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Why 95% of Traders Fail

China Economy Will Collapse By The End Of 2011

Economics / China Economy Nov 24, 2011 - 02:49 AM GMT

By: Submissions

Economics

Best Financial Markets Analysis ArticleWealthCycles writes: Casey Research Host: Your original estimate for the collapse of China was by 2011… do you think (that was) relatively close?

Gordon Chang: I think it is very close when you see what is going on right now.  -Gordon Chang, Forbes.com


Europe seems to be on everyone’s mind the last few months. However, there is an elephant in the room that everyone is ignoring, and it's China.

For a while it seemed everyone was proclaiming that the 21st century would be “China’s Century.” Much like the 20th was “America’s Century,” and the 19th was “Britain’s Century.” Everyone just seems to accept the fact of China’s ascendancy.

But is it true?

Gordon Chang, who writes for Forbes.com, thinks otherwise. His prediction is that China will collapse by the end of 2011!

That leaves us a little over a month to see if Chang is right. He clarifies in this interview with Casey Research that he could be a month off, but that he believes China’s collapse is much closer at hand than anyone realizes.

Why does he think this? One of his first reasons is the type of corruption occurring now in China:

Clearly what we see in China right now is a lot of corruption (with) enormous amounts of money. We know that because Macau is the world’s largest (gambling) gaming destination, not Las Vegas. And Macau has just a few casinos. Well, what’s going on there is the cadres go down and launder their money at the high stakes tables… the (money then) becomes untraceable.

You know, it’s not like the corruption in the first part of the reform era, where corruption really greased the wheels to permit business to occur.  What is happening now is very short-term corruption, where people are stealing tons of money (with a) very short-term perspective.

Along with the corruption, mass insurrections are becoming more commonplace in China:

But what the real problem is, we see protests in China increasing. According to a report, 200,800 mass incidents (protests and demonstrations). That is well up from five years ago, which was 80,000 to 90,000.

But this is not just a numbers game. What is really worrying for the (Chinese) regime is the increasing violence of protestors. So we not only have demonstrations and strikes, we have, basically, mass insurrections, bombings.

And the kicker to the protests:

And many of these bombers and protest leaders are really the heroes in Chinese society. That’s a real problem for the regime.

At the moment, the regime appears to be keeping its population happy with a growing economy. A good portion of the money buoying the economy is now coming from China’s stimulus packages. As a result they have ended up with scores of ghost cities, newly built and gleaming and empty of life. These are full-fledged cities built for millions of people, with only a skeleton population of 10,000-100,000 people living in them.

Another reason China could go down much sooner than we expect is because of our lack of information. In the United States, their is a free press with no internet censorship. As an example, WealthCycles.com has published many articles, blogs, and videos criticising the US Government and Federal Reserve on economic issues. This is in stark contrast to China, from the BBC:

(Weeks ago) Communist Party leaders agreed a list of "cultural development guidelines" which included increased controls over social media and penalties for those spreading "harmful information".

Along with the government censorship of the population, there is also the cultural attitude of "face". We'll let Charles Smith over at OfTwoMinds.com explain:

China, and other Asian cultures, are built around "face". This requires a public facade, to maintain face and cloak the private, back-door reality. In general, Asian people do not like criticizing their country, as this is experienced as a loss of face.

Here's how ‘face’ works. If you marry a ‘local’ in China, Japan, Thailand, etc., then they will eventually, obliquely and with reluctance, tell you some of the unsavory details of how life actually works. Maybe. If they do, they will not like it if you repeat these ‘we lose face’ realities to other Big Noses. You will have to do so in private, in a hushed voice.

As a result, there are always two doors in Asia: the front door, carefully arranged to present a face-enhancing image to the outside world, and the back door, where everything important actually takes place.

A typical front door in China is the banquet with the glad-handing mayor. The back door is for his mistress, the cash ‘commissions’ from various deals and the cover-up of the face-damaging deaths in the local factory. Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face.

This culture of face, along with China’s stranglehold over the media, prevents us from knowing the full details of the situation on the ground. This means China could go down much sooner than expected.

Then, of course, there is the Chinese economy. Of which, the main issue is the financial sector. Chinese bankers appear to have been using the “No one got fired for hiring IBM” logic in issuing loans. This makes sense, as China’s banking sector is highly politicized. Minxin Pei’s explains in his article “Swimming Naked in China”:

For years, China’s state-owned banks systematically restricted credit to China’s dynamic private sector. Such a system came into being because state-owned banks wanted to make more money with their low-cost (if not free) household deposits, because when state-owned banks lend to state-owned firms, they can charge only regulated (low) interest rates and repayment is not assured. Generally, such lending is politically safe (since no bank managers go to jail for making bad loans to state-owned enterprises) but economically unprofitable. On the other hand, lending money to private firms is politically unsafe (bank managers risk corruption charges should loans go sour) but economically lucrative (as they can charge high rates).

With lending being highly politicized, private firms have been forced to tap the ‘shadow banking system’ for capital. However, with Beijing tightening credit to fight inflation… state-owned banks have been forced to call in the loans made through the ‘shadow banking system,’ thus hurting the debtors and triggering a spate of bankruptcies. This in turn could lead to a severe downturn for China.

And what appears to be the most damning evidence of all, from the AP article “Top of Chinese Wealthy’s Wish List? To Leave China”:

(Su) sits at the top of a country -- economy booming, influence spreading, military swelling -- widely expected to dominate the 21st century. Yet the property developer shares something surprising with many newly rich in China: he's looking forward to the day he can leave.

Yet affluence alone seems a poor bargain to those with the means to live elsewhere. Despite more economic freedom, the communist government has kept its tight grip on many other aspects of daily life. China's leaders punish, sometimes harshly, public dissent and any perceived challenges to their power, and censor what can be read online and in print. Authoritarian rule, meanwhile, has proved ineffective in addressing long standing problems of pollution, contaminated food and a creaking health care system.

There is also a yawning gap between rich and poor in China, which feeds a resentment that makes some of the wealthy uncomfortable. The country's uneven jump to capitalism over the last three decades has created dozens of billionaires, but China barely ranks in the top 100 on a World Bank list of countries by income per person.

Among the 20,000 Chinese with at least 100 million yuan ($15 million) in individual investment assets, 27 percent have already emigrated and 47 percent are considering it, according to a report by China Merchants Bank and U.S. consultants Bain & Co. published in April.

As (Su) dined in the VIP room of a Beijing restaurant, (he) (l)owered his voice (and) said  for many rich there are worries about the authoritarian government. ‘This is a very sensitive topic. Everyone knows this. It's freer and more just abroad,’ he said.

Gordon Chang’s prediction of China collapsing before 2011 is a bit presumptuous. But we must admit, it does appear that China isn’t all that it is cracked up to be.

--To read more WealthCycles.com articles like this sign up for a free trial:

© 2011 Copyright WealthCycles. - 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


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


Comments

jim
26 Nov 11, 23:18
Blaming China

According tot The author everyone is super honest and clean except the Chinese. Every casino in the world is clean and corrupt-free except in Macau. The problem is the western and japanese economies collapsed and he has no comment on that. Come february 2012 the author will come up with something else to make a better fool of himself.


Jack
01 Dec 11, 02:15
What are you talking about jim?

He's not blaming China for anything and he's certainly not suggesting that every country other than China is "honest and clean". But the fact remains that they've set themselves up for disaster.

Just look at the income gap and the massive housing bubble that they've created. China has made the same mistakes the U.S. made in the lead up to the 2008 crisis and magnified them to ridiculous proportions. It's a recipe for disaster.

I ,for one, certainly wouldn't be surprised if China's economy collapsed in the near future.



04 Dec 11, 23:44
China

Nah, China has the world's largest population, relatively backwards and underdeveloped.... she has massive potential. Look at Taiwan, Japan, Korea, Hong Kong, etc... Those are East Asian countries with $30-40K GDP per capita. By 2050, China should easily rival, if not exceed those numbers. I'm not worried.


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