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The Dominoes Begin To Fall In China
Submitted by Tim Staermose of Sovereign Man blog,
Forget tapering. Forget Ukraine. The largest single risk to the world economy and financial markets right now is China.
What’s going on in China reminds me a lot of what I witnessed firsthand when I lived in South Korea in the 1990s, before that economy’s crash in 1998.
Just as China now, South Korea was an immature, state-controlled financial system funneling cheap money to well-connected and politically favored large enterprises.
Fuelled by a steady diet of cheap money, these companies kept adding capacity with no regard to profitability or return on capital. They simply focused on producing more stuff and expanding their size. They employed more people, and everyone was happy.
But, all the while, they were borrowing more and more money, until eventually they collapsed under the debt load when liquidity dried up.
Before Korea, the exact same thing happened in Japan, and a giant, unsustainable debt binge brought the “miracle economy” to its knees.
But the Korean and Japanese debt bubbles are nothing compared to what we see in China today.
Consider this: in the last five years, the Chinese created $16 TRILLION in credit that is now circulating in the economy… financing ghost cities and useless infrastructure projects.
Floor space per capita in China is now 30 square meters (about 320 sq. ft.) per person. Japan was at that level in 1988. And the economy burst the following year.
More astounding, this $16 trillion in credit is DOUBLE the $8 trillion in credit that China created in the previous 5,000+ years of its existence.
The Chinese government recognizes it has a problem. It realizes it can no longer keep the dam from breaking. And in the past week, it bit the bullet.
In the last two weeks, Chaori Solar and Haixin Steel were allowed to default, i.e. they weren’t bailed out.
This is the first time in China’s modern history they’ve had a default, let alone two. They can no longer keep the game up, and the dominoes are beginning to topple.
I cannot stress this enough. What we’re witnessing is a major paradigm shift.
Of course, the Chinese government claims they can control the impact of these “relatively minor” corporate defaults.
But as we saw during the sub-prime crisis in the Unites States, the complex web of inter-linkages in the financial system means they are playing with fire.
I expect many more defaults in China in the coming weeks and months. I expect some important Chinese financial institutions to get into trouble.
And I expect the Chinese government will completely lose control over the situation.
My recommendations are 2-fold:
1. If you have any exposure to Chinese stocks, or the Chinese Yuan, I strongly suggest you reconsider.
2. If you have investments in iron ore or copper producers, get out.
But it’s not all doom and gloom. It’s going to take time for China to suffer through this crisis. But, if the Chinese government lets the dominoes fall where they may, the country will be better off in the long term.
The lessons from markets such as South Korea and Indonesia, in aftermath of the 1997-1999 Asian economic crisis, are clear.
If China frees up and liberalizes its financial markets in the face of a crisis, writes off bad loans, and closes down insolvent banks, it will emerge in a much stronger position once the crisis blows over.
And there will be lots of money to be made buying good-quality Chinese shares during the crisis. But, for now, it’s time to brace for the downturn.
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lame
Since I do not know all that much about China, I cannot really add that much good commentary, so I will just have to sit and watch it all.
Yeah, I have popcorn.
Can we start making pennies out of copper again?
I have one word for you, Duo. Are you listening?
Plastics.
carbon fiber now. get with the program...
Did Simon take up teaching writing to his cronies?
"Every sentence must be its own paragraph!"
FFS.
"Forget tapering. Forget Ukraine."
Articles starting with a command to erase something of importance from reader's memories should instantly be treated as utter bollocks and ignored all together. Don't tell me what to remember!
Are you listening?...Plastics...
http://www.youtube.com/watch?v=kAH_LDCF03c&list=RDkAH_LDCF03c&index=1
Dustin Hoffman would understand I suppose...
"Everybody's talking at me
I don't hear a word they're saying
Only the echoes of my mind...
Backing off of the northeast wind,..."
Is it safe?
We still do. But now we call them "dimes".
in china, we call it blackfast!
Yea and it worked so well for Japan didn't it? That is why they are still having financial issues twenty something years later. And the US will fall the same way.
Trust any government to do what should be done?!
Why do that when you can come up with even more complicated financial tricks or you just, you know, lie?
When is it safe to trust the Chinese government/markets?. All governments lie and it's clear the Chinese are very good at it.
"Everything the state says is a lie, and everything it has it has stolen." — Frederich Nietzsche.
Start here.
And don't look back.
nothing burger
nothing a little rehypothecation can't fix, right?
is the Chinese celebration over? over 10 years of massive, heated growth....
The greatest capital misallocation and environmental destruction the world has ever seem.
Although this level of environmental degradation is just another form of capital misallocation.
Excellent. Keep deflating, China.
If I am going to continue to buy their crap that poisons me and breaks down after just a couple of uses, then I want it 50 percent cheaper.
"If China frees up and liberalizes its financial markets in the face of a crisis, writes off bad loans, and closes down insolvent banks, it will emerge in a much stronger position once the crisis blows over."
And what happens if they bail out shitty banks with tax payer money then have the central bank monetize corporate debt by buying the toxic shit on their balance sheet?
I guess they'll hire The Bernanke as a consultant.
he's very expensive and requires money up front. maybe they should just listen in instead?
That would mean that China is 6 years behind the collapse of the US Economy firmly in our sights!
Couple of days ago, I read an article on ZH about the loan structure in China. That is, the same asset/collateral had been used to secure multiple loans from different sources. The first question that came to mind was does China have the equivalent of a public record/UCC system to record secured interests in collateral? I find that an economy the size of China would not have something similar to at least make note in public records about claims/seniority. If China does not, then we are truly in uncharted waters as the debt to asset/collateral ratio in China really can't even begin to be understood/measured as unwinding this would be basically impossible.
It's one thing to have a senior/secured loan against an asset/collateral which is made public. At least in this situation if you are the lender, recovering some amount of the loan if the asset/collateral goes bad is feasible (and more efficient as only one party would be pursuing the asset/collateral). But to have multiple parties all laying claim to the same asset/collateral, this would be a complete and total nightmare as the losses would be substantial (not to mention the legal battles that would ensue). No doubt that this could grind the entire China economy to a halt as basically, all credit flows would become paralyzed. Maybe (really, hopefully) I missed something in the ZH article but this is the type of credit scenario that will reshape global borders, distribution of wealth, and claims to natural resources.
If this is the case, no wonder the Yuan and stocks are too be avoided as god only knows where this will end. But the contagion to the world is what's really the wild card here as asset liquidations, carry trade unwinds, FX volatility, etc. are complete unknowns at this stage (as this type of "adjustment" to credit markets has never been witnessed in modern history).
Really the only faint hope of being saved from a Chinese meltdown is that ZH and western media are exagerating the size of this ponzi credit disease in China. The Chinese are not very forthcoming with their data so we will never know for sure until TSHTF.
If you are a lender, and given the recent price of copper and potential cost of legal fees, why go after it at all?
Tell me you don't still believe in secured debt after GM, MF Global, MERS and all the other scams in recent history...
Hahaha
Owned GM stock for 15 years;shucked it in 2007
Owned GMAC bonds till they matured and paid out 2005;
Whew;close one.
Never again!
It is just repothecation Chinese style with out the bank overhead.
If you promise something two, ten, 30 more times and no one call it, well that is just being efficient, or a bank, or a gov social security scheme.
/S
free market capitalism. no such thing as too big to fail. only in china. haha.
i think the chinease leaders will wipe out there banks and save there currency. no soup for you.
After the chi-lapse they can take all that new gold and trade it in for a bag of rice.
What I don't understand is why China chose to fuck around so much with its credit bubble. Did they even attempt to fix the pollution problem? Did they try to upgrade some factories and power plants so they don't release NO2, SO2 or carbon particulates? Did they fix the problem of ground water being contaminated with shit from factories? Of course not. They had to build ghost cities and the biggest mall in the world that has no stores. Idiots.
junked for carbon
China prints the Yuan, except in China, Party tell CB what's "kosher", not the other way around, like say with USD... Am I right? Think about this.
P.S. Yes, US politicians, you lost the power that they have, over 100 yrs ago. Dummies! Just mint more state quarters, dipshits. County quarters? City quarters?
Until you get a bit of the fabric coming unravelled, you do not know how interconnected the whole of it is.
Until the loan is called and the collateralis sought, you do not know how many times it may have been used.
The figure of sq. ft. per capita cited by the author is an interesting measure....I have no idea what it means, but it is interesting it was at about that same level in Japan before things went south.
Couldn't happen to a nicer totalitarian shithole.
Suck a wang, China.
bring it on as i don't give a fuck anymore. why don't i care? glad you ask(heha), CAUSE I DON'T HAVE A FUCKING THING TO LOSE!!! hope it starts a reset that spreads world wide and sets the whole fucking ponzi debt schem ablaze and burns 1000's of fucking billionaires fiat wealth to ashes...
If you couldn’t make a success of it in this economic iteration---which was the easiest lifestyle and wealth-making era for the common man in the history of the species---then you are really going to end up a serf or slave when the Great Reset comes, as assets and wealth gravitate toward the Darwinian Fittest to the degree they did from, say, the Garden of Eden to somewhere around 1875. Like most humans in the comfortable developed world (myself included), you got carried. You got lucky. If you are on a computer and connecting via the internet, then at the very least you got a consolation prize in the Great Birth Lottery.
Despite the faults with the current system that so many are wont to point out repeatedly each and every day, just a cursory look at world history suggests THESE are the Good Ole Days. Got kids? Sorry.
Teach your kids how to hunt and fish, keep them fit and how to live outside..........they'll need it
It's called being on borrowed time. All this is predicated on a debt based system that will eventually collapse. Things go on until they don't. Moral bankruptcy not coincidentally goes along with the financial bankruptcy. Technological changes in many cases these days are increasingly invasive on privacy and Orwellian in general, and the companies doing well are the conglomerates with .govt contracts. SMEs are having a hard time competing as the big firms can internalize the costs of red tape and 0bamacare.
I believe it is more moral to let the chips fall where they may and have the needed liquidations and fire sales on 'assets' than to live the lie and inflate. The immorality of taking on debt cannot be overstated, same as the usury.
I take control of my own life, but I can still see what is going on with the PC degradation of morals and moral relativism and how things like LGBT and abortion are accepted. I'm an anarcho capitalist but I do not endorse a libertarian, anything goes lifestyle. I just see how things like drug wars have unintended consequences and actually is lazy and a system of graft as it is my job to persuade others to voluntarily stop using drugs.
Thats the big worry for me scary shit
"If China frees up and liberalizes its financial markets in the face of a crisis, writes off bad loans, and closes down insolvent banks, it will emerge in a much stronger position once the crisis blows over."
Just like we did....Huh.....Oh.... right, we didn't do that. We "saved" them all so they can continue to destroy us. Sorry. I had it backwards and upside down.
substitute the words CHINA for USA,
Then multiply the phony debt FIAT by 100X, ( USA debt and funny FIAT is 100X worse than china )
THen you might have a story worth telling,
This story is like comparing China's Navy to the USA Navy,...
Like comparing an ant in debt, to an elephant in debt.
Keep people focussed on ant's, and ignore the USA.
And of course, no matter how big a clusterfuck this becomes, no matter who's lives are destroyed or even ended because of government engineered economic collapse, we should always endeavor to make money from it. Of course. FUCKING TRADERS will sell their mother for a fiat buck.
WOW your telling me you can't trust a communist banker?
No, you can trust your american fascist banker.
All is fair in love and war. Nixon set 'em up when abandoned gold backed currency for fiat and opened up to trade fiat for Chinese products. We just give them enough rope to hang themselves and sit back and enjoy the show. Chinese culture is such that the victim of deception is dishonored by allowing himself to be taken in. The deciever brings honor to himself by his cleverness.
Chinese gov't assets consist of a few US treasuries, which are quickly eroding away to intentional inflation, and 90% equity stakes in a bunch of corporations whose accounting is completely fraudulent.
All smart Chinese leaving their country as fast as they can since 1970's.
Future smells bad for Chinese when hundreds of millions of corpses rot in the streets.
American cost for this exercise is only green ink and paper, plus end of cheap plastic crap. Better than blood of our children.
All going to be better in the long run? You mean after the economy collapses which blows up the fragile global economy - then we get chaos - then we get mad max --- then we get something better?
I can't wait!
So, although Jim Rogers has been advocating COMMODITIES in the face of US QE, he/we were all wrong?
And you wonder why we don't trust the Bulls (Wall St), nor the Bears (Contrarians).
Looks to Mr like BOTH sides keep making money -- as long as there is ACTIVITY, to generate Fees, etc.
While it is clear that the Chinese have created too much money, the reality is that China cannot be compared to the west where such a situation would signify a catastrophe. Because China has a public banking system it has complete control over its money supply.This means it can- a) set interest rates to zero on loans b) cancel debt c) continue to provide as much credit as it feels it should. What many people overlook is that Keynes pointed out that if supply and demand are kept balanced the result is not inflationary. This means if China has the resources and manpower to build a new city and the state provides the funding the result is not inflationary.
The key fact that everyone in the west overlooks is that if you own the right to create money you can get out of any financial crisis without a disaster occurring.My take is that this story is just part of the anti Russia and China campaign that our bankster controlled media continues to spit out. The reality is that the west is in far greater danger because we have a parasitic private banking cartel that has control of the right to create money and is sucking all the healthy money out of our economies. I expect China will allow more companies to fail, but the ones that fail will be ones that have annoyed the government. Important companies will continue as they will be offered interest free money. We shall see.I live in Asia and we have a credit bubble in Thailand like you can not fathom.....