is now trending downwards for the first time in a decade. China’s Government has realized that this is a major problem for the country and so has announced that “GDP is no longer a measure of success.”
This is an incredible admission from the Chinese Government as everyone on the planet knows China’s GDP measure has been a work of fiction for decades. The fact that GDP growth is slowing in spite of all the manipulation of the metric is a major sign that things are sharply turning for the worse in the People’s Republic.
Indeed, we get additional indications that China’s economic data is dramatically overstated from other less massaged metrics.
China recently announced that it would be implementing a crackdown on fraudulent trade invoicing. It is not coincidence that right after this, China posted a truly horrible steel export results for the month of May: a mere 1% increase from the year before (hardly the stuff of which 8% GDP growth is made of).
Another metric is electricity usage, which increased by a mere 2.9% in the first quarter of 2013.
So, steel exports are increasing by 1% year over year. Electrical usage increased by just 2.9% in the first quarter of this year, and the Chinese Government has announced that the world should stop looking at its GDP numbers because they are not truly indicative of the economy there.
The Government is right in saying this, though not in the way it means. China’s GDP is not indicative of its true GDP growth… it’s sharply overstating it.
More evidence shows up in the China ETF (FXI) which has been in a massive wedge pattern for five yeas now. AS soon as we take out that bottom line, it’s GAME OVER.

Investors take note, China, the growth engine for the global economy is sputtering. The implications will be serious for markets globally.
For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:
http://phoenixcapitalmarketing.com/special-reports.html
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Don't take that metric as usable. The Chinese simply don't use electricity as others do. It's an extension of their crippling miserliness. They have buildings that are unheated and uncooled shells, full of offices, desks, workers and such. But heat it? Turn on the aircon or heatpump sitting in the corner of every living room or office?
Never happen.
An office building in London or Canada will be heated and cooled all night long. In China, when everyone goes home at 6pm or so, the building draws nearly -zero- electricity from the grid. Lights are off, all computers turned off, and no hvac cycling at all.
They buy heaters, put them in their offices and homes for show, but never turn them on as that would cost money.
You completely miss the point that deltas are valid because they compare like things, all other things being equal. As long as there's not some external factor (such as really pleasant temperate weather suppressing use of HVAC), then their different (from ours) habits regarding the use of HVAC don;t matter. We were never in the picture.
GDP doesn't matter. People don't need to buy things or eat. What really counts is the number of aircraft carriers you have.
I've chatted with some Chinese (or tried to) about worsening situation of the Chinese economy and they look at me like I'm an alien lifeform. You should see the hateful look that I get when I suggest they take money out of the banks and hold cash as some of their banks may fail (if not all). They have absolutely no clue about the problems they face as they only read the Chinese version. They really do think they are going to take over the world soon. Sadly these are decent people just trying to better their lives and hoping for something better. I can only hope they turn on their 'leaders' rather than the rest of the world, but I don't think that is going to happen.
So I warned a Chinese business woman I know that there was going to be a real estate collapse in China. She had borrowed a few million from here well placed boyfriend who works in the financial services area. I gave here a few US articles from analysts like Phoenix, etc... I heard she sold 4-5 properties in Beijing, partly because of my discussions with her. That was over 2 years ago and she probably lost out on a doubling of her investments. I was told that I better never show my face to her again.
Is there provincial resetting and defaulting debt? yes
Are there "ghost cities and malls? yes
Is there inflation and corruption and capital controls, and bla bla bla? yes yes yes yes
Is the central government creating moral hazard and manipulating markets. of course
Can a US financial analyst (without the feet on the ground knowledge of magnitude in HK and China) begin to understand the Chinese mindset and how the Chinese economy works on the ground. No, not a fucking chance, but like a broken clock eventually they will be correct for a short time.
Down in Texas they always say everything is bigger and if your from the North or the East Coast, etc..., you don't have a clue about "How big things are in TX or how things are done here in Texas". Well think about the scale: The population of any one major city in China is about the same as the population of the State of Texas (along with all the infrastructure to go with it). Much of it is still off the books and anyone's radar for analysis. PBOC published numbers and China GDP are mostly baloney, except in the case of RMB in circulation.
On the street, you can trade all sorts of things for food, services, etc... Phone cards are as good as cash in some neighborhoods and most businesses (esp. in rural areas) are still unlicensed and still don't pay any taxes. Christ, every used cardboard box, bottle, can, plastic bag is scrutinized and horded, reused or recycled for it's value. Still in most areas, if you throw a used can on the sidewalk, it's like doing someone a favor (it will be gone in an instant). Chinese that have real money spend it mostly on investments and just enough on visible money facades (clothes, cars), and the average person is frugal as hell. They WILL buy an A/C unit just to show they have one, but they won't turn the fucking thing on unless they have a visitor. This is so hard for an average American to understand -- the scale, the mindset, the cultural issues -- it effects everything, esp. the economy. We have always based our own economic estimates in the US on 70% of the economy being Consumer driven. Mass consumerism has just got it's start a few years ago in China. And yeah from a Western financial perspective looking down though the filter of numbers it looks like a fucking mess.
Excellent summary CitizenPete;
I am married to a Shangaier who grew up in the last years of the Cultural Revolution and whose fortuitous timing (and industry, she is the hardest-working individual I have ever known and appears quite unable to postulate Time Off) earned her a pretty penny in the Deng Xiaopeng-inspired Opening to Capitalism. She bought properties in Shanghai in the 1990's literally with suitcases of cash, 100% on the barrelhead, what's a mortgage? She moved into trading Art and has not seen a bear market in her lifetime. Her people have been on a decades-long uptrend and mine have begun a long, slow decline.
Amerikans have to wrap their heads around the guaranteed fact that future Amerikan generations will inherit a lesser kingdom; that their seniors have sold them out. This has never occurred in our history and TPTB, who see this coming, are scrambling behind the curtains to spray Lysol on the stench. The Chinese, who traditionally sacrifice their own good for their future generations (I say traditionally, that's changing too) cannot conceive of it happening to them, for a 180-degree different reason. So neither of us are quite prepared.
She doesn't get my caution and I have all but given up on trying to persuade her to move some holdings 'to safety'. The Party won't let the PBOC fail; it's never happened before.
I can only remind her of the ancient proverb to ponder or remember ("xiang xiang") good times in hard times and hard times in good. Talk about a schism!
This sounds like Amerika and its sheeple.
Those ARE the Chinese in America...
They are fed bullshit propaganda by their leaders about how great their economy is-nothing to see here, move along!
Just like in the USSA. Interesting, huh?
China posted a truly horrible steel export results for the month of May..
Did he really say May????
Nothing new and poorly written.
At the end of the day we are still faced with bankrupt governments, insolvent banks and debt crippled individuals. That is all there is to know and all you need to know.
And by the way, corporations are in the same mess given that the best they can do is borrow money to buy back stock. That is a sure sign of a lack of any vitality in the future.
Time to start a war with Japan to deflect the anger of the people who will soon have no jobs
I think the world is suffering from an economic delusion of epic proportions and scale. The sole focus on 2008 being "the end" for US economic prominence (if not dominance) has turned into a false meme of geopolitical proportions. global labor is being devalued in dollar terms to basically nill here...this is while the USA is powering ahead with the biggest energy boom in its history, an epic technology upgrade cycle and dirt cheap financing for a total ramp up of the "war on terror part Deaux."
the rest of the world looks to be in total chaos right now.
the President really needs to start firing people. His approval ratings should be at 60% right now.
Hahahaha. Amerika doesnt have a prezidunt, it has a narcissistic, lying, arrigant illrgal alien muslum fascist tyrant.
inflation/deflation
TPTB will just do whatever suits them the most. if the sheeple dont wake up to dollar deval and gold manipulation, they will Ctrl + P.
If the people start flocking to gold to the point of overpaying, the TPTB will dump even their phys because they know gold will go lower if they hike rates to +20%.
The common man cannot win here.
TPTB cannot be "beaten" by buying gold. they control the game. If gold goes to $50k, they will sell you paper. short it and "preserve the dollar"
C-A-N-N-O-T W-I-N...
off topic rant....i know
"increased by a mere 2.9% in the first quarter"
That's over 11% in a year. Hardly "mere". What's he smoking?
The world GDP is a figment of the imagination of the political class for the most part. It is part estimate and part projections. Nothing new here, but what we must be ready to cope with are in implications of deflation for many countries where the numbers are used like words in political dialogue, cheap and easy to utter, but very hard to live with when consumer/voters discover that wages are falling, investments unable to return earnings, and the price of goods and services falling in a competitive race to the bottom. Housing is just one of the themes governments play, but it does not last long.
Skip tapers, look for more QE tricks, and expect a major turn to political/military action. History never changes, but unfolds with more ceremony in each iteration.
Act II Scene 1. We find Father Obama in the Den swinging a golf club. " Some folks don't want a black president to succeed even when its clear he is done more good than anyone believed was possible in housing and health, but it has almost happened. So believe it. Ask Hilary if she plays golf, likes Hawaii and can believe six impossible things before breakfast? That is just politics.
The funny thing is they are buying shitloads of gold with money they don't have. I think that is brilliant. Some day when gold goes up 10x they will use it to pay off their debt. How can I do that? Everytime I buy gold they want money not credit.
Wow Whidbey,you need to understand what's going on before commenting.You obviously have no clue what's going on.
Do we try to educate?
Crush, Kill, Destroy?
All that credit expansion and you can't even get good sukiyaki in all of China. Tsk, Tsk!
Sukiyaki is a Japanese dish, perhaps you're thinking of Chop Suey.
Meh, give me twice-cooked pork, MuShu Shrimp and scallion pancakes any day!
I know its Japanese. The joke was that China should have understood the consequences of excess credit creation and excess investment, as their Japanese neighbours have been suffering the aftermath for decades. Everyone knows that China hates Japan's guts for various historical reasons.
And "Chop Suey" is an American invention I believe.
"The joke was that China should have understood the consequences of excess credit creation and excess investment, as their Japanese neighbours have been suffering the aftermath for decades"
At this point I'm sure they do. Trouble is, this ball started rolling before it became obvious, and now it's too late to change course. Japan, Korea and the Little Tigers owe their (former) success mainly to massive credit expansion in the west. China was late to the game and entered the fray just as western credit expansion started to peak.
We're now in a global contraction which has exposed the falacy of the export led growth model. Unfortunately for China, they failed to reach the critical mass necessary to transition to a domestic led economy, if such a thing is even possible given their massive population and lack of primary resources.
One thing should be borne in mind when talking to Chinese on any sensitive subject. They have ove 60 years of the Surveilliance State behind them, whereas we in the west are just getting started. This means that it's very unlikely, especially for a foreigner, to get a true picture of what Chinese actually think based on conversation alone.
I used to double space my papers to get my page count up to where it needed to be as well, Phoenix Capital.