Guest Post: The Reasons For China's Imminent Bust

Tyler Durden's picture

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The global dominant narrative about China is wrong, claims Gordon Chang. Don't expect it to be the 'pocketbook of last resort' that will rescue world markets from their current malaise.

And don't expect its remarkable economic growth to continue. In fact, expect a "hard landing" for China - and soon. columnist and international lawyer Gordon Chang has spent much of his time since the early 1980s working and living in China. His primary knowledge of the country and his relationships there give him a superior understanding to how its economy is actually faring than many analysts based in the West. And what he sees today doesn't inspire confidence.

We are seeing the first real signs of slowdown in China's economic growth looking at the year-over-year numbers for the past several months. Car sales have decreased nearly 5% since last year, and property values are beginning to plummet in key markets (30% in October alone in Shanghai).

Gordon sees these as the inevitable harbingers of a coming collapse in China due to excessive stimulus policies the government undertook starting in 2009. The bubbles and malinvestment created by this stimulus have not been addressed, and increasing weakness and transitions inside the political system are making it less likely they will be before market forces intervene.

On The Repercussions of Excessive Stimulus

Inefficiency eventually catches up with every economy. They have a semi-closed system so that they are not necessarily subject to the principles of economics in the same way that we are, but they can only delay the inevitable. They cannot prevent it entirely, and that is really going to be their problem. Because they have done a lot which just does not make economic sense. I mean it might make sense in terms of rapid buildup of an economy, but they have to pay a price. And they have not paid their price yet.


The one thing that people say is "These Chinese leaders are so great at economic management because they got through 2008-2009 and they had enormous double-digit growth while the rest of us were suffering." Well yes, they did that but they did that at great cost.


And so for instance in 2009, the first full year of their stimulus plan, they dumped something like $1.1 trillion into a then $4.3 trillion economy. And so did they create growth? Yes, they did, but they also created a stock market bubble, a property market bubble, and inflation. And they have yet to deal with the property market and the inflation problems. Those are dislocations that they do not have the answers to. I would rather have our economic problems than theirs any day of the week.    

 On Growing Political & Social Instability

Starting at the end of next year, the Communist party is going to change the officers of their Politburo Standing Committee, the apex of political power in China. We are going to have a new General Party Secretary. And then in the early part of 2013, the government officers change. And sometime after that, the all-important Central Military Commission has a revamp of membership. And so at this time of political transition, the important economic decisions are not being made. But it is even worse than that, because corruption indeed is engulfing the political system. It is causing so much friction in society. The Communist Party is not able to mediate conflict and its only answer is to increase coercion.


And that is why you have survey after survey of the rich and the super-rich, they talk about leaving China. It is not the poor who are going, which we have seen in many waves throughout the last couple hundred years, now the rich are thinking of getting out. They are getting passports, they are putting their families offshore, and this is of concern because this is a leading indicator.


If you go about 25 miles south of where I live, and go to Princeton, New Jersey, you will see a lot of beautiful homes. I mean, they are all paid for, they have got a wife there, they have kids, and they have one or two Mercedes in the driveway. It is the perfect American family, except one thing is missing, and that is Dad. Dad is a senior official in Beijing and he is stealing as much money as he can. And at maybe not the first sign of trouble, but perhaps the second sign of trouble, he is on the United flight to New York, because he is not going to stay to defend a regime that is shaking. And that is one of the reasons why I think we have to be concerned about the way the Chinese economy is going, because the Chinese rich are starting to see the signs and are beginning to bail out.


We are talking about the people who have benefited the most from this system. And they can see the problems at the top of society. We have now a weak General Party Secretary, Hu Jintao, and he is going to be followed by probably by someone who is just as weak, especially in his beginning years, Xi Jinping. This is a political system that will not be able to make the decisions and to implement them that everyone knows have to be made. And that is why, for instance, we have not seen much in the way of reform over the last five years. In fact, we have seen a reversal of reform. And most of the conditions that have given rise to China's extraordinary growth either no longer exist or are disappearing fast. And so this is an economy in trouble.


On The Popping of China's Real-Esate Bubble

There was just too much money in the economy and so people then poured money into apartments. And China has gone on a tear building ghost cities and all the rest of it. And now the progression that you talked about -- skyrocketing prices and then stable prices, selling volume, and then property price declines -- is what we are seeing in China.


In October, last month, prices in places like Shanghai declined 30%, as we saw developers start to offer these enormous discounts. And by the way, these discounts were so big that people who bought at earlier stages in these same developments, where these discounts were being offered have now taken to the streets complaining if you are giving 30% discounts to these other guys, then give it to me as well. And so we have not got a little bit of social unrest because of falling property prices.


In Wenzhou, which is in prosperous Zhejiang Province, which was perhaps the most prosperous province up to about a year ago, developers are, one developer is now offering BMWs to the first 150 buyers of apartments. And this is just a sign that property prices have not only softened, but they are starting to fall quickly.


You know, every market has to go to equilibrium. There are too many apartments in China and not enough buyers and occupiers. And it was going to go to equilibrium in some fashion. What is really surprising observers is that the rapidity at which we see this move to equilibrium. Last year there were, in about I guess it was April or May, the state grid in China reported there were 64.5 million apartments that showed no electricity usage for six consecutive months. That is enough housing for 200 million people, but yet Beijing was decreeing the building of 30 to 50 million more apartment units....


But at the end of the day, there has got to be a correction. And what goes up fast comes down fast. And what we are seeing is the down phase. The only issue is whether Beijing can stop the down phase by administrative measures. But so far the Chinese leaders, Premier Wen Jiabao, last Sunday said "nope, we are going to stay with these tightening measures." And that has really created great pessimism in the Chinese property market...


And so really what we have is a government now that is really trying to bring the property market down. And of course it wants to do so gradually, you know, orderly. But as you say, it is a bubble, there is a pin and the problem is that Chinese leaders cannot manage the process of bringing the property market down to equilibrium....


When China's elite analysts start talking about prices being 50% of where they are this year that means that they are probably privately thinking that no, prices will not halve: they might go down even further than that. And that is really a problem because that mentality, once it gets embedded in people's minds in China really means that, Chinese leaders then have very few tools in which to prop up the property market.    


Click the play button below to listen to Chris' interview with Gordon Chang (runtime 40m:55s): 

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LawsofPhysics's picture

well, at least until they politely ask to settle the U.S. debt in gold - take gold to 15,000,000,000,000 an ounce and give them an ounce.

Max Fischer's picture



The collapse of China.  The collapse of Europe. The collapse of the US.  The depletion of energy.  Gold and silver to $5k.

Doomsday economics certainly is the fad these days.

Max Fischer, Civis Mundi 



agent default's picture

Nah, it's just back to reality. With accrued interest.

MillionDollarBonus_'s picture

This sure makes me glad to be in America, where despite our problems we have far more educated economic advisers and government officials. People from all over the world compete for the privelage of studying at our Ivy League schools and consequently America has some of the smartest and most competent government officials in the world, many of whom have prior experience in top financial institutions. This is why America is not subject to the gross neglect demonstrated by Chinese economic planners with inferior educations and backward mentalitlies.

The Deleuzian's picture

MDB...You're getting close to perfecting pure sarcasm...Or Newspeak...It's a wonder the PTB hasn't gobbled you up yet...

spiral_eyes's picture

Yawn, bitchez.

China will liquidate its dollar holdings to bail itself out again.

Welcome to the Great Treasury Crash of 2011/12/13.


TheJokingJollyRoger's picture

Such a trade war will inevitably lead to a actual military war.

Carlyle Groupie's picture

At such time China will win and take Taiwan for free.

Mr. Firstname M. Lastname's picture

ehhh fuck china, how in the fuck are they gonna get half a billion soldiers across the Pacific when the batteries die halfway to Hawaii.  molon labe

When the host dies, the parasite follows.

trav7777's picture

ROTFL...with what military?

They have no navy, a pathetic army, and no air force worth a shit.  they couldn't mount an amphibious invasion of Hong Kong, much less Taiwan

Vic Vinegar's picture


C'mon are fast-becoming an internet celebrity.  How many people get songs - especially this catchy - dedicated to them?  Own it!

Trav's Theme:

Cliff Claven Cheers's picture

That is awsome, Trav has his very own song.  

Looks like Fuu put it together. 

hardcleareye's picture

Well that was different....  but he has missed some of Trav's best junked lines.....

JamesBond's picture

"they have no navy..."



Eeyores Enigma's picture

The Deleuzian - You of course realize that MDB is an auto-response computer system don't you?


Even if sHe is in human form IT'S automated.

The Deleuzian's picture


FEDbuster's picture

MDB either works for the Obama Administration or the NYT.  His delusions are the talking points of both entities.

eaglefalcon's picture

Be careful what you are glad for.


If real shit hits the fan in China, the people will overthrow the government and hang all the politicians.  This prospect scares the craps out of the Chinese elite and they are bailing.  They know they are hopelessly outnumbered.  They know that the people have absolutely no trust in them.  Plus, ordinary people don't have much to lose because there is no welfare.  The so called "retirement funds" are meager and have been already wiped out by inflation of the past 2 years


The same thing wouldn't happen in America.  The people here are too docile and brainwashed, too dependent on paycheck, government and welfare.  Economic collapse will result in a Fascist state.  And if you frequent zerohedge, you are the perfect candidate for concentration camps.


I'd choose anarchy over fascism on any given day.


The Deleuzian's picture

EagleFalcon...I think you're taking it all too hard...If anything...Zher's would be a think tank

Cathartes Aura's picture

ZHer's a "think tank"??? *snort*

given the auto-bot angry responses to Million$'s obvious troll posts virtually every thread, it's more like monkeys flinging shit around the cage than thinking - some threads do differ, but in the main, ZHer's are here to entertain themselves in a small small circle. . .

most spend more time trawling the interwebs for the perfect titty-pic-avatar than pondering the state of the world.

Robot Traders Mom's picture

@eaglefalcon-Best post in quite a while...I'm glad you chose to incorporate FEMA at the end.

Vampyroteuthis infernalis's picture

EF, when everything goes bankrupt and those welfare/retirement promises vanish into thin air. The people will quickly go into a rage since they then have nothing left but delusions and poverty. Revolution will then be in the streets.

The Deleuzian's picture

Vamp-----the peasantry will be killed off slowely and quietly....Or otherwise quickly and thoroughly

FEDbuster's picture

Man made pandemic targeted at 50+ population, solves most of their "problems".  WW3 would be messy and take out many of the younger "slave" age worker bees.  TPTB in China will try to direct attention away from themselves and at a foreign bad guy (ours do the same thing all the time).  Obama is getting his foot in the door with Marine base in Australia, so who knows?   Maybe China will set up shop in Cuba?

Uchtdorf's picture

Who said: When people with nothing have nothing left to lose, they lose it?

bigmikeO's picture

Gerald Celente says that. Then he lost his (paper) gold to Corzine / MF and now he's losing it. Ironic...

Cathartes Aura's picture

who doesn't??  it's repeated that often.

Socratic Dog's picture

I have to take this as sarcasm.  It just can't be real.  No one could be so fucking stupid.

I seem to find myself thinking that about most all your comments.

The Deleuzian's picture

Socratic Dog...MDB is most obviously being uber-sarcastic...Even those Ivy-League shmucks don't believe what they say publically...They're saying exactly what MDB is saying just pleasantly!!!

zen0's picture

obviously you have not studied at an Ivy League school, unless spelling is optional.

privelage = privilege.

CPL's picture

So far it doesn't seem so. Isuggest that you go all in for allof our sakes for the economy. It certainly would put our minds at ease.


You could shut your pie hole and listen with your ears and not your mouth.

Buck Johnson's picture

Bingo, dead on.  We have delayed and delayed and kicke the can down the road to where the end of the road is 100 feet in front of us.  And so we are trying to find some way of extending that road but it won't happen.  Everything comes to an end, everything.  As he said equilibrium in China is also the same in the rest  of the world.  Everything must be brought back into equilibrium regardless of how much pain and suffering and countries going under that happen.

sabra1's picture

as long as it's the 1% suffering, painfully! then, we take back our gold!

AldousHuxley's picture

Gold 2000: $300

Gold 2011: $1800


China Shanghai composite index 2000: 2000

China Shanghai composite index 2011: 2500 off of peak of 6000 in 2006


S&P500 (SPY) 1999: 130

S&P500 (SPY) 2011: 120


Doomsday has been here for last decade. Faux economics is just revealing itself.


tell Japan what a fad their lost decade was....


and you know what US is in world war III right at 4 fronts?

Hobbleknee's picture






That's 5, and soon Iran will make 6.

Robot Traders Mom's picture

Fuck it. You might as well throw Syria in for good measure...

Uchtdorf's picture

There are Mexicans and Muslims ready and waiting to pour across the borders of Texas, NM, AZ and Cali. Heck, let 'em have CA.

eaglefalcon's picture

Iraq: bad situation, troop commitment required, pulling out will give rise to a hostile regime

Afghanistan: not so bad, troop commitment required but only in small numbers, occupation is economically viable because of the profit from the poppy fields

Pakistan: no confrontation likely in near future because the chinese swore to defend it

Yemen: already toppled and no troop

Libya: the europeans need oil from there, so it's up to them to come up with the money and troops


It appears that if iraq can stablize, the US can afford quite a few more occupations


bottomlin: they don't send the elite to die on battlefields, they send the plebs.  In that regard, the brits have more guts because their elite do go to combat



i-dog's picture


"the US can afford quite a few more occupations"

Yep ... they're now in the process of occupying Australia ... and the FEMA camps have already been built ... for "refugees", of course ... not for citizens ... never for citizens.....

spinone's picture

We need to occupy Afganistan to keep the Chinese out of the middle east.  We'll be there till the middle east is out of oil.

thefedisscam's picture

LOL. This Lang Xian ping is FREE LANCE Chinese live in HK!! He has NEVER been a Mainland Chineses resident! How does he know ANYTHING about Mainland China?  Just by reading the stupid Western media about China?  LOL

He has a huge mouth about everything! A lot of Misinformation from him! Whoever believe his judgement will get SCREWED!

BurningFuld's picture

Nice to live in Canada.  Well except it's totally frekin' dumping snow on me.

hivekiller's picture

I thought that was the new new China given how many Chinese live there.

BurningFuld's picture

See we don't have to worry about being attacked by the Chinese because they will be attacking themselves.

chindit13's picture

I hate to disturb your sleep, but if you took the time to read some Chinese history, you might not feel so safe.  China prefers intramural warfare, because if one is on both sides, one can always rack up a "win".

Let them eat iPads's picture

BC = Beijing, China

UBC = University of Beijing China

Reformed Sheep's picture

I spent a few years in Vancouver, Canada. Affectionately called Hong-couver by the locals.

Canada was a great place, but has deteriorated since getting the Harper govt...