The following is an excerpt from a client letter published in early March.
As noted previous articles… the global central banks have begun to realize that the success of their reflationary efforts has resulted in yet another speculative bubble in asset classes, specifically stocks and real estate.
Nowhere are these issues more evident today than in China.
Many commentators have spent a great deal of ink proclaiming China to be the next great economic power. While it is true China has seen dramatic improvements in its economy over the last 30 years, my view has been and remains that most of the “growth” of the China “miracle” is just a debt-fueled bubble built upon a loose foundation of Government corruption and fraud.
The reason 99% of investors fail to see this is because:
- They believe Chinese economic data as gospel.
- They fail to understand China’s economic policies from a political perspective.
Regarding #1, Chinese economic data is absurdly gimmicked to the point of making the US’s look clean in comparison (no small feat). Indeed, back in 2007, no less than current First Vice Premiere of China, Li Keqiang, admitted to the US ambassador to China that ALL Chinese data, outside of electricity consumption, railroad cargo, and bank lending is for “reference only.”
Put another way, one of the top-level Chinese politicians admitted in private that China’s economic data is a total fiction. However, the reality is even worse than this admission. The truth is that even China’s electrical consumption data is dodgy at best as it has become a political tool for the Chinese Government to illustrate its “growth” much like China’s GDP.
The reason for this economic gimmicking pertains to #2 above: the political perspective of China’s economic data. As a communist regime, China’s government has one focus and one focus only. It’s not economic growth for growth’s sake, nor is it improving the quality of life for China’s population.
No, China’s Government is obsessed solely with remaining in power.
The reasoning for this is that a Government job remains the easiest, cushiest means of becoming wealthy in the People’s Republic. Case in point, last year Chinese officials are known to have stolen at a minimum the equivalent of $157 billion.
The CDIC report, which was obtained by the Economic Observer newspaper, suggested that nearly 10,000 luxury homes had been sold by government officials in Guangzhou and Shanghai alone last year.
It also claimed that an astonishing $1 trillion (£630 billion), equivalent to 40 per cent of Britain's annual GDP, had been smuggled out of China illegally in 2012.
Economists and experts cast doubt on the figure, but said the flow of money from China was dramatic. Li Chengyan, a professor at Peking University, suggested that a total of roughly 10,000 officials had absconded from China with as much as £100 billion.
To put the above numbers in perspective, this theft is equal to roughly 2% of China’s total GDP. On a per official basis, we’re looking at roughly $15.7 million… not over the course of a decade but in ONE year.
In contrast, the average college graduate in China makes $2,500 per year. So you’re talking about an average theft equal to over 6,250 years’ worth of work for a college educated Chinese civilian.
A few other indications of just who is getting ahead in China:
- Immediate family members of Premiere Wen Jiabao control assets worth at least $2.7 billion.
- Gong Aiai, a deputy chief of a county bank, (not even a major bank) was found to have assets worth $160.2 million.
- Zhang Xiuting, an anticorruption official, is currently under investigation for amassing 19 properties along with his former wife.
In simple terms, many if not most of the people who have gotten wealthy in China over the last few decades were corrupt Government officials or those close to them. In this light, you can see that China’s Governmental policies are all really aimed at one issue: keeping the Government in power by keeping the Chinese population content enough not to demand real change.
All other issues (economic growth, improved air quality, stimulus projects, etc.) are secondary to this issue. And the single biggest threat to Chinese officials’ abilities to live high on the hog is inflation.
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