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Guest Post: China: Continued Boom Or Bursting Bubble?

Tyler Durden's picture


Submitted by Jim Quinn of The Burning Platform

China: Continued Boom or Bursting Bubble?

In a recent article, How China Ate America’s Lunch, Clif Carothers described what China has accomplished in the last thirty years:

In thirty short years, China was able to accelerate her GDP from $216 billion to $6 trillion. She amassed reserve capital of $3 trillion. She reversed America’s fortunes from the greatest creditor nation to the greatest debtor nation. She gutted America’s factories while creating the world’s largest manufacturing base in her own country. A measure of output that highly correlates to GDP is energy consumption. In June of this year, 2011, China surpassed the United States as the largest consumer of energy on the planet. While the US consumes 19% of the world’s energy, China consumes 20.3%.

While China was growing their economy by a phenomenal 2,800%, the US GDP grew from $2.3 trillion to $15 trillion – a mere 650% increase, of which 420% was due to inflation. There is no question that China’s progress has been remarkable. The question is whether that growth is sustainable and built upon a solid foundation.

In a February 2010 Casey Report article titled Is China’s Recovery a Fraud?, my thesis was the $2.1 trillion stimulus package rolled out by Chinese authorities after the 2008/2009 financial crash was leading to enormous malinvestment.

The officially announced stimulus package in November 2008 totaled $586 billion and was to be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income building, tax cuts, and finance. In reality, the central government pumped an additional $1.5 trillion into the economy in an effort to maintain social stability through the subsidization of its industrial base. Chinese banks funneled cheap loans to state-owned enterprises in order to manufacture artificial profit margins to keep Chinese goods competitive and employment maximized. In the short term, the stimulus produced the desired effect.

Specifically, the Shanghai Index – which had topped out at 5,913 in October of 2007 and had fallen to a low of 1,678 by November 2008 – responded to the stimulus by rebounding to 3,300 in January 2010, as the chart below shows.

As with all monetary and fiscal stimuli, however, the initial high is always followed by a hangover. Today the Shanghai Index stands at 2,350, down 29% from when I penned my article. China is also experiencing accelerating inflation, a real estate bubble of epic proportions, a looming banking crisis due to the billions in bad loans made by Chinese banks as commanded by the Chinese government, and growing social unrest due to rising food and energy prices.

There are few opinions in the middle regarding the China story. People are either convinced China is a juggernaut that can’t be stopped and will become the dominant world power (a recent, global Pew Poll found that 47% of respondents think China is or will be the dominant global power), or they see a colossal bubble that will burst and cause worldwide mayhem. While some might think my world-view has a negative slant, I tend toward what I think is healthy skepticism that causes me to view things in a more realistic manner.

Based on the facts as I understand them, the Chinese government has created a commercial and residential real estate bubble in an effort to keep peasants employed and not rioting in the streets. In the case of the US subprime mortgage bubble, critical thinkers like Steve Eisman and Michael Burry figured out it was a bubble three years before it burst. Jim Chanos and Andy Xei have been warning about this Chinese bubble for over a year. They have been scorned by the same Wall Street shills who denied the US housing bubble. As Eisman and Burry proved (reaping billions), just because you are early doesn’t mean you are wrong.

Inflated Dreams

The table below paints a troublesome picture of rising inflation and gigantic over-investment in real estate. And this takes into account the fact that, much like the Bureau of Labor Statistics (BLS) here in the US massages data, the Chinese statistics are tortured by the Party to paint the best possible picture. Even still, the Chinese government’s own numbers show inflation escalating as economic growth is slowing.

And the trend is not improving: The latest data show year-over-year inflation surging by 6.4% in June and food prices skyrocketing by 14%. With annual disposable income of less than $2,500 in urban areas and just $600 in rural areas, food and energy account for a huge percentage of the average Chinese person’s daily living expenses. The Chinese authorities are terrified by the revolutions sweeping across the Middle East and are desperate to put out the inflationary fires.

To contain stubbornly high inflation, the Chinese central bank has raised the benchmark interest rate three times this year, including the latest rate hike of 25 basis points announced on July 6. In an attempt to rein in excess lending, it has also hiked the reserve requirement ratio six times, ordering banks to keep a record high of 21.5% of their deposits in reserve.

Even with inflation surging, the Manufacturing Output Index fell to 47.2 in July – the lowest in 28 months, and indicating contraction. China’s automobile industry, which overtook the US in 2010 with sales of 18 million autos, has experienced a dramatic slowdown, with growth of only 3% through June versus 32% growth last year. For all of 2011, the China Association of Automobile Manufacturers expects sales to decline versus 2010.

Real Estate Out of Reach

In response to the 2008 worldwide financial collapse, Chinese authorities unleashed $2.1 trillion of stimulus, or almost 33% of GDP. This compares to the US stimulus of $800 billion, or 5.5% of GDP, spent on worthless Keynesian pork. Unlike the US, where no jobs were created, China’s command-and-control structure funneled the stimulus into building cities, malls, roads, office buildings, and residential units. Millions of Chinese were employed in creating properties for which there was no demand. Moody’s approximates that China’s banks have funded at least RMB 8.5 trillion (US$1.3 trillion) of the RMB 10.7 trillion of outstanding local government debt, which was a significant portion of the 2008 national stimulus package. When the central authorities tell the banks to lend, the banks ask, “How much?” The result has been soaring real estate inflation and malinvestment.

Everyone has seen the pictures of the ghost cities (Chenggong) with no inhabitants; ghost malls (South China Mall, Dongguan Mall) with no shoppers; residential towers with no residents; and roads with no cars. Analyst Gillem Tolluch from Forensic Asia Limited describes the scene in China today:

China consumes more steel, iron ore and cement per capita than any industrial nation in history. It’s all going to railways that will never make money, roads that no one drives on and cities that no one lives in. It’s like walking into a forest of skyscrapers, but they’re all empty.

There are 218 million urban households in China, and the central government ordered local governments to build 36 million more units by 2015. They just have one small problem: Prices for apartments in Shanghai and other major metropolitan areas have soared by over 100% in the last five years.

The average size of a “cheap” apartment in second-tier Chinese cities is 60 square meters (650 sq ft) and fetches an average price of $1,230 per square meter, or $73,800. Mid-tier apartments in Shanghai or Beijing sell for $3,500 per square meter, or $210,000 for an average size apartment. “When prices are over 20 times more than annual household income, it’s not affordable,” says Andy Xie, an independent economist in Shanghai. Millions of working Chinese have been priced out of ever owning property and blame the corrupt local government cronies and connected speculators. Anger is simmering among the masses.

Confirming the overvaluation, a report by the Chinese Academy of Social Science points out that in the country’s metropolitan centers today, house prices per square meter generally amount to between 50% and 100% of average annual incomes. “To secure a flat of 90 square meters, an average working family in Beijing and Shanghai will have to work for more than 50 years to pay off their loans, compared to five to 10 years in the developed world,” according to the report. Report authors Lu Ding and Huang Yanjie conclude that, “[S]ky-high housing prices have undermined housing affordability and caused great anxiety and resentment among the public, who are wary of the conspiracy among ‘speculators’ – developers and government officials in charge of real estate businesses.”

House of Cards

China has methodically and relentlessly grown their economy for the last thirty years. However, as the US and Europe discovered the hard way with their real estate busts, if one makes an abundance of cheap-money loans to speculators, prices will rise far above the true value of the asset bought with the debt. And in time, the bubble must burst. The pressure in this bubble is mounting. Andy Xie lays out the real situation on the ground in China:

No other government in the world would spend that kind of money. If you go to local Chinese cities, you will see what they spent that money on: Tens of millions on just trees, parks and government buildings.

All of the major ratings agencies are warning about an impending banking crisis in China. Fitch downgraded the country’s credit rating and warned there was a 60% chance the Chinese banking system will require a bailout in the next two years. Just like the US, China has too-big-to-fail banks, with five banks accounting for 50% of the lending in China. In a July 2011 report, Moody’s cautioned that the non-performing loans on the balance sheets of Chinese banks could rise to between 8% and 12%, versus the 1% proclaimed by Chinese officials. China’s regulators have belatedly applied the brakes, but it is too late. The house of cards looks susceptible to just the slightest of breezes.

Fraser Howie, managing director at CLSA in Singapore, captured the essence of the coming collapse in his recent assessment:

If you are going to address the misallocation of capital in the banking system and credit system, that’s going to have huge knock-on effects on the profitability and viability of the banks. And if there were a major banking crisis, you would start to see money trying to get out of China. What would the government do to maintain stability? You could have a whole host of problems. It’s almost far too complicated to contemplate.

There is one sure thing regarding bubbles: They always pop. It’s in their nature.

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”Ludwig von Mises


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Wed, 10/12/2011 - 16:02 | 1766942 GeneMarchbanks
GeneMarchbanks's picture

Beating this topic to death are we? It never gets old, yet people in the West who think China is a bigger concern than an insolvent banking system on two continents are continually sucked in by China affairs that will not cause any real crises. The story is still the collapse of the West where, lets not forget, the real problems originated.

Wed, 10/12/2011 - 16:07 | 1766985 prains
prains's picture

Beating this topic to death are we?


don't be mislead, although not the message in this article, if you listen carefully that beating is the drums of war way off in the distance. Once the flow charts come out at the UN security council, it's game on.

Wed, 10/12/2011 - 19:37 | 1767768 AldousHuxley
AldousHuxley's picture
  • housing bubble
  • bad debt hidden by banks
  • unaffordable healthcare
  • demographic time-bomb
  • rampant corruption
  • income disparity


Sounds like China copied US right down to the economic collapse.

Wed, 10/12/2011 - 16:10 | 1766991 SheepDog-One
SheepDog-One's picture

Yep Gene, for the moment we have the luxury of looking down our noses at whats up with China...whats up with Europe...when we're sitting on the worst mess of all by far right here!

Wed, 10/12/2011 - 16:44 | 1767093 LawsofPhysics
LawsofPhysics's picture

Might as well replace "China" with "the world".  Lots of card houses out there.

Wed, 10/12/2011 - 19:26 | 1767730 AldousHuxley
AldousHuxley's picture

well china pegged their RMB to dollars, so US banking system is Chinese banking system. Wall st. screwed Americans as well as the Chinese.

US is like a fake sugar daddy and China is like a gold digger. Chinese gold digger had a fun ride but now realize that American sugar daddy is really broke and actually the party was on gold digger's credit card.


Wed, 10/12/2011 - 23:33 | 1768325 covert
covert's picture

china is doing both.


Wed, 10/12/2011 - 15:57 | 1766949 long-shorty
long-shorty's picture

China is the Lenny Dykstra economy. Just because you once had a lot of assets doesn't mean you won't be broke went you spend the assets poorly, and simultanously borrow against your assets and spend that money poorly too.

Wed, 10/12/2011 - 15:58 | 1766953 long-shorty
long-shorty's picture

forgot to mention, very short CLF via options.


Wed, 10/12/2011 - 16:04 | 1766964 SheepDog-One
SheepDog-One's picture

'Chinas House of Cards'...the title could easily replace China with US and it would be no different.

What does it matter what China does, its all lies anyway. Until the day of complete melt down, all will be well so whatever. Drink heavily.

Wed, 10/12/2011 - 16:03 | 1766970 halflink123
halflink123's picture

I would say the opposite-most of the Wall Street shills have been saying china IS in a bubble. If chanos aint a wall street shill i don't know who is.  Even more so, he's US centric and buys the US crock and bull.

Fact: China has more reserves than national debt.


Fact: China makes everything for the whole planet.


Fact: US cant compete w China and is running $T trade deficits w the country.

US is bankrupt, China is not. 



Wed, 10/12/2011 - 16:08 | 1766977 SheepDog-One
SheepDog-One's picture

Fact: China doesnt care if 1 billion of its people have to die to keep its 'economy' going.

Wed, 10/12/2011 - 16:09 | 1766988 imapopulistnow
imapopulistnow's picture

Talks like a progresive...

Wed, 10/12/2011 - 16:14 | 1766996 SheepDog-One
SheepDog-One's picture

And you talk like an asshole. 'Progressive' LOL what did you do start listening to Glenn Beck last month?  No I dont talk like a 'progressive' fuknut I talk like a realist and point out that its irrelevant to talk about 'Chinas economic state' without pointing out they really dont give a shit...and unfortunately we're so stupid we're heavily in debt to them. 

Wed, 10/12/2011 - 16:49 | 1767111 imapopulistnow
imapopulistnow's picture

China is rapidly tranforming their nation from one of adject poverty to developed nation status.  Wages and working conditions are relative.  Much better than in China in the past but obviously not to western standards yet.  But they will be.  The important matter is they are continuously improving.  Wages annually increase more than inflation, workers can buy more every year than the year before and they are willing to work hard and educate their young knowing that the future is theirs to hold.  China's leadership cares very much about the welfare of their people, both from the paternalism embedded in their culture and pragmatically from the concern that they must keep their people reasonably happy in order to retain power.  Will their bubble crash like ours did in 2008?  Perhaps, but what they have going for them is $1.5 trillion in foreign reserves and 6 to 1 bank reserve requirements.  We entered our bubble with 30 to 1 bank reserves (excluding the many off balance sheet mechanisms).  China is building millions of low cost housing units to offset the construction declines from thier speculative real estate bubble.  They are further taking measures to encourage domestic spending to offset the obvious decline in exports to bankrupt developed nations.  They just capitalized their banks as a preventive measure rather than wait for a Lehman to collapse first.  They cautiously observe our mistakes in economic mismanagement and adjust accordingly.  You will likely be working for one of them in the future when the Yuan become the world's reserve currency and they buy our assets for pennies on the dollar.   (I suggest you replace the Che Guevara poster in your cubicle with one of Chairman Mao before they arrive).

Wed, 10/12/2011 - 16:53 | 1767128 imapopulistnow
imapopulistnow's picture

adject = abject, progresive = progressive

Wed, 10/12/2011 - 18:15 | 1767472 mjk0259
mjk0259's picture

Yes and US economy crashed every twenty five years or so during it's ascent to global domination. Even if China does crash, it will keep rising at least to approximately Japan level which is close to, if not better, then rapidly declining US level. Not that I look forward to this.


Wed, 10/12/2011 - 16:53 | 1767132 rosiescenario
rosiescenario's picture

"...and unfortunately we're so stupid we're heavily in debt to them. "


....and they were dumb enough to buy our paper........inflation always favors the debtor....Ben will print us out of our problem.....we hope.

Wed, 10/12/2011 - 16:10 | 1766992 halflink123
halflink123's picture

Fact: China doesnt care if 1 billion of its people have to die to keep its 'economy' going

remember US has been in wars for a decade? how many americans died? you think US cares if its people die? or any politicians?


Its not right, its sick but China isnt unique in this

Wed, 10/12/2011 - 16:19 | 1766998 SheepDog-One
SheepDog-One's picture

Yea of course, what are you trying to argue with me for I agreed, only backed up the facts a bit more. Just further pointed out its a ridiculous discussion to begin with, China will starve out a billion people to make its 'economy' work, if need be.

Wed, 10/12/2011 - 19:19 | 1767714 malek
malek's picture

So does this make the previous 3 facts go away, or irrelevant in comparison?? Whistling past the graveyard, are you?

Wed, 10/12/2011 - 16:11 | 1766993 moskov
moskov's picture

So Americans care about Chinese people for how to  keep their economy going? Pretty pretty impressive coming out of THE PARASITE OF GLOBAL ECONOMY

Wed, 10/12/2011 - 16:18 | 1767007 SheepDog-One
SheepDog-One's picture

Yea exactly, this is only a momentary luxury seeing as how we sit on the biggest mess of all by far!

Wed, 10/12/2011 - 16:15 | 1767001 SMG
SMG's picture

Fact: China's reserves are backed by absolutely nothing.

Fact: In return for making everything for the planet, China has recieved trillions of pieces of toliet paper.

Fact:  US is ahead of China in miltary power and food production. Also China cannot feed itself on it's own.

US wins this one, but I think they will be very unhappy once they find out what has happened.  If there's any Chinese reading this, please remember the US is controlled by the Illuminati Oligarchy an they are the ones who did this to you.   I would hate to see WWIII caused by this costing billions of lives.   


Wed, 10/12/2011 - 16:23 | 1767022 moskov
moskov's picture

Fact: China's reserve is backed millions of skilled workers and world's largest manufacturing base.


Fact: US military power in real term is useless since China and Russia has enough nuclear heads to destroy the enire planet more than 20 times. the urban myth of China cannot feed themselves is just another delusional bullshit backs by nothing. 


If US is controled by Illuminati, then China would make sure Illuminati also disapear once for all. Chinese secret society is everywhere. Peace

Wed, 10/12/2011 - 16:35 | 1767055 SMG
SMG's picture

China has accomplished alot in the last few decades and should be proud of that.  I'm just saying that I hope all this gets resolved without WWIII.  Nobody wants to see that but the Oligarchy.

Wed, 10/12/2011 - 23:33 | 1768326 reader2010
reader2010's picture

Thank for very much for your ignorance.

Wed, 10/12/2011 - 22:14 | 1768131 long-shorty
long-shorty's picture

Your "fact" is crap. Debt implicitly guaranteed by the Chinese federal government is somewhere in the neighborhood of 2.5x their foreign currency reserves.


Wed, 10/12/2011 - 16:04 | 1766971 TheSilverJournal
TheSilverJournal's picture

China is fine. They have huge down payments so hardly anyone will lose their house to the bank. Any money the Chinese spend on infrastructure or building empty buildings is better than getting absolutely nothing out of it by investing it in soon to be worthless US Treasuries. And when the USD goes into hyperinflation, the Chinese will be much better off because they will no longer be able to sell their goods to the US in exchange for USDs that Bernanke just runs off the printing press and instead they'll consume those goods themselves.

Wed, 10/12/2011 - 16:38 | 1767063 Mugatu
Mugatu's picture


Chinese bubbles
Running out of time?
Make me happy
Make me feel fine

Chinese bubbles
Please don't get worried
Loads of bad debt
Will you get buried?

I am the inventor of the Piano Key Necktie!


Wed, 10/12/2011 - 22:45 | 1768226 chindit13
chindit13's picture

They have huge downpayments gained from Mom and Pop borrowing against the family company in the shadow banking system at rates of 25-180% per year.  The connected plutocrats and cronies might have the cash to put down large downpayments, but the masses---who are buying---do not.  They have a population where 99% earn 50,000 yuan or less a year, the equivalent of $8000.  From this pittance, how many years does it take to "save" that 40% downpayment, after subtracing for rent, food, commuting, school fees, etc.?

Empty cities and homes decay naturally unless regular maintainance is carried out.  They decay even faster if there is substantial pollution, and faster still if the quality of construction was abyssmal.  China might have gotten the GDP boost---via debt---but they will get very little use out of these empty structures.

Potemkin economy.

Wed, 10/12/2011 - 16:05 | 1766975 broke433
broke433's picture

You forgot the gold bubble.

Wed, 10/12/2011 - 16:05 | 1766976 gwar5
gwar5's picture

China = Bust.... and they know it.  The West is too broke to buy their stuff and their own domestic consumption is not accelerating fast enough to take up the slack despite the Chi-Coms' big efforts. 


/OT anybody catch this already?  Madoff whistle blower, Harry Markopolos, catches Bank of New York Mellon and State Street Bank stealing billions from pensions.

Business insider October 7, 2011. 


And Now We Know Why Nobody Took Madoff Whistleblower Harry Markopolos Seriously... - Business Insider



Wed, 10/12/2011 - 16:18 | 1767008 TheSilverJournal
TheSilverJournal's picture

Why is it good for the Chinese to ship their goods to the West at all? All the Chinese get for shipping their goods to us is pieces of paper. So they make a good and ship it to us and we make pieces of paper and ship it to them and you think that is bad for the Chinese if that process isn't sped up? The Chinese might not know it yet, but they don't want the paper, what they really want is goods. That's the whole point of trade, to trade these goods for those goods. WHEN THE CHINESE REALIZE THAT THEY ARE TRADING THEIR GOODS FOR WORTHLESS PIECES OF PAPER, THEY WILL STOP THAT TRADE, WHICH WILL BE A GOOD THING FOR THE CHINESE. Because now they will be able to actually benefit from the trade and will trade their goods for other goods. So to sum it up, when fiat hyperinflates away, the Chinese will be able to consume what they produce.

Wed, 10/12/2011 - 17:03 | 1767169 imapopulistnow
imapopulistnow's picture

They are trading their low cost labor for state of the art technology and some of the most modern factories in the world.  Japan successfully did they same thing - until they literally ran out of people and domestic demand due to a low birth rate.

Wed, 10/12/2011 - 19:52 | 1767801 TheSilverJournal
TheSilverJournal's picture

Japan didn't run out of demand. Demand is infinite. People always want stuff. In fact, demand comes from supply because the only reason to supply something is to trade it for something else. So the thing to look at is really production. You only produce in order to consume and you can only consume what has been produced.

Japan had a bubble created from easy money and it never let that bubble implode which is kind of like the US except the US is now in much worse shape than Japan was because the US makes relatively little. 70% of the US economy is service sector. The main export of the US is the USD which is now just run off a printing press at a forever increasing rate.

Wed, 10/12/2011 - 16:06 | 1766979 i root for that...
i root for that fat jersey governor's picture

the problem is such discussion would not help your invesment decision in near-, mid-, or even long-term. The reality is the corrupt political power in Chins, for their own power, will do anything and everything to postpone that crash, to their wish, forever or at least a long time (at least long enough to make sure the current regime won't see it, or to be punished for it). Since there is no democracy there like the U.S. or EU, those bastards might be able to pull it off.

So when it comes to betting on the fall of China or the collapse of world economy due to China's fall, you really can not predict anything in a meaningful term to help my investing strategy - talking is getting old here.

Wed, 10/12/2011 - 16:07 | 1766982 moskov
moskov's picture

Wow. Is the VooDoo China Doll very popular in the US these days?

Where's the debt ceiling drama again? I need some of that to add to the enormous house of dollars cards.

Wed, 10/12/2011 - 16:28 | 1767034 buzzsaw99
buzzsaw99's picture

i like japs better than chinks. nothing personal.

Wed, 10/12/2011 - 18:16 | 1767478 moskov
moskov's picture

I like Japs too, but Americans, too pathetic to compare with Japs

Thu, 10/13/2011 - 01:22 | 1768525 Mayor McCheese
Mayor McCheese's picture


Wed, 10/12/2011 - 16:07 | 1766984 kito
kito's picture

"Millions of Chinese were employed in creating properties for which there was no demand"


chinas five years plan is to urbanize some 300 million people in the rural areas. no demand--ha!!! chanos and other china bears will be waiting a long time for something that will not happen. as jim rogers points out, their real estate exposure is limited in relation to the entire nation's economy. china will keep on yuan.

Wed, 10/12/2011 - 17:00 | 1767162 imapopulistnow
imapopulistnow's picture

Over 1.3 billion Chinese of which only 150 million have achieved western living standards.  Sure looks like a source of future demand to me.

Wed, 10/12/2011 - 17:54 | 1767382 kito
kito's picture


Wed, 10/12/2011 - 23:38 | 1768333 reader2010
reader2010's picture

150 million have achieved western living standards.


Based on what? oil consumption? 

Wed, 10/12/2011 - 16:08 | 1766986 Archimedes
Archimedes's picture

I have read this script before..about 5 years ago! China is still here. And being early does make you wrong! I learned a while ago; Just because you know how the game ends you can still lose by placing bets too early. The world moves much slower than your mind. Patience and ride the ups and downs, try not to get frustrated and emotional. Eventually it will collapse but no one really knows when. So make money on the ups and downs....

Wed, 10/12/2011 - 16:17 | 1767006 moskov
moskov's picture

Even after the Cultural Revolution and Tiananmen Square. PRC is still here and continuing lending their money to the US aka the rest of the world. I have no idea why are the China Doom Story  keep chasing around those professinal's attention while their mess back home is 10 times greater. When China was building the Great Wall, I beg Americans was still out of this planet yet. For Americans: Don't be too childlike, grow up and be honest to your problem first

Wed, 10/12/2011 - 16:34 | 1767051 buzzsaw99
buzzsaw99's picture

China lends the usa trillions of dollars that China slaved for and which we print for free and you think **we** have a problem? LMFAO!!

Wed, 10/12/2011 - 18:10 | 1767450 moskov
moskov's picture

Yes.When China stops lending it, Print as much as you want. You would be rich

Wed, 10/12/2011 - 22:49 | 1768236 reader2010
reader2010's picture

When China stops sending money our way,  our bombs will be dropped all over China. 

Wed, 10/12/2011 - 16:51 | 1767116 Jim Quinn
Jim Quinn's picture

Shanghai Index October 2007 - 5,913

Shanghai Index October 2011 - 2,420

Four year return - Negative 59% while their GDP was supposedly growing 9% per year.

Sure smells fishy

Wed, 10/12/2011 - 22:54 | 1768247 chindit13
chindit13's picture


Post charts of the SSE vs. bank lending and shadow banking.

It is clear from where the "growth" came.  I will postulate that absent gains from RE speculation, Chinese industry "profits" are negative.  As RE prices stabilize or even fall, all will be laid bare. Certainly the SOEs are money losers.

Then there are the much vaunted FX reserves, which are largely just export revenue turned into yuan.  Reserves do not mean profits.  The actual export could well have been a loss, though the revenue gets plopped into the "FX Reserve" figure.  Build for $100, sell for $90 still equals +$90 FX reserves.

Wed, 10/12/2011 - 16:12 | 1766997 wombats
wombats's picture

Bubbles are pretty. :)

Wed, 10/12/2011 - 16:15 | 1767003 kito
kito's picture

stick to the bubbles that are made in the u.s.a.--they are about the only thing left which is domestically manufactured.

Wed, 10/12/2011 - 16:16 | 1767005 marcusfenix
marcusfenix's picture

bubble, bubble...toil and trouble

the whole damn global economy is one giant bubble, China, the US, the EU...

one massive gas bubble floating on a sea of gasoline and everybody has plenty of free matches but nobody thought to bring a fire extinguisher...

Wed, 10/12/2011 - 16:26 | 1767021 cranky-old-geezer
cranky-old-geezer's picture



China's RE market may sag but it won't collapse like ours did. Why? Because China has the biggest manufacturing economy on the planet ...something we didn't have when our RE market collapsed.

China isn't letting their banks do liar loans and no-doc loans and securitization all the other lending fraud we let our banks do. China didn't let their banks set up MERS to bypass legally required recording of notes & mortgages.

Yes China's RE market may sag, but it won't implode like ours did ...and is still imploding.

Wed, 10/12/2011 - 16:47 | 1767105 LawsofPhysics
LawsofPhysics's picture

Sure, but then when the world is broke, who will be china's customers?  Mars?

Wed, 10/12/2011 - 19:22 | 1767722 malek
malek's picture

Seems like a small problem, compared to others who will have to ask themselves who will be their supplier in such a case...

Wed, 10/12/2011 - 19:28 | 1767739 cranky-old-geezer
cranky-old-geezer's picture



If China runs out of customers, America will be 3rd world.

Hoping to see China go down?  You'll see America go down first.   So go ahead, have it your way ...and go pick out your refrigerator box ...and pick out a bridge you wana live under ...assuming you still wana live when things get that bad.

Wed, 10/12/2011 - 20:55 | 1767972 Bicycle Repairman
Bicycle Repairman's picture

Does anybody remember who went down first in the 30s? 

Wed, 10/12/2011 - 16:25 | 1767024 steve from virginia
steve from virginia's picture


China has hyperinflation b/c of an ongoing internal F/X arbitrage taking place between 'official' rate of exchange and the black market rate of exchange: between dollars and yuan, between the PBOC and the loan sharks/platform lenders.

Because lending rates of the underground economy must exceed the F/X cost (of gaining yuan) the rate of inflation due to the F/X arb must exceed 100% (with some rates charged by loan sharks being 180%).

Inflation is buying the currency you need (dollars, to buy fuel) with the currency the bosses give you (yuan). The official rate is ... roughly 6 yuan/dollar, the unofficial 'loan shark' rate is 12 yuan per dollar. Yuan are then lent out @ 120-180% annual interest. The dollars are offered by manufacturers who sell poisoned dog food in the US. The aim of the transaction is fuel -- diesel as well as crude which China lacks.

Energy shortages in China now look to be permanent. Add that card to the tower of cards!

The only reason China hasn't collapsed so far is because it is hard to short, it's hard to borrow shares, the government buys securities, China doesn't have Credit Default Swaps nor do commodities trade in exchanges in China, their currency isn't convertible, except in Hong Kong.

They made big mistake, copying America's waste-based economy just as that economy and copycat in the EU are all taking shits. All of them are basically fucked.


Fucked. Permanently.

Wed, 10/12/2011 - 16:27 | 1767032 gnomon
gnomon's picture

China mismanaged their mercantilist looting of The West and grew their own bubble, one very apart from ours.  The motley crew of mafias that make up China from the CCP to the PLA to the Regional Economic Warlords who thumb their nose at Bejing have all gotten too greedy and now will pay the price.  Just as we are paying the price for our own Banksters and attached vermin.  

The West and The East are two sides of the same coin, but The West still outshines The East because it has known LIberty and many still want to preserve it, (and to restore it), while the poor people in The East can only dream of what they have never experienced first-hand.

China is set to go down hard and no amount of so-called enlightened Statism will keep that enormous bubble intact.  All of history argues against a soft landing at this point of excess, just as it does with us here in The West.

We will be linked in misery, and if things go very wrong, war.

Wed, 10/12/2011 - 17:03 | 1767167 rosiescenario
rosiescenario's picture

"I am my master's dog at Kew, pray tell whose master's dog are you?"


Time for us dogs to re-assert ourselves.....

Wed, 10/12/2011 - 17:10 | 1767037 HL Shancken
HL Shancken's picture

When the China Bubble Bursts




If the world has invested in the wrong things, and China is one of those things, then the bursting of the China bubble may be the greatest catastrophe of all. China’s financial system is a mess, and a major crisis cannot be far off. With the U.S. economy dipping lower and Europe facing its own financial nightmare, China cannot postpone its own day of reckoning. So what will China’s leaders do? What plans have they made?

To give readers some idea of the problem, a recent WikiLeak revealed that the U.S. had advanced knowledge of a secret Chinese missile test last year. In response to this revelation, Chinese Gen. Xu Guangyu told the South China Morning Post that American officials possessed enough advanced detail to suggest the presence of a sensitively placed U.S. spy in China’s rocket forces. According to the South China Morning Post, Gen. Xu said that “if China could no longer keep secret its missile launches, it would not be able to launch a surprise attack on the U.S.”

But why would China want to launch a surprise attack on the U.S.?

In 2005 Chinese Defense Minister Chi Haotian explained that an ailing Chinese economy would produce a social explosion that could sweep away the Communist Party. “If we do not have good ideas,” warned Chi, “China will inevitably change … and we will all become criminals in history. After some deep pondering, we finally came to this conclusion: only by turning our developed national strength into the force of a fist striking outward – only by leading the people to go out – can we win forever the Chinese people’s support and love for the Communist Party.”

To survive the consequences of an economic downturn, the Party needs to lead the Chinese people – as Chi Haotian suggests – “out of China.” This may seem confusing to those who think China is a post-Communist country; but as journalist Richard Mcgregor points out in his book The Party, China is yet a Leninist state.  And yes, they really are Communists, though what this means is lost on nearly all outside observers – and somewhat bewildering to the Chinese themselves. The rulers of China keep their Communist goals and objective from public view. They do not like the glare of publicity; and so they banned Mcgregor’s book because he underscored the Party’s control over the army, police media and big business.

Two things are important to remember about the Chinese Communist Party: first, Communism remains a philosophy set against freedom; second, Communism is ultimately about the elimination of capitalism in favor of socialism (because capitalism opens the way to freedom). This latter point was underscored by none other than Deng Xiaoping himself – and by the Party in its secret conclaves today. But few in the West have bothered to read Deng’s collected works. Neither have they understood the reason for the Communist Party retaining its name and its ideology behind the scenes, where its strategies are meditated in secret.

The rationale behind Chinese capitalism is not to eliminate Communism. The rationale is to fight fire with fire – to defeat capitalism by capitalist means. The objectives of “Chinese capitalism,” as conceived by Deng Xiaoping, were outlined in an article published by the Hong Kong newspaper Cheng Ming on 6 June 1991. Here it was shown that Deng Xiaoping was secretly working to advance Sino-Soviet supremacy while the Americans were duped into giving China everything it needed. After the fall of the Soviet Union, as reported by Bill Gertz in the Washington Times of 21 Oct. 1992, China and Russia signed a pact restoring intelligence ties. From that point forward the Russians assisted the Chinese in their continuing military buildup.

The Chinese Communist goal was clearly stated at the beginning, in 1977, when Deng Xiaoping explained the strategy of opening economic relations with the West. Deng told the CCP Central Committee that they were engaged in “the international united front struggle” which was a strategy about which the “American imperialists” know absolutely nothing. “We belong to the Marxist camp,” he explained, “and can never be so thoughtless that we cannot distinguish friends from enemies.” According to Deng, President Nixon and President Ford were enemies, as well as President Carter. All future “American imperialist leaders” were also enemies. “What we need mainly is scientific and technical knowledge and equipment,” he said. In the future, America “will have no way of avoiding defeat by our hands.”

The strategic thinking of the Chinese Communist leadership holds that as long as America continues to enrich China, and as long as China can build its military power, then peace is workable. But when the economic wellspring runs dry and the Sino-American partnership has exhausted its profitability, then peace becomes unworkable. Rising discontent within China must then be diverted. The natural course would be for the people to hold the country’s leaders responsible, and to remove them from power. Many of these leaders would be tried as criminals, and would lose their heads. The only alternative to this would be war with the United States. This course automatically shuts down the Chinese democracy movement, which would have to choose between China and America in the course of a life-and-death struggle. In such a contest, the Chinese Communist Party automatically wins the assent of nearly all Chinese – including democrats.  

And so, the best course for a failing Chinese economy is war. One might ask what kind of war? In a secret 2005 speech given by Chinese Defense Minister Gen. Chi Haotian (titled “War is not far from us and is the midwife of the Chinese century”), a  biological attack on the United States was suggested as optimal. “It is indeed brutal to kill one or two hundred million Americans,” said Gen. Chi. “But that is the only path that will secure a Chinese century….” Having already noted that millions of Chinese would die if the Chinese economy collapsed, Gen. Chi explained that the only way out for China was to “teach the Chinese people to go out” (i.e., attack the United States). “We, as revolutionary humanitarians, do not want deaths,” said Chi. “But if history confronts us with a choice between deaths of Chinese and those of Americans, we’d have to pick the latter….”

Worried about the Chinese public’s reaction to the mass extermination of Americans, the Chinese Communist Party conducted an online survey through an intermediary. “[W]e wanted to know whether the people [of China] would rise up against us if one day we secretly adopted resolute means to ‘clean up’ America,” Gen. Chi explained. The survey asked if it was acceptable to shoot prisoners of war, along with women and children. If an overwhelming majority approved of such measures, “then they would approve our ‘cleaning up’ America,” said Chi.

The curious American reader might ask how the Chinese public reacted to the survey. “What turned out to be comforting,” noted Gen. Chi, “is they [the Chinese public] did not turn in a blank test paper. In fact, they turned in a test paper with a score of over 80. This is the excellent fruition of our Party’s work in propaganda and education over the past few decades.”

And so, if China’s economy stops growing, America should expect that its relations with China will deteriorate. This is based on the internal logic of the Chinese political system – which appears to be locked on a collision course with America.

Wed, 10/12/2011 - 23:16 | 1768289 buyingsterling
buyingsterling's picture

Excellent piece. The eastern military mind has always differed from most minds in the west. Throughout the USSR's reign, top military officials publicly argued that a nuclear war with the US was winnable; scores of studies and papers from the Russian Ministry of Defense are interesting reading for westerners who assume most people want what we want. Our MAD strategy is a reflection of our comparatively sane psychology, but our belief that others share its premises is dangerous. "Acceptable losses" mean something different to leaders of countries that have engineered giant famines, and still run vast gulags.

Wed, 10/12/2011 - 16:30 | 1767038 MrBinkeyWhat
MrBinkeyWhat's picture

I liked the last info-graphic. Who else does that look like?  Hint: US

Wed, 10/12/2011 - 16:37 | 1767066 Xiamenren
Xiamenren's picture

own a home in china.  in buying a home, there is a process.  look for a desirable area, look for sales offices within sites under construction, haggle prices, pay the entire amount, and now wait, for over a year for the complex of high rises to be finished.  wiait some more for interior work to be completed,  by this time, the sales office has been closed for over a year, everything sold out.  wiait another three months for inspection approval.  watch planned communities,n side by side, just like yours, dark at night.  The they give you the keys and now you have up to a year to "decorate" your home that is an empty shell.  this is reality.  what is also certain is that there is absolutely no simmering unrest, no smoldering resentments; it now the province of MSN to include "hidden unrest" as boilerplate to any article concerning China economy.  there is a slowing of the economy, but it is hardly noticable

Wed, 10/12/2011 - 16:43 | 1767091 gnomon
gnomon's picture

Oh, those increasing numbers of riots that are being reported are a figment of the West's imagination?  Land seized for Ponzi schemes and 25 per cent of China's GDP spent on Police State mechanisms are definitely good indicators for future peace and harmony.

Wed, 10/12/2011 - 17:40 | 1767331 ValidName
ValidName's picture

" what is also certain is that there is absolutely no simmering unrest, no smoldering resentments;"   This is sarcasm yes?

There are serious issues and what IS certain is that it is getting worse.  They are a long way from having any kind of real unrest, the .gov there are absolute experts at breaking the balls of anyone who even thought about protesting.  But people are expressing their frustration more and more.  First with inflation and second with income disparity.  They continue to just shit on migrant workers, but I don't have any real contact with that group.  Ordinary Beijingers  I do talk to, and they recognize the corruption issue but just seem to suck it up and move on.  Health care is just a mess, you either pay the bribe or suffer, or watch someone you love suffer.

You bet there is resentment, but is anything going to really happen?  I doubt it.

Wed, 10/12/2011 - 17:11 | 1767194 imapopulistnow
imapopulistnow's picture

China is simply too damned big to continue to play the mercantile game.  They are equal in size to 10 Japans or 25 South Koreas.  History may well opine that their mercantilism contriibuted greatly to the decline of the west.  (I suspect this is something the Chinese already know)

Wed, 10/12/2011 - 17:13 | 1767204 rosiescenario
rosiescenario's picture

As a modest proposal, may I again suggest that we outsource our prison system to China? I believe it would be a win : win situation for all parties concerned (excepting perhaps the perps).


Unoccupied housing complexes in China could be converted to prisons, local Chinese would be employed, and the recidivism rate would certainly drop.

Useful trades such as computer assembly could be taught at these facilities which would also have the benefit of raising Apple's net margins.

Wed, 10/12/2011 - 18:24 | 1767512 mjk0259
mjk0259's picture

Russia would be better for prison outsourcing. Still lots of need for miners in Siberia.


Banking, Hedge Funds, etc  should be relocated to China so at least a few of them would be shot once in a while.

Wed, 10/12/2011 - 17:22 | 1767243 ValidName
ValidName's picture

I live in Beijing 6 months out of the year, and rent a 3 bedroom apt in the CBD.  A week before I left to come back to the US I had dinner with friends and they were pushing me to look at a 2 bedroom apartment for sale... look as in look at a brochure because it hadn't been built yet.   Typical.  This was not the "shell" type but would come with all the applicances etc and was priced at 1.5 million USD.  I laughed and they gave me the "dumb westerner" look.  Of course they own 5+ apartments each, and its a great investment.. they have never lost money, don't know anybody who has ever lost money and have zero belief that the price can go any direction but up.

I wanted to tell them exactly what I thought about Chinese property in general but did not want to come off as arrogant.  But essentially the quality is shit.   No j-traps in the drains (or poorly designed ones), air conditioners that can only cool one or two rooms, and no a/c in the kitchen.  Metal cabinetry like something out of the 1970s.  Solid concrete that becomes a sweat box in the summer, and windows that freeze up on the inside in the winter.  3 burner stove and a baby oven, baby fridge, no garbage disposal and no dishwasher.   And within 3 years the doors stop closing properly and anything with a hinge is suspect.  It is crap, and nobody but Chinese would ever buy this stuff.  I rent a 3 bedroom for about $2700 a month, wtf would I pay 1.5 million to own it?  Especially when you don't really own property in China anyway.

Yes the place is booming and people make insane amounts of money, but corruption is beyond description.  And the air pollution is like living on Venus.  It is an interesting place, but I would never live there without an escape hatch back to the U.S.

Thu, 10/13/2011 - 10:38 | 1769425 JohnF
JohnF's picture

Why wouldn't you want to buy it? You can get a 70-year mortgage and the monthly costs are about the same...

And yes, I am being sarcastic.

China resembles nothing less than the biggest bubble ever. At some point, markets correct and true prices are determined: that is generally a very, very painful experience, and China is no exception.

Wed, 10/12/2011 - 17:45 | 1767352 Squid-puppets a...
Squid-puppets a-go-go's picture

if anyone doubts the fragility of the chinese economy in thie current climate, recall this

going into the great depression, America was the great creditor to Europe, a trade imbalance that is not dissimilar to the china/america one today.

Did America's great surplus shield it from the great depression? not on your life.

Wed, 10/12/2011 - 18:10 | 1767457 mjk0259
mjk0259's picture

Why use a chart of the Chinese stock market? Any profitable Chinese business gives it's money to CP or other insiders. The stocks are just a toy for stupid foreigners to pour money into. Look what happened to Yahoo with it's ownership of the Chinese version of Paypal. CP passed a law requiring no foreign ownership of such companies and then gave it to a Chinese. Yahoo didn't even find out for months.


My gf is Chinese. She bought a small store, more like a stall, for $30K usd 2 years ago. It's supposed to be worth triple that now and rents for $10k/year. She also lends money there  at 2% a month. Her relatives are CP so they can make people pay. No way for foreigners to make money there unless involved in technology transfer or import/export and you will only make money till they get what they want and then everything you think you owned there will disappear.


Seems like they can keep this up for quite a while. They haven't fully utilized all the technology they already stole yet.


Wed, 10/12/2011 - 22:37 | 1768198 reader2010
reader2010's picture

Fuck yeah.

Wed, 10/12/2011 - 18:54 | 1767640 gnomon
gnomon's picture

China is shot through with hubris, (and CORRUPTION), much more than what the U.S. exhibited prior to the Fall of 2008.  The China Trolls on this thread actually believe their Thousand Year Reich crapola.  Whether China's bubble bursts first or last they will burst regardless, either of their own weight or because they were give the final push by the collapse of the Western Banking System.

Dream On China Trolls, dream a little dream of past genocide and extrapolate it into the present, (because I KNOW that you will).

(And don't count on us not being ready for you).

Wed, 10/12/2011 - 22:33 | 1768182 reader2010
reader2010's picture

China Trolls are from places, such as GS and JPM.

Wed, 10/12/2011 - 22:32 | 1768176 reader2010
reader2010's picture

Since 1978,  China's monetary based has been enlarged more than 3000%. That's hyperinflation.

Wed, 10/12/2011 - 21:32 | 1768055 jhcullen
jhcullen's picture


How did the world get so far away from mises's theories? How did those in power not recognize and understand what this guy had to say. His system works for the people. His system is sustainable. We must start the transition back to Mises or face collapse. We need to start now. We would endure short term loss for long term gain. If we at least give it a try we might be able to avoid the shitstorm that we all know is coming and land softly into a better future. Yet we dig ourselves deeper and deeper. Why?


PS... I know why. Greed.

Wed, 10/12/2011 - 21:32 | 1768056 jhcullen
jhcullen's picture


How did the world get so far away from mises's theories? How did those in power not recognize and understand what this guy had to say. His system works for the people. His system is sustainable. We must start the transition back to Mises or face collapse. We need to start now. We would endure short term loss for long term gain. If we at least give it a try we might be able to avoid the shitstorm that we all know is coming and land softly into a better future. Yet we dig ourselves deeper and deeper. Why?


PS... I know why. Greed.

Wed, 10/12/2011 - 22:29 | 1768169 reader2010
reader2010's picture

Pimps at PIMCO are still buying Chinese stocks though.

Do NOT follow this link or you will be banned from the site!