Is Communist China Resilient Enough to Endure?

Despite the many proclamations that the 21st century will be "the China century," China's communist party government (the CCP) is facing a growing number of challenges -- economic, demographic, political, and international. There is no guarantee that the present form of government in China will survive the next decade, let alone the next century.

Having governed China for 63 years, the party is approaching, within a decade, the recorded longevity of the world's most durable one-party regimes — the former Communist Party of the Soviet Union (74 years), the Kuomintang (73), and the Revolutionary Institutional Party of Mexico (71). Like a human being, an organization such as the CCP also ages.

...China's rapid economic development has thrust the country past what is commonly known as the "democratic transition zone" — a range of per capita income between $1000 and $6000 (in purchasing power parity, PPP). Political scientists have observed that autocratic regimes face increasing odds of regime change as income rises. Chances of maintaining autocracy decrease further once a country's per capita income exceeds $6000 (PPP). China's has already reached $8500 (PPP). And nearly all the autocracies in the world with a higher per capita income are petro-states. So China is in an socioeconomic environment in which autocratic governance becomes increasingly illegitimate and untenable.

...Since the fall of the Soviet Union, top CCP leaders have resolved not to repeat the Soviet tragedy. Their policy has been, therefore, resisting all forms of political reform. The result is, unfortunately, an increasingly sclerotic party, captured by special interests, and corrupt and decadent opportunists like Bo. It may have over 80 million members, but most of them join the party to exploit the pecuniary benefits it provides. They themselves have become a special interest group disconnected with Chinese society. If the fall of the Soviet Communist Party (CPSU) offered any real lessons, they are definitely not the official Chinese narrative that Gorbachev's political reforms brought down the party. The sad truth is: the Soviet regime was too sick to be revived by the mid-1980s because it had resisted reforms for two decades during the rule of Brezhnev. More importantly, the CCP should know that, like the millions of the members of the CPSU, its rank and file are almost certain to defect in times of a regime crisis. When the CPSU fell, there was not a single instance of loyal party members coming to the defense of the regime. Such a fate awaits the CCP. _Minxin Pei_in _the Diplomat

Of course, it is not clear that Communist China is technically a "communist" nation, as envisioned by Karl Marx. Referring to China as communist is largely an acknowledgement of how the very corrupt Chinese government chooses to designate itself. But China's government is essentially a "totalitarian" government:

The difference between a totalitarian party and an authoritarian party is that the former is far more deeply and extensively embedded in the state and the economy. The CCP controls the military, the judiciary, the bureaucracy, and the economy to a far greater extent that the KMT or the PRI. Extricating a totalitarian party from a state is far more difficult. In fact, such a feat has never been tried successfully. In the former Soviet Union, it led to regime collapse. In Eastern Europe, democratic revolutions did not give such regimes a chance to try.

So the task for China's new rulers is truly daunting. _Minxin Pei

Daunting? Closer to impossible, in the long run, given the corrupt intransigence of China leadership from the military to Beijing to local governments.

Gold is pouring into China as a repository of wealth. Well-placed Chinese who are able to move capital out of China, are doing so. If China ever allows the ordinary Chinese person to freely invest his assets overseas, watch out for an explosion of capital flight from the middle kingdom.

China is increasingly balanced on the razor's edge. The CCP had best take care not to give the tightly coiled internal unrest and frustration inside the country even the slightest opportunity or excuse to spring forth.

Will Commodities Prices Collapse by 2015?

China economist and observer Michael Pettis expects commodities prices to crash by up to 50% over the next few years. Here is a rough outline of his argument:

China currently is the leading consumer of a wide variety of commodities wholly disproportionate to its share of global GDP.　 The country represents roughly 11% of global GDP if you accept the stated numbers, and substantially less if you believe, as I do, that growth has been overstated because of the difference over many years between reported investment, i.e. its input value, and the actual economic value of output.　 China nonetheless accounts for between 30% and 40% of total global demand for commodities like copper and nearly 60% of total global demand for commodities like cement and iron ore.

The only reason China has provided such an extraordinarily disproportionate share of global demand for hard commodities has been the nature of China’s growth model.　 While China may represent only 11% or less of the global economy, it represents a far, far greater share of the world’s building of bridges, railroad lines, subway systems, skyscrapers, port facilities, dams, shipbuilding facilities, highways, and so on.　

Over the next decade, two things are going to change.　 The first is increasingly recognized, and that is that Chinese growth rates will drop sharply.　 The second is that China will rebalance its economic growth away from its appetite for commodities.

Which Way Can Prices Go?

For these reasons I am very pessimistic about hard commodity prices and expect them to drop substantially further in the next two to three years.　

Production capacity for hard commodities is rising much too quickly, in a belated response to the unexpected surge in demand just under a decade ago. Expected economic growth rates in the country that has been biggest source of new demand – virtually the only source – have fallen sharply and commodity prices have fallen with them.　 Historical precedents and the arithmetic of rebalancing suggest, however, that the current consensus for medium-term Chinese growth is still too optimistic.　 Expected growth rates will almost certainly fall further in the next two years.

Beijing has finally become serious about rebalancing China’s economy, and rebalancing means shifting Chinese growth away from being disproportionately commodity intensive.　

Instead of representing 30-60% of global demand for most hard commodities, Chinese demand will shift to a more “normal” level.　 Remember that even a very limited shift – from 50% of global demand, for example, to a still high 40% of global demand – represents a sharp drop in global demand.

There has been so much stockpiling of commodities and finished goods with implicit commodity content in China that the country could well become a net seller, and not net a buyer, of a wide variety of commodities in the next few years.

This is going to come as a shock to many people. 　In my discussions with senior officials in the commodity sectors in Brazil, Australia, Peru, Chile and even Indonesia, it seems to me that many analysts have been insufficiently skeptical about the Chinese growth model and are unaware of how dramatically the consensus has changed in the past two years.　

They have failed to understand how deep China’s structural problems are and how worried Beijing has become (this worry may be best exemplified by the extraordinary growth in flight capital from China since early 2010).

Under these conditions I don’t see how we can avoid a very nasty two or three years ahead for commodity producers.　 This isn’t all bad news, of course.　 What will be a disaster for hard commodity producers will be great news for companies and countries that are commodity users or importers.　 One way or the other, however, we are going see a big change in the distribution of winners and losers. Read more at http://globaleconomicanalysis.blogspot.mx/2012/09/by-2015-hard-commodity-prices-will.html#VS6Z04Tib0oovfOx.99 _Michael Pettis _ via _Mish

More at the link above.

More: 6 Signs of China's Deteriorating Economy

We have looked at exactly this issue previously in relation to both oil prices and the commodities markets generally. China is the second largest national economy in the world, and the champion of the emerging nations known as the BRICs. Many people thought that China was ready to lead the world as a replacement superpower hegemon to the US.

Many people still believe in the idea of China as global leader, continuing to support exponentially growing global demand for oil, commodities, food, etc.

But it might be best to use caution when investing in any venture that is dependent upon continued massive economic growth in China. Only a fool bases expectations upon extrapolations without limits, constraints, and qualifications.

Like Rats from a Sinking Ship, Ex-Pats and the Super Rich Are Looking to Desert China

After some 23 years in China, and this year, 20 with the firm I established, Dezan Shira & Associates, it is time to move on. But why? China has been very good to me of course, it took a 30 year old with no real sense of direction in his career and turned him into a millionaire entrepreneur with offices around the world. So why change that?

... there is never really just one simple reason for leaving a country one has resided in for a long time, although I have seen many expats after awhile become disenchanted and even cynical about China in particular. “If you don’t like it, leave” chant the slightly more patriotic of our Chinese friends. And they’re right, albeit up to a point. And the disenchantments about China are many and varied... _Chris Devonshire-Ellis "Why I'm Leaving China

Mark Kitto goes into even more depth in discussing his reasons for leaving China after many years there:

....you’ll never become Chinese, no matter how hard you try, or want to, or think you ought to. I wanted to be Chinese, once. I don’t mean I wanted to wear a silk jacket and cotton slippers, or a Mao suit and cap and dye my hair black and proclaim that blowing your nose in a handkerchief is disgusting. I wanted China to be the place where I made a career and lived my life. For the past 16 years it has been precisely that. But now I will be leaving.

I won’t be rushing back either. I have fallen out of love, woken from my China Dream. “But China is an economic miracle: record number of people lifted out of poverty in record time… year on year ten per cent growth… exports… imports… infrastructure… investment…saved the world during the 2008 financial crisis…” The superlatives roll on. We all know them, roughly.

Don’t you think, with all the growth and infrastructure, the material wealth, let alone saving the world like some kind of financial whizz James Bond, that China would be a happier and healthier country? At least better than the country emerging from decades of stultifying state control that I met and fell in love with in 1986 when I first came here as a student? I don’t think it is. _Mark Kitto: You'll Never Be Chinese

Kitto goes on to describe the ugly and rising strain of xenophobic nationalism sweeping across China. This xenophobia appears to be the best tool China's leaders have to keep the giant empire from spinning apart in a centrifugal cataclysm of corrupt alienation. Read the article to understand what I mean.

And China's super-rich? They are simply trying to find a way to preserve their assets -- whether obtained honestly or dishonestly.

Wealthy people are leaving China. Many of them are kleptocrats, corrupt officals and financial criminals, and some are seeking havens in the U.S. and Canada...

...up to 18,000 officials had fled China between 1995 and 2008 with stolen assets totaling 800 billion yuan (US$125.7 billion).” Of late this trend and hot money outflows has been rapidly gathering steam.

China has gone full tilt into Ponzi schemes. Now that domestic stock markets are widely considered rife with fraud (China’s eleventh richest businessman jailed for stock fraud), the con men in China have conjured up “wealth management” scams to fleece the public and on a rather colossal scale. These are actively marketed by large banks. _Superwealthy Leaving Country

Much more at the linked story.

China is not alone among emerging nations, in terms of capital and human flight. Once again, Russia's own capital and human flight is picking up steam, worsening the bear's demographic crisis to new depths.

Brian Wang argues that all of this pessimistic talk about China is being overdone.

Read Brian's piece linked above, and the articles he links, then read this.

Meanwhile, be careful where you put your assets, yourself, and the people you care about. You may not always have sufficient warning to get out in time.

More: Rich Chinese parents want to send children overseas for education

Reality Check: What Does Chinese Economic Growth Really Mean?

China promoters have long touted the admittedly amazing economic growth numbers coming out of China. And even now, in the middle of a global downturn involving both Europe and China, investors' eyes still turn to China when scouting for isolated patches of growth:

China has long been seen as the country with the biggest potential to prevent the world from falling into another 1930s-style depression, helping to offset contraction in North America and Europe. Admittedly, China is highly dependent on markets in both regions for exports, and thus for wages and domestic consumer spending. And admittedly, the economic data coming out of Beijing have been called into question. Yet growth there will still be the most robust of anywhere in the world, according to forecasts from Oxford Economics via Datastream – real GDP should grow 7.5 percent in China this year. But that’s almost anemic compared to the country’s recent track record of annual double-digit GDP advances. _Fiscal Times

But even if one takes the Chinese economic growth figures at face value, there are any number of details which could devil your dreams, should you decide to make big and bullish bets on China.

News of a slowdown in China’s economic growth has been building of late, and many disparate theories have been offered in explanation of the phenomenon. One issue facing the country has been debated particularly heatedly. Commentators cannot seem to reach a conclusion on whether the Chinese economy is a victim of over-investment.

...The story, in simple terms, begins with the restrictions China places on the maximum deposit rates allowed by banks there. These restrictions, though slightly relaxed earlier this month, leave borrowers accepting very low rates on deposits, because of lack of other investment opportunities.

The low rates allow money to flow to borrowers, who pay very low rates on their loans. That means householders are effectively losing money to subsidize the borrowing of investors. The Chinese financial system is being used as a machine, that allows this to happen.

The borrowers in China are the local and central government agencies, real estate developers, corporations, and other infrastructure investors. Because their investments are effectively subsidized, they face lower repercussions than borrowers face in free market conditions.

...China’s low interest rate constraints mean investment that is concentrated in a single area, and therefore provides economic growth in the short term, has its cost spread across the entire country through the household financial system.

The cost of building the infrastructure is much higher than the benefits that come from it. This is over-investment. The scourge is exacerbated by the structure of the country’s financial system. The subsidized lending leads to worse decisions being made because market realities are not in force.

China’s per capita income and worker productivity mean that the level of capital stock in the country should land at a much lower equilibrium level. Advanced infrastructure is not saving labour as much as it does in Germany or the United States. China is over-investing.

...Politics in China is undergoing its most egregious challenges in decades this year. The succession plans for the replacement of the country’s leaders have already been rocked by scandal. Something special will be needed to avoid the worst effects of the over-investment problems that have been created in recent years.

That is unlikely to come from these appointments. China is still conservative when it comes to reform, even when faced with economic slowdown. The recent tremors in the party’s system of choosing successors, could bring to the fore a more open method of investing leaders but it is not likely to do so.

China’s government has allowed over-investment to become rampant in the east Asian giant. It is not a sustainable situation. If something is not done at the highest levels in the country there will be a market readjustment that will shake China and the rest of the world.

Pettis also makes a startling statement on China:

” A mainland think tank, Unirule, estimated in 2011 that monopoly pricing and direct subsidies may have accounted for as much as 150 percent or more of total profitability in the state owned sector over the past decade. I calculate that repressed interest rates may have accounted for another 400 to 500 percent of total profitability over this period.?Monopoly pricing, direct subsidies, and repressed interest rates all represent transfers from the household sector.”

_Value Walk

China Financial Markets _ Michael Pettis' blog

Another look at threats to economic stability in China from Patrick Chovanec

Inbred Chinese State Owned Enterprises Hope to Monopolise Coming Shale Gas Boom in China

Meanwhile, belated news of coal and other commodities stockpiles growing to record levels, and reports of faked electricity utilisation data being leaked to financial media, suggest that someone in China may be trying to project a false impression.

The political class in China benefits from the massive economic inequality fueled by corrupt state owned enterprises. As long as Chinese wage earners cannot invest outside of China, corrupt insiders have the means of re-distributing hard-earned funds from the pockets of wage earners, into the pockets of political insiders and the well-connected.

How is that different from the situation existing in western countries? In western countries, citizens can invest overseas, can move to other countries relatively easily, and are generally not being held as captive blood donours to the same extent as their counterparts inside China.

How long can this China scam of massive malinvestment continue? Time will tell.

China's Big Gamble: Will Beijing Wait Too Long to Prevent Collapse?

Washington Post
This video interview with Beijing-based economist Michael Pettis display's a more rational and sober view of China's economy than is typically available via the skankstream. As Pettis discusses, China must choose whether to take its medicine now, or to wait 4 or 5 years and be consumed by the aftermath of its neglected choices.

It is quite possible that the Beijing leadership -- both the current leadership and the leadership soon to be put in place -- is waiting to see whether Barack Obama is re-elected as US President. If Obama is re-elected, Beijing may feel safe in putting off its difficult decisions for a few more years, knowing that China is unlikely to be challenged or confronted by the Obama administration in any meaningful way. In addition, should Obama lead the US for an additional 4 years, Beijing is likely to gain strategically in comparison with an America clearly in decline under the Democrat.

But what might happen, should Beijing take too long to correct past mistakes and current policies? Perhaps another Beijing based economist, Patrick Chovanec, illustrates the danger best with his "Nine Nations of China" map:

Nine Nations of ChinaWhile Chovanec is careful to deny that he foresees an actual breakup of China into these 9 distinct regional powers, his portrayal of the fault lines is intriguing.

Here is how the 9 nations might rank in population, should an actual collapse and breakup of the Beijing government take place:

Rank	Country	Population
#1	India	1,140,566,211
#2	The Yellow Land	358,790,000
#3	United States	304,059,724
#4	Indonesia	237,512,355
#5	The Crossroads	226,260,000
#6	Brazil	196,342,587
#7	Pakistan	171,852,793
#8	Bangladesh	154,037,902
#9	The Metropolis	146,850,000
#10	Nigeria	146,255,306
#11	Russia	140,702,094
#12	Shangri-La	131,520,000
#13	Japan	127,288,419
#14	The Back Door	111,510,000
#15	Mexico	109,955,400
#16	The Refuge	109,770,000
#17	The Rust Belt	108,740,000
#18	Philippines	96,061,683
#19	Vietnam	87,558,363
#20	The Frontier	86,320,000

…

#29	United Kingdom	60,943,912
#30	The Straits	59,080,000
#31	Italy	58,145,321

Sources: National Bureau of Statistics of China and U.S. Census Bureau

Patrick Chovanec

Some of the 9 nations are wealthier, more populous, and stronger than others, but even the smallest in population ranks above Italy and just below the UK. There are reasons why Imperial China has broken up into warring regions time and time again throughout recorded history. No one of intelligence believes that this process cannot happen once again.

It is indeed possible that China could view a continuance of the Obama government as a guarantee of continued loss of strength in the US, giving them at least 4 more years to begin working on the serious structural problems of the middle kingdom. It is difficult to say just how emboldened Beijing's strategists might grow, should US voters make such a choice in November. But it is likely that Beijing would wait for the maximum time, to allow for a maximum weakening, before making any fateful moves, such as an invasion of Taiwan, combined with a proxy EMP strike over North America.

And during that waiting period of roughly 4 years, China's own economic and political infrastructure is likely to be experiencing growing shock waves that will become more difficult to ignore. That should be a matter of concern to any China watcher, particularly in terms of how Beijing strategists might react should the natural fault lines of China suddenly deepen and tremble.

China: Abrupt 70% Drops in Growth, Income; Trade Balance Plunges on Crude Oil Buy-Up; World Commodities Prices Totter

China’s trade deficit hit $31.5bn in February as exports slumped, underscoring concerns about slowing global demand and cooling growth in the world’s second-largest economy.
February exports from China fell 23.6 per cent from the previous month, and rose a slower-than-expected 18.4 per cent from the previous year. The fall in exports, combined with spectacularly strong imports as China bought commodities such as crude oil and iron ore, brought the trade deficit to its highest level in years.
_FinancialTimes

Video Source: Financial Times
The above video describes the abrupt 40% to 70% drops in growth, income, and land sales experienced by virtually all regional Chinese governments -- a reflection of the deflating economic bubble within China. This data was obtained independent of the Chinese government, and as such is likely to be more reliable.

Below you will see some revealing charts, describing the radical drop in China's trade balance caused by an apparent stockpiling of crude oil and other commodities.

...here are some truly stunning charts showing the epic collapse in the Chinese economy, which while still experiencing intermittent flashes of inflation, will have no choice but to resume easing all over again, in the process sending all commodity prices higher yet again. _ZeroHedge

All Charts via ZeroHedge
China's current trade deficit is the largest since 1989, and is reflective of a number of economic trends impinging upon China's long term economic plan.

World commodities markets from Australia to Brazil to Africa are trembling at the thought of a significant and prolonged slowdown in Chinese demand for raw materials.

China's buildup of its crude oil stockpiles -- with its inevitable stressing of world crude markets -- is even more interesting, as it suggests a multi-tiered strategic thrust on the part of the middle kingdom, using world financial markets as a proxy force.

This is not a China collapse, but rather a foretaste of what happens when there is a suggestion of an eventual auditing of the books. When the books are actually audited, even more significant adjustments will be made. But even later, in the aftermath of the auditing, there will be a reckoning.

Beijing Faces a Delicate and Dangerous Balance of Crises

What makes the future look particularly bleak is the lack of escape routes. If Chinese investors panic and rush for the exits, they will discover that in a market awash with developer discounts, buyers are very hard to find. The next three months will be a watershed moment for a Chinese investor class that has been flush with cash for years but lacking a place to put it. Instead of developing a more balanced, consumer-based economy, an entire regime of Beijing technocrats — drunk on investment-led growth — let the real estate market run red hot for too long and, when forced to act, lacked the credibility to cool the sector down. That failure threatens to undermine the country’s continued economic rise.

Real estate woes are already sending shockwaves through China’s broader economy. Chinese steel production — driven in large part by construction — is down 15 percent from June, and nearly one-third of Chinese steelmakers are now losing money. Chinese radio reports that half of all real estate agents in the southern city of Shenzhen have closed up shop. According to Centaline, more than 100 local government land auctions failed last month, and land sale revenues in Beijing are down 15 percent this year. Without them, local governments have no way to repay the heavy loans they have taken out to fund ambitious infrastructure projects, or the additional loans they will need to keep driving GDP growth next year.

In a few cities, such as coastal Wenzhou and coal-rich Ordos, the collapse in property prices has sparked a full-blown credit crisis, with reports of ruined businessmen leaping off building rooftops; some are fleeing the country. _Patrick Chovanec

Outside analysts must read between the lines of what information the authoritarian governments in Beijing allow to leak out. But it is becoming more clear by the week that Beijing did not anticipate the power of the tiger which was unleashed when China began to pursue world-class industrialisation.

Entrepreneurs in China who have gotten rich by exploiting the government-fed demands to build cities and infrastructure to house the coming wave of residents are now getting out of China while the getting is good. Back in June Forbes magazine wrote that 60 percent of China’s high-net-worth individuals are either considering emigration or have already left the mainland for safer havens elsewhere. Global Financial Integrity estimates that the sums of money that have already left the country are huge, exceeding $2 trillion dollars through 2008. Such a financial exodus has naturally been criticized by the Chinese government. Writing in the communist newspaper Global Times, Zhong Dajun protested, “We have been working hard to develop the economy in the past 30 years, but now these elite members of society are fleeing with the majority of the wealth.”

It’s the financing of those efforts to “develop the economy” that is the problem. The Chinese government’s plan to move 350 million people from rural areas into cities required building those cities in advance. Here was their perfect opportunity to use the Keynesian approach to create wealth out of paper: The government set up 10,000 investment companies to build them, and provided financing through banks funded by the government. It would put people to work, stimulate the economy, and “provide for the common good” on communist terms. It was also designed to foster a change in the economy from rural to a demand-driven consumer society. It was “jump-starting” to a degree never seen in history — “pump-priming” to push the economy ahead.

The pending implosion is the natural result of such efforts. Twenty new cities were being built every year, but few citizens were moving into them. “Ghost cities” they were called, and thanks to Time magazine’s photographer, Michael Christopher Brown, pictures of them can be seen here and here and of empty apartment buildings here. _New American Bob Adelman

It was a grand plan, and many people still believe that it may succeed. Whether these same people are still throwing their money into Chinese investments or not is another question.

In 2008, China sent over $700 billion to states to invest in things like roads, trains, bridges, housing and entire cities. Some of these projects were bridges to nowhere. Although the government estimates that public debt as a percentage of GDP is just 17%, Bloomberg estimates that it is at 80% because of fixed investment.

...Construction has played a big role in the country’s full employment and urbanization strategies. “The people you see climbing bamboo scaffolding in Shanghai all came from the interior of China and they are now moving back,” said Kalish. “It happened in 2008 when the country lost about 20 million manufacturing jobs because export markets were basically closed off because of the credit crisis. About half of them moved out of the coastal cities and the rest were laid off. The stimulus package got most of them back to work quickly, but a lot of those migrant workers stayed in the interior cities because wages had improved along with working conditions. China is changing and with it come a host of new problems. _Forbes

Even with all its problems, it is still not very difficult to find China boosters who talk up China at every opportunity. But where are they putting their own money, personally? No one seems to ask them that.

Problems are flaring up across China, as Beijing faces its once a decade transition of power. More on that particular problem from Gordon Chang

And once again, global investors must face the question of what happens to commodities and currency markets should the Chinese economy take a significant nosedive? Do your investments take that possiblity -- along with a possiblity of the collapse of the Eurozone -- into consideration? They should. The secondary fallout from a cascading collapse of economies presents both hazard and opportunity.

Image credit via Forbes

China's Economic Problems Deepen; World Is Not Immune

“We’re reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness,” Nomura’s Zhang said in an interview in Beijing yesterday.

...The price of land in Beijing slumped 76 percent in August from a month earlier, while in Guangzhou it plummeted 53 percent, according to Soufun. Land auction failures surged 242 percent in the first seven months of this year because of government curbs on the property market, the Beijing Times reported Aug. 3.

...Funding problems are just “the tip of the iceberg” and “sharp declines in property sales and prices are likely in the next two to three months,” said Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong.

...“The risk of China replaying the hard landing of 2008 is increasing as the property sector cools and exports weaken,” Shen said. “ I fear that once the real economy deteriorates and officials do loosen policies, it will already be too late.” _Bloomberg

When global markets contracted in the 2008 crash, China lost a huge portion of its export income. Without its economic mainstay, China was forced to create an artificial real estate boom inside its own borders, to boost GDP and support employment. China's ongoing construction and real estate bubble has consumed a huge proportion of global commodities production -- helping to support the economies of commodities producing nations.

When China's internal bubble collapses, the repercussions will spread around the globe, adding to the ongoing economic turmoil.

In Europe, the situation may be more dire as the inability of policymakers to solve Greece's debt crisis over the last two years has allowed its problems to ripple into Italy, Spain and other struggling economies.

The stock market's slump this week resumes the sell-off that slammed share prices in early August. The Dow dived 2,000 points, or nearly 16%, from July 21 to Aug. 10. _LATimes

China's government is brittle, and difficult to change. When state policies fail and threaten to create massive disruption, China's brittle ruling apparatus may find itself at a loss.

In democracies, economic shocks typically result in electoral defeat for the incumbent government, which at least provides the public with someone to blame, and a test of the hypothesis that the crisis was the result of mismanagement.

In a closed oligarchy like that of China, there is no such mechanism. The system could break down from within, as factional disagreements within the central committee spill out into the broader party and the public at large. Alternatively, large-scale public protests, combined with disagreements over the extent to which repression is desirable and feasible, could bring about a rapid breakdown. _NationalInterest

The empire is still riding on its vast cash reserves, built up during the golden days of exporting. The clout from these reserves has allowed China to push Russia around in many ways, and to work its way into positions of strength and influence on several continents. But the economic equation is shifting and changing in several ways, both subtle and unsubtle. If China cannot shift and flow with the changing currents, terrible troubles may soon confront the celestial kingdom.

China has had a gigantic bubble. Now, will it collapse or will it just slow down, that is a different issue but some sectors of the economy will collapse," [Faber] said. _IndiaTimes

When BRICs Crumble, Will Commodity Prices Collapse?

Common wisdom assumes that commodity prices, including oil prices, will continue to rise on exponential demand from emerging nations, such as China, India, Brazil, Turkey, Russia, etc. But under the sheen of those rosy projections, exists a growing excremental stench of corruption and decay. If the magical trajectory of the BRICs should falter, how far would commodities prices fall? And what would be the repercussions for already stressed world financial markets, desperate for safe havens and hedged to the hilt?

China's property bubble is set to implode, and when it does, the Chinese economy will cool far more than anyone thinks, taking commodities along for the ride. Commodity producers like Australia and Canada are at extreme risk as well. _Mish

Not just Australia and Canada are at extreme risk. Two BRICs -- notably Russia and Brasil -- are gambling on continued high commodity prices into the indefinite future. Corruption in all of the BRICs is hampering genuine market-based growth, but economic dependence on raw commodities prices is particularly bad in Russia.

When commodity prices dive, Russia may well grow desperate.

Prime Minister Vladimir Putin, the country's uncrowned czar, has linked his legitimacy to the economy's performance by offering the Russian people a grand bargain: submit to his increasingly autocratic rule and the state will compensate with economic goodies like higher incomes and hefty social-welfare spending. Now that the economy is faltering, Putin is under intensifying pressure from a discontented public to restore Russian democracy, potentially destabilizing Russian politics. He has already faced protests in Moscow against his rule amid the economic downturn. There's also a risk that leaders in Moscow will resort to nationalistic appeals to distract the public from problems at home, escalating tension with Russia's neighbors, the rest of Europe and the U.S. _Time

Russia's ongoing demographic collapse, and the threat of losing much of Eastern Siberia to Chinese influence, is not helping the mood in Moscow. But without the clout that comes from high energy prices, Russia becomes an angry dancing toy bear with nuclear weapons.

Venezuela, Iran, the Arab states of MENA, Mexico, and many countries in tribal Africa and Asia, are also pathologically dependent on high commodity prices, due to internal corruption having squeezed natural markets to death. How will their people deal with the many difficulties and hardships they will face when their governments cannot feed, clothe, house, or water them?

Even the US is vulnerable to a fall in commodities prices. The US is the world's third largest oil producer. The recent boom in US shale oil & gas production is one of the few bright lights in an otherwise dim Obama economy. And although the jobs, housing, manufacturing, and other sectors in the US economy continue to sag, Obama has not had enough time to entirely destroy the US private sector.

Few readers of this blog understand the precarious state of China's economic house of cards. That is because almost all of the economic information coming out of China is closely controlled, and coated with a shiny facade. But it is time for readers to begin asking themselves about the global repercussions of a more sustained commodities price slump than they have seen.

China: "An Unsettling and Unending Vista of Emptiness?"

video via economiccollapse.net
Most of the modern worldwide commodities bubble is being driven by demand from China -- both directly and indirectly. China's GDP continues to impress the outside world's economic gurus and analysts. But "it's not the quantity of GDP that matters, it's the quality." If, after the collapse of much of China's huge export market, China's economic growth is now being built upon ghost infrastructure (to nowhere), a financial reckoning will eventually come. When that happens, what will global commodities markets do?

Source for Table

As western economies begin to crumble and even China’s cheap manufactured items become too expensive, the Asian powerhouse could be in big trouble. Maybe even more trouble than the western economies.

Fact is, its domestic market isn’t robust enough to take up the slack. Not nearly robust enough. The government overlords can only keep the factories running, people employed and inventories piling up for so long.

At some point, even the Chinese must submit to the inexorable forces of supply and demand. Factories will be shuttered. Massive layoffs will ensue. Unrest will rise among millions of Chinese factory workers (nee peasants). _EconomicCollapse

More from the Atlantic
Dramatic Slowdowns in China Coming

If your investment strategy is based upon a continuing exponential growth in demand for petroleum and other commodities, it may be time for a rethinking.

Certainly most believers in "peak oil doom" are counting on continued high global demand, to make their dreams of doom come true. For those in better tune with the global economic and demographic symphony, it is not too late to move away from the groupthink to a more justifiable position.

Further, if you are an American who is coming to see your president as a combination of Nixon's paranoia and Carter's incompetence, you may want to take a look a some "going Galt" options that many of your cohorts are eyeing.

More interesting takes on why the government -- any government -- is not a friend to your financial well-being, by Doug Casey

The US population is drowing in debt and demographic decline. The same twin disasters are beginning to take hold of many European nations, if they are not careful about who immigrates. Japan and Russia may well be beyond the point of demographic return, for their core populations.

As long as the "intelligensia" of the world can be distracted by hysteric nightmares of carbon climate catastrophe, overpopulation doom, resource scarcity doom, ecological collapse, and other figments of inadequate and undisciplined minds, attention of the masses will be diverted from the genuine disaster creep of debt and demographics.

Centripetal China in Chaos

ChinaHardLanding CSMonitor
Fewer people may be eyeing China recently, in light of the unrest in Arab countries and the devastating natural disasters and aftermath in Japan. Yet China holds a big piece of the puzzle, as to how the future will turn out. Best not to forget it.

For example, a fascinating method of financing a commodities and real estate boom:

...companies importing copper are indeed buying it on deferred payment terms. For example, 1,000 tonnes of copper bought using a 180-day LC means the companies don’t have to pay the bank issuing the LC for 180 days after the shipment arrives in China.

During that time, though, the copper can be pledged as collateral for cash — and the funds raised are free to be invested any which way the company wishes.

As our source points out, with real estate and commodities having gained 20 to 30 per cent, or more, in some six-month periods, this could have been an extremely profitable activity in the last couple of years. _FT

Western investors may well be lured in by outward signs of economic growth which are actually based upon shifty loan schemes resembling something Bernie Madoff might have dreamed up. When all the loose ends of this "infrastructure to nowhere" are pulled in, what will be left?

....China's export-led economy is due for a hard landing. Instead of 9.8 percent, its growth in the fourth quarter of 2010, China's GDP could decline toward a recessionary 6 percent. That will slow domestic job growth, choke off the expansion in the rest of Asia, and rattle investors around the world.

It also will no doubt burst the global commodity bubble, which would be bad news for commodity exporters, ranging from Brazil and Canada to Australia and New Zealand.

A hard landing in China is very likely for two reasons. For one, Beijing's policy tools are crude. In the wake of a real estate bubble, a jump in consumer inflation from negative territory in 2009 to 4.9 percent in January 2011, and a rise in food prices to a politically untenable 10.3 percent, China has slammed on the brakes. Eight times since January 2010, the central bank has raised reserve requirements – a sledgehammer tool the Federal Reserve here hasn't used in decades.

Another reason for a hard landing: In a part command/part market-driven economy like China's, any economic policy is hard to enact. _CSMonitor

Even the best of markets will behave chaotically from time to time, and require painful corrections. But China's economy is even less of a market economy than that of the US. Too much relies upon top-heavy dictates based upon little more than educated guesses, tainted by nationalistic and ideologic bias. The "Knowledge Problem" always has the last laugh.

It is always good to look at how power is distributed in a society, before one attempts to predict the society's future:

Key in the survival of political systems is not democracy in the western sense but a diffusion of power over generations, a leadership that reacts to popular concerns, and room for upward socio-economic mobility. China has all of those.

Unlike in the Middle East, where strongmen and family dynasties who have ruled for decades on end have become the focal points of anger, there has been remarkable diffusion of power in China. None of the powerful families, like those of past leaders Deng Xiaoping, Ye Jianying, or Chen Yun, have had offsprings promoted above a certain rank in the Standing Committee of the Politburo.

That ranking is far more important than titles like Vice Premier or Minister. For instance, Prime Minister Zhou Enlai during the Mao era was ranked at number seven in the Party hierarchy in the 1970s. The offspring of political figures mostly enter business, as there is more money and personal freedom there. _ShaunRein

Rein's insight is key. In a "one-child society" such as mainland China's, wealth and power do not diffuse and propagate through the generations in the same way as they do in societies with extended families -- aunts, uncles, cousins, siblings, etc. The urge to wealth and power tend to take on a sense of immediacy and urgency which may be partially sublimated and diluted in societies which provide a greater sense of immortality through one's extended progeny.

Nationalism becomes more prominent as well, which in the face of a growing "male dominant society," could easily lead to international frictions and more frequent brushfire wars and conflicts -- in an attempt to diffuse the growing bottom-up pressure from a male "youth bulge."

The speculative fever which has driven China's economy since the collapse of its export markets in 2008, is built upon multiple inter-locking layers of corruption at most levels of government -- but particularly at regional and local levels. National leadership tends to look the other way as long as economic numbers look good, and as long as China's military and technological strengths appear to grow. Everything else is built upon the economic numbers, at this point.

Never forget that China -- like the late USSR -- is an empire, comprising multiple ethnic regions and relying upon the stripping the resources of multiple client states in the region. Also never forget that China's recent economic, technological, and military resurgence was largely fueled by massive outside investment, which continues throughout the last few years of global financial and economic turmoil. Never forget that China's wealth is incredibly lopsided demographically and geographically. China's historical tendency to break apart into warring centres of power should never leave one's mind when contemplating possible fates of the middle kingdom.

China: The World's "Rich Pauper"

Let’s face it – most Chinese growth is the result of overheated investment, and removing the sources of overheating without eliminating growth is going to prove impossible. I have been making the same argument for at least two or three years, and so far we have seen how Beijing veers between stomping on the gas when the economy slows precipitously and stomping on the brakes when it then grows too quickly. I don’t believe anything has changed. _Mish

While broadly seen as the heir apparent to the US' global hegemony, China has some deep problems which are rarely considered by more mainstream journalists and analysts.

Only a decade ago, China's GDP of US$1.1 trillion was only one quarter of Japan's US$4.2 trillion. And, as late as 2005, China's GDP, at US$2.2 trillion, was half Japan's US$4.5 trillion. Some analysts predict that if China's economy continues to surge at its current pace, it could surpass the United States as the world 's top economy in 2020.

Such sanguine prospects, however, do not obscure the fact that China is still a developing country, with a per capita GDP of US$4,500, which about one tenth of Japan's and one quarter of Taiwan's. China's new ranking as No. 2 contrasts starkly with the per capita ranking of No. 95 among the 182 countries ranked by the International Monetary Fund.

The plain fact is that the Chinese people are still poor, with 100 million people living below the U.N. poverty line of US$1 a day. The number of poor is nearly equal to the entire population of Japan. That's probably why we have not seen an official expression of elation over the historic event. _ChinaPost

In fact, the number of poor in China is far larger than the population of Japan. Clearly, even the "realists" are unable to face the stark reality of China today.

Here is more from Mish's Global Economic Analysis:

China has spent $750 billion on rail lines, much of it wasted.

The culprit is not design, but rather shoddy construction accompanied by fraud, greed, and unrealistic growth targets. If that sounds familiar, it's because it was one of the factors in the US housing bust, and indeed every huge bust in general.

...China's problems go far beyond high-speed rail, to construction and malinvestment in general.

I have talked about China's Vacant cities before but here is a quick recap from Chinese Bank Lending Spree Continues; $75 Billion New Loans First Week in January Alone; Inflation Gone Amuck

...Not only do I believe that the combination of very low cost of capital, socialized credit risks, and strong short-term political incentives to fund massive projects always leads to capital misallocation, but I also believe that the explosion in NPLs [Non-Performing Loans] a decade ago, and the fact that total SOE [State Owned Enterprise] profits are just a fraction of the interest rate subsidy they receive, is strong evidence that misallocated capital has long been a serious problem in China.

... _Mish

China's increasing reliance on overbuilding and speculation is causing several old China hands to look for ways to short the communist government's economy.

China's government is getting worried over the spreading contagion of unrest across MENA (middle east and north africa).

China’s rulers are caught between fear of a Soviet Union-style collapse if they begin political reform, and an Egypt-style overthrow if they do not, the political analyst said.

“Some say, if you don’t engage in political reform, there will be disaster ahead,” he said. “Others say, if you do, there will be disaster ahead.”

The government has not responded to the Arab uprisings with a political reform program. But an emergency meeting of the Communist Party leadership last Saturday — played up the next day on the front page of People’s Daily, the party’s mouthpiece — suggested it was badly spooked. _NYT

Even in Africa -- a continent thought to be in Beijing's pocket -- there is a spreading restlessness regarding China's willingness to bribe African leaders in order to carry out projects that are not in the best interests of the African people. Other nations -- particularly Brazil -- are moving into African economic territory.

Since the collapse of its export market in 2008-2009, China has implemented a policy of fevered construction to boost its economy. Unfortunately, a large proportion of this construction is of a shoddy nature, which will lead to a premature collapse of a wide variety of structures -- including China's vaunted high speed rail and wind power infrastructure.

If you are invested in China, you may need to take a closer look at the underlying realities on the ground there. China's continued use of US treasury instruments as repositories of wealth should tell you what shaky ground China's economy rests upon.

Megacities in China: A Further Prelude to China's Collapse?

Telegraph_via_NBF
We recently learned about the connection between the "skyscraper index" and an impending financial/economic crisis. China is currently testing the skyscraper index with its massive building projects. But a massive project to merge several Chinese cities containing multi-million person populations may introduce an entirely new index: The Megacities Index.

The "Turn The Pearl River Delta Into One" scheme will create a 16,000 sq mile urban area that is 26 times larger geographically than Greater London, or twice the size of Wales.

The new mega-city will cover a large part of China's manufacturing heartland, stretching from Guangzhou to Shenzhen and including Foshan, Dongguan, Zhongshan, Zhuhai, Jiangmen, Huizhou and Zhaoqing. Together, they account for nearly a tenth of the Chinese economy.

Over the next six years, around 150 major infrastructure projects will mesh the transport, energy, water and telecommunications networks of the nine cities together, at a cost of some 2 trillion yuan (£190 billion). An express rail line will also connect the hub with nearby Hong Kong. _Telegraph_via_NextBigFuture

NextBigFuture
China is already exhibiting some early, subtle signs of significant problems on multiple levels -- similar to signs present in the USSR a decade or so prior to collapse.

In 1975, while I was in Siberia on a two-month trip through the U.S.S.R., the illusion of the Soviet Union’s rise became self-evident. In the major cities, the downtowns seemed modern, comparable to what you might see in a North American city. But a 20-minute walk from the centre of downtown revealed another world — people filling water buckets at communal pumps at street corners. The U.S.S.R. could put a man in space and dazzle the world with scores of other accomplishments yet it could not satisfy the basic needs of its citizens. That economic system, though it would largely fool the West until its final collapse 15 years later, was bankrupt, and obviously so to anyone who saw the contradictions in Soviet society.

The Chinese economy today parallels that of the latter-day Soviet Union — immense accomplishments co-existing with immense failures. In some ways, China’s stability today is more precarious than was the Soviet Union’s before its fall. China’s poor are poorer than the Soviet Union’s poor, and they are much more numerous — about one billion in a country of 1.3 billion. Moreover, in the Soviet Union there was no sizeable middle class — just about everyone was poor and shared in the same hardships, avoiding resentments that might otherwise have arisen.

...The corruption extends to the enforcement of regulatory standards for health and safety, which few in China trust. In recent years China has endured a tainted milk scandal and a tainted blood scandal, each of which implicated corrupt officials in widespread death and debilitation. In a devastating 2008 earthquake, some 90,000 perished, one-third of them children buried alive in 7,000 shoddily built “tofu schools” that skimped on materials. Nearby buildings for the elites that met building standards, including a school for the children of the rich, were largely unscathed.

The government tries to tamp down the outrage over the abuses inflicted on the public by banning demonstrations and censoring the Internet. But it is failing. Year by year, the number of demonstrations increases. Last year alone saw 100,000 such protests across the county, directly involving tens and indirectly perhaps hundreds of millions of protesters.

China is a powder keg that could explode at any moment. And if it does explode, chaos could ensue — as the Chinese are only too well aware, the country has a brutal history of carnage at the hands of unruly mobs. For this reason, corrupt officials inside China, likely by the tens of thousands, have made contingency plans, obtaining foreign passports, buying second homes abroad, establishing their families and businesses abroad, or otherwise planning their escapes. Also for this reason, much of the middle class supports the government’s increasingly repressive efforts. _Solomon

China has a long history of empires alternating with chaotic internecine wars carried out from warlord-led strongholds.

The rise of regional mega-cities could well presage the breakup of modern CCP-ruled China into warring factions and (mega) city-states. Joseph Tainter's Collapse of Complex Societies dissects the rise and fall of multiple cultures and civilisations throughout history -- and points out the tendency for the complexity of a society to outgrow the society's ability to cope with complexity.

Certainly the sheer size of the Chinese society lends to vast complexities, which can push the ruling powers to their limits of coping. It appears that the leadership of the CCP is determined to press ahead at warp speed, in the direction of rapidly increasing complexity.

China's rapid ascendancy in the global economic and technological hierarchy was achieved via huge outside investment, cheap labour manufacturing and export, an ambitious, highly intelligent and educated workforce, highly talented industrial spies, counterfeiters, etc. Some of those strengths are still operating at high levels. But the core of China's rise -- massive export wealth -- is hampered by a global economic downturn, and a sustained recession led by Luddite and left-reactionary policies implemented by the current US administration.

China is attempting to compensate for the significant decline of its export market by ambitious construction projects inside China. This megacities project is only one of many huge spending and stimulus programs operating -- virtually all of them teeming with corruption, mis-allocation of resources, and shoddiness.

Only a few persons anticipated the fall of the USSR years and decades before its collapse. Will the same be true for China?

Potemkin China, Empty Skyscrapers, Cargo Cult Cultures

Chinese government officials believe high-rises "show their progress in terms of urbanization and modernism," spur wider development by boosting investor confidence, and symbolize "a city's desire to become modern and international," says Chiow, a Chinese-American based in China for the past 15 years. _USAToday_via_ImpactLab

Lawrence showed that in almost all cases the initiation of construction of a new record-breaking skyscraper preceded major financial corrections and turmoil in economic institutions. Generally, the skyscraper project is announced and construction is begun during the late phase of the boom in the business cycle; when the economy is growing and unemployment is low. This is then followed by a sharp downturn in financial markets, economic recession or depression, and significant increases in unemployment. The skyscraper is then completed during the early phase of the economic correction, unless that correction was revealed early enough to delay or scrap plans for construction. For example, the Chrysler Building in New York was conceived and designed in 1928 and the groundbreaking ceremony was conducted on September 19, 1928. "Black Tuesday" occurred on October 29, 1929, marking the beginning of the Great Depression. Opening ceremonies for the Chrysler Building occurred on May 28, 1930, making it the tallest building in the world. _Mises

Table 1: World's Tallest Buildings

Completed	Building	Location	Height	Stories	Economic Crisis
1908	Singer	New York	612 ft.	48	Panic of 1907
1909	Metropolitan Life	New York	700 ft.	50	Panic of 1907
1912	Woolworth	New York	792 ft.	57	——
1929	40 Wall Street	New York	927 ft.	71	Great Depression
1930	Chrysler	New York	1,046 ft.	77	Great Depression
1931	Empire State	New York	1,250 ft.	102	Great Depression
1972/73	World Trade Center	New York	1,368 ft.	110	1970s stagflation
1974	Sears Tower	Chicago	1,450 ft.	110	1970s stagflation
1997	Petronas Tower	Kuala Lumpur	1,483 ft.	88	East Asian
2012	Shanghai	Shanghai	1,509 ft.	94	China?

If large buildings are constructed due to high utilisation and strong demand for space, they can be very profitable over their lifetimes. But if a skyscraper is constructed as a symbol or monument to the "greatness of a nation's political structure," the building may remain the empty prayer of a cargo cult.

China is building 44% of the 50 skyscrapers to be completed worldwide in the next six years, increasing the number of skyscrapers in Chinese cities by over 50%, says Andrew Lawrence, an Asian property analyst at investment bank Barclays Capital.

China is already host to six of the 15 tallest, completed buildings in the world, according to the Council on Tall Buildings and Urban Habitat, at the Illinois Institute of Technology in Chicago.

..."The appetite in China for high-rises, in the last five years and the next five, is bigger than ever before in the history of building," says Silas Chiow, China director for Skidmore, Owings and Merrill, the U.S. architectural firm, founded in Chicago, responsible for the Burj Khalifa.

The firm is currently engaged in 50 China projects, including the tallest buildings in eight separate cities.

Chinese government officials believe high-rises "show their progress in terms of urbanization and modernism," spur wider development by boosting investor confidence, and symbolize "a city's desire to become modern and international," says Chiow, a Chinese-American based in China for the past 15 years. _USAToday_via_ImpactLab

China is already full of "ghost cities," "ghost housing projects," "ghost office complexes," and "ghost shopping malls."

There is no denying the huge number of people living in China -- many of whom could use better and larger living and working space. But the economic structure of Communist Chinese society is rife with the mal-allocation of resources and enterprise. Corruption permeates the culture, driving much of the "road to nowhere" construction frenzy. Too much of the GDP-inflating construction is of a shoddy nature -- certain to collapse far sooner than projected lifetimes suggest.

Will the "Skyscraper Index" prove prophetic for Potemkin China of the cargo cult, or will the middle kingdom defy the curse of the world's tallest buildings?

More on skyscraper index:
From Mises.org
From CNN here and here

China's empty skyscrapers and office buildings

Amazing satellite images of some of China's ghost cities

World's loneliest shopping mall

More: And just in case you are still thinking that China may be ready to lead the world, perhaps you should think again:

We hear constantly how China's economy has "leapfrogged" other nations and now ranks third in the world — still behind the U.S. — with a total GDP of $3.3 trillion. The truth is more complex.

China has 1.3 billion people. So you're spreading that economy among one-sixth of the world's humanity. As the chart shows, China's economy on a per-person basis — the real measure of success — doesn't even come close to ours. The average American produces over $42,000 a year in goods and services; the average Chinese produces $2,800. That's an enormous gap in productivity.

Moreover, in its recent rankings of economic freedom, the Heritage Foundation put China 135th out of 179 countries. The U.S., even with all its current problems, ranks ninth. Who's the leader?

Citizens in big cities such as Beijing and Shanghai live a privileged existence, well-documented by the Western media. Deep inside rural China, however, hundreds of millions live in near-absolute poverty. This isn't a country ready for global economic leadership.

China's economic success has been driven by mercantilist policy of beggaring its own people in the interest of building up massive trade surpluses. Its foreign currency holdings now total $2.9 trillion, and most of that is in U.S. Treasuries and other dollar-denominated assets. That's China's hole-card in talks with the U.S. _IBD

China Bad Loan Bubble Threatens Continued Growth

China's economy is teetering on the edge of a major slowdown...David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world's third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge. _Marketwatch

“China is at risk of overheating, with spot fires breaking out in various parts of the economy.” _Bloomberg

China was well-situated to profit from the technology and debt-driven hyperkinetic growth spurt of western economies during the 80s, 90s, and early to middle 00s. Cheap, high-quality labour drew trillions of dollars of outside investment, and reaped more trillions of dollars of export profits. Many financial analysts have been slow to realise that the dynamics have changed since the 2008 global slowdown. Many financial journalists have mistaken China's recent manic internal lending, construction, and commodities-buying spree, for a sign of genuine economic growth and wealth-building.

...in China...when the Central Banks says "Lend", that is a command, not a suggestion and thus banks lend. However, the only realistic place that money can be lent is more housing, more infrastructure, or more manufacturing, none of which China remotely needs at the moment....Meanwhile bad loans are piling up, just as they did in the US with subprime.

The moment China's property bubble collapses (and it will), the bad loans on the books of China's banks will be exposed for what they are, in spite of the widespread fallacious belief China's banks are protected because China's borrowers are putting more money down.

...Also note Li Daokui's statement "Europe’s rescue package makes another global slump less likely". Once again I beg to differ. The bailout imposes some fiscal restraints on many countries. More importantly, the loans come at the expense of productive portions of the European economy for the misguided notion that the unproductive European countries can be bailed out.

Such policies are never good for long-term growth. All they provide is an short-term illusion that something good is happening. As soon as the stimulus is taken away, more debt remains than before. _Mish

Video via Mish
China's government is hoping to bluff long enough for Europe and North America to get back to growing another huge debt bubble, involving much more investment in China and the "involuntary" buying of $trillions more in Chinese exports.

This is where the debt / demographic collapse of Europe begins to throw a monkey-wrench into such optimistic ad libbing by the CCP. And it is where the ongoing economic destruction by the massively inept Obama - Pelosi regime begins to work against China's ability to maintain its blowing bubble of bad debt.

Perhaps China's economic growth rate will fall from 12% down to 6%? Or perhaps China's government cannot survive any significant fall in economic growth, or any serious downturn in economic activity. Internal Chinese politics rests upon an explosive foundation. There is no telling what might set it off.

China Crash Imminent; All Currencies Doomed but Gold

Here is a Marc Faber discussion with Bloomberg on the European debt crisis, the China bubble, and the state of commodities and currencies of the world. H/T SeekingAlpha
As regular readers of Al Fin know, this blog considers much of China's recent economic growth to be largely smoke and mirrors, and sleight of hand -- on top of its bubble-like nature. China did not take the opportunity to reform its corrupt system of banking and state-owned enterprises when it had the chance. Instead China went on a building and buying spree in an attempt to prop up the economic numbers, and to prevent popular unrest from the massive unemployment that would logically be taking place in China at this time otherwise.

But without overseas buyers and investors, the Chinese economy will face a significant adjustment, as values are more carefully scrutinised. Europe is in no condition to resume its former buying spree, and the US is getting progressively bogged down in a quasi-permanent Obama - Pelosi quagmire.

As the Dow Jones IA swooped below 10,000 at one point today, the divergent movement of oil vs. gold was quite striking. Gold moved sharply upward, while oil moved swiftly downward. Consider it a preview of coming attractions, perhaps.

China's Buildings Chip, Crack, Collapse Too Soon

Compared to the less than 30-year average life expectancy of China’s buildings, the average life span of a building in Britain is capable of 132 years and in the United States it is 74 years.

...Alarm was raised several times in 2009 over the poor quality of the country's buildings.

In October of that year, a six-story apartment block collapsed in Central China's Wuhan, Hubei province. It was later found to have been held together by "steel supports as thin as iron wires", according to the subsequent investigation.

Earlier, in June 2009 a 13-floor building in the Lotus Riverside residential complex in Shanghai toppled, killing one worker. An investigation revealed the building's foundations had been undermined by a combination of soil piled 10 m high on one side of the structure and the digging of a 4.6-m underground car garage on the other.

One month later, a construction pit at the site of a planned building in Nanjing, Jiangsu province, collapsed and is believed to have caused massive cracks on nearby residential buildings. _ChinaDaily_via_ImpactLab

China is a massive consumer of the world's materials, energies, and resources, but is China putting the world's resources to good use? We know that China pollutes the world's skies, oceans, and land masses. But is it for a good cause?

"Every year, new buildings in China total up to 2 billion square meters and use up 40 percent of the world's cement and steel, but our buildings can only stand 25 to 30 years on average," Qiu Baoxing, vice-minister of housing and urban-rural development, said at a recent international forum on green and energy-efficient building.

This means the average life span of China's residential buildings is shorter than their intended life span of 50 years at the blueprint stage. As a result, property developers have been urged to extend the median life span of buildings.

Industry sources have added to the mix by stating that the per unit energy consumption of China's short- lived residential buildings is two or three times that of residential buildings in developed nations.

In China, construction waste comprises 30 to 40 percent of the total urban waste.
The construction of a 10,000-sq-m building will create 500 to 600 tons of waste, while the demolition of a 10,000-sq-m old building will create 7,000 to 12,000 tons of waste, according to industrial data.

Space from building demolition in China annually constitutes about 40 percent of the total construction area. _ChinaDaily

Eventually, one must ask the question: "What is the point of it all?" Why is China devouring so much of the world's resources to build a huge volume of construction, when it is all going to be torn down -- or will fall down on its own -- within 30 years? Particularly when most of this new space is unoccupied, and may well never be occupied before collapsing or being demo'd.

For all of those who insist that China is the place to invest one's assets, perhaps it is time to begin to pay attention to what is actually going on. It is not always clear who is cooking China's books, only that they use too much MSG, pork fat, and bubble gum.

Originally published at abu al-fin