Sol Sanders: The [Chinese] emperor has no clothes

rcwhalen's picture

My old friend Sol Sanders has written an important comment on the coming collapse of the Chinese Ponzi scheme.  For years now, I have been warning people that the Chinese Communist Party is not above manufacturing economic and financial statistics.  During my trip to France last week for an event sponsored by the Global Interdependence Center and the Banque de France, I appalled a group of economists by suggesting that there are no banks in China. Statistics on growth, debt and investment are all a fiction used to manipulate opinion, inside and outside of China.

We all remember the famous quote by Mao Zedong:  "Political power grows out of the barrel of a gun." But how many of us have actually read the book?  Here is the full quote famed on 6 November 1938, during Mao's concluding speech while addressing the "Problems on War and Strategy" on the party's sixth Central Committee's sixth Plenary session:

Every Communist must grasp the truth, "Political power grows out of the barrel of a gun." Our principle is that the Party commands the gun, and the gun must never be allowed to command the Party. Yet, having guns, we can create Party organizations, as witness the powerful Party organizations which the Eighth Route Army has created in northern China. We can also create cadres, create schools, create culture, create mass movements. Everything in Yenan has been created by having guns. All things grow out of the barrel of a gun. According to the Marxist theory of the state, the army is the chief component of state power. Whoever wants to seize and retain state power must have a strong army. Some people ridicule us as advocates of the "omnipotence of war". Yes, we are advocates of the omnipotence of revolutionary war; that is good, not bad, it is Marxist. The guns of the Russian Communist Party created socialism. We shall create a democratic republic. Experience in the class struggle in the era of imperialism teaches us that it is only by the power of the gun that the working class and the labouring masses can defeat the armed bourgeoisie and landlords; in this sense we may say that only with guns can the whole world be transformed. We are advocates of the abolition of war, we do not want war; but war can only be abolished through war, and in order to get rid of the gun it is necessary to take up the gun.




The [Chinese] emperor has no clothes

By Sol Sanders


The shudder that relatively minor bad news from China sent through world markets last week was a warning that the halcyon days of Beijing’s economy are over. Indeed, reluctantly because of self-interest and wishful thinking, a universal consensus finally is emerging that the Chinese economy is in deep trouble, a crisis that could perhaps overturn the regime itself.

The cardinal indicator is that the Chinese economy is slowing down. How much, how fast, which sectors, is all open to speculation given the notorious unreliability of Beijing statistics. But certainly we long ago dipped below that 8% minimal annual gross national product growth rate which once was accepted inside and outside the Middle Kingdom as the requirement for political stability.

In a sense, it was inevitable: perhaps the world has no history of a regional economy as large as China’s growing at its phenomenally high rate over the past two decades. But, then, too, it has been obvious to all but the most optimistic that huge aberrations were being built into a wanting modernization process that would eventually haunt the leadership. That’s where we are now.

There is unusual agreement, again, among Chinese and foreign critics of what is wrong and even accord on remedies for amelioration. Communist Party Chairman, chief executive, and chief of state Xi Jinping and to a lesser degree Prime Minister Li Kegiang, some 18 months in office, are saying all the right things. Xi, unlike his predecessors, even manages to project charm to sell what will be under the best circumstances extremely difficult structural reforms. The new leadership has come down hard on corruption which is not only endemic, but has taken on growing economic aspects with everything from undermining manufacturing quality to facilitating a huge capital flight. It acknowledges that pollution, paralyzing major cities for days and increasingly jeopardizing children’s health, is an economic hazard.

But however clear a new formula would have to be found, the task is daunting. Such a strategy would have to replace the two-pronged drive put into place once the Chinese Communists abandoned Marxist-Leninist-Maoism in all but name. Mao-style autarky was trashed for an enthusiastic welcoming of foreign investment and transfer of technology to build export markets based primarily on abundant cheap labor. But at the same time, Beijing continued the Soviet tradition of enormous expansion of the infrastructure, well beyond contemporary or projected demand.

This Weltanschauung now has eroded dramatically.

The worldwide economic downturn ended an unlimited expansion of markets for Chinese exports. These manufactures had become part of a vast, new production chain in which international companies used Chinese assembly to produce products for sale to the U.S. and the rest of the industrial world at bargain prices. While these operations introduced limited manufacturing, through manipulation of currency and subsidies Beijing was in fact subsidizing foreign buyers. One look at the retail prices of products at an American retailer indicates that some dissident Chinese economists may well be right arguing that a capital-short country was exporting capital to wealthier nations.

Furthermore, Chinese razor thin margins have been jeopardized by rising costs, including growing fuel imports and a flattening out of the labor supply due to the regime’s attempts to stem population growth. For these reasons China already has lost many of the lowest end manufactures to other low-wage competitors; infants garments, for example, to Bangla Desh. There is even some movement because of technological improvements of off-shored manufacturing back to the industrial countries. For example, with America’s shale revolution reducing the price of domestic natural gas to a third of delivered prices of LNG in East Asia, petrochemicals and their plastic products are returning.

At the same time, China’s vast infrastructure expansion is falling victim to a growing credit crunch. Having sailed through the financial crisis with an unprecedented “stimulus” package of $586 billion in November 2008, Beijing created overcapacity and overinvestment. At the same time, local government’s expansion was based on sales of diminishing farmland for industrial and infrastructure development and credit from regional bankers.

The net result of all this is debt that even the government has found difficult to estimate and a fragile financial structure at every level of government. Perhaps more important, it has resulted in an increasingly onerous situation for private developers who carry a disproportionate weight in the overall growth. With stop and go credit policies, intrepid bureaucrats have created new shadow credit organizations beyond the scope of government monetary and fiscal policy.

The generally accepted recipe for solving these problems is to move the economy away from its concentration on investment and exports toward greater consumption and financial liberalization. But, in fact, recent trends have been in the opposite direction, as the government faced dismantling a system which had profited small urban elite enormously with a superficial appearance of modernization. The strongest resistance has come from huge government corporate entities and the welter of smaller SOEs [state owned enterprises] in the hands of regional and local Party apparatchiks. Their influence inside the ruling Communist Party gives them call on capital, even when as often happens, to entities either deficit or bankrupt.

What gave the markets the shivers last week was a statement from Li that a series of defaults were inevitable as the government tries to rationalize. A default by Haixin Steel, a relatively small operation but with ties to coal and iron ore companies was what gave rise to international concern. It also reflects what industry sources believe is a growing collapse with half of the country’s steel mills losing money. A week earlier China experienced its first bond default when Chaori Solar, a small privately owned solar panel maker, was unable to meet interest on Rmb1bn ($163 million) of bonds sold only two years ago.

In the past, the government has always picked up defaulting companies. If that policy is now to be abandoned, it is unclear just how big the debacle will be and whether it could lead to panic. Already world copper and iron prices fell sharply under the pressure of Chinese speculators retreating from their bets on a continued high level of metals production.

To remedy these problems, Xi’s highly publicized reforms, however much pushed by the leadership, are running into the often hidden outcome of past excesses. For example, not only does the attempt to moderate the “one child” policy appear as a lame effort to resolve an already warped sex ratio in the society – female fetus abortions having produced a vast excess of males – but a huge, corrupt bureaucracy created to enforce the strategy is blocking real changes. Furthermore, such side issues as hundreds of thousands of “illegal” births have produced a sizeable population which cannot claim identity from the still deeply held conviction of Party leaders they must control any dissidence through strict monitoring. A similar problem exists for the hundreds of thousands of part-time workers in all the major metropolitan centers, brought in as “cheap labor”, but refused urban citizenship and a right to limited social welfare benefits. The security proponents are allied with local governments in this instance against any “reform” because of the additional costs it would heap on already overburdened local government and the dismantling of authoritarian control of every individual.

While the system does have the support of the Party apparatchiks, a highly touted new urban middle class does not exist. Best estimates are an upper 1% of households -- 2.1 million out of about 530 million households -- owns 40-50% of the country’s $10.5 trillion worth of real estate and financial assets. That these ultra-rich – many at the Party’s highest echelons – are moving money into foreign real estate and other investments is widely reported. Should they consider moving 30% of their assets abroad, which is a figure rumored in Chinese circles, the much celebrated Chinese monetary reserves of $3 trillion in dollars would be inconsequential in stemming the tide.

This prelude to a cataclysmic readjustment of the Chinese economy is arriving at a time when Western economists and businessmen have had to abandon a long-cherished hope that continued rapid Chinese [and Indian] development would prop up the world economy. But their disillusionment on this aspect is likely to pale into insignificance as the effects of the Chinese slowdown impacts further on commodity producers in Africa, Latin America and Australia.

Beijing leadership’s quandary is that the struggle to refashion the Chinese economy with further liberal economics comes up against the determined effort of the CCP to maintain its power monopoly which forbids just that. For example, the effort to turn the yuan into an international currency requires it become convertible. That would not only jeopardize current export subsidies but would further encourage the flight of capital, largely a function of the corruption in the Party, often at its highest levels. 

That produces an explosive environment where almost any scenario is arguable.


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assistedliving's picture

yadda yadda yadda nothing new here same zebra different stripes

a point we may be missing is IT ALL COMES OVER HERE (+ Australia.  see Australian R/E

problem is its the 0.01% buying from the other 0.01%

ps in Saudi.  Chinese are moving in big time in our other back yard.  wtf


imbtween's picture

heh, when I saw the headline I thought it said "Col Sanders".


pashley1411's picture

BS.   Fascisim - the combination of the state, and a quasi-free economy heavily weighted towards dominance by business oligarchs, is practically the standard model for 21st century nations.

merchantratereview's picture

The people are too mindfcked to ever wrest power from the CCP.


That said, everyone there already knows everything is fake. Problem is, they can't tell the difference between real and fake, and worse yet. THEY DON'T CARE!!!

Quinvarius's picture

And China only had success when they stopped using the gun.  THh Great Leap Forward is a great example of the stupidity of Mao and government economic planning in general.  It will pale only in comparison to the West's Great Leap into Financialization as destroyer of prosperity.

novictim's picture

LOL  And you thought Solyndra was a boondoggle?  China is THE boondoggle to end all boondoggles!!

The analysis is good but too timid.  What happens when the consequences of all this Chinese "wealth"  being called for what it is...Funny-Money...plays out?

Let's see...Iron and Mineral...Solar panels...electronics...all taking a huge hit.  And the ripple effects? Imports of raw materials to China are coming to a halt!  Business investment in factories and production are being redirected to "anywhere else".  

"That these ultra-rich...are moving money into foreign real estate ... Should they consider moving 30% of their assets abroad...Chinese monetary reserves of $3 trillion in dollars would be inconsequential..."

So, now what happens to the real estate market!  hahahaha

All that "All Cash Buyer" shit backed by Funny Money!  That is OVER!!!  YAY!

And now you know why investors are pulling out of the real estate gamble.  Home prices will be dropping very soon, Zero Hedge.

The Most Interesting Frog in the World's picture

The Chinese know their currency is complete shit...  A home that will drop in value is probably better than keeping it in Yuan...

toadold's picture

Interviews with wealthy who are fleeing China are increasingly indicating  that they are loosing not only the top one percent but also those who arevthe upper middle class who run productive organizations and even some from the military,admittedly not a large percentage of the population but important.  The insane levels of pollution are being given more as reasons to beat feet, they don't want their kids life shortened by it and the failure of the party to control it is also scary.  It is getting to close to the loss of the "Mandate of Heaven" and the beginning of "Interesting Times."

The Most Interesting Frog in the World's picture

BTW, do not think for a second Obama, Reid and Boenher wouldn't blow your asses away if a couple million of you showed up angry on the finely manicured lawns of the federal grounds in DC...  

TPTB_r_TBTF's picture

we will find out in May,

when 10 million Rednecks descend on DC.


The Most Interesting Frog in the World's picture

See you there...


Note to self, obtain retina identification blocking devise (and other useful items) for "gathering".

The Most Interesting Frog in the World's picture

Thought I would re-word the beginning for future article...


My old friend Sol Sanders has written an important comment on the coming collapse of the US Ponzi scheme.  For years now, I have been warning people that the US Republicrat Party is not above manufacturing economic and financial statistics.



elwind45's picture

Would exploring for minerals in outer space replace the diving companies of Victorian ENGLAND?

elwind45's picture

....and with the dollar collapsing were are they going to get dollars?

snodgrass's picture

If you have no nation-state, then you have no means of enforcing the rule of law. TPTB want to eliminate the nation-state and substitute corporate rule where corporations are the state and workers just the help. In that case, you have absolutely no representation and no rights. War will continue because corporations will fight over resources. If you want an example of this, look at the Obummer administration which is corporatism at its worst.


So much for your "theory".

elwind45's picture

Have you ever owned stock in other than street name?

LawsofPhysics's picture

Yes, yes, but what about the Chinese people.  Compare them to the average 'merican.

Good luck with that.

Zero-risk bias's picture

Not meaning to be facetious, but I'm curious to what you meant LoP.

What about the Chinese people? What is the comparison? Intellectually? Financially? Statistically? I struggle to find an 'average' in either place.

Care to elaborate?

WhyWait's picture

Fascinating.  The unravelling of this knot is going to have some bizarre twists and turns.

But this article certainly doesn't dig down to the bottom.

Wikipedia reports the Communist Party of China as having 86 million people.  Wikipedia won't say anythhing the CIA doesn't want us to know (Important details of Barry's family history for example,  largely disappeared about 4 years ago, over the loud protests of the Wikipedia volunteers, and important details of the Bush family history disappeared at about the same time) but this number is probably about right.  With 2.1 million families owning most of the land, leading a party with a legacy of having built its power by organizing the peasants to overthrow the old landlord class in the countryside, this party's mass base must involve a lot of members who are outraged at the corruption and at odds with the leadership.  But I've seen no direct evidence on this.  Has anyone got a feel for this?

The article reminds us of the evidence that these 2.1 million families are of doubtful loyalty to China.

Wikipedia lists 167 million Chinese migrant workers.  The new industrial working class draws heavily from them.  From hints in the media - for example the NYT stories on the Foxconn workers - it seems certain that the CPC has no base at all among this oppressed and angry population.  Does anyone here know?

And then there have been frequent reports of local strikes and demonstrations, with estimates that these occur thousands of times a year throughout China.

The CIA's specialty in recent years, the Color Revolution, involves penetrating a society, planting agents and client organizations (NGO's) throughout its society, and then at an opportune moment using them to detonate the society's internal contradictions and sieze power in a controlled popular uprising - to the great detriment of the masses they enroll.  Is China open enough for them to have laid this groundwork?  Does anyone on this list know?

China seems ripe for such an event, and a collapse of the financial system would certainly be the moment to strike.  The Chinese people and leaders have had 25 years of watching these things happen in other countries.  But their reluctance to come to Putin's defense perhaps suggests they may not have absorbed this lesson - or are too corrupt to care.    

messymerry's picture

[The article reminds us of the evidence that these 2.1 million families are of doubtful loyalty to China.]


The Chinese elites are no differrent that any other elites.  The master they serve is mammon.  Pure and simple. 


There are three chains that bind us, gold, iron, and silk.  Wealth is a golden chain, Power is an iron chain, and fame is a silken chain.  Silk or steel, chains are chains. 

I've taken a vow of poverty.  I choose not to play.  Punta Arenas might be a nice place to watch the fireworks from...



weburke's picture

good work rcwhalen.

zionhead's picture

Mao Zedong: "Political power grows out of the barrel of a gun."


But nobody but AIPAC/ZIO-CON seems to have understood his message.

Ban KKiller's picture

Let's all go get more political power. It is all that is keeping the dark side Cheneys from total ownership....sort of.

Are you growing a garden our are you not subversive?

Zero-risk bias's picture

Do you have a garden? I don't, but I can at least dig the sentiment.

What Mao said, is overrated. Everything does not grow out of the barrel of a gun.

I get that he was being metaphorical, but that's still just plain stupid. It is a false dichotomy.


Dick Buttkiss's picture

That single quote by Mao sums up the era of the nation-state as perpetual war for perpetual war, "peace" being an abstraction for all but a tiny few the world over.

If humanity is to survive, much less prosper, the nation-state — government as we know it — must come to an end.

Here's a brilliant young girl who has taken that first courageous step:

Pass it on, the better to help others do the same.


NotApplicable's picture

What a waste of time!

ALL emporers are naked. Anyone who fails to see this is too busy being their tailor.