On The Coming Collapse Of China's Ponzi Scheme Economy

Tyler Durden's picture

Authored by Jake Van Der Kamp via The South China Morning Post,

So much production in industries like steel is based on demand for more production, but should that demand falter, the whole system could come crashing down

Friends who have a greater interest than I do in reading the tea leaves in Beijing tell me that the emphasis in relations with Hong Kong from now on will be on one country rather than two systems.

I think this phrases things the wrong way. The one country bit was never in issue.

What they actually mean to say is that Beijing’s system of state command of the economy will become dominant and Hong Kong’s more freewheeling system will fade away.

I don’t think it will happen.

In my view human society is so dynamic that no command system can last long in charge of an economy. Attempts at this particular form of hubris inevitably end in either war or financial crisis. For the Soviet Union it was financial crisis. I think the same fate awaits Beijing.

Consider crude steel production, a test-tube example of how command economies get it wrong. In the mainland this stood in June at an all time monthly record of 73 million tonnes, five times the total production in all of Europe.

Steel was recently targeted for a reduction in capacity but then a regime of easy money intended to help the industry overcome a difficult period of contraction instead stimulated production.

It has happened across the mainland’s rust belt industries.

Why is so much steel needed?

Simple. It is needed to build more steel mills so as to build more shipyards, ports, railways and bridges so that more ships can be built to carry more iron ore to more ports and thence along more rails and bridges to more steel mills so as to build more shipyards, ports, railways ...

What we have here, in short, is a giant Ponzi scheme. In a Ponzi scheme you pay out the winnings of the first entrants with what others later pay into it.

As long as it keeps growing everything is fine. When it stops growing it collapses.

In this case you justify production with demand based purely on more production. As long as you keep pushing production up everything looks fine. At its peak in 2014 China turned out 30 times more cement than the United States, and the latest production figures are only a smidgen less than 2014’s.

Command systems may be good at deciding where to direct economic effort in wartime but they are hopeless in peacetime at deciding when to stop and do something else.

They just keep going down the same old track and then what you get is economic cancer, uncontrollable growth.

You don’t see it right away. Any Ponzi scheme looks just fine as long as more people can be found to put their money in. But the end is inevitable and the longer it is delayed the more resounding the collapse.

It has so long been delayed in the mainland that, when the end finally comes, I believe more than half of the loans and advances of the financial system will prove irrecoverable, which would be very resounding indeed.

When will it happen?

I cannot tell you. No one has ever conducted so big a Ponzi scheme from so high a level of authority before. The closest comparison is the Soviet Union and its collapse was not only extraordinarily rapid but took the whole world by surprise.

I think the Chinese Communist Party is unlikely to survive this coming debacle although I do not think it will result in the break-up of China or replacement by a full democracy.

Political and economic affairs are more likely to resemble the Russian emergence from a command economy.

I am sure, however, that it will happen long before 2047. We will then make a less difficult transition to one country, one system across all of China, a system that will look more like present-day Hong Kong’s than present-day Beijing’s.

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ET's picture

The question becomes who shall be the scapegoat?

Watch the Chinese propaganda to see how they view Trump, who is itching for a trade war.

sickavme's picture

Thanks to the internet, even the chinese version of "watered-down communism" is fast becoming extinct.

I dunno why they try, the vast number of chinese people are able to bypass their "great virtual wall"...

 

The internet is a living thing, it will break thru barriers, sometimes harshly, sometimes quietly, but it always will...

 

And politicians haven't a clue...

The Cooler King's picture

So yesterday, they were holding the world hostage with water & today their ponzi is collapsing.

 

OK, now I'm up to date.

Caloot's picture

They aren't a Ponzi scheme.    They are a central planned Marxist nation, that like the old ussr, used current capitalist systems to steal prices, so as to act in a free market.   Problem is those prices are no good, because the very actions they would use those prices for, are in fact changing in value because they are entering the market. Couple this   with fake money kenysian style and all they have created is a completely mal invested economy, unable to accommodate all the actions of the state.   And it fails.  Every time.   Including China.    Including the US.  Ponzi schemes can exist in the framework of a free market.   A centrally planned state cannot.

sinbad2's picture

These Marxists are so evil, they actually allow the people to have a slice of the pie.

Stuck on Zero's picture

When the China ponzi scheme fails the Chinese will be left with powerplants, bridges, infrastructure, housing, and factories. When the US F35 and finance ponzi scheme fails we'll be left with nothing.

Caloot's picture

The fact that there are 9 upvotes to this really shows the reality of zh.   A pile of statists.  They will all go live in the Utopia they've built?,. Laughable.   No.   More like they will devolve into a massive war and starve.   I just can't believe the inability to even perceive 30 year old history.  Stated differently.. the ussr  sure was awesome.

Conscious Reviver's picture

False dichotomy. Both Chinese and US economies are centrally planned. Local government restrictions are less in China. They don't do zoning laws.

The point that went over your head is that when the world wide fiat ponzi scheme collapses, China will wind up having more and better physical assets than America.

How did this come to pass?  Maybe because the US leadership is only motivated by corruption and no one in authority is ever punished for criminal actions. In China, the high placed get punished for crimes. Including sometimes with a bullet to the head.

"In my view human society is so dynamic that no command system can last long in charge of an economy." When does Janet throw in the towel.?

DWD-MOVIE's picture

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edotabin's picture

Took the words right out of my virtual keyboard.

For years I've been reading articles ranging from the Yuan is the next reserve currency to China is toast with their ghost cities and $25 Trillion banking problems.

Nobody don't know shit for sure yet they don't hesitate to pass off opinion (even if well-founded in very few cases) as 100% fact. At this point unless the article is very well written and provides a broader perspective backed up by very solid facts, I call BS.

It's like the rayciss and sexiss stuff ; too much, too frequent, usually premature and designed to fulfill an alternate purpose.

Dubaibanker's picture

China simply cannot fail for multiple reasons:

1. It is insulated from the rest of the world hence all profits remain inside (eg: tech, banking, hotels, airlines, 90% retail, low manufacturing etc).

2. They have USD 3-4 trillion parked in US and other nations. If push comes ot shove, they will bring it all back, and then US and UK will go down, not China, relatively speaking.

3. If we are discussing this on ZH, then chances are, China Govt knows about it and has taken evasive actions internally and externally like stopping capital outflows, enforce anti money laundering, arresting people etc.

4. China became almost the first country early this year to freeze a house or maybe 2 in Canada of a Chinese who defrauded banks in China. First time overseas by any nation that I can remember on a house. Very tardy process.

5. China has perhaps 40% of all Fortune 500 companies now and all these send money back home on a daily basis.

6. China is innovating in tech, pharma, space, railways, electric engines, science at a rapid speed. In future, we will be buying more of their goods and services.

7. Any country that has fallen apart in the last decade has been supported by China in billions not by bankrupt IMF or WB like Venezuela, Pakistan, many in Africa, Latin America, now Phils though Phils is not falling apart among many others.

8. China has created CPEC, BRICS bank, OBOR etc and suported Russia massively. These are not signs of someone about to enter a collapse stage.

9. Anyone who thinks the Middle Kingdom is going to collapse should visit the nearest eye doctor because they are not reading the correct reports!

10. China has a massive population like India (India has been bankrupt for 25 years yet it continues to sustain). Large populations are a positive, lot can be hidden, lot can be distributed, cheap labour utilized. Someone needs to read up on economies of scale basic text books.

Hope this helps all. because shrill western voices have been predicting a collapse of China since 2001. Yet they themselves have had 3 collapses and continue to have debts that are 5 times the CASH RESERVES of china. I mean those are 2 diametrically opposite sides of the scale.

One has cash and other has debt. How can there even be a comparsion.

All these Harvard, Stanford, Yale, Chicago etc should be shut down because they call themselves premium yet spin garbage out every single day in robot like student creating slave factories. Their professors, most of them but not all, are stuck in their own spin that they are better than the rest. Yeah right!

Go get yourself some real life experience, ye harvard and Yale bozos who could not even save their own nation and it's largest companies without printing FAKE monopoly money.....hahaha...or could save might Merrill or Lehman....,...

Massive ponzi was run by Madoff and Arthur Andersen and Allen Sanford and all names here are American...no one is Chinese who is running a ponzi........yet these elites talk about China.....Leave China alone to it's own luck....and go get a life instead of pointing a finger at China when 3 or 4 fingers are pointing back at you.

Grumpy6's picture

Don't kid your self, buddy.  The Chinese have a lot of problems.  Government corruption has alienated hundreds of millions of Chinese.  Their pollution problems exacerbate their water shortage problems.  They are still net importers of energy, with a growing demand for it.  The Chinese population is ageing and will require more social services.  Chinese millionaires tend to exfiltrate much of their wealth to the West.  The coastal Chinese and the Chinese of the interior have a huge income differential, which creates problems and unwanted population migrations.  The Chinese generals and admirals have an insatiable appetite for expensive modern weapons. The Chinese banking system is a mess.  So please don't make these guys out to be ten-feet tall.  All Chinese government eventually collapse due to internal civil frictions.  Now the Chinese have to worry about guys like Trump who could upset the wonderful foreign trade the Chinese enjoy.  Stand-bye for a shit-storm.

Dubaibanker's picture

Thanks for the comment. Appreciate your point of view.

Here are some more facts. They are aware of pollution and have plans. They just dont tell the western media. No other country has done as much as they have on pollution except accords and talking!

 

China posts air pollution ‘battleplan’ Air pollution to be curbed in 28 cities in North China

Coming to social services.

china spends more per capita and is hiking health care spending which seems surreal. at USD 1 trillion per annum they will be spending in the next few years more than most countries combined!

Healthy future

Over the last 35 years, 800 million people have successfully been lifted out of poverty in China. In such a short amount of time, no other country has ever been able to compare to the success and impact of China’s poverty reduction efforts. In 2016, the country lifted 12.4 million people above the poverty line. China is hoping to fully alleviate the poverty throughout its country by 2020.

 

Difference between rest of the world and Chiina is that China doesn't talk but the rest of the world keeps talking on twitter and facebook and .....

I request you to read Chinese media and please don't base your opinions on western media fake news stories!

China is building marvels that we havent even heard of, and they been building this bridge, for example, for over a decade.

Bridging the divide: Workers connect final steel stretch creating the world's largest sea bridge which is a startling 14 MILES long and took seven years to build

Read more: http://www.dailymail.co.uk/news/article-3667827/Bridging-divide-Workers-connect-final-steel-stretch-creating-world-s-largest-sea-bridge-startling-14-MILES-long-took-seven-years-build.html#ixzz4r1Tm4bok 

TheReplacement's picture

The healthcare thing is funny to me.  Expropriating a huge percentage of productive capital to maintain a mostly unproductive population does not seem like a good plan for a civilization to thrive.  What is more, does this sort of thing not incentivize people to not save in order to take care of themselves?  If so then each generation will become more dependent on the following generations being larger and more productive in order to support them. 

Simple math says that eventually, even if the central planners can keep the economy going, they will run out of things like water and food and land.  It is a ponzi scheme.  It will fail.  We just cannot say when.

Anyone saying, 'yeah but the US...' is a moron.  The US is clearly in the same kind of boat but actually much worse off.  Hence the illegal importing tens of millions of, mostly young, people to support the retiring boomers.  As noted by others above, the first problem lies in that the Chinese will have all of that wonderful new infrastructure on which they can rely.  The US has failed in a most comprehensive way to provide itself with good infrastructure with which to move forward.  Secondly, China is mostly monolithic in race and culture.  The newly imported young generation is not of the same race as the majority and they care nothing for the culture of the elders.  If anything, they would like to remake American culture more like their own. 

China will fail epically.  The US will fail epicallier.  Either that or we have a good war and things work out just swell. 

Caloot's picture

It doesn't matter. You can't centrally plan a society due to the complexity of humans.   They will collapse under the weight of their state.  That is their future.  No amount of capitalism can save it. 

Conscious Reviver's picture

Wake up and smell the coffee. The US zombie economy is centrally planned. Google, Facebook, Amazon, Tesla etc. are. gov projects. Big Pharma controls the chemical state of American brains. The Fed / Wall St. pick winners and losers. The Fed telegraphs their plays. The Pentagon cannot account for over $2Trillion and then the guys tasked with finding it get vaporized.  You are out of your mind. Put down your MSM news feed and walk away.

land_of_the_few's picture

Totally. They had also been predicting the collapse of Russia for years. Economic recovery didn't seem to influence those commentators either. The actual collapse had already happened years before, in the 90s "golden years" of course.

Theosebes Goodfellow's picture

~"Fuck China."~

All of it at once or one at a time? Coming from a guy calling himself "Captain Chlamydia" that sounds like very bad advice either way. Just sayin'...

skbull44's picture

Infinite growth on a finite planet, what could possibly go wrong?

 

https://olduvai.ca

So Close's picture

There will be no need for a scapegoat.  OBAR is gonna require all the cement/steel/etc. the world can throw at it for the time being.

DaBears's picture

Way cheaper shipping by sea than rails, besides you can blow up few train tracks and trade stops but you can't blow up entire seas. OBOR is just another ponzi  scheme backed by redundant, more expensive and less efficient shipping methods. It's probably cheaper deliver goods via future tech like super fuel efficient air frieght than trillion$ worth of degradable train tracks made with "Made in China" low grade steel and concrete.

DelusionsCrowded's picture

Its less about trade route and more about demand route . Trade is just the justification . Rail , tourists , electric transportation at nodes , treking holidays etc. Future demand is not based on supply its based on demand , human demand ,robots generate supply at the push of a button .
Create an experience and the people will come .

yogibear's picture

Western banksters will collapse the Chinese economy before China can do it to the west.,

Conscious Reviver's picture

This is the question du jour. China, with Russia is winning and will obviously prevail against the the Zino-Anglo money poison, imo.

SoDamnMad's picture

They will use all the steel for rail on the Silk Road in order to ship more steel to Europe. Europe needs to protect it's own steel industries that have been hammered by cheap Cihinese steel which is supported by the government. The Europeans might hate Trump but they feel the Chinese are screwing them and causing a rise in unemployment and a failure of their steel production and would love tariffs on Chinese commodities.

icm63's picture

CHINA uses State fiat money, US uses interest fiat money.

That is CHINA has no foreign creditors of any size (ie bonds), the US does and has to pay interest to them.

Hard to go bust when you are the HOUSE..

 

 

 

BeanusCountus's picture

True. But China concerns me more than anyone. We KNOW the shit that the US is knee deep in (mostly). At least we have some semblance of a reporting system. China has no such thing. I don't think you can take one single thing out of their communication network as fact. Hard for me to believe anything they say. No doubt we will find out. Doubtful it will be in time.

Caught_Fish's picture

Imagine that productive capacity turned towards weapons.

sinbad2's picture

Exactly, can you imagine how many ICBM's nukes planes tanks etc they could build a year if they put their mind to it?

DelusionsCrowded's picture

I think your comment is based on old insights , I suspect Xi & Co have changed this considerably .

What happened to GeoBox thing google bought a while ago to monitor economic activity from satellite ?

CoCosAB's picture

If CHINA PONZI collapses THEN IT'S byebye AMERICAN SUCKERS!

Greg's picture

Yeah, like we hold their debt and all.

 

EuroPox's picture

It is not what the Communist Party wants that matters, it is what the eight ruling families want... Tiananmen, June 1989, was just a trial run.

Conscious Reviver's picture

Europox trial run for what?  Color revolution? Eight Bankster families?

cherry picker's picture

Which Ponzi scheme has a better chance for survival? USA or China?

Which country has most invested in the other?

I am led to believe China owns more of the USA than the USA owns in China.

yogibear's picture

Exactly. China. You lose BIG!

hibou-Owl's picture

When the next collapse hits China won't lose "Big", that big pilef debt they own will turn into fire sale assets. USA will be sold for centemes.

xrxs's picture

Excellent stuff, but remind me not to walk on the sidewalk next to Jake's apartment in Hong Kong.

beijing expat's picture

Been waiting 30 years and watched them cover the country with world class infrastructure. Sheet, can't even use your phone on the subway in London and NYC. Who is fooling who?

Xena fobe's picture

What about those buildings made of sand?  Stainless steel that rusts after one year spent indoors?  

 

falak pema's picture

China is an EXPORTING economy with positive current accounts, unlike most big western countries (Germany exc.)

The financial crisis in China is to keep the US $ alive as its China's biggest client. We are seeing a huge shift away from US clients and a huge internal market now needing that productive capacity. I don't see a return to commie CHina rule, more a private sector/government sector partnership as today. Reigning in HK today is to allow the pivot AWAY from $ economy in this interim period.

If the EU and Far East economies move away from #maga fortress USA; now in suicidal momentum; it could stabilize in a world that limits trade with the US to the extent of making the $ lose its pivotal role. 

After that China will rule as new lead player; circa 2030. Renewables will replace fossil to ease the hold of obscurantist ME Islam and this Wahhabist madness will also die as it fed off the US as a parasite in the previous paradigm where oil was king.

Caloot's picture

China will collapse under the weight of 2 billion people.  They will suppress it with violence.   And they will fail. All the money and first class nfrastructure...?    How about in the forties when America had all that AND the fact that all the rest of the modern world was destroyed, and still the empire is in collapse under it's social pressures and it's use of Fiat.   

Herodotus's picture

Trump needs to call for free, multi-party elections in China.

roddy6667's picture

In China they see what democracy has done, and they don't need it.

sinbad2's picture

As a brilliant American once said,

“As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart's desire at last and the White House will be adorned by a downright moron.” (Mencken)

css1971's picture

It's no surprise that Japan and Germany run heavily export oriented economies.  both were National socialist and mplemented fascist economic policies. Japan until the 1980s was still running a command economy based on their wartime model.

China dumped communism and switched to fascism too.

All you lefties should be proclaiming the success of National socialism and fascism loudly. You don't believe in the socialization of the means of exchange any more do you? Which makes you a fascist, not a socialist.