Warnings From The "China Beige Book"

Authored by James Rickards via The Daily Reckoning,

Leland Miller, a good friend of mine, is the founder and proprietor of an economic research service called the “China Beige Book.”

The name “beige book” was borrowed from the surveys conducted by regional Federal Reserve banks of economic conditions in their regions. (In the days before the internet, the Fed issued hard-copy booklets with different-colored covers based on subject matter. The economic conditions booklet had a beige-colored cover. Hence the name.)

Lee does in China what the Fed does in its regions, except he covers the entire country. He has a diverse network of over 3,000 companies and entrepreneurs in all business sectors. He gets his information straight from the source and bypasses government channels. It’s like a private intelligence service.

In fact, Lee’s network is better than the CIA’s when it comes to economic data. The CIA actually turns to Lee for advice.

The detailed research service costs about $100,000 per year for one subscription.

But Lee publishes summaries on a quarterly basis, and they are freely available. His latest summary doesn’t paint a pretty picture.

The China Beige Book, CBB, says that China had been covering up and smoothing over problems related to weak growth and excessive debt in order to provide a calm face to the world in advance of the National Congress of the Communist Party of China, which took place last month.

CBB also makes it clear that the much-touted “rebalancing” of the Chinese economy away from investment and manufacturing toward consumption and spending has not occurred. Instead China has doubled down on excess capacity in coal, steel and manufacturing and has continued its policy of wasteful investment fueled with unpayable debt.

It’s become obvious that the first cracks are starting to appear in China’s Great Wall of Debt.

The Chinese debt binge of the past 10 years is a well-known story. Chinese corporations have incurred dollar-denominated debts in the hundreds of billions of dollars, most of which are unpayable without subsidies from Beijing.

China’s debt-to-equity ratio is over 300%, far worse than America’s (which is also dangerously high) and comparable to that of Japan and other all-star debtors. China’s trillion-dollar wealth management product (WMP) market is basically a Ponzi scheme.

New WMPs are used to redeem maturing WMPs, while most of the market is simply rolled over because the underlying real estate and infrastructure projects cannot possibly repay their debts.

A lot of corporate lending is simply one company lending to another, which in turns lends to another, giving the outward appearance of every company holding good assets, but in which none of the companies can actually pay its creditors. It’s an accounting game with no real money behind it and no chance of repayment.

All of this is well-known.

What is not known is when it will end. When will confidence be lost in such a way that the entire debt house of cards crumbles? When will a geopolitical shock or natural disaster trigger a loss of confidence that ignites a financial panic?

There was little prospect of this in the past year because President Xi Jinping was keeping a lid on trouble before the recently concluded National Congress of the Communist Party of China.

With the congress behind him, Xi is ready to undertake reform of the financial system, which means shutting down insolvent companies and banks. Now the first bankruptcies have begun to appear.

Dandong Port Group, which does business in the hot zone near North Korea, has just defaulted on its debt. This may be the opening default in a wave of defaults about to hit. The question is whether President Xi can implement his planned reforms and clear up insolvent companies without turning the process into something more dangerous that can spin out of control.

The early signs are that this restructuring process will be more difficult than Xi expects and that the potential for panic is higher than at any time since 2008.

CBB forecasts that either China will experience a significant slowdown in 2018, which will have ripple effects on world growth, or else it will face an even bigger debacle down the road. Both outcomes are bad news for the global economy.


JerseyJoe Sun, 11/12/2017 - 21:17 Permalink

A debt shell game. I liked the explanation where large state backed enterprise X can't service its debts, so their bank loans company X more money BUT the money is held just to service the debt.  NPL become a performing loan like magic.   But company X owes more money that it still can't pay but "the can" is kicked.  MAGIC. 

MaxThrust JerseyJoe Sun, 11/12/2017 - 22:52 Permalink

Strange as it may sound, this little ponzi trick just might work as long as the additional debt does not cause a rise in consumer inflation. In other words the additional debt is just a book-keeping exercise to show a company is able to borrow and pay its debts. This could go on fore a very long time before something happens to cause a crash.

In reply to by JerseyJoe

jmack Sun, 11/12/2017 - 21:23 Permalink

  "Dandong Port Group, which does business in the hot zone near North Korea, has just defaulted on its debt. This may be the opening default in a wave of defaults about to hit. The question is whether President Xi can implement his planned reforms and clear up insolvent companies without turning the process into something more dangerous that can spin out of control."     This is the wrong way to look at the situation.  You want to see an attempt to paper over the default that fails, or you want to see the government authorities wash their hands of the whole situation in such a way as the defaults are left to a laize faire situation.  Then you will see multiple dominoes fall, which can lead to outsized moves to the down side, but until that happens then it is btfd.

G_T_A_44 Sun, 11/12/2017 - 21:28 Permalink

Blah....Blah....Blah. The CIA mouthpiece flappin' & yappin' his gums again. Climb back into your hole and drool your verbal diarrhea. Don't forget your Bib.

Let it Go Sun, 11/12/2017 - 21:40 Permalink

China's central bank has warned extreme credit creation and trouble in the shadow banking system could lead to a full-blown financial crisis. In response, they continue pumping out liquidity. If they don't the whole system might seize up and cease to function, on the other hand, such actions only create more problems going forward. The article below looks at how China's policies are affecting global markets. http://China, China, China, It Is All About China html

bluez Sun, 11/12/2017 - 22:57 Permalink

China is now way too big to worry about stupid things like an "economy". China has grown beyond that.Only fragile house-of-cards wannabe nations like the USSA worry about an "economy".Look at the once mighty United Kingdom. They forgot what the real game was about. The USSA is following right in their footsteps.Our Great Leaders have done it again!

Pernicious Gol… Mon, 11/13/2017 - 01:28 Permalink

Japan's population is about 9% of China's. Japan's debt to GDP ratio is around 237%. China's debt to GDP ratio is around 65% Since Japan seems to be holding up under this debt load just fine, and China's population is some 11 times larger than Japan's, it's obvious China won't have any problems even when its debt to GDP ratio is 11 x 237% = 2,607%.

Troy Ounce Pernicious Gol… Mon, 11/13/2017 - 06:19 Permalink

 That's right. Nothing matters anymore as long the population believes all is well and trusts their leaders.Japanese particularly have a tendency to trust their leaders. They might start raising questions if one can skate on the vomit on the roads of Fukushima due to radiation sickness.The herds are stupid, some herds are more stupid than others.50 000% Debt to GDP? Here we come.

In reply to by Pernicious Gol…