The China Growth Myth Debunked, What Happens When the Credit Bubble Pops?

By: Graham_Summers

Virtually 95% of all the evidence of economic recovery has stemmed from China in one way or another. Whether it’s the rise in price of commodities (China stockpiling), the global economy (the “China” growth miracle will lead us into a recovery), or even retail numbers (China producers lowering prices in an effort to move inventory), China is linked in one way or another to the “green shoots” nonsense.

Unfortunately for those of us living in reality, the view that China will bring about a new era of growth is a total fraud through and through. The Chinese government, unlike its US counterpart can FORCE China’s financial industry to do anything it says. And China’s government has been screaming “lend, lend, lend!!!”

Indeed, Chinese banks have lent out $1.1 trillion in the first half of 2009: an amount equal to one third of the country’s GDP. Over the same time period, loan-deposit ratios at Chinese banks have only increased from 65% to 66%. Put another way, only the tiniest fraction of the money being lent out has actually gone into deposits.

So where has it gone?

Well, China’s exports (about 40% of its economy) in July were down 23% Year-over-Year. China’s industrial production is up, but only back to 2001-2002 levels: hardly a sign of major investment.

Meanwhile China property values are EXPLODING. According to Andy Xie formerly of Morgan Stanley, property in China now costs roughly the same per square meter as in the US. The only difference is that your average Chinese worker makes 1/7th as much money as your average US worker.

And then of course, there is the Chinese stock market which exploded higher starting with the Stimulus plan in November.

What I’m trying to say is that China’s “boom” has almost entirely been the result of financial speculation. China’s economy is not growing anywhere near what its “official” numbers claim. Instead, the boom in commodities and the Shanghai Stock Exchange have come from Chinese investors taking out loans and piling into the markets. There are stories of Chinese college graduates taking up day trading instead of looking for jobs.

Will China become the next economic super-power?

Probably in a decade or so.

Is China’s economy stronger than the US’s now?

They’re certainly throwing a LOT more money around relative to GDP.

Can China transition from an export-focused economy to a standalone entity within a year by pumping hundreds of billions of dollars into its system?

ABSOLUTELY NO CHANCE WHAT-SO-EVER.

So what happens when China’s credit bubble pops?

US stocks finally catch on two weeks later.

As you can see, the Shanghai Index (dotted line) rolled over in earnest at the beginning of August. They did a quick bounce last week, but look primed for more trouble in the near future.

Keep your eyes on the Shanghai Index. It lead the US markets up… it will lead them down as well. Whenever the China bubble implodes the US market will collapse like a house of cards.

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Good Investing!

Graham Summers

http://gainspainscapital.com

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

© 2009 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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