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Guest Post: The Death Of China Cult

Tyler Durden's picture


Submitted by Also Sprach Analyst,

People in Hong Kong have a long history of mistrust of China. This city, after all, was a colony of the British Empire for more than a century, and has only been under Chinese rule (under one country two system, to be precise) for a mere 15 years. In this city, you seldom hear anything bad about Britain (because most have no idea), but you hear a lot of bad things about China, particularly the Chinese Communist Party. We just never trust them.

While the mistrust of the political class of China continues in Hong Kong (and will certainly continue for much longer), the doubts on the strength of the Chinese economy and the doubts on the ability of the political class to manage the economy have more or less evaporated after 15 years of Chinese rule.

It used to be that Hongkongers go to China to purchase really cheap stuff. Now, it is the Mainland Chinese who come to Hong Kong to buy really expensive stuff. Places in China which were farmlands are now full of modern buildings. Infrastructures in large cities are getting better, sometimes even better than Hong Kong. Before the transfer of sovereignty, Hong Kong was already a rich city while China was a very poor country. China used to be poor, dirty, relatively uncivilised, you name it. Today, it almost as if this city would have died if the Chinese economy did not grow at the rate as it did in the past decade. China today, especially for big city like Shanghai, is just like Hong Kong: modern, international, classy.  You can’t say many things bad about cities like Shanghai.

No one would ever dispute the achievement of the Chinese economy What we see in China now, on the surface at least, is progress. And the progress was huge indeed.  For 30 years or more, the Chinese economy has defied “gravity”, and has never been in a recession, and has lifted enormous number of people out of poverty. Predictably, the perception on the Chinese economy has changed very dramatically over the past decade, from a market that you wanted to stay away from to a market that no one wants to miss.

Chinese equities as something to be avoided is perhaps a bit of an exaggeration, but less than a decade ago, you could quite easily find people who had some serious doubts on investing in China. On the macro level, the story of “China as the forthcoming greatest economic power” was not yet the biggest story, even though everyone knew that China was growing very fast. On a micro level, many held the impression that Chinese companies were either not well run, or were run by crooks, who cooked up their books and/or produce very inferior products simply to rip people off.  On top of that, the Chinese government cooks up statistics, and doubters spin that in their own favour, suggesting that the economy could not have grown that fast.  Meanwhile, corruptions were rampant.  Businessmen bribed government officials in order to profit, while government officials got rich through taking massive amount of bribes. 

china_flagIf you insisted on that grim view on China in early 2000s (right after the Chinese government lied about SARS, as a reminder of who were the type of people who ran the government), although you would have missed the bull market in stocks (which ended in 2007 by the way), such grim view was not necessarily inaccurate.  Since the beginning of time (well, that’s an exaggeration of course), China has the creativity and necessary skills in creating fake and low quality products beyond anyone’s imagination, which are sometimes dangerous for human consumption. We also knew that corruption in China was horrible since the beginning of time (and this is not an exaggeration, as that has been a recurring theme of the rise and fall of different dynasties ever since Imperial China): you couldn’t possibly not bribe officials if you want to do business and be successful in China, while for government officials, you can’t possibly be not corrupt if you want to have a successful career as a civil servant (and by successful, it really means climbing up the ranks while continuing to be bribed without being caught or something).  Banks would lend to whoever with connections to government officials (i.e. those who have bribed government officials) so that it requires extra faith for investors to believe in banks’ books. And as a businessman, as long as you have great connections with government officials, banks would probably still be willing to lend to your company cheaply even though you are cooking up your books.  Finally, no one has ever believed in Chinese statistics in full at face value, and with a political regime which is obsessed with promoting their own achievements, doubters are justified in believing the statistics are purposefully massaged to make them look great.

These are the problems for China in the past.  But if all these problems with China sound familiar to you, it should, because they are more or less what increasing number of people are talking about. These are not just history, but current reality.  China is still full of businessmen who make crap products that are dangerous for human consumption. Corruption is as serious as it was, if not more so. You still have to bribe officials to achieve your goals successfully (and the costs of bribing officials to achieve your goal, as I understand, are getting ever higher), and government officials cannot have a successful career without being corrupt. Banks have not changed their practices in determining who to lend money to, so as long as you have good relationship with government officials, you can get cheap loans even you did not actually own the collateral you are posting to banks, and as long as you can get loans, you can’t possibly go bust even if you are already insolvent and are cooking up books (as long as the officials that you have connection with are still around and well).  Finally, there is still no one who is willing to believe in Chinese statistics in full at face value.

The only difference between the recent years and  ten years or so ago is that people just ignore it now, because the extraordinary bull market and the seemingly unstoppable economic growth has created a China cult, a cult among investing community that China is the best place to be investing in.  Just as hedge fund manager Hugh Hendry said “10 years are enough to create a cult in capital market. In fact, China has not seen any year with negative growth for more than 30 years.

Despite the fact that the Chinese stock market bubble has gone bust in 2007, the whole China cult continues to get new followers.  After the bubble went bust and the Lehman crisis hit, quite a number of people were confident that the stock market will surpass the 2007 peak very soon because the Chinese economy has been strong.  The view that China became the best place to invest has become ever more popular as the Western economies looked mortally wounded after the crisis (while they are not).  The ever more popular idea that the economic weight has shifted from the East to the West, or the idea that we are back in a bipolar world for the first time since the end of the Cold War, and among many other ideas, have reinforced many people’s belief that China is the place to go.  Even to this date, we understand that there are a lot of European companies which are still looking to invest in China apparently because China looks “safer” relative to Europe.

In the beginning of the recovery of the global economy, investing in China did pay off well relative to many markets in the rest of the world, reinforcing the idea, once more, that China is really invincible, that China is the best place to invest.  The same doubters who did not invest in Chinese stocks 10 years ago because they thought companies cook up their books started to buy in 2007, 2008, 2009, 2010, 2011, and 2012.  The same doubters who did not invest in Chinese stocks because of the worries on corruption are now accepting corruption as a reality and that it is something which determines whether a company can make money.  The same doubters who thought Chinese banks have understated non-performing loans started to believe that buying Chinese banks is like buying HSBC in the 1980s, which will give you a return in the order of hundreds of times over the next 3 decades.  Investors have also been much less careful about frauds as the cult reaches its climax, even though things have not changed. But instead of identifying the problems related to poor governance, frauds and corruption, some insist that these are isolated cases and have nothing to do with the culture of how businesses are done in China.  Also, while Chinese statistics are not reliable, more and more people are trying to spin the unreliable data to fit their own bullish arguments.  Instead of suggesting that growth is overstated, now they say consumption is understated, and the China consumption will be the biggest investment story of the era.

But Chinese equities outperformance did not last long: first in Shanghai, then in Hong Kong, they have turned from two of the best markets to markets doing even worse than Europe.  While a lot of investors were still very hopeful that stocks could get to the 2007 peak very soon, that is just not happening.  Bears like ourselves started to be ever more vocal about the structural problems in the Chinese economy since late 2010 and 2011, namely, real estate bubble, over-capacity across the economy, over-investment and the associated unsustainable increase debt etc., and we are getting ever more concerned about issues that we did not mention much: corruption and its link of over-investment, and the consequence of lack of inflationBears have got it right for almost 2 years now as far as stock investments are concerned, and the economy is now slowing down rapidly while the real estate market cools, just as the bears have predicted. Unfortunately, people increasingly blame short-sellers instead of admitting that they have been wrong.

Still, the cult has not died yet.  The past few years have produced an impression of the Chinese government that it is invincible, and it has miraculous control over the economic machine, that the slowdown is “intentionally” engineered by the government and everything within the economy is still very much under control.  Unfortunately, most who use this argument to justify that the slowdown is not a big problem have all invariably forgotten that most economic slowdowns in recent memories started with central banks tightening monetary policy to control inflation and slow down the economy, and most, if not all, of the cases ended with recession that they did not want to get into.  Many have also not realised how difficult it would be for China to relate its way out of a debt deflationSo how different China is in this regard is totally beyond our comprehension, and we are forced to suggest that the believers of China cult have gone delusional.

As the economic slowdown becomes a reality and a hard landing unavoidable, more of the problems we have identified will surface. The cult will surely die within the next few years at most. The only questions are when it will finally die, and whether it will suffer a violent death or slow death.

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Tue, 07/03/2012 - 16:05 | 2585045 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Who to trust?

Trust no one!

Hold your own wealth!

July 13th, buy silver!

Tue, 07/03/2012 - 16:11 | 2585065 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Belief in a cult or belief in the truth? Ignorance is bliss until the money vanishes.

Tue, 07/03/2012 - 16:32 | 2585128 BigJim
BigJim's picture

 Finally, no one has ever believed in Chinese statistics in full at face value, and with a political regime which is obsessed with promoting their own achievements, doubters are justified in believing the statistics are purposefully massaged to make them look great.

Wow, it's a real shame they don't have reliable, objective government statistics to use like we have here in the West :-P

Tue, 07/03/2012 - 16:37 | 2585154 LowProfile
LowProfile's picture

Not to put silver down, but it's an extremely speculative PM.

Gold is for saving.

Tue, 07/03/2012 - 17:02 | 2585238 The Monkey
The Monkey's picture


Yeah, maybe in 5 years it goes kaboom. Until then, they will be buying iPhones like mad.

Don't be a chump.

Tue, 07/03/2012 - 18:52 | 2585491 oddjob
oddjob's picture

Blatant speculation on the short side.

Thu, 08/23/2012 - 23:20 | 2732612 SAT 800
SAT 800's picture

Moron, fool, idiot. Silver prices track gold prices but always incrrease in larger proportion; also, Silver will not be confisticated. What else was it you wanted to know? Why are you so stupid ? I don't know.

Wed, 07/04/2012 - 04:48 | 2586192 Lebensphilosoph
Lebensphilosoph's picture

Two wrongs make not a right.

Tue, 07/03/2012 - 16:16 | 2585077 Martin W
Martin W's picture

Trust no one! /Fox Mulder


The truth is out there

Tue, 07/03/2012 - 16:21 | 2585100 Waffen
Waffen's picture

what's July 13th?

Tue, 07/03/2012 - 16:26 | 2585110 veyron
veyron's picture

Who is the owner of the juggernauts in your avatar?

Tue, 07/03/2012 - 16:32 | 2585127 ParkAveFlasher
ParkAveFlasher's picture

you guys negotiate, we all win.

Tue, 07/03/2012 - 17:15 | 2585273 Marginal Call
Marginal Call's picture



google image search is awesome. 

Tue, 07/03/2012 - 20:38 | 2585674 Buckaroo Banzai
Buckaroo Banzai's picture

Finally, some information I can actually use.

Tue, 07/03/2012 - 16:31 | 2585124 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

A silver bomb.  We will buy the silver off of the shelves, creating massive demand, and lighting JPM's shorts on fire!

Tue, 07/03/2012 - 23:43 | 2585160 LowProfile
LowProfile's picture

I hope you realize silver is highly speculative compared to gold.

See FOFOA for why.

edit:  All you twats junking me better Ixquick FOFOA and learn something, bitchez!

Tue, 07/03/2012 - 21:43 | 2585771 Cosimo de Medici
Cosimo de Medici's picture

I thought all of you "backed up the truck" when it fell from $48 to $42, or $37 to $32, or $35 to $27, or every day Ag is "on sale"? Damn you guys must earn money hand over fist if after unloading all of your fiat to buy at "less than $4" like 90% claim, you still have enough buckets of fiat remaining to trash JPM.  I really must have chosen the wrong profession.  What, do you guys all cheat on Disability Insurance or something to pull in all the extra moolah?  And with all that disposable cash you and the 99% are sitting on, Blythe has got to be shaking in her Manalo Blahniks.

Tue, 07/03/2012 - 23:44 | 2585970 LowProfile
LowProfile's picture

I sometimes suspect TPTB are herding the sheeple into silver.

It makes sense, since the chances of silver being used as a reserve asset is about 100 times less than gold.

Thu, 08/23/2012 - 23:34 | 2732629 SAT 800
SAT 800's picture

It's irrellevant; you're a fool. the price tracks the gold price, but makes bigger percentage gains. "Reserve Asset" means nothing; the market decides how worried people are. Stand by to have your eyes opened.

Tue, 07/03/2012 - 21:43 | 2585772 philipat
philipat's picture

A hard landing in China? 5% economic growth. Eat your heart out.

Oh, and by the way, in absolute terms, 5% groth on a $10 Trillion economy is the same as 10% groeth on a $5 Trillion economy. It;s called the law of large numbers.

Tue, 07/03/2012 - 16:17 | 2585053 BigJim
BigJim's picture

ZH propounding US Citizenism as usual, China central planners greatest  in World.

Price discovery not necessary in unicorn-enabling Middle kingdom.

Tue, 07/03/2012 - 16:18 | 2585084 magpie
magpie's picture

...all the while EU-citizenism is being propounded in the USA.

Tue, 07/03/2012 - 16:34 | 2585136 trilliontroll
trilliontroll's picture
The superior man, when resting in safety, does not forget that danger may come. When in a state of security he does not forget the possibility of ruin. When all is orderly, he does not forget that disorder may come. Thus his person is not endangered, and his States and all their clans are preserved.
Chinese philosopher & reformer (551 BC - 479 BC)
Tue, 07/03/2012 - 16:52 | 2585186 BigJim
BigJim's picture

Virginity like bubble; one prick, all gone.

Man who run in front of car soon get tyred.

Man who run behind car soon get exhausted.

Foolish man give wife grand piano, wise man give wife upright organ.

Man who walk through airport turnstile sideways going to Bangkok.

Man with one chopstick go hungry.

Man who eat many prunes get good run for money.

Panties not best thing on earth! but next to best thing on earth.

Wife who put husband in doghouse soon find him in cat house.

Man who fight with wife all day get no piece at night.

It take many nails to build crib, but one screw to fill it.

Man who stand on toilet is high on pot.

Crowded elevator smell different to midget.

                        - Things Confucius ~probably~ didn't say

Tue, 07/03/2012 - 18:21 | 2585425 AnAnomalous
AnAnomalous's picture

Subtleness of sublime Chinese citizenism being beyond your clumsy roundeye swinging penis bignose gripping, US American European US Citizen can only mocking and makes funnies in face of proud Chinese conformity of culture and norms ruling.

Smack!, so say they.

Behind the silliness of you I see ugly face of American US citizenism warlordism and consumption making, who seek to engulf all resources and world power for sake of roadcar culture of suburbs spreadingness and mall stripping.

Tue, 07/03/2012 - 22:57 | 2585883 azzhatter
azzhatter's picture

Ananomolous said penis

Tue, 07/03/2012 - 18:50 | 2585483 Arnold Ziffel
Arnold Ziffel's picture
To write with a broken pencil is . . . pointless.  When fish are in schools they sometimes . . . take debate.  A thief who stole a calendar . . . got twelve months.  When the smog lifts in Los Angeles . . . U.C.L.A.
Tue, 07/03/2012 - 20:46 | 2585685 Buckaroo Banzai
Buckaroo Banzai's picture

Actually I'm quite sure China's central planners ARE the best in the world.

Reminds me of an old Russian central planner who got asked, "you call your latest 5-year plan the 'Optimal Plan.' How can you be so sure?"

He replied, "We are the smartest, best educated men the Soviet Union has to offer. We worked hard to produce the best plan we possibly could. Therefore, it is the Optimal Plan."

Tue, 07/03/2012 - 16:09 | 2585058 LFMayor
LFMayor's picture

The pricks at AnAnonymous hardest hit.

The cult will surely die within the next few years at most. The only questions are when it will finally die, and whether it will suffer a violent death or slow death.

Remember what I told you a couple weeks ago AnAnon.  All those extra Poly Tech and Norinco SKS's and Mak-90's that were stacked up ready for shipping and didn't get moved when the Clinton ban took hold just didn't evaporate.  Somewhere out there there's a shit ton of munitions buried, just waiting for your masters to show the slightest weakness.

Your paradox is to choose when to jump.  Choose wisely, else you'll be right out of the pan and into the fire, dragged with your masters down the street and then riddled.

Happy 4th of July!


Tue, 07/03/2012 - 18:05 | 2585393 AnAnomalous
AnAnomalous's picture

You being decadent Westerners they, sad and mighty the laughter of my belly at the yous!

Inadmissable it is that you find the Chinese way as, knowing such as you are how Chinese are leaving you behind in the soil. 

As USA citizen roadcar racers are say, eat my powder!

USA like senile masturbating monkley at zoo, peoples doing laughing and mocking of it but it not reaching the realization.

Chinese citizens will soon have USA masturbating senile monkley in cage, all making laughter at him.

Rising Chinese star, sinking USA shiny-dome eagle. 

So sad, for American US citizens.

Tue, 07/03/2012 - 18:22 | 2585431 magpie
magpie's picture

Weeell, then AnAnonymous mission must be considered a success with his meme spreading...i just wonder if there are graphical representations/meme generators already to go with it. 

Nevertheless, i wish Americans a happy Independence Day to reflect and perhaps also celebrate their Founding Fathers' ideals.  

Tue, 07/03/2012 - 18:30 | 2585442 AnAnomalous
AnAnomalous's picture

4 July,1776: a day that will live in infamous!

Birthing day of US Citizenism, cause of all grief and sorrow in world.

Should be day of morning for world, not firepopping and celebarations of mass eating of corn on the stick and grilling of meats. 

Shame, shame on American US citizens for celebarating the spreading of US Citizenism!

But typical, yes, of them.  Like steeling food from starving childsren and make laughing of it.

Tue, 07/03/2012 - 18:36 | 2585457 magpie
magpie's picture

Like i have said before, best to have a Young Ladies Illustrated Primer to US citizenism

Wed, 07/04/2012 - 00:28 | 2586022 TheFourthStooge-ing
TheFourthStooge-ing's picture

AnAnomalous said:

4 July,1776: a day that will live in infamous!

Day of 1776,July,4th being 100 year anniversary celebration of George Washington and King Henry VIII using US citizenism and time traveling Ben Franklinism to sink Easter Island.

Eastern Island blobbed down so that US of A could blob up. Indeed, 1776,July,4th possessing much amount of infamousity.

Tue, 07/03/2012 - 16:10 | 2585061 hedgeless_horseman
hedgeless_horseman's picture



And the progress was huge indeed. For 30 years or more, the Chinese economy has defied “gravity”, and has never been in a recession, and has lifted enormous number of people out of poverty...

...and a few of them, even, in China.

Thu, 08/23/2012 - 23:39 | 2732636 SAT 800
SAT 800's picture

Very Few. And, almost without exception is Chinese Communist "money".

Tue, 07/03/2012 - 16:14 | 2585066 Yen Cross
Yen Cross's picture

 Was 1998 really that long ago?                   Is anyone really surprised?

Tue, 07/03/2012 - 16:17 | 2585082 moskov
moskov's picture

When China slows, that means China dies.

When US/EUROPE/JAPAN literally being nuclear destroyed, euro destroyed, dollar destroyed. They are still bullish and sound.


Yeah. Too bad it's up to the Chinese to price the West's life support

Tue, 07/03/2012 - 16:19 | 2585085 Aziz
Aziz's picture

China and the West have the same problem: the misallocation of labour/capital/resources.

Only a market— the cumulative preferences of the entire society — can allocate resources in a way that will bear the fruit of long-term prosperity.

Given that everyone is now a centrally planned mess I find it plausible that China — while certainly having massive problems — may not actually be as bad as the unwinding imperialism of Western nations, particularly America. China's economy is technically less government-oriented (as a percentage of GDP) than America.

Hard landing for everyone — but at least China were up in the air to begin with.

Tue, 07/03/2012 - 16:30 | 2585119 francis_sawyer
francis_sawyer's picture

 "China and the West have the same problem:"


Central planning... there... fixed it...

Wed, 07/04/2012 - 05:20 | 2586205 dexter bland
dexter bland's picture

China and the East have a bigger problem. They don't have enough domestic consumer demand so rely on the west to provide them with the markets for the shit that they are admittedly very good at producing cheaply. Problem only arises when you start putting your best customers out of work and they can't afford to buy any more.

Even in the West we are taught to believe that saving for the future is virtuous and spending freely is dangerous. Dangerous for the individual, but healthy for society - "The paradox of thrift". Many analysts seem to have just assumed China would go the way of the other Asian tigers and use exports to the West as a launchpad for building their own self-sustainable economy. Only problem is that China is orders of magnitude bigger. There's no way they can achieve the same goal without hurting the source of their demand - OR - encouraging their own citizens to adopt Western profligate ways.

The latter is a possibility but may take a very long time.




Tue, 07/03/2012 - 16:18 | 2585086 kato
kato's picture

Interesting. Thanks.

Tue, 07/03/2012 - 16:19 | 2585090 Northeaster
Northeaster's picture

This post is a little late, it was posted on NC in the early am hours.

Tue, 07/03/2012 - 16:33 | 2585132 nonclaim
nonclaim's picture

The data presented isn't really time sensitive...and the original post is from 2 days ago, so what?

Tue, 07/03/2012 - 16:20 | 2585094 free market dreamer
free market dreamer's picture

Yes, China will crash and burn just like the good ol' USA.... But... But... But... China doesn't have a populace that is fat, lazy and with entitilement issues... China's population will be able to at least float on top of the waters of a collapsed economy... Americans will mostly sink to the bottom... Who's in better shape to build from the destruction of fiat/debt money? China... And who also has their hand in natural resources globally? China. They know the game is up, just biding their time like everyone else but positioned a little more nicely...

Tue, 07/03/2012 - 17:05 | 2585245 magpie
magpie's picture

If everything crashes, the USA is Russia 2, a petro state with a large navy.

Tue, 07/03/2012 - 17:22 | 2585292 FREEEEEEEEEDOM

Men are versatile and very adaptable, if the enviroment premiers lazyness thats what you get. Theres nothing wrong with the American gene, on the contrary i would argue that the American genepool is the finest of the earth. We Europeans lost alot of great men to your continent the last few hundred years, brave men who had a lust for freedom, brave men who believed in the ideals of liberty. You surely cant believe these fine traits somehow just vanished? No, they are lurking in the shadows behind years of oppression waiting to show its full wrath once again. Long live the ideals of freedom, long live the idea of sovereignty, the bells of tolerance and liberty will ring so fuckin loud every bankster and crook will regret the day they were born!


Happy 4th July my brothers, someday i will join you in the great land of yours, but for now, we have an old world to defend.

Wed, 07/04/2012 - 15:53 | 2587400 meatbag
meatbag's picture

The Chinese are less than one generation from a farming economy.  80% of the populous still can weave a simple fishing net themselves and catch a meal.   The west is several generations removed and when the electricity fails, they panic.  The Chinese go on as if nothing happened.


Yes, the western gene should still be strong.  I would like to think I could rise to the occasion, but the fucking little things, like learning how to survive, would really slow me down compared to the average Chinese. 

And to all you preppers with your canned food, magnesium fire starters, and shotguns, that not how it works in the real world.

Eat Bitter.

Tue, 07/03/2012 - 16:20 | 2585095 levelworm
levelworm's picture

Since the beginning of time (well, that’s an exaggeration of course), China has the creativity and necessary skills in creating fake and low quality products beyond anyone’s imagination,


I really like this sentence.

Tue, 07/03/2012 - 16:27 | 2585112 moskov
moskov's picture

This guy must be retarded in knowing some real history.


I feel sorry for him

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