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Guest Post: The Making Of China's Epic Hard Landing

Tyler Durden's picture


Submitted by Dee Woo,

The Making of China's epic hard landing

1. The unsavory episodes of China's economy

For the better part of the past year, my concern about Chinese economy was constantly aggravated by the depressing stories of entrepreneurs who committed suicide, fleeted the country or emigrate to the western world in droves. Much of the media has blamed the credit crunch and monetary tightening for all these unsavory episodes. The public outcry for the deteriorating conditions for Chinese entrepreneurship climaxed with the seemly positive step the People's Bank of China(PBOC) took to alleviate the liquidity crisis: cut the reserve requirement ratio (RRR) to 21 percent from a record high 21.5 percent on Dec 5 2011.

Right now the outlook for Chinese economy is looking rather confusing: should it continue the painful structural adjustment to burst the economic bubble built up after so many years of high growth? Alternatively, should it adopts the expansionary policy to reinvigorate the flagging economy? Either way China is approaching dangerously close to an epic hard landing.

2. It's the structural problems and not a liquidity crisis

For one, it's easy to lay the blame on the tightening monetary policy. Nevertheless, nothing can be further from the truth. The main overseas markets for Chinese goods, Europe and the US, are both battling a possible recession, which greatly tightens their purse string. To make the matter worse, the cost push inflation, especially the wage inflation,is eating away the comparative advantage of China’s manufacturing industry. All this has nothing to do with the tight monetary policy but the structural change of Chinese economy.

(The manufacturing sector is bleeding. Purchasing Manager Index(PMI) has dropped to 49, lower than market expectation. This is the first time since Feb 2009 PMI contracted. The orders are declining, especially overseas orders, and the stocks are piling up.)

In any case, the difficult access to credit for Chinese private small and medium businesses (SMBs), the driving force behind China’s manufacturing industry, is a chronic problem long before the monetary tightening.  More than 70% of the Chinese banking market is controlled by the “big four”--- Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China. These state-owned commercial banks skew the monetary resource towards the state-owned enterprises or other privileged corporations. This allocation deficiency of Chinese banking system provides the breeding ground for China’s huge and complicated shadow banking network, where most credit-starved private SMBs seek costly funding. The shadow banking system is awash with cash fleeting the negative real interest rate in the commercial banks, hardly regulated and monitored. In April 2011, 467.8 billion yuan of residential deposit left the commercial banks. We all can guess where the money ended up. Money is chasing positive yields into the wild wild west of shadow banks.

Contrary to what many might like to assume, China now is not even close to suffering a liquidity crisis under the tightening monetary policy. There is more than enough liquidity to go around. China’s M2 has surpassed that of the U.S. or Japan, as China’s M2 is around US$ 11.55 trillion, exceeding the U.S.’s US$ 8.98 trillion and Japan’s US$ 9.63 trillions. Regardless of all the hype of tight monetary policy, in 2010, Chinese banks issued 7.95 trillion yuan of loans, breaching the government's target ceiling of 7.5 trillion yuan. In 2011 the total new loan will stand comfortably close to 7.5 trillion. As of October 2011, the outstanding balance of RMB deposits totaled 79.21 trillion yuan,whose year on year growth rate is 13.6%. The PBOC's rate hike only removed 4.75 trillion yuan from circulation. According to Fitch rating, China's total social financing in 2011 may top 18 trillion yuan (US$2.8 trillion), a rise of 3.5 trillion yuan from the official target due to inflow of non-banking liquidity. Meanwhile, the PBOC claimed the total social financing of the first 3 quarters in 2011 is 9.8 trillion yuan, 1.26 trillion yuan less than that of last year. The PBOC's data suggests an effective tightening monetary policy while the Fitch report implies the opposite. The PBOC proves to be an inadequate central bank to rein in the liquidity binge Beijing have indulged itself in for so long during the boom time. Under such a gloomy context, China's credit expansion against all odds is still breath-taking.

(Over the past decade, China's M2 surges past the US's by a wide margin from as low as nearly one third of the US's.)

We obviously can't blame the tightening monetary policy for the sorry state of China's economy. We can't really pin our hopes on the loose monetary policy to turn around its fortune either.

3. The undoing of Beijing Consensus

Monetary policy alone won't fix the structural deficiencies of Chinese economy. The well-being of Chinese economy is hugely leveraged on the consumption economy of the US and Europe. American and European economic turmoil together puts a massive strain on the demand for Chinese export. The substantial and increasing wealth gap in China has shackled the domestic demand so much that it fails to pick up the tab left over by the US and Europe markets. China is now saddled with a serious excess capacity problem, which forces down the marginal returns on the investment and makes investment more effective incurring inflation and bubbles than propelling GDP and employment ahead. This is the serious sign for over-investing and overheating. In 2010, China's export/GDP ratio is about 37% ,and Investment/GDP ratio is 45.8%. According to David M. Kotz and Andong Zhu's research, China's export plus fixed investment contributes almost 70% of GDP growth since 1999 while domestic consumption contributes roughly 30%. Using the export/investment combo to power economy ahead is what we know as Beijing consensus. It works beautifully for the past decade when the world is prospering in the globalization and free trade. However, now its good run is finished for good.

To overcome the current economic malaise, the US and Europe must check their deficit-fueled consumption economies into the rehab. They must increase their chronic low saving rate, produce more and import less. That means the export-led growth engine for Chinese economy may be gone for good.


(According to Economist Intelligence Unit and US bureau of economics analysis, China will depend on an export-led economy late until 2030.)

4. The consumption-led economy is the only way out

The dire situation in the US and Europe calls for another round of quantitative easing. With both Japan and UK firmly committed to QE and deteriorating market conditions, the embattled US and Europe will be more and more reduced to monetary aggressiveness. In the end, we will see a global competition of currency devaluation. China will lock horns more frequently with the US, Europe and other export nations over currency issues. The trade tension will flare up.

The only way out for China is turning its economy into a consumption-led one. Or else fight for the overseas markets in vain and be prepared for trade wars. Or else try to reignite the economy with more wasteful investment and be prepared for a colossal asset bubble and epic hard landing.

5. The outlook for China's inflation and economic bubble

And also, don't be too optimistic about China's inflation prospect. Indeed, China's CPI tumbled to 4.2%,the lowest level since September 2010. Nevertheless, the battle against inflation is far from over. China is the world's biggest importer of food and commodity. With the global competition of loose monetary policies, the food and commodity inflation will be persistent, to say volatile at least. China will face the serious threat of imported inflation and cost-push inflation regardless of whatever monetary policy it adopts. That combined with negative real interest rate and diminishing marginal return in industries will push more and more money into asset investment and speculation. The inflation will be lurking if these structural problems persist.

Overall, there are both internal structural factors and external global factors, which contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.

China's hard landing would be a tragedy not only to China but to the world. Without China's growth of consumption economy, the global economic recovery will be a prolonged and painful process.The icing on the cake for this article would be what I said in “The Boom And Bust Of China's Rise”: Hedge funds and Fed’s QE2 are not all to blame for all these. The Chinese economy already stands close to the edge. What speculators do is to push it over and profiteer handsomely from the chaos.

While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency(the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.


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Mon, 01/09/2012 - 01:31 | 2045886 euphoria
euphoria's picture


Mon, 01/09/2012 - 02:09 | 2045937 Michael
Michael's picture

The empty vacant brand new residential property of China could house the entire population of the United States comfortably.

Mon, 01/09/2012 - 02:14 | 2045941 Michael
Michael's picture

The only problem is; Chinese drywall.

Mon, 01/09/2012 - 02:33 | 2045964 Michael
Michael's picture

You know what my pet peeve is? Video surveillance cameras at every major street corner throughout the entire United States.

Look up when you're stopped at a traffic light and tweet your location when you look up atop the traffic light you're stopped at today.

The USA network of traffic light surveillance cameras pointed at you are recording your image in real time.

Who are these cameras really for? Their for you and you're paying for them, not criminals or terrorists.

Mon, 01/09/2012 - 06:02 | 2046071 Element
Element's picture

All over Australia as well, they're down all the motorways and freeways, traffic lights , all public areas, Govt buildings, most city street corners, ATMs, Taxies, Buses, Trains, Subways, airports, hire car companies, anywhere you want to be mobile ... it's just endless spying on our movements.

And people generally don't even realise they're there, don't even realise these cameras and microphones are spreading like wildfire into the suburbs. Everywhere you go in any city now you are under almost constant surveillance of some sort.

And at the same time, we are continually being told of how the cyber criminals keep getting smarter and better equipped, to rip us off, and how it's so necessary to greatly increase on-line surveillance, and now smart-phone surveillance, and broad-spectrum pro-active pre-emptive interdiction strategies.

There was yet another Govt national broadcasting fear spreading story about all this just today.

So ... we have all this undreamed-of mega surveillance, actively spreading outwards in every conceivable way ... yet the criminals are somehow more prevalent and threatening to us than ever before?

This makes sense, right?

We are being actively conditioned by Govt agencies to accept it all as normal and prosaic and necessary, but it is obviously anything but that.


Mon, 01/09/2012 - 11:03 | 2046455 MachoMan
MachoMan's picture

It's my understanding that, here at least, the things that look like cameras sitting atop street light posts are actually traffic counters...  (so they don't have to run the wires across the road).  Needless to say, there is no local governmental body that watches any of the camera footage from hundreds of intersections...  (that function alone would probably render them the largest employer and would be too big to keep secret).

Not saying this doesn't happen elsewhere, where bigger budgets are the norm and there is less fiscal prudence (not that we're a bastion of that, but we're at least a little better than the average bear).

Mon, 01/09/2012 - 12:58 | 2046836 FeralSerf
FeralSerf's picture

License plate numbers are read automatically.  They don't need a human to watch screens.  One (official) reason is to catch red light violators.  A lot of work has been done and more done in the future on facial recognition software.

Maybe at some point problem proles can just be "turned off" (ie killed) automatically by computer.  Think how efficient and cool that would be.  sarc off/

Mon, 01/09/2012 - 08:25 | 2046144 JohnG
JohnG's picture


My main residence is in the middle of nowhere Ga...

I keep a house near Atlanta because my wife refuses to quit her "job." We do not need the income.

For now, I go there with her during the week.  This is a constant bone of contention with us; I do not want to be anywhere near Atlanta.  I like living two hours away where I am left alone.

Big Brother.  Disgusting.  And the article promotes it as a "good thing....."

Scanners, cameras EVERYWHERE.  I can protect myself on the net, but physical location, automated, worries the hell out of me.

Mon, 01/09/2012 - 08:44 | 2046165 tarsubil
tarsubil's picture

Be good for goodness' sake and because you are being watched.

Mon, 01/09/2012 - 09:28 | 2046241 JPM Hater001
JPM Hater001's picture

You know my pet peeve?  Back to back to back posts.

Mon, 01/09/2012 - 02:16 | 2045944 qussl3
qussl3's picture

Didnt you hear?

New family formation in China is EXPLODING!

They are breeding like rabbits man, babies by the dozen, .......


Oops, wrong country.

Mon, 01/09/2012 - 11:00 | 2046447 Bicycle Repairman
Bicycle Repairman's picture

How much of the US could be housed by the USA's shadow inventory?

Mon, 01/09/2012 - 11:26 | 2046517 Kayman
Kayman's picture

Bicycle Repairman

And the Fed wants to create more supply.  What else can you do when you are a money printer.

Mon, 01/09/2012 - 04:23 | 2046029 pkea
pkea's picture

imo, the real black swan event would be not the geopolitical tensions itself but the true consequences of the upcoming war or a natural disaster such as an earthquake this spring / summer that will slow down the globe triggering defaults in 2013 and possibly in the fall this year. what will China do without iranian oil, who/what does it need more, iranian and russian oil and commodities or western markets? what comes first? what sort of landing can you get without all of these ingredients? what is all that pile of western paper that they have surplus of is really worth? answer that and you again will get the picture. 

Mon, 01/09/2012 - 07:52 | 2046117 Doña K
Doña K's picture

The most important element you left out is demand. There is no demand for products as there is no money velocity.

Mon, 01/09/2012 - 08:32 | 2046151 TheSilverJournal
TheSilverJournal's picture

There's always demand for products. People always want stuff. The Chinese are perfectly capable of consuming their own stuff. The question is how many of these goods are worth how many of those good..and that's how trade works. When the Chinese discover that the US isn't trading real goods and is instead trading pieces of paper from a printing press, they'll be much better off when they stop and instead trade their goods for other actual goods.

Mon, 01/09/2012 - 11:31 | 2046525 Kayman
Kayman's picture

Doña K

There is no demand for products

1. because 25% of employable Americans are not working

2. we have our satiation point.  How many ipads and iphones can you use ?  Isn't this just a modern day Slinky ?

Mon, 01/09/2012 - 01:32 | 2045889 ekm
ekm's picture


I was born and lived in communism in Eastern Europe for 20 years. Hombres, you can't run an economy for long by telling people what to do. Hear me!? It always ends up in hard landing.

All that crap about China surpassing the west and shit and shit and shit. Anybody knows any country that resorted to totalitarianism and did not end up hard landing? All Eastern Europe did right after 1990. How about talking about North Korea? China is no exception.

Mon, 01/09/2012 - 02:10 | 2045938 wandstrasse
wandstrasse's picture

so you think the West is NOT a centrally planned command economy where people are told what to think and to do??? Hombre.. That it looks different does not mean it IS different.

Mon, 01/09/2012 - 02:18 | 2045948 jeff montanye
jeff montanye's picture

it is different but the difference is narrowing and our "leaders" seem proud of it, cocky almost.  pride goeth before the fall.

Mon, 01/09/2012 - 09:01 | 2046190 TheSilverJournal
TheSilverJournal's picture

The US is centrally planning housing, which is the largest asset that most own. The US backs 95% of all newly issued mortgages in an effort divert resources from the economy to prop up housing, which seems pretty socialist to me.

Mon, 01/09/2012 - 03:27 | 2046004 ebworthen
ebworthen's picture

ekm - I appreciate your perspective.

Mon, 01/09/2012 - 01:35 | 2045893 nah
nah's picture

like america would let them starve to death


Mon, 01/09/2012 - 01:43 | 2045903 e92335i08
e92335i08's picture

Short chinese banks

Mon, 01/09/2012 - 02:35 | 2045967 TBT or not TBT
TBT or not TBT's picture

The trick is, how to do that.

Mon, 01/09/2012 - 03:42 | 2046021 lewy14
lewy14's picture

You cannot.

Which is why there will be no hard landing.

What's unique with China is that while some part of the economy is undergoing speculative boom, monetary/credit expansion and cost-push inflation (the private / shadow) sector, another part of the economy is undergoing balance sheet recession and debt deflation - that would be the big 4 banks and the state sector.

How will this resolve? It won't, and it doesn't need to.

In a debt deflation, the destruction of balance sheets becomes a problem of apportioning losses - the Chinese state arrogates the power to so apportion. And it does so ruthlessly, and efficiently.

The "fiscal buffer" is financial repression of Chinese citizens - the big 4 banks and the state sector can absorb whatever losses they need to, via the negative real rates. They'll simply suck in whatever they need to in the form of reserve requirements and Captain Renault-style raids (shocked - shocked! - to find shadow banking going on. Winnings to be deposited - in Bejing).

This game can and will go on for quite some time because growth and nominal interest rates are still quite positive - China has yet to "roll down the curve to zero" in the way that Japan, and now the US and EU have.

So no hard landing.

Again, the power to survive debt deflation is the power to apportion political and financial pain - it's only a "crisis" when that power is contingent and disputed. TPTB in the west are themselves attempting to arrogate that power...

Mon, 01/09/2012 - 07:05 | 2046095 Element
Element's picture

Maybe working bankruptcy and writedowns into that, as vital and essential as well as forthright and trust enhancing restorative systemic processes, would be helpful.

Mon, 01/09/2012 - 10:20 | 2046341 Hippocratic Oaf
Hippocratic Oaf's picture

FXP is a good start

Mon, 01/09/2012 - 15:26 | 2047391 ucsbcanuck
ucsbcanuck's picture

don't really like ultrashort stuff

Mon, 01/09/2012 - 11:13 | 2046482 ucsbcanuck
ucsbcanuck's picture

Indirect way - buy puts on FXI.

Mon, 01/09/2012 - 01:52 | 2045908 qussl3
qussl3's picture

Consumption led economy only works with a relatively flat wealth distribution. Even then only until and up to debt saturation.

Long tax havens and BS luxury, this pig is done it's just going to take a while to stink.

Either that or the Chinese attempt to print their way to a middle class, companies paying increased wages have to get the money from somewhere no?

Mon, 01/09/2012 - 06:55 | 2046093 snowbaall
snowbaall's picture

China's crash isn't a surprise.  You can't go around building half a million dollar condos if nobody has a pot to piss in.

The Chinese crash will also bring down Australia and New Zealand.

But Chinese girls are pretty.

Canada might also take a hit.

2012 is gonna be rough.

Mon, 01/09/2012 - 01:47 | 2045910 pkea
pkea's picture

Chinese consumption led economy is another hopium....

Mon, 01/09/2012 - 02:01 | 2045928 ekm
ekm's picture

Right on. How can a nation with 49c/hr average salary resort to consuming?

Mon, 01/09/2012 - 02:19 | 2045952 Freddie
Freddie's picture

LOL!  Some Dem junked you for the hopium.    Well the Tyler's seem to be getting that TARP fiat because I keep seiing banners on ZH for the Democrat Party's Allah.

Mon, 01/09/2012 - 03:13 | 2046005 fnord88
fnord88's picture

The adds are different for every user. It shows you adds based on your browsing habits. Analytics are a powerful tool, and it appears they have rooted out your deep dark secret. Perhaps you did not even realise, but on some level, deep in your subconscious, google knows you love bambi. Hell, you probably voted for him last time, and have just blocked it out.

Do you ever wake up and not know how you got there?

Mon, 01/09/2012 - 11:14 | 2046487 ucsbcanuck
ucsbcanuck's picture

Yes, normally accompanied by a headache, dry mouth and general feeling of shittiness. Occassionally next to cougar as well.

Mon, 01/09/2012 - 11:36 | 2046549 Kayman
Kayman's picture

I think most people wake up not wanting to admit they know damn well how they got there.

Mon, 01/09/2012 - 12:02 | 2046611 QuietCorday
QuietCorday's picture

If this is true, why do I get so many Russian/Thai brides ads on ZH?

I am not even male.

*very confused*

Mon, 01/09/2012 - 14:14 | 2047120 ozziindaus
ozziindaus's picture

The Google Oracle says you're a closet Lez.

Mon, 01/09/2012 - 02:07 | 2045934 ekm
ekm's picture

Can't advance buy printing credit. China has had 3 to 4 hard landings that were paperized, just money printed (money is credit). It's come to the point that any credit printed will increase the price of food taking up most or all of incomes. A little bit more food inflation and booooooooooooom, Tian An Men number 2.

Mon, 01/09/2012 - 02:18 | 2045950 George Huxley
George Huxley's picture

This hard landing is going to piss off a lot of Chinese. I hope they don't scapegoat a certain western nation that owes them a lot of money that it can't pay back right now.

Mon, 01/09/2012 - 03:57 | 2046026 DaBernank
DaBernank's picture

The US can pay it back with the click of a few keystrokes. The Chinese would be on the losing end of that deal. I am amazed at the Chinese M2 number, just astounding. As long as their population is OK with never getting any of their money back from the big 4 banks, things will be ok, but these Chinese are not the Chinese of Mao's era.

Interesting times.

Mon, 01/09/2012 - 02:18 | 2045951 non_anon
non_anon's picture

that's how the fortune cookie crumbles

Mon, 01/09/2012 - 02:26 | 2045959 electricgorilla
electricgorilla's picture

Scott Minerd from guggenheim also believes China could see a hard landing. Short Chinese Real Estate ETF's?

Mon, 01/09/2012 - 02:26 | 2045960 spiral_eyes
spiral_eyes's picture

"Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy."

This is nuts. Many of America's modern problems can mostly be attributed to losing her productive economy, and replacing it with pen pushing financialism. China's strength can mostly be attributed to picking up the slack in global productivity that has allowed America to live beyond her means as a parasite for the last 20 years. 

How can America be an independent nation — in energy, in politics, in spirit — while she is chained by the shackles of maintaining and controlling an oil-dependent global empire? 

Mon, 01/09/2012 - 02:40 | 2045975 qussl3
qussl3's picture

Shoot your way there.


Mon, 01/09/2012 - 02:54 | 2045987 spiral_eyes
spiral_eyes's picture

That costs more than America can afford in dollars, manpower, productivity, etc.

Mon, 01/09/2012 - 03:07 | 2046001 qussl3
qussl3's picture

As long as the USD is the reserve currency and the dingbats recycle their current account surpluses in USTs then they are paying for it.

Why the heck do you think the Chinese are experiencing inflation when they produce a healthy portion of the world's goods?

Mon, 01/09/2012 - 10:06 | 2046312 spiral_eyes
spiral_eyes's picture

A lot of Eurasian countries are breaking out of the dollar reserve system and using either their own currencies or the Euro or the Yuan. Even Japan has joined this trend, ditching the USD for the yuan and yen for bilateral trade with China. 

We're approaching the Bretton Woods endgame. 

Chinese inflation is a different but also related issue. It's mainly to do with global resource pressures. But have no doubt: if China cuts exports and consumes more of their productivity at home (when you have a multi-trillion dollar hoard that could be used as a monetary base that is very easy) aggregate inflation could drop like a stone.

Mon, 01/09/2012 - 02:42 | 2045978 bankonzhongguo
bankonzhongguo's picture

Chinese economics is like trees falling over in the forest.

You are surrounded by massive evidence, but you never actually witness the event yourself.

If you are passively invested in China, you were toast years ago.

If you are actively invested in China, then you are on your third Martini at Tao.

Mon, 01/09/2012 - 08:29 | 2046148 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Maybe after the fourth you will actually hear the trees falling.

When the slave labor runs out, that's when things will change quickly.

The forest will be like Tunguska in Siberia.

Americans will be riding bicycles to work at that point.

Mon, 01/09/2012 - 02:51 | 2045984 jimmyjames
jimmyjames's picture

I think we will see western corporations leaving China in droves and moving to more lax environmental standard countries when the cost of pollution clean up is dealt out to those responsible-

Mon, 01/09/2012 - 03:17 | 2046007 ebworthen
ebworthen's picture

Wow, look at Figure 95 (second chart), bank lending and M2, China versus U.S.

Who are the Chinese lending to?  Small towns and villages?  How are those people going to pay back the loans?

Where is their incentive for being more productive?

How long can that last being told where to work and live with the dirty water and polluted environment?

Ugly all around.  Hard landing indeed.

Mon, 01/09/2012 - 03:33 | 2046017 bob_dabolina
bob_dabolina's picture

How are those people going to pay back the loans?

The FED will buy those shit loans. Where the fuck have you been? 

Mon, 01/09/2012 - 04:10 | 2046032 ebworthen
ebworthen's picture

Eating out too much I suppose.  Our FED?  Aren't they too busy buying European bonds and haven't the Chinese been buying our bonds (I know, not as much lately).

Mon, 01/09/2012 - 04:34 | 2046043 UP Forester
UP Forester's picture

After Thursday's chart of the Fed, BOE and BOJ "creating" 25% of the world's GDP, what does the figure come out to if you add the PBoC?

Pretty soon it'll be "all your nominal are belong to us"....

Mon, 01/09/2012 - 03:32 | 2046015 chump666
chump666's picture

china is boned from every angle.  they have it coming, welcome to capo boom and bust...commies.

Mon, 01/09/2012 - 06:14 | 2046081 BigDuke6
BigDuke6's picture

Dumb European oil embargo against iran may keep them, China, in the game for a bit longer.

Iran has 10 per cent of the world’s oil reserves and is the third largest exporter. Much of Iran’s oil exports flow to its growing Asian markets, particularly China, which imports about a third of Iranian oil. The EU currently imports between 15 per cent and 20 per cent of Iranian oil. The US has not imported any oil from Iran since the 1979 Islamic Revolution.

If sanctions get implemented, Tehran will likely have to sell its output at a discount to its remaining buyers and any new ones. China and India are likely to benefit from cheaper oil.

Keeps inflation down and the peasants from rioting a while longer.

Mon, 01/09/2012 - 06:28 | 2046084 chump666
chump666's picture

the huge fear for China and also India is the massive outflows.  China won't intervene that much as they know inflation is a still a big problem.  So if oil does go upward over 100+ .  Everyday Chinese and Indian companies are buying USD forwards.  Constant.  So inflation could go hyper if the INR and Yuan are dumped on mass.  As far as an oil embargo.  That will be a flashpoint, no doubt there.  China net imports, and the west prompt Iran to tighten the taps.  China will be in the mix.  Not a good situation looming.  

Mon, 01/09/2012 - 03:43 | 2046020 chindit13
chindit13's picture

Short China?  I'm not sure how much meat is left on that bone.  The SSE has had two nice avalanches since 2007 that has left 6000+ almost as much of a gilded memory as the Nikkei's 39 handle.

Today the SSE reacted favorably to promises of a centrally planned equity market.  Let this breathe for a day or so and maybe another short term opportunity will arise.

So many questions remain about China.  Is the real China the one of rather recent memory, or the one that served admirably as its own worst enemy for the last two thousand years?  Do Chinese companies actually make any profit from ongoing operations, or is business a loss leader that merely creates a platform for real estate speculation?  What the heck are Chinese people thinking when they borrow in the shadow banking market at rates that would make a Sicilian loan shark, or even a JPMorgan credit card division blush? (To paraphrase our woefully misunderstood AnAnonymous, what is with Chinese citizenism?)  How can the government even pretend that some sort of rational credit analysis was carried out when loans equal to 80% of GDP went out the bank doors in about an 18 month period?  With fully 99% of the working population earning 40,000 yuan or less per year, can China really support the same retail space per capita as the US?  Now that the bloom is off the rose, will China happily allow resource contracts signed in a host of Third World nations to be broken so that they don't have to take delivery of things they no longer need or want?  (Burma has already tossed 20,000 Chinese laborers and handed Beijing a sunk cost of $600 million by cancelling construction of the Myitsone Dam project, which was to have provided thousands of megawatts of power to Yunnan Province, and has announced that long term gold and silver mining contracts might be cancelled in 2012.  If a neighbor dares do this, what will stop far flung nations in Africa from doing the same?)

Maybe there is still some meat on that bone.

Mon, 01/09/2012 - 03:54 | 2046025 jimmyjames
jimmyjames's picture

Short China?  I'm not sure how much meat is left on that bone.


Short Copper-China is loaded to the gills with it-

Remember a few years back-even Chinese pig farmers were hoarding it-

Mon, 01/09/2012 - 04:09 | 2046034 chump666
chump666's picture

AUD and aust indexes.  also REILTs in Australia once their housing market goes bust.  hedge funds will tear into Australia on a china hardlanding

Mon, 01/09/2012 - 04:15 | 2046036 qussl3
qussl3's picture

AUD will only break when the rates are slashed, in this crazy fiat world, Oz still is the least stinky linen especially with the carry.

Once that goes, AUD will implode.

Mon, 01/09/2012 - 07:08 | 2046088 Element
Element's picture

AUD will implode.

And almost everyone here but the big miners and big foreign heavy-equipment buyers are hoping it does implode.

The tourism industry and manufacturing are seriously hoping for it to implode ... a global recession may actually be a relative improvement in conditions, otherwise ... which could help retailers and banking.

The major beneficiaries of USD parity are extractive foreign investors, not Australian suburbs. It's interesting to see people desperate for rate falls ... but an AUD fall is what would really help right now.

Mon, 01/09/2012 - 05:33 | 2046070 Sandmann
Sandmann's picture

You make so many good points ! The Chinese People as you call them are realists in that they know this is an Oligarchy whose own children are feather-beeded with US Passports and homes in Vancouver. That they have a window of a few years to get rich and escape, so they can sign up to any loan shark for a punt. They gamble on keeping a factory running long enough to acquire offshore capital; speculate and flip a few Shanghai apartments; scam a few Westerners in a JV.......but they do not intend to live in China when Canada and the USA have better legal structures. I tend to reflect on our Western Crime Families and their Crony Capitalism and suspect it is on a much bigger scale in China with no foundations or culture beyond a cultural norm that Chinese can exploit Chinese if no foreigner is available and willing.

China is simply the other side of the Global Bubble blown by Greenspan and Clinton which saw the USA and EU give China MFN status and the right of every manufacturer on the planet to circumvent tariffs by relocating to China. When you sell a radio from hOng Kong direct to a US or European Customer it is free of Duties and Sales Tax.....but sell it retail from a store in LA by mail to a customer in Europe and it is hit with Duties and Sales Tax .....then try sell US-made towels to a customer in Berlin and wonder why direct shipment from a Chinese factory is such a better deal than from a South Carolina factory.

China builds retail space to please Westerners and get them competing for contracts so at least one lobby group pushes to keep trade barriers down. Under Bretton Woods Persistent Surplus Nations were supposed to face Tariffs to restore balance in high Deficit Nations, but for some POLITICAL reason this never occurred.......the US having >50% global manufacturing capacity and being a surplus nation until 1975.

China cannot avoid a hard-landing. As Jimmy Goldsmith wrote in his book The Trap letting China have access to markets in the West would destroy social structures, employment and public finances., It is China that has created the Banking Bust by feeding pigs a high protein diet without any constraint



Mon, 01/09/2012 - 06:32 | 2046083 Element
Element's picture

What the heck are Chinese people thinking when they borrow in the shadow banking market at rates that would make a Sicilian loan shark, or even a JPMorgan credit card division blush?


Isn't it obvious, it's just subprime-lending(^2) and like in the US, they were not seriously considering having to actually pay such rates.

The far more interesting question though is, "what were the Chinese 'banks' thinking?"

Mon, 01/09/2012 - 07:46 | 2046112 spankfish
spankfish's picture

From the article: "What speculators do is to push it over and profiteer handsomely from the chaos."

chindit13: "Maybe there is still some meat on that bone."

chindit13, I think the there is still meat on the bone, but it is rancid.  Only the maggots/speculators will feed/profit from it.  Then again a starving man will eat anything... you could be right.  Time, which we are all short of, will tell the story of how the maggots survived eating this rancid meat and the rest succumbed to this global profiteering. 

Mon, 01/09/2012 - 08:10 | 2046130 YHC-FTSE
YHC-FTSE's picture

Nice post. The only thing I want to add to the speculation is that business is sometimes a loss leader that merely creates jobs in China. That's their whole raison d'etat - to keep as many employed as possible. I doubt they give a shit about status, profits, GDP growth, RE bubbles, or anything else that concerns us on a daily basis. 


Is China really heading for a hard landing? How do you define "hard" in this context? If it is widespread unemployment, soaring costs, bankruptcies, starvation, and social unrest, then the chances are slim, and even if it did happen, their leadership have seen it all before, and I doubt they give a damn. This is the nature of communism, and it might be good for them to experience how bad a command economy can be, so they can change themselves out of such a state. It's all up to them - we have our own problems, don't we?

Mon, 01/09/2012 - 05:52 | 2046076 roy10
roy10's picture

LOL - this post may actually mark the bottom for the Chinese market.

Mon, 01/09/2012 - 06:03 | 2046077 chump666
chump666's picture

oh no China may juice their stock market via commie intervention.  awesome.  yuan contiues a devaulation wipeout on China company USD buying and inflation hits China like a sh*tstorm.  Cue civil unrest in less than 3mths.   

Mon, 01/09/2012 - 06:06 | 2046079 chump666
chump666's picture

and the central planners move us closer to war.  all eyes EUR and oil.  since the whole world is dumping EUR and hedging on oil.


Mon, 01/09/2012 - 06:04 | 2046078 ConspiracyTheory
ConspiracyTheory's picture

Hard landing or not... one just need to take a look at the Shanghai Composite Index chart.

Current SSE starts in 1990, and compare the current level with the 20 years history to get a sense of the relative level. Compare this chart with 50 years chart of S&P and FTSE. Which one would you rather short if you are doom and gloom and armageddonians?

How will the China market perform in the next 5-10 years? Are they going to bust? I would rather not bet against them. In the medium - long run, better bet against Europe and U.S., not China.

Mon, 01/09/2012 - 11:23 | 2046512 ucsbcanuck
ucsbcanuck's picture

Don't forget - when bubbles deflate the asset values tend to crash beyond their correct values. It seems like the smart move is to short China now, then go long in 2-3 years time.

Mon, 01/09/2012 - 12:12 | 2046642 ConspiracyTheory
ConspiracyTheory's picture

I would rather short China in 2007, at 6000. Not at the current level when it has dropped 70% from its peak. It's like saying the best time in the history to short American market is to short S&P index when it's at 500.

Mon, 01/09/2012 - 15:34 | 2047423 ucsbcanuck
ucsbcanuck's picture

Sure, agreed - but I think there is more real pain to come. Not all the skeletons haven't come out of the closet yet. And that drop was even before the explosion of the bubble. What will the stock market look like after the bubble has well and truly exploded?

But yes, starting at 6000 would have been a better call. Would have been tough to pick though - in 2007 the real estate bubble still hadn't hit its peak.

Tue, 01/10/2012 - 17:24 | 2051752 ucsbcanuck
ucsbcanuck's picture

Actually a better comparison is the Nasdaq as that was more representative of a bubble.

Nasdaq closed above 5000 in Mar 2000. In Oct 2002 it closed just below 1120. This was a fall of over 77% from the peak. It was trading at 1996 levels.

I don't think all the bad news has been priced in yet for China.

Would I have liked to short the Nasdaq in 2000? Hell yeah!


Wed, 01/11/2012 - 01:03 | 2053428 ConspiracyTheory
ConspiracyTheory's picture

I don't think Nasdaq is a good comparison since it's an industry focused index (high tech) whereas Shanghai Composite is more broad based index with different industries represented. S&P is a better comparison for this purpose.

Besides, even if we assume the bad news has not been priced in, how much more can it go lower? Nasdaq in your example dropped 77% in a real bubble, Shanghai has dropped 70%. Is 7% return what people call "the best time in history to short?" China is not going back to the stone age. They are and will still be the world's growth engine for the next few years while the West is in recession / recovery.

The guest post's last statement reads "Now is the best time in history to short China market". Really? Or is it the opposite?

If we go back to this thread at the end of 2012, it'll be interesting to see how much money someone makes/loses trying to follow the advice of shorting at the day when this thread is posted.


Mon, 01/09/2012 - 07:15 | 2046099 Dre4dwolf
Dre4dwolf's picture

I think the problem is that the general mind set for most individuals has shifted.

People used to want to spend/get into debt to buy fancy chinese made crap.... nowadays most people are contempt... I mean... really look at it... whats the difference between an Ipad 1 and an Ipad 2? whats the difference between a 55" LCD and a 55" LED? How many times have you HAD to upgrade your computer recentlt? .... We hit a point where all the TECH is so big and so fast, that theres no point in really upgrading until the current hardware breaks, an average TV could last for 5 ~ 7 years! how much bigger than 55" can you really get with it still being viewable ?


TV's will shift to flex screen tech (OLED) as will other hand - held devices (samsung will profit)... like 2 years down the road if WWIII hasn't wiped us out.

Storage will move from traditional Hard Disc tech to FLASH ram/roms / CD's and DvD's and even Blue Ray will be replaced with flash cards/decks.

Cars will slowly move towards Hybrid Tech (using Gas/Oil/Diesel/Electric).

Lithium and other semi-precious Industrial metals will SPIKE in value 4 ~ 7 years down the road.

Food will explode in price as population continues to jump.

Computer tech will hit a speed bump PROBABLY , and computers might actually need to get BIGGER in order to get FASTER for a short period of 2 ~3 years as the lithography is approaching 10 ~ 20 Nm which lets face it is really really small... we might start seeing CPU'S that look like the old slot type design again ^^

Profitable Business for 2013~ 2020

-Bicycle Shops

-Electronics will be pushed through by Samsung and Toshiba (MAYBE SONY ALSO BUT I DOUBT IT), Samsung is going to desimate APPLE in the long run...

-Microsoft will unlease a new console (new xbox or something) they will have SMALL growth relative to where they are now... but I think it will just be a small bump and then a steady stream of sustaining where they are at.

-Apple will go down slowly, they just can't adapt the the changing environment and their tech is WAY behind.... retro style devices can only get you so far... their tech is CRAP in comparison right now to what their competition is putting out... not to mention over-priced.

-Oil, oil is going to be extremely profitable.

-Silver will do amazing IF industry picks up.

-Gold, its honestly not worth that much, the only chance of it being worth anything is if we go back on a gold standard.... I doubt it will happen and even if it did the Govts gona come to your house with guns and steal whatever you have to mint coins.

-Financial institutions, this is 50/50.... all the banks are fraud, pretty much they are profitable when they can get away with robbing people on mass.... when people catch them and new laws are passed to protect consumers thats when you see them tank.... banks are like the mafia.... business is good so long as no one stops you from showing up to your "clients" house with a loaded shot gun and robbing them blind... pretty much because the banks aren't contempt provided a service they have a lot of special corrupt interests to please... which could ultimatly be their undoing.


That about sums it up... my predictions.


Mon, 01/09/2012 - 07:20 | 2046100 props2009
props2009's picture

2012 is stoking recession

Mon, 01/09/2012 - 10:30 | 2046370 Shizzmoney
Shizzmoney's picture

How hilarious and ironic is it that the 99% of China's population can only have 1 child, but if you are a rich Chinese person, you can have more than 1 kid for a mere $29K per child.

I mean, if you can't even have principled Communism, where is there any hope in the world?


Mon, 01/09/2012 - 11:02 | 2046454 ozziindaus
ozziindaus's picture

Correct me if I'm wrong but doesn't China benefit from US QE? That's the driving engine behind the crony US government/corporate outsourcing scheme.

Mon, 01/09/2012 - 11:21 | 2046502 AGuy
AGuy's picture

I would be hesitant to short China. I certainly believe China is in the mother of all bubbles, and it should have popped five years ago. The reason why it hasn't popped yet is because the Chinese gov't is deeply concerned about loosing power if the economy falls into recession. The Chinese gov't will likely throw more credit and capital to defer the pop again.  I recall that China's bubble was on the verge of popping in 2009, but the gov't implement a stimulous program and increased credit. I see no reason why they won't repeat the same.


Mon, 01/09/2012 - 12:08 | 2046629 ConspiracyTheory
ConspiracyTheory's picture

Well, Shanghai Index has dropped 60-70% from the peak in 2007 (6000 to current 2000). The lowest level in its short history is 1000. If this is not the defnition of popping, then I don't know what is.

The current level of China stock market is equivalent to present S&P index at 500.


Mon, 01/09/2012 - 12:08 | 2046628 HistorySquared
HistorySquared's picture

NPLs are currently 1% on the bank balance sheets. The most pessimistic forceasts are for 8-12%. 

They reached 40% during previous crises. 

Mon, 01/09/2012 - 12:51 | 2046814 Random_Robert
Random_Robert's picture

We read all about these "Structural" economic problems everywhere... Chine, Europe, the US...

You have to understand what "strucutural" means. If you substitute "capital" for "structural" you will derive the same meaning.

The "structure" underlying any economy is work, and work is real capital, and real money is the stored proxy-value of real work done in the past.

In short, real work is real capital, and real money is real capital...

So, when you read about "structural" problems, you need to understand that they are not talking about anything that can be fixed by adding more liquidity. Liquidity is NOT money, and liquidity is NOT capital.



Mon, 01/09/2012 - 15:14 | 2047244 earleflorida
earleflorida's picture

china is in good shape, period!

this article stinks to high heaven

china's next *5 year 'grand-plan-installment' will be less exports and more imports [corn/soy argentina], and building out infrastructure [iron ore/ coal - australia/india], with greater import commerce from singapore, malaysia, taiwan, n. korea, burma, vietnam, indonesia, mongolia, kyrgyzstan, tajikistan, laos, thailand, turkmenistan, venezuela, peru, bolivia,  brazil,*Japan,... etc., etc.     

pboc = frb's [absolutely no difference except china's got a whole-lot emerging yet to do with it's well thought out economic/defense strategy going back 40 years]

boc, ccb, icboc, and the aboc [ the big four] equates to the ny fed/ treasury


Mon, 01/09/2012 - 20:10 | 2048160 chump666
chump666's picture

China fudge stats coming through. They jerked Europe around with their bullsh*t, now they're jerking themselves.

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