More Signs China Is Going BustEconomics / China Economy Sep 29, 2011 - 12:04 PM GMT
While the world fixates on Europe, signs of a China crash are mounting behind the scenes.
Imagine you run a business with 3,000 employees. Your factories churn out 20 million pairs of sunglasses per year -- the best-selling brand in China. You are a celebrated businessman in your region, with expanded interests in real estate and solar energy.
Oh, and one more thing: You are flat broke.
As it turns out, your company borrowed huge sums at high interest -- more than cash flow could justify -- and you have no hope of paying the loans back. Now the business is insolvent. What do you do?
If your name is Hu Fulin, you run away.
"The east China city of Wenzhou is battling its own subprime crisis," Shanghai Daily reports, "after seven local business owners fled." Wenzhou, the "cradle of China's private economy," is China's latest ground zero for a credit boom gone bust.
Hu Fulin is one of the seven "runaway bosses" who, faced with insurmountable debts, decided to hit the road this month, "leaving thousands of employees in a state of shock and enormous unpaid loans in hundreds of millions of yuan."
When Mr. Hu disappeared, his suppliers panicked too. Large payments were owed, along with two months' salary for thousands of employees.
The Wenzhou crisis is dubbed "subprime" because the state-owned banks pulled back, allowing private lenders to step in at sky-high rates. The loans being defaulted on had subprime rates of interest.
The Chinese government attempted to cool off reckless lending by putting restrictions on the state-owned players. All they accomplished was a juicy handoff to others to take on more risk, in exchange for subprime lending terms.
And the net result? Bosses fleeing as loans implode. "Thousands of employees in a state of shock." A ripple of destruction all down the supply chain... and a possible tipping point in the whole Ponzi-financed boom that counts Chinese real estate as its white-hot center, as greed morphs into fear.
The Wenzhou bust comes against a backdrop of warning signs for China's broader economy. The dragon had already lost a step, as evidenced by manufacturing data declines.
"The country's huge manufacturing sector is starting to slow," the NYT reports, "and orders are weakening, especially for exports. The real estate bubble is starting to spring leaks, even as inflation remains stubbornly high."
(This isn't the first time I've spoken about China. Sign up for Taipan Daily to receive more investment commentary.)
But what about the rich?
As in the United States, it's the wealthiest portion of Chinese society that drives spending (and thus equity valuations). Those who can afford luxury apartments and Hermes scarves matter a lot more than subsistence farmers.
Here too there is trouble. "Sounding the latest alarm about slowing economic growth in China," the WSJ reports, "Mercedes-Benz on Friday said luxury-car sales gains slowed in what has been its fast-growing major market."
After 60% growth in the first half of 2011, the pace of Mercedes sales decelerated in July and August. The rich are paring back.
Yet more warning signs abound. Last week, Chinese property stocks were hit hard on fears of a financing crunch. Various Hong Kong-listed developers fell more than 10% in a single day.
"Initially, people were worrying about earnings," said Agnes Deng of Baring Asset Management. "What happened is that people started to worry about balance sheet problems as well as cash flow and funding."
Cracks in the façade are widespread. Property prices are dipping in many cities after "a sharp decline in sales volumes," the Financial Times adds. Shanghai real estate transactions are down more than 50% year-on-year.
Guess who is in the middle of all this? "China's economy is very distorted, and the banks, as ever, are at the epicenter of the distortions," says Edward Chancellor of Grantham Mayo Van Otterloo. "If China runs into problems with the banking system, which I think it will, I cannot see a situation in which foreign investors are the main priority of Beijing."
It is hard to pinpoint the bursting of a bubble. But for China the warning signs abound, with free-falling copper prices a quiet confirmation. Even as the world focuses on Europe, a full-on China bust could have greater impact than many realize.
Publisher's Note: China's collapsing as we speak. When it crashes to the bottom it will affect every single investment out there. Gold, silver, commodities, emerging markets, bonds... even blue chip stocks like Wal-Mart, Microsoft, Apple... There's only one thing you can do to protect yourself.
By Justice Litle
Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor to the free investing and trading e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.
Aside from his career in the financial industry, Justice enjoys playing chess and poker; he enjoys scuba diving, snowboarding, hiking and traveling. The Cliffs of Moher in Ireland and Fox Glacier in New Zealand are two of his favorite places in the world, especially for hiking. What he loves most about traveling is the scenery and the friendly locals.
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