Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
Billionaire Investor Paul Tudor Jones Says Stock Market Valuation Is “Terrifying” And He Is Right - 26th Apr 17
The Great BrExit Divides - Britain, USA and France - 26th Apr 17
10 Facts That Show Our Taxes Are Worse Than You Thought - 26th Apr 17
What Trump’s Next 100 Days Will Look Like - 26th Apr 17
G20: SURPASSING THE 2nd GLOBAL STEEL CRISIS - 26th Apr 17
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17
Can Marine Le Pen Win? French Presidential Election Forecast 2017 - 21st Apr 17
Why Stock Market Investors May Soon Be In For A Rude Awakening - 21st Apr 17
Median US Household’s Wealth Has Declined by 40% Since 2007 - 21st Apr 17
Silver, Platinum and Palladium as Investments – Research Shows Diversification Benefit - 21st Apr 17
U.S. Stock Market and Gold, Post Tomahawks and MOAB - 21st Apr 17
An In Depth Look at the Precious Metals Complex - 20th Apr 17
The Real Story of China’s Strong First-Quarter Growth - 20th Apr 17
3 Types Of Life-Changing Crisis That Make You Wish You Had Some Gold - 20th Apr 17
The Truth is a Dangerous Thing - 20th Apr 17
2 Choke Points That Threaten Oil Trade Between Persian Gulf And East Asia - 20th Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

Is China’s Economic Recovery a Fraud?

Economics / China Economy May 03, 2010 - 03:27 AM GMT

By: James_Quinn

Economics Best Financial Markets Analysis ArticleThe China growth miracle has resumed its vertical trajectory. We know this because the Chinese government says it's so. And, of course, governments never massage economic numbers for public consumption, right?

If you believe the data, China's GDP has tripled since 2000, with annual growth rates ranging from 8% to 13% over that time frame.


While we can't be entirely sure about the numbers, we are sure that China produced while America consumed, and that while China saved, America borrowed. This is the formula that made the world go round until September 2008, when the wheels came off the worldwide financial system.

In the first quarter of 2009, China's GDP fell to an annualized 6.1%, the lowest since 1999. In an attempt to reboot the economy, the Chinese government unleashed a colossal $586 billion stimulus package, equal to 14% of GDP.

That stimulus appeared to have the desired effect, with Chinese GDP growth ramping back up to 10.7% in the fourth quarter, allowing the country to exit 2009 with a reported 8.7% growth rate. 

China's Reported Recovery

There is no disputing that China has achieved tremendous economic progress over the last four decades. China's GDP in 1970 was $92 billion. Today, it is $4.9 trillion, a 5,326% increase in 29 years. They now command the third largest economy in the world and will surpass Japan as the second largest economy on the planet within the next two years. Remarkable for a totalitarian regime operating a command-and-control economy that, among other actions, can order banks to make loans without consideration for whether the loan has a chance of being repaid.

Pundits and the mainstream media have bought the China miracle hook, line, and sinker. They speak of China in the same revered tones they worshipped Japan in 1988. Back then, the “experts” concluded Japan was unstoppable. Japan's miracle economy proceeded to implode under the weight of bad debt and malinvestment, leading to a 20-year downturn that continues today.

Of course, history has shown us that centrally planned economies appear to be strong from a distance but eventually rot from within. The malinvestment created by the economic cronyism inherent in such a system is almost certain to lead to collapse (e.g., Soviet Union circa 1989, United States on or about 2015).

Even so, the figures reported by China are remarkable, with capital investments soaring over the last decade. The real question is, were these investments made wisely or have billions been squandered on worthless plants, equipment, and infrastructure? If the latter, then the excessive overcapacity will likely prove the pin that pops the Chinese bubble.

To answer the question on overcapacity, it is important to first understand the nature of the China miracle. It is quite simple.

The Chinese Miracle

The average Chinese factory worker earns $3,544 per year. In comparison, the average U.S. production worker makes $32,320. The Chinese have tied their currency to the U.S. dollar, so as the dollar has fallen, Chinese goods have become cheaper to the rest of the world.

The Chinese have leveraged their cost advantages to aggressively compete for market share, in quick order becoming the manufacturer for the world. From just $250 billion in 2000, Chinese exports have grown to over $1.5 trillion today.

One consequence of this global manufacturing shift has been that China has piled up huge trade surpluses. The trade surplus with the U.S. alone has exceeded $200 billion per year over the last five years.

This relationship satisfied the desires of both countries; using their houses as ATMs, the Americans ran up unprecedented levels of debt to buy cheap stuff produced in China. Which, in turn, allowed the Chinese to provide employment to millions of peasants flooding into the urban areas from the countryside in search of work.

All was well until the debt-induced U.S. housing bubble burst, bringing a grinding halt to the worldwide economic boom. The U.S. and Europe have experienced the worst recessions since the Great Depression, with consumer spending plunging and imports tumbling. That begs the question, with the consumers of its products prostrate under their many debts, and suffering from rapidly deteriorating economic conditions, how could China grow its GDP by 8.7% in 2009?

Or, to be blunt, are the GDP figures reported by the Chinese government fraudulent? To paraphrase the smoothest of U.S. presidents, it depends on what the meaning of the word “fraud” is. The definition of GDP is:

GDP = private consumption + gross investment + government spending + (exports – imports)

China's foreign reserves stand at $2.4 trillion. This surplus has permitted Chinese officials the flexibility to roll out their enormous stimulus plan and give them the confidence to instruct government-controlled banks to make $1.4 trillion of loans.

As you might imagine, these loans to businesses and consumers have resulted in dramatic increases in consumption, housing, commercial real estate construction, and construction of new plants. The government has also directly undertaken infrastructure projects related to roads, public transit, dams, and earthquake rebuilding.

In addition, due to year-end inventory restocking, Chinese exports have stabilized and are once again contributing to GDP, albeit to a far lesser degree than in the go-go days of the recent bubble past.

Therefore, it is likely that their GDP figure of 8.7% is a realistic number. But that doesn't mean that China is out of the woods. Far from it.

Consequences of Malinvestment

In my view, the tsunami of liquidity unleashed by the government will lead to a classic crack-up boom. With their nation's money supply growing at 28%, it's as if Chinese bureaucrats went to the Greenspan/Bernanke school of creating financial collapse. 

With the Chinese recovery artificially created through credit expansion, we can turn to famous Austrian economist Ludwig von Mises for an explanation of what happens next: 

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

All of the signs of a coming crash are present.

Hedge fund manager Jim Chanos, renowned for smelling out the Enron fraud before everyone else, had this to say about the Chinese real estate market: "I do see all of the signs of a credit-induced real estate bubble that I think is going to be a doozy."

Supporting that view, it is worth noting that there is now 30 billion square feet of commercial real estate under construction in China. Annual car production has surpassed 10 million units, even though the average cost of a car is three times the average annual salary of a Chinese worker.

Additionally, the ratio of average home prices to average annual household income is almost 10-to-1 in China; in most developed economies, it is no higher than 5-to-1. Home prices are rising at an annual rate of 18%. Prices of new apartments in Beijing and Shanghai leapt by 50% during 2009. Total fixed investment jumped to 47% of GDP in 2009, 10% more than in Japan at its peak. The P/E ratio of the 300 largest Chinese stocks is 39. The Chinese small-cap index P/E ratio is 76.

In other words, all of the elements for a collapse are in place. Only a trigger is needed.

Chinese authorities have started to tighten lending requirements in the last few weeks. The result has been that Shanghai stocks have fallen to the lowest level since October 31. Whenever central bank bureaucrats think they can fine-tune a multi-trillion-dollar economy, the unintended consequences engulf them. As the U.S. recovery peters out by mid-year and the bankrupt countries of Eastern Europe drag the rest of Europe back into recession, Chinese exports will resume their decline.

Combined with a real estate collapse, the Chinese miracle will reveal itself to be another debt-induced fraud. This will be another step towards the Greater Depression. The investment implications are that worldwide stock markets are likely to retest their 2009 lows by the end of 2010. Industrial commodities are likely to plunge. Gold and silver would surely correct in the short term, but as faith in all fiat currencies declines, they will resume their place as a currency that can't be manipulated or created out of thin air.

Join me at www.TheBurningPlatform.com to discuss truth and the future of our country.

By James Quinn

quinnadvisors@comcast.net

James Quinn is a senior director of strategic planning for a major university. James has held financial positions with a retailer, homebuilder and university in his 22-year career. Those positions included treasurer, controller, and head of strategic planning. He is married with three boys and is writing these articles because he cares about their future. He earned a BS in accounting from Drexel University and an MBA from Villanova University. He is a certified public accountant and a certified cash manager.

These articles reflect the personal views of James Quinn. They do not necessarily represent the views of his employer, and are not sponsored or endorsed by his employer.

© 2010 Copyright James Quinn - 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.

James Quinn Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Yadda
07 Jun 10, 10:29
Can China be Shorted?

I have been wondering the last few months if China can be shorted. After all the Communist Party is still in control so can it just declare the price of everything essentially. For an American investor looking for opportunity can an ETF like a Proshare be used to bet against the Chinese asset valuations? Can't the Chinese government just nullify any and all contracts if necessary to stay in power so that an ETF bet against China would never pay off? I should say I am very bullish on the industrious on the Chinese people but those valuations just don't make sense so there needs to be a correction. The question then is: is this the end of the Communist Party control?


Nadeem_Walayat
07 Jun 10, 15:36
Short China

Its easy to short China without any risk of "nullification", just take a look at any one of a hundreds of spreadtrading firms such as IG Index.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife