Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19
Will Labour Government Plant More Tree's than Council's Like Sheffield Fell? - 4th Dec 19
What the UK Economy GDP Growth Rate Predicts for General Election 2019 - 4th Dec 19
Gold, Silver and Stock Market Big Picture: Seat Belts Tightened - 4th Dec 19
Online Presence: What You Need to Know About What Others Know About You - 4th Dec 19
New Company Tip: How To Turn Prospects into Customers with CRM Tech - 4th Dec 19
About To Relive The 2007 US Housing Market Real Estate Crash Again? - 3rd Dec 19
How Far Will Gold Reach Before the Upcoming Reversal? - 3rd Dec 19
Is The Current Stock Market Rally A True Valuation Rally or Euphoria? - 3rd Dec 19
Why Shale Oil Not Viable at $45WTI Anymore, OPEC Can Dictate Price Again - 3rd Dec 19
Lib Dem Election Dodgy Leaflets - Sheffield Hallam Battle General Election 2019 - 3rd Dec 19
Land Rover Discovery Sport Brake Pads Uneven Wear Dash Warning Message at 2mm Mark - 3rd Dec 19
The Rise and Evolution of Bitcoin - 3rd Dec 19
Virtual games and sport, which has one related to the other - 3rd Dec 19
The Narrative About Gold is Changing Again - 2nd Dec 19
Stock Market Liquidity & Volume Diminish – What Next? - 2nd Dec 19
A Complete Guide To Finding The Best CFD Broker - 2nd Dec 19
See You On The Dark Side Of The Moon - 2nd Dec 19
Will Lib Dems Win Sheffield Hallam From Labour? General Election 2019 - 2nd Dec 19
Stock Market Where Are We?  - 1st Dec 19
Will Labour's Insane Manifesto Spending Plans Bankrupt Britain? - 1st Dec 19
Labour vs Tory Manifesto Debt Fuelled Voter Bribes Impact on UK General Election - 30th Nov 19
Growing Inequality Unrest Threatens Mining Industry - 30th Nov 19
Conspiracy Theories Are Killing This Nation - 30th Nov 19
How to Clip a Budgies / Parakeets Wings, Cut / Trim Bird's Flight Feathers - 30th Nov 19
Hidden Failure of SIFI Banks - 29th Nov 19
Use the “Ferrari Pattern” to Predictably Make 431% with IPOs - 29th Nov 19
Tax-Loss Selling Drives Down Gold and Silver Junior Stock Prices - 29th Nov 19
We Are on the Brink of the Second Great Depression - 29th Nov 19
How to Spot REAL Amazon Black Friday Bargains and Avoid FAKE Sales - 29th Nov 19

Market Oracle FREE Newsletter

UK House prices predicting general election result

Time To Get Real About China

Politics / China May 22, 2015 - 05:41 PM GMT

By: Raul_I_Meijer

Politics

The present Chinese leadership appears to be trying to gain (regain?) more -if not full- control over the country’s economic system, while at the same time (re-)boosting the growth it has lost in recent years.

President Xi Jinping, prime minister Li Keqiang and all of their subservient leaders – there are 1000′s of those in a 1.4 million citizens country- apparently think this can be done. Yours truly doubts it.


As I’ve repeatedly said over the past years, I don’t think that they ever understood what would happen if they opened up the country to a more free-market, capitalist structure. That doing so would automatically reduce their political power, since a free market, in whatever shape and form, does not rhyme with the kind of control which the Communist Party has been used to for decades, and which the current leaders have grown up taking for granted.

I don’t think they’re fools or anything, just that their -preconceived- ideas of power don’t rhyme with the kind of economy Beijing, starting with Deng Xiao Ping, has created. In particular, they have allowed other segments of society to accumulate great wealth, and with wealth comes power.

And in fine Pandora’s Box fashion, it’s very hard, if not impossible, to reverse the process. This failure to grasp to what extent these ‘market liberation’ policies have had a Sorcerer’s Apprentice effect, may, if not must, lead to utter chaos and worse…

A closely related failure is that the rulers have allowed the shadow banking system to grow to ginormous proportions. Likely, in their eyes this ‘merely’ helped the economy grow at double digit speed for years, and they could stop it at will. But something else was growing along with it: the power of the shadow banks -and the people behind them-, both economic and political. Which is not acceptable in a one party rules all system.

And so there is a crackdown going on, presented as ‘reform’, and shadow bank loans have indeed diminished. But that is hurting the economy much more than it heals it. And so measures are reversed on the fly.

The official line is that China has to become a more consumer based economy, if only because exports are not what they used to be, due to lower living standards in the major customer economies in the western world.

The first part of the private citizens’ segment of this shift was the housing boom. Though the Chinese are traditionally strong savers, certainly compared to for instance Americans, they did borrow a lot, got into debt, to fund their real estate purchases. The first part of the problem is that not exactly all of that was borrowed from ‘official’ banks. The second is that home prices are now falling in most cities.

The Chinese are not only known as savers, they’re also notorious gamblers. That accounts for a substantial part of the housing boom, but it accounts even more for what came when that boom started fainting: stock market insanity. A craze that was fully encouraged by Beijing. As Bloomberg put it the other day:

[..] government officials and state media have encouraged the rally. China’s official Xinhua News Agency reported last week that the advance in stocks has further to go, while the China Securities Regulatory Commission has said that market gains reflect support for the economy.

Private investors, grandmas and teenage granddaughters, still believe Beijing controls the whole game. They undoubtedly must also think Xi and Li will make the housing sector rise from its ashes. This is a huge risk for the Communist Party. But they must have the illusion that they got it down. Government and citizens all believe.

The past few days have seen 2 notable companies, Hanergy Thin Film Solar and real estate/electronics conglomerate Goldin Group, lose about half their market cap within a day, for a total loss of some $50 billion. In Hanergy’s case, it reportedly took less than half an hour. And yesterday, Joyou, a Chinese branch of German bathroom giant Grohe, went straight from $400 million to just about zero.

It looks like all Beijing has left in its arsenal is extend and pretend. The question is, does it have the gunpowder to do that? While tons of people habitually point to Beijing’s $4 trillion stock of US treasuries, they may not be a cure-all.

The same people might want to consider to what extent the Chinese growth ‘miracle’ has been funded by debt. By the printing press. And while they’re at it, they may want to ponder what’s going to happen to that debt, now growth has started sputtering.

There seems to be a consensus that Chinese debt is somewhere in the range of $28 trillion, which is almost twice US GDP, and almost three times Chinese GDP. And for all we know the debt may be much higher still. All we really have is official numbers, plus a few ‘indirect’ data. One thing we do know is that Beijing will always make everything look better than it is. Every politician does.

And we know that they have a substantial series of issues to deal with. In fact, there are so many it’s impossible to catch them all in one comprehensive essay. China’s not nearly as simple as Greece. Let’s try a few:

• China’s housing boom is deflating, with prices down up to 6% YoY in many places, though of course for now less severe in major cities like Beijing and Shanghai. As one comment said recently, paraphrased: ‘there are no more buyers, everyone around here already owns property.’

• China is in the grip of a stock mania, with millions who are losing out on their apartment investments trying to make up for their losses with stocks. Many borrow heavily for their ‘profits’ (and not always from official banks). The stock mania is already popping as well. It will probably rise a bit more at times and at places, but exchanges that skyrocket when economies flatline or worse, will be smacked down by fundamentals at some point. That is true on Wall Street and in Europe, and it’s also true in Hong Kong, Shanghai and Shenzhen.

IPO’s are falling out of the deep blue skies like so many frogs, and people seem to think there’s all this pent-up demand for them, but the Hanergy and Goldin examples should serve as huge red lights flashing. And besides: what does pent-up demand mean when people borrow substantial parts of credit used for stock purchases?

When you read that at the Shenzhen exchange, rallies of more than 500% aren’t unusual, and the 103 stocks listed trade at an average 375 times reported earnings, you should know you’re looking at an ordinary slot machine, not an exchange that reflects any underlying real economy.

• Local governments are heavily in debt to the shadow banking system. Their liabilities may well exceed $6 trillion The crack down on the latter does not change that. Beijing has introduced a swap system, where paper can be swapped for bonds of much longer maturity at lower rates, but that leaves the question of who’s going to pay the debt to the shadow system.

Do local governments now need to borrow more from state banks just to pay off their loans to the shadow banking system? Or are the state banks themselves going to pay the debt after the swap? Or is perhaps the PBoC itself going to pay off the shadow banks directly? It looks as if the swap measures, which are pretty absurd in themselves since they encourage more borrowing, do not -or hardly at all- involve the ‘shadow debt’.

• Chinese factory activity is contracting. This is not growth slowing down, this is negative growth. Chinese consumers don’t help to avoid this, because they’re not consuming. They are doing one of three things: pay off housing -margin- debt as prices are falling, go nuts for stocks, or they are saving. No consumer based society is in sight.

• Capital outflow was $159 billion in Q1. This should be a major worry for Beijing. It hurts China’s international financial position. The country’s also stuck in its US dollar peg, and it dare not risk get out because of the potential losses on its Treasurys holdings. It’s all nice and stuff that the IMF considers including the yuan into its SDR basket, but it’s not a one way street to glory, or to the demise of the USD as some would have you think, for that matter.

Meanwhile, China keeps investing billions abroad. Untold billions in Africa. $50 billion in Brazil to damage the Amazon even more, $60 billion in the new Silk Road project.

But where does that money come from? Why is there so little scrutiny of that? Why do we all allow the Chinese to purchase our homes and our land and our industries, and make them all more expensive for ourselves?

Given that $28 trillion debt load, how is this not monopoly money, and why couldn’t we just as easily print that ourselves?

Is this a sign of how great the Chinese economy is, or is it perhaps a sign of how awful our own economies are really doing, and how indebted we are compared to Beijing? Is it because they caused our manufacturing sectors to all but vanish? How and why can a country blow a $28 trillion+ debt bubble in a decade and proceed to use that debt to buy the world? What does that say about that world?

As for China itself, and the losses on homes and stocks that are in the offing, I’ve long been on record stating I can’t see how it will not descent into civil war, and I still don’t. As I said above, Beijing never understood what forces it unleashed when it started ‘freeing’ its market, and from what I can see, it still doesn’t.

Or maybe it has, and got too scared to call a halt to what’s happening. That recent sudden permission for all 1.4 billion Chinese to open 20 stock trading accounts may be an act of desperation, as it came when real estate prices started tanking. But Xi and Li still must know, and fear, what awaits them if and when those stocks and apartments start their descent into hell.

By Raul Ilargi Meijer

Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2015 Copyright Raul I Meijer - 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.

Raul Ilargi Meijer Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

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

6 Critical Money Making Rules