16 November 2011

China's Hidden Problems Slowly Coming to Light

Larry Lang is the chair professor of Finance at the Chinese University of Hong Kong. If he says that China's finances are in a difficult position, outsiders should pay attention. Keep in mind that these incendiary remarks were made in a session where all forms of filming or taping were strictly forbidden:
In the unusual, closed-door lecture, Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. “What I’m about to say is all true. But under this system, we are not allowed to speak the truth,” he said.

Despite Lang’s polished appearance on his high-profile TV shows, he said: “Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it.”

...Lang’s assessment that the regime is bankrupt was based on five conjectures.
Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said. _ET
Apologists for the communist regime's finances have not been silent, attempting to portray Lang as a sensationalist and a rabble-rouser. If that were the case, why would he insist that no taping or filming be allowed for his closed-door presentation?

Brian Wang has a somewhat contrary view from Lang's here: Lang Xian ping claims a depression has started in China

It is important to understand and acknowledge that the Chinese communist government is a police state which carefully controls as much information coming out of China as possible. China jails political prisoners, uses them for organ donours, and executes them if the person is obscure and little known outside the country.

Like Russia, China has never had a stable representative democracy. China has always cycled from insurrection to warring fiefdoms to empire and back again. No one really knows how long the current empire can last. More from zerohedge:
In response to the 2008 worldwide financial collapse, Chinese authorities unleashed $2.1 trillion of stimulus, or almost 33% of GDP. This compares to the US stimulus of $800 billion, or 5.5% of GDP, spent on worthless Keynesian pork. Unlike the US, where no jobs were created, China’s command-and-control structure funneled the stimulus into building cities, malls, roads, office buildings, and residential units. Millions of Chinese were employed in creating properties for which there was no demand. Moody’s approximates that China’s banks have funded at least RMB 8.5 trillion (US$1.3 trillion) of the RMB 10.7 trillion of outstanding local government debt, which was a significant portion of the 2008 national stimulus package. When the central authorities tell the banks to lend, the banks ask, “How much?” The result has been soaring real estate inflation and malinvestment.

Everyone has seen the pictures of the ghost cities (Chenggong) with no inhabitants; ghost malls (South China Mall, Dongguan Mall) with no shoppers; residential towers with no residents; and roads with no cars.

...All of the major ratings agencies are warning about an impending banking crisis in China. Fitch downgraded the country’s credit rating and warned there was a 60% chance the Chinese banking system will require a bailout in the next two years. Just like the US, China has too-big-to-fail banks, with five banks accounting for 50% of the lending in China. In a July 2011 report, Moody’s cautioned that the non-performing loans on the balance sheets of Chinese banks could rise to between 8% and 12%, versus the 1% proclaimed by Chinese officials. China’s regulators have belatedly applied the brakes, but it is too late. The house of cards looks susceptible to just the slightest of breezes.

Fraser Howie, managing director at CLSA in Singapore, captured the essence of the coming collapse in his recent assessment:

If you are going to address the misallocation of capital in the banking system and credit system, that’s going to have huge knock-on effects on the profitability and viability of the banks. And if there were a major banking crisis, you would start to see money trying to get out of China. What would the government do to maintain stability? You could have a whole host of problems. It’s almost far too complicated to contemplate.

There is one sure thing regarding bubbles: They always pop. It’s in their nature. _Source

The material above was adapted from earlier postings at abu al-fin

After the global crash and contraction of 2008, China's leaders were forced to scramble to keep China's GDP high. They achieved this by pumping up a huge construction, infrastructure, and housing bubble. The distortion of global economic indicators caused by this huge and wasteful misallocation deceived many outside observers into predicting that China would rapidly become the world's dominant power in every way.

But what has instead happened, is that China is becoming the great ghost nation, full of ghost cities, ghost shopping malls, ghost office and apartment buildings -- even ghost Disneylands! China is the land of pollution, the land of oppression, the land of intellectual piracy, the land of the police state where political prisoners are stripped of their vital organs before being executed. But no one is supposed to notice things such as that.

It is possible for countries with rich natural resources -- such as Saudi Arabia or Russia -- to distort their economies for long periods of time without the leadership class being forced to pay a high price. Should the resources run out, or should the prices drop, these nations will face serious repercussions for their short-sighted crippling of their countries' markets.

It is possible for countries with rich labour resources -- such as China -- to grow wealthy from foreign investment and export income for as long as the export boom lasts. But after the boom is gone, if the nation does not reform its distorted markets and corrupt financial infrastructure, the clock will begin ticking on its downfall.


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Blogger Whirlwind22 said...

Wonder how long China has until the house of cards falls down?

Wednesday, 16 November, 2011  
Blogger al fin said...

When the people get tired of all the make-believe.

Wednesday, 16 November, 2011  
Blogger Bruce Hall said...

... and who will buy the IOUs of the USA?

Thursday, 17 November, 2011  
Blogger al fin said...

The grim reaper?


Thursday, 17 November, 2011  
Blogger Hell_Is_Like_Newark said...


The world stopped buying all our debt a while ago. Its been heavily monetized by the Fed buying debt (from third parties) with newly created dollars.

This was also done in WWII. Back then though, the post-war economy expanded (technological breakthroughs, and a big increase in population) enough to soak up much of those excess dollars. As a result, the post war inflation was tempered.

I don't think the outcome of this round of Fed printing will be as benign.

Friday, 18 November, 2011  

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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