China Has Become One Big "Stuffed Channel"

Tyler Durden's picture

Zero Hedge covered the topic of automotive channel stuffing long before it became a conversation piece, particularly as it pertains to Government Motors, a story which has recently taken precedence after being uncovered at such stalwarts of industry as German BMW and Mercedes, implying the German economic miracle may, too, have been largely fabricated. Another core topic over the years has been the artificial and inventory-stockpiling driven (in other words hollow) "growth" of China's economy, whose masking has been increasingly more difficult courtesy of such telltale signs of a slowdown as declining electricity consumption and off the charts concrete use. It was only logical that the themes would eventually collide and so they have: the New York Times published "China Besieged by Glut of Unsold Goods" in which, as the title implies, it is revealed that China is now nothing more than one big "stuffed channel."

First, we find, what has been painfully obvious to anyone holding an even modestly skeptical view on the Chinese centrally planned economy.

The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.

Just like in the US, and Europe, the Chinese government is, gasp, lying about everything:

The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.

Naturally the Politburo, which measures GDP once a product or service is created, is delighted to produce more, more, more of everything. The demand aspect of the core economy equation does not matter. The problem is that even the Chinese central planners have now run out of space under the rug.

But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.

And now that China too has run out of collateral with which to fund endless supply, which in turn requires legitimate demand, it has big, big problems:

Business owners who manufacture or distribute products as varied as dehumidifiers, plastic tubing for ventilation systems, solar panels, bedsheets and steel beams for false ceilings said that sales had fallen over the last year and showed little sign of recovering.


Sales are down 50 percent from last year, and inventory is piled high,” said To Liangjian, the owner of a wholesale company distributing picture frames and cups, as he paused while playing online poker in his deserted storefront here in southeastern China.


Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales had dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace.


“My supplier’s inventory is huge because he cannot cut production — he doesn’t want to miss out on sales when the demand comes back,” he said.

Demand is not coming back, because every channel has now been stuffed. But what story of channel stuffing would be complete without one's auto industry being exposed as a total sham. Sure enough:

Inventories of unsold cars are soaring at dealerships across the nation. Quality problems are emerging. And buyers are becoming disenchanted as car salesmen increasingly resort to hard-sell tactics to clear clogged dealership lots.


The Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of full capacity far below the 80 percent usually needed for profitability.


Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.

Even Detroit makes a cameo appearance:

The Chinese auto industry has grown tenfold in the last decade to become the world’s largest, looking like a formidable challenger to Detroit. But now, the Chinese industry is starting to look more like Detroit in its dark days in the 1980s.

It gets worse:

Automakers in China have reported that the number of cars they sold at wholesale to dealers rose by nearly 600,000 units, or 9 percent, in the first half of this year compared to the same period last year.


Yet dealerships’ inventories of new cars rose 900,000 units from the end of December to the end of June. While part of the increase is seasonal, auto analysts say that the data shows that retail sales are flat at best and most likely declining — a sharp reversal for an industry accustomed to double-digit annual growth.


“Inventory levels for us now are very, very high,” said Huang Yi, the chairman of Zhongsheng Group, China’s fifth-largest dealership chain. “If I hadn’t done special offers in the first half of this year, my inventory would be even higher.”


Manufacturers have largely refused to cut production, and are putting heavy pressure on dealers to accept delivery of cars under their franchise agreements even though many dealers are struggling to find places to park them or ways to finance their swelling inventories. This prompted the government-controlled China Automobile Dealers Association to issue a rare appeal to automakers earlier this month.


“We call on manufacturers to be highly concerned about dealer inventories, and to take timely and effective measures to actively digest inventory, especially taking into account the financial strain on distributors, as manufacturers have to provide the necessary financing support to help dealers ride out the storm,” the association said.


As dealer lots become cluttered, many salesmen have resorted to high-pressure sales tactics. That has resulted in growing customer dissatisfaction in the past year, according to surveys by J. D. Power. As a result, auto dealers are voicing the same complaints about inventory as businesspeople in a wide range of other industries.

China, like any self-respecting "capitalist" country has found the best way to deal with such a trivial nuisance: denial.

Officially, though, most of the inventory problems are a nonissue for the government.


The Public Security Bureau, for example, has halted the release of data about slumping car registrations. Data on the steel sector has been repeatedly revised this year after a new methodology showed a steeper downturn than the government had acknowledged. And while rows of empty apartment buildings line highways outside major cities all over China, the government has not released information about the number of empty apartments since 2008, according to a report last Friday.


Yet businesspeople in a wide range of other industries have little doubt that the Chinese economy is in trouble.


“Inventory used to flow in and out,” said Mr. Wu, the faucet and sink sales manager. “Now, it just sits there, and there’s more of it.

And now readers know why in addition to everything else, we have a special place in our hearts for the "inventory" component of US GDP, which in Q2 accounted for 0.3% of the 1.5% GDP.

As for China, we wish it luck in further easing to provide more supply-driven push for its channel-stuffed economy: with $14 trillion in deposits, or $5+ trillion more than the US, which can rush out at a moment's notice, and buy everything that is not nailed down (and certainly gold) at the faintest whiff of inflation, and record high soybean prices which we discussed previously will keep the PBOC on hold far longer than most experts predict, all those rumors of a China hard landing are increasingly becoming facts.

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bdc63's picture

so, let me guess ... the car manufacturers are going to need another bailout? ...

Clueless Economist's picture

Just as long there remains a glut of Won Ton Soup and General Tso chicken, I will remain calm.

Ineverslice's picture

Channel-Stuffed Pan-Fried Dumplings...bring it on.

Can't get enough of those (with hot mustad).

TruthInSunshine's picture

Paul Krugman, Ph.D, Nobel Laureate, New York Times columnist, and all-around douchebag is of the opinion that thermonuclear f*cking war between the U.S., China, Russia & anyone else who participates, would lead to so many broken windows that it would be his wet dream come true, and the uber-stimulative economic "policy" sure to 'un-stuff' China's channel.


*Check out Paul Krugman's new book, When Mars Attacks, available in all fine bookstores now!


I have arrived at the conviction that the neglect by economists to discuss seriously what is really the crucial problem of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions.


--Friedrich August von Hayek


AlaricBalth's picture

"So if we could get something that could cause the government to say, ‘Oh, never mind those budget things; let’s just spend and do a bunch of stuff.' So my fake threat from space aliens is the other route,” Krugman said before a laughing crowd. “I’ve been proposing that.”

A false flag alien attack. I think it has been tried already.

AldousHuxley's picture

central planning works well to pull a country out of poverty, but doesn't work to become a world class  leader.


however, Chinese elites still care about China. unlike American billionares who sold out Americans to Chinese and Indian elites.



dbomb12's picture

It seems like central planning has done the complete opposite, the more central planning (big government) comes less freedom more worthless currency, 0 growth, high unemployment and dont forget 50% of the pop. living on food stamps

TrulyBelieving's picture

You have to excuse A huxley.  He lives in a socialist fantasy world where all outcomes are made up in his head. Same as Mao, Pol Pot, and Stalin, they would visualise a utopian world in their head then try to make it happen in the real world. And the real results were, well you know....  

redd_green's picture

Sorry, but, man youcould not be further from the truth.  The Mao days, when the elites would give up something for the country to do better are decades past.    The elites all want more billions and they care not how many peasants heads they crush.   I've seen it, it is very ugly there.     The Chinese billionaires sold out their fellow countrymen the exact same as the American billionaires have.

Stackers's picture

Stuffed Crust Pizza for dinner ?

old naughty's picture

Your last sentence is telling...

But them elites are not tptb.

Ar-Pharazôn's picture

LOL you've been able to contraddict yourself in 2 seconds.


Central planning dont work to become world leader? and wtf are doing chinese now?

Hype Alert's picture

Overcapacity is a serious problem and if it's not allowed to clear by bankruptcy, which the FED and apparently China is working overtime to avoid, it will be cleared some other way. 


They should let the system work and stop screwing with it.

onthesquare's picture

All China has to do is stop making such high quality, long lasting stuff.  Make pots and pans that rust out in weeks instead of months, cloths that loose buttons the first time you do them up instead of the second time.  You get the general idea.

BigJim's picture

Yes, that would certainly work.. but I just can't see the proud Chinaman stoop to such depths.

Manthong's picture

It’s just a good thing for us today that Hayek’s quaint notions about value have been discredited and that credit has eliminated the need for any and all capital anymore.

TruthInSunshine's picture

Indeed, manthong...indeed.

Hayek's value oriented ideals derivative of notional, barbaric sentiment, has no place in this modern money mechanics world, and we are told we should be grateful & indebted to others, allowing them much credit, for that.

BigJim's picture

re: nuclear war... if broken windows are economically stimulative, imagine the positive effects of melted windows!

Long sand.

Panafrican Funktron Robot's picture

People ran out of money (borrowed or otherwise) to buy stupid shit.  At least at the same rate they were before.

Think we'll see 15 again?

StychoKiller's picture

Mu-shu shrimp and scallion pancakes, nom nom nom!

Calmyourself's picture

I wonder if Miss Venezuela is available for channel stuffing..  Oh you mean inventories, oh never mind..

Manthong's picture

I don’t understand how anyone can zing you for that.. maybe because she is a godless communist?
Her channel is not worthy? Because the repartee standards here are so high?

Nope.. I still don’t understand.

AldousHuxley's picture

no, probably because she is not rich.

most republicans marry for money....then 15 years later after mid life crisis, they ditch the old hag and go for some liberal young thing.

blueridgeviews's picture

Wow, there must be a lot of Republicans in Hollywood. News to me.

Calmyourself's picture

Yes wascally Republicans like John Edwards.. What, I am wrong again, he channel stuffed who, Hunter Riell, ugh.. 

Anyway zinging me ha, most of the trolls here do not understand the human condition, our basic drives or economics much less my witty repartee..  Read a few of Aldous here.. Angry, disenfranchised and eyeing up the bath salts.. 

DCFusor's picture

Channel stuffing was a topic of conversation long before ZH existed.  That's pretty ridiculous, bitchez - maybe you're just too young to know any better.  Don't dislocate your shoulder backslapping.

Panafrican Funktron Robot's picture

"Channel stuffing was a topic of conversation long before ZH existed."

Where?  Where was this a topic of conversation amongst the public before ZH existed?

DoChenRollingBearing's picture

Depending on whose figures you believe, there are between 70 and 90 Chinese vehicle brands now on sale in Peru alone!

There is going to be a bloodbath among the Chinese car companies.

Chinese automotive bearings?  We have a nice order on the way for our "Precio Nada Mas" crowd...

Calmyourself's picture

Thanks Gramps, I was channel stuffing filter elements into Aussie mine inventories in the 80's..  The numbers must be made and at that time the PTB were interested in units moved they failed to check my margins, ha..  When they checked, I educated them (you) on the benefits of market share..

kaiten's picture

"so, let me guess ... the car manufacturers are going to need another bailout? ..."


No, just an another parking lot.

nope-1004's picture

All of your channels are belong to us.

Governments lie, big time.  This is a perceptions managed economy, based on mouth pieces, not on goods pieces.  The only thing produced these days is a good story.

Truth is, all channels are stuffed.  To admit the truth means one grand economic waterfall will follow shortly thereafter.


Joshua_D's picture

You can't eat perceptions.

BLOTTO's picture

What has been will be again,
what has been done will be done again;
there is nothing new under the sun.
-King Solomon


Jlmadyson's picture

So how in the world do they pump up Q3? Stockpiles to the high heavans and nothing moving.

They have nothing left.


100% global recession indeed Faber.

LawsofPhysics's picture

For debtors anyway, big fucking difference between being a debtor and a creditor.  Regardless of how many channels are stuffed.

America was a creditor once...

cougar_w's picture

And China can trade finished goods for oil and other raw resources, assuming anyone still wants finished products.

I don't know what America produces. Lard mostly from what I can see on the streets. Oh and ammunition. And financial innovation.

We're screwed faster than the Chinese, unless they suffer some kind of sudden onset of mental retardation. All they have to do is wait for us to get so fat we can no longer produce our own food.

Fat people, with guns, starving to death. What a world.

BliptoP3's picture

Don't forget about Hope, we have an excess - we could sell some of that worthless crap to China.

cougar_w's picture

What? And start another round of Hopium wars in Asia?

TheFourthStooge-ing's picture

cougar_w, I am shocked that you didn't mention America's biggest export: fraud.

cougar_w's picture

Fraud: Ah, but you see that's now called "financial innovation" which I did mention. Unless you meant the other kind of fraud, being government statistical analysis of the economy, which yes indeed the Chinese learned from us.

TheFourthStooge-ing's picture


Fraud: Ah, but you see that's now called "financial innovation" which I did mention.

You are correct, as "financial innovation" encompasses the guile and subtlety of fraud. I had "financial innovation" confused with "rule of law", which is blatant theft in broad daylight with no consequences, and thus not subtle at all.

Peter Pan's picture

There are two problems:

The world has massive overcapacity for everything except peace, jobs, good medicine, good education and a good retirement and yet these are the basics. Unless world leaders concentrate on these, there is little scope for improvement in mankind's lot.

The second problem is that for China to encourage more in house consumption, it's going to have to get those raw material inputs at a much cheaper price than it is presently paying Austrailia and Brazil because otherwise it cannot produce at a sufficiently cheap price for the vast bulk of the Chinese people. This will bode ill for the resource producing nations.

Yellowhoard's picture

The Chinese need to allow their currency to float naturally and rise against others.

This would lower material costs and provide their people with greater purchasing power.

But that might cost Apple 20 bucks or so in per unit profit from their Foxconn manufacturing.

Terminus C's picture

I owe you $10,000 and it is my problem. I owe you, $3,000,000,000,000 and it is your problem.

There are no creditor and debtors anymore. Both sides of the debt are fucked because the debt bubble has gotten so unmanageable that only those that create "money" will come out as a winner.

Maybe china can "invest" in itself as the US did but, during the growth in the nineteenth century, the US was able to export to the world (particularly Europe) which allowed it's industry to grow rapidly.

China will not be able to do that in a global recession, thus massive channel stuffing.

Also, politically and socially, China today is nothing like the US in the nineteenth century.

LawsofPhysics's picture

China has long since recognized that the growth meme is dead.  Their policies are very clear on this.

Maybe you are correct, but perception is everything.  China sees themselves as a creditor, period. I don't think a U.S. default will result in a muted response from China (or Russia).  I also recognize that the U.S. still has many natural resources, provided that it can physically protect and maintain control of those resources.  Better get all those fat, well-armed folks out there.

It is a lawless world now, possession is the fucking law.  Ask yourself what happened the last time a world creditor with a large population and strong manufacturing base dealt with a world depression and multiple currency collapses/devaluations?

Terminus C's picture

I suspect a major land war in Asia is imminent and Iran/Syria are the likely flash points, though most certainly not the end points.

Something that needs to be considered is that China and Russia are not natural allies, they are indeed natural enemies and have been at war with each other, off and on, for centuries. They have a common "enemy" in the US but only in the short term as their true rivals are each other for the domination of Asia.

China's war machine will not be turned directly against the US... except as Japan's was in WWII. America was not ready to cede control of Asia to Japan at that time... they may be willing to let China have it.

War is coming, a big one.

reader2010's picture

Our Navy bosses say we need at least eleven carrier strike groups all the time for a reason. China has the biggest army, the 3rd biggest navy and air force.