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China Facing Economic, Financial and Stock Market Crash Scenario

Economics / Financial Crash Dec 18, 2009 - 03:38 AM GMT

By: Mike_Shedlock

Economics

Diamond Rated - Best Financial Markets Analysis ArticleProblems in China continue to mount. Money supply is growing rampantly out of control, property prices are in a bubble, exports are weak, commodity speculation is pervasive, and GDP growth is more of a mirage than real.


Money Supply Growing Record 29.74%

Please consider China Monthly New Loans Are 294.8 Billion Yuan, Above Forecast

New local-currency loans totaled 294.8 billion yuan ($43.2 billion), compared with 253 billion yuan in October, according to data released by the People’s Bank of China on its Web site today. The median forecast of 19 economists in a Bloomberg News survey was 250 billion yuan.

M2, the broadest measure of money supply, rose a record 29.74 percent in November from a year earlier.

China’s banking regulator plans to slow new lending to between 7 trillion yuan and 8 trillion yuan next year, a person familiar with the matter said this week. China is trying to ensure that there is enough credit to support an economic recovery without increased risks of bad loans and asset bubbles.

“We believe slower credit growth in 2010 will be key to avoid a boom-bust scenario in the economy,” Wang Tao, a Beijing-based economist for UBS AG, said in a report.

What is China doing with all that printing?

Please take a A 4-Minute Tour of the China Property Bubble to find out.

The world's largest shopping mall, South China Mall in Guangzhou, China, is almost entirely empty. Click on the link to see a fascinating video.

China Plans To Control Property Prices

Please consider China Can Boost Growth as It Cools Property, Merrill Says.

The government “plans to control property prices by accelerating property investment and increasing supply,” economists Lu Ting and T.J. Bond said in an e-mailed note today. That contrasts with efforts in 2006 to cool prices by controlling investment, the economists said.

China Is Overbuilding Already

Note the insanity. China want to control prices by building more. It already has completely empty shopping centers, condos, and even a completely empty city.

China's Empty City



That is an amazing video of a completely empty city.

China Has Trouble Maintaining Demand Growth

In spite of obvious speculation and overheating in the housing sector, China Faces Difficulties in Maintaining Demand Growth.

China, the world’s third-largest economy, faces “increased difficulties” in maintaining growth in domestic consumption, the nation’s top economic planning agency said.

A recovery in external demand is “difficult,” the National Development and Reform Commission said on its Web site today, citing Vice Chairman Du Ying. The nation’s economic recovery “is not yet solid,” the agency known as NDRC said.

China will maintain a “moderately” loose monetary-policy stance and “proactive” fiscal policies in 2010 as its economic recovery isn’t solid yet, the official Xinhua News Agency said Dec. 7, citing a statement by the annual central economic work conference.

The country still faces a “very challenging” international environment and “the domestic problems it is confronted with are also complicated,” Du said in the statement today. “The potential risks in the fiscal and financial sectors can’t be underestimated,” Du said.

Economic growth in China, which is spending $586 billion on a stimulus package, accelerated to 8.9 percent in the third quarter after slipping to 6.1 percent in the first. The government is targeting 8 percent growth for the full year.

Moderately Loose Monetary Policy?!

What would a "loose" policy look like? Regardless, when Vice Chairman Du Ying says the "recovery is not solid" and the environment is "very challenging" you can take his word for it. Actually you can look at money supply growth and empty cities and conclude the same thing.

Bear in mind that China calculates GDP a peculiar way, as soon as the money is allocated. Much of that GDP growth is a mirage. Moreover, much if not most of what isn't a mirage, is nothing more than property malinvestment and other speculation.

Bubble Concerns In ‘Sizzling’ Shanghai


Please consider ‘Sizzling’ Shanghai Homes Defy Tax, Bubble Concerns

Escalating prices in Pudong, transformed within two decades from vegetable fields to skyscrapers for Citigroup Inc. and HSBC Holdings Plc, underscore a Chinese property market that set record highs this year after the government unleashed $1.3 trillion in new bank lending to counter the global recession.

Premier Wen Jiabao said Nov. 28 that property speculation must be suppressed, and the government on Dec. 9 reinstated a sales tax on homes sold within five years of purchase after reducing the period to two years in January. That change is superficial and will have minimal impact, said Lu Qiling, an analyst at Shanghai Uwin Real Estate Information Services Co.

“It’s only a token measure,” Lu said. “It won’t change the upward trend in housing prices.”

“The government is clearly in a dilemma,” Luk said. “It wants to address the surging property prices and concerns on bubble-bursting, yet it dares not take drastic measures for fear of hitting the market too hard.”

The nation’s real estate and stock markets are a “bubble” that will burst when inflation accelerates in 2011, former Morgan Stanley chief Asian economist Andy Xie said in an interview in Hong Kong today.

“China’s asset markets are a Ponzi scheme,” said Xie, now a Shanghai-based independent economist. “Property is heading for one huge bust that will take a year and a half to unfold.”

The Shanghai Property Index, which tracks 33 developers listed in the city, has more than doubled this year, compared with a 75 percent gain for China’s benchmark Shanghai Composite Index.

True Believers

Lu Qiling sounds like a true believer: “It won’t change the upward trend in housing prices.”

Whether or not sales taxes will affect prices, I can guarantee you that all bubbles pop and China is in a bubble. Instead I side with Andy Xie who states “China’s asset markets are a Ponzi scheme”

Copper Stockpiles Soar

Please consider China May Re-Export Copper on Stockpiles

Copper stockpiles held in duty-free warehouses in China, the top user, may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year, according to Xi’an Maike Metal International Group.

“We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year,” Luo said in an interview.

Luo’s estimate of the bonded-zone stockpiles compares with 60,000 tons by Macquarie Group Ltd. in July. It’s also more than triple the inventory in Shanghai Futures Exchange warehouses, which stood at 104,275 tons as of the week of Nov. 2. A bonded zone holds imported goods before duty has been paid.

In addition to the bonded-zone stockpiles, China may also hold 150,000 tons in the Shanghai area, including in exchange- monitored warehouses; 235,000 tons at the State Reserve Bureau, which maintains government holdings; and 200,000 tons with fabricators and private investors, Luo, 36, said yesterday.

Chinese Pig Farmers Speculate In Copper

This story is a little dated as it is from September 17, but there is no reason to believe conditions have changed. Please consider China’s Pig Farmers Amass Copper, Nickel

Private investors in China, the world’s largest metals user, have stockpiled “substantial” quantities of copper as the government ramps up stimulus spending to spur the economy, according to Sucden Financial Ltd.

Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That’s about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.

Sucden’s estimate underscores the difficulty analysts face in gauging metals demand in China amid increased speculation by retail investors, whose holdings remain outside the reporting framework undertaken by exchanges. Private investors in China also had as much as 20,000 tons of nickel, Goldwyn wrote.

Also see Pig Farmers are Making Brent Nervous, from November 11.

Before getting into to the relationship between copper and pork products, I want to draw your attention to what makes me nervous, have a look at these photos from China. They are excerpted from a China Central Television Channel (CCTV) program documenting private speculation and hoarding of metals throughout the country. According to an associate of mine at an Asia-focused hedge fund who was just in China, “It’s pervasive; people are piling this stuff up in their backyards.”

China's Banks Capital Strained

Inquiring minds are very interested that Chinese Banks Hide Transactions Off Balance Sheet.

Dec. 18 (Bloomberg) Chinese banks’ capital strength is probably more “strained” than it appears as lenders use more off-balance sheet transactions to make room for loan growth, Fitch Ratings said.

The increasing amount of unreported transactions, including repackaging loans into wealth management products to sell to investors, and the outright sale of loans to other financial institutions, represent a “growing pool of hidden credit risk,” Fitch said in an annual review of Chinese banks.

Music, Pumpkins, And Lessons Not Learned

Hiding assets off the balance sheet is one of the things that wrecked Citigroup. The Citi kept accumulating assets thinking there was plenty of time left at the ball.

Former Citigroup CEO Chuck Prince: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

Well, the music stopped abruptly about one month later and Citigroup was stuck with $1 trillion in off balance sheet garbage. Chuck Prince turned into a pumpkin and was tossed out the door.

Exactly how much of that garbage is left and what it is worth is hard to tell, other than by judging the action in Citigroup share price (which is not pretty to say the least).

Chinese Banks Learned Nothing From Citirella

Chinese banks obviously learned nothing from Chuck Prince and Citirella. Then again, there is a huge difference between banks in China and banks in the US. In China, when the central bank suggests banks need to lend, they lend (and lend and lend).

Yet, the structural problems remain, exports are weak, commodities pile up, and speculators have taken over the housing and commodity markets.

Asset Bubbles And Inflation In China

Don't confuse unsound lending and pervasive speculation in China with inflation in the US. Remember that commodity prices are set at the margin, and in this case the margin include pig farmers.

If you are looking for inflation, the place to find it is in China, not the US.

Scylla or Charybdis?

China is in a Scylla or Charybdis scenario. If China continues to inflate it will overheat. If it doesn't, unemployment and unrest will soar, and the economy will implode. Either way, there is no winning solution.

Peak oil and environmental pollution compound China's problem immensely. China is simply on an unsustainable path for many reasons.

Various Chinese asset bubbles are guaranteed to pop, but as I have said many times, the timing of such events is unknown. In this case however, I am more apt to believe sooner, rather than later.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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