For years now China has been heralded as an economic miracle that will drive the global economy towards growth and eventually eclipse the US as THE superpower in the world.
This theme was driven by the view that somehow China had obtained the magic balance between free-market capitalism and Central Planning. Globally analysts breathlessly talked about China’s insatiable demand for commodities as its economy grew by double digits for three decades straight.
Unfortunately all of this overlooked basic common sense… that China was actually just one giant debt-fueled fraud in which the politically connected got rich skimming off the top of an endless sea of loose money funneled into dodgy investments and projects.
For example, let’s say that China built a city. Regardless of whether any of the buildings are ever purchased or leased, China will count the entire city in its GDP growth. As one can imagine, this has highly incentivized China’s government to build “bridges to nowhere” or economic projects that are never actually used.
Indeed, at one point Chinese bureaucrats even resorted to detonating buildings for the express purpose of then building another one… all in the name of generating that magic GDP growth… and generating additional bribes and under the table deals for the officials who signed off on the projects.
Throughout this period, Chinese officials who were “on the take” fled the country with their bribes and Indeed, between 1991-2011, it’s estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP was just 2.1 trillion RMB in 1991.
As the Chinese economic miracle increased in size, so did the pace of fleeing officials.
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 simple terms, China’s Government signed off on serial bubbles in shadow banking investment vehicles, real estate, and stocks because they:
1) Kept the populace from rioting by creating the dream of wealth and prosperity
2) Were the easiest means of getting rich for corrupt officials.
Fast forward to today and all of China’s bubbles are imploding.
To deal with this China has announced that it will:
1) Halt all IPOs.
2) Ban short-selling in some companies.
3) Arrest those involved in undermining stock market stability (anyone it wants to arrest).
4) Create a “balance fund” backed by the Central Bank, 21 brokerages and the Chinese sovereign wealth fund. The fund will be used as a kind of Plunge Protection Team for China.
5) Issue a number of small bailouts of brokerages and financial firms.
Regarding #3, yes, China is now arresting short-sellers… because somehow they are responsible for the bubble bursting. Obviously Chinese officials didn’t pay attention to what happened to US financials back in 2008 when the SEC banned short-selling them: they rallied for about a week before they continued to fall an incredible 73%.
China also engaged its own version of the Plunge Protection Team and is now spending $29 BILLION per day to prop up its market.
The state-owned China Securities Finance Corp. has been spending up to 180 billion yuan a day ($29 billion) to try to stabilize stocks, a person familiar with the situation said earlier this week.
The average income in China for a college graduate is $2,500 per year. So the Chinese Government is spending the equivalent of 11.6 MILLION people’s annual incomes per day.
Most analysts seem to think that China’s stock market problems can be disconnected form the Chinese economy. They cannot. China’s economy is growing at 3.5% at best and at worst is flatlining.
According to official forecasts, China was to be responsible for 33% of global GDP growth going forward. What do you think will happen when the financial world wakes up and realizes that China is in fact imploding?
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