Billionaire hedge fund investor Jim Chanos is cited by Politico as arguing that China is another “trust me story” – like Enron. The basic idea is that the facts, like gasoline consumption and electricity consumption, do not support the Chinese government’s “reports” of 8+% GDP growth. Very similar to the American story, the “growth” being reported is a result of artificial demand from massive government spending. However, unlike America, the government spending has been much more effective in stimulating production, but not private demand. The reasoning proceeds that the glut of production will eventually result in even the government pulling in its horns to allow the glut to work off…a collapse in the making:
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined.
This, Chanos and others argue, is happening in sector after sector in the Chinese economy. And that means the Chinese are in danger of producing huge quantities of goods and products that they will be unable to sell.
The Pivot Capital report was extremely popular in Chanos’s office and concluded, “We believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the U.S. subprime and housing boom.”
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. … There is simply too much stuff, too many stores and no buyers.”
Governments can print money indefinitely, but contrary to popular belief, in real terms, they can run out of ability to purchase real production. Ultimately, government’s ability to “stand in” for private sector demand depends on government’s ability to force the private sector to give it the real resources it needs to purchase what the private sector will not voluntarily purchase on its own. Whether the government forces that transfer of real resources from private to public hands through taxation, monetary inflation or borrowing, the source for that transfer – the private sector well - is running dry and collapse of the artificial demand appears imminent.
A recent article in the WSJ talks of “China Nurtur[ing] Futures Markets in Bid to Sway Commodity Prices“:
Chinese leaders are concerned that their nation’s enormous economic expansion is becoming an excuse for foreign suppliers to inflate commodity costs. So, they hope to use their three futures exchanges to fight back.
Government officials say the country is positioning its futures markets to be major players in setting world prices for metal, energy and farm commodities. By letting the world know how much its companies and investors think goods are worth, China hopes to be less at the mercy of markets elsewhere.
Its easy to see why China would want to protect itself from recent large fluctuations in commodity (mainly oil) prices, when they spent $180 billion importing oil last year. They won’t have a very easy time doing it, however. China is still a communist government and they do not have a legal system in place to support futures contracts. None of them would be enforceable. There is also a huge policy bias towards large state-owned enterprises like China Oil. The Shanghai Futures Exchange won’t be an open, competitive, and effective market until small players in the exchange can get equal rights. The authoritarian Chinese Government policy makers (dictators) only allow the economy cake to grow on the condition that the largest piece is received by their friends in high positions at giant state-owned enterprises.
Unfortunately, just as the Chinese economy is manipulated by a small group of people, the US (and world) economy is manipulated in the same manner by the FED and entities like Goldman Sachs. China should be setting it’s sites on getting rid of Goldman Sachs instead of setting up its own pitiful exchanges. There is not much of a link between the HUGE fluctuations in oil prices and China’s steady increase in demand for oil (and other commodities). The true culprit and beneficiary behind these things is (government sponsored) Goldman Sachs. GS manipulated who would be rescued by with its immense amount of government cronies in Washington, successfully killing off its competitors, and then rode the energy curve up and down gaining huge rewards in the mean time.
If China’s goal is control and manipulate the biggest economy in the world (it is), all it has to do is take a look at the US’s Federal Reserve. We do it much better here in the states! We set up an authoritarian entity, claim that its “private” and separate from any form of oversight, then let it freely give out trillions of tax payer dollars to support whatever manipulative policy it desires! All without any of its skeletons coming back to haunt any elected officials.
The International Monetary Fund’s (IMF) Press section reports that their chief economist, Olivier Blanchard predicted on Tuesday the world’s recovery:
“The global economy is beginning to recover from the worst recession since the Great Depression, but sustaining it will require engineering greater U.S. exports and larger Asian domestic demand”. Blanchard said that two rebalancing acts will have to come into play: ‘First, rebalancing from public to private spending. Second, rebalancing aggregate demand across countries, with a shift from domestic to foreign demand in the US and a reverse shift from foreign to domestic demand in the rest of the world.’ …”
So…this reminds us of a cartoon that shows a business executive with a chart showing declining sales and simply drawing a new rising line on the chart. Come on! The IMF is saying that all that has to happen for world recovery to occur is: 1.private demand must take over from the government and 2. Asia must buy more goods from the US than the US buys from Asia. That’s all —-no problem – right? When we see Dumbo fly!
Good thoughts from from Nicholas White on the unintended cost of government manipulation for political gain. Can Retailers Compete With Government’s “Crown Corporations”?
China Stakes has an article which argues China’s expectations for inflation are building, yet it is experiencing deflation presently. China Inflation Expectations Building
Th recent North American “Summit” from a Canadian’s perspective. Mixed Messages from Mexico
Newt Gingrich and Emily Renwick argue for repealing the capital gains tax. Capital Gains Tax: An Argument for Repeal
John Mauldin gives us a summary of Gary Shilling’s recent thoughts. Slow Long-Term Growth, And Government’s Response
The National Inflation Association suggests what might be next: Cash for Clunkers Could Lead to Government Bulldozing Homes
Chinese young people have little respect for US economic policy which involves the destruction of the dollar and the value of US debt. According to Reuters:
“Chinese assets are very safe,” Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.
His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.
Germany has ridiculed the US inflation solution. Back in March, FT began to report on Germany’s fear of US inflation:
Mounting public debt and excessive liquidity in the economy could tip the US into an inflationary spiral, a senior economic adviser to Angela Merkel, German chancellor, has warned.
The comments by Christoph Schmidt, one of the five “wise men” who advise the German government on economic policy, cast fresh light on the transatlantic rift over how to tackle the global economic crisis.
“I see an inflationary risk in the US in the medium term because of the development of money supply there,” Prof Schmidt told the FT in an interview. “There is a danger that [governments] could start considering inflation as a way to reduce the burden of public debt.”
The US rush to inflate is old news, but its consequences are not as predictable as some let on. Inflation doesn’t create any new wealth- it’s is a wealth transfer. Creditors have their wealth transferred to debtors. Who are the creditors? Who are the lenders? Who are the bondholders? Who is getting paid back with “cheaper dollars”. Mostly its people who live in net creditor countries like China:
But only about 25% of US debt is owned by non-US entities. The rest -we owe ourselves. The Social Security “trust fund” holds alot of US debt, but that’s really meaningless. So who in reality is owed the most (net) within the US? Well… its retired people. People who have saved in the past. Where are they? Where do they live?
Petr Duczynski presents rough estimates of net external assets for regions and states of the United States derived from gross state product and state personal income. The estimates were for 2000, but the trend is toward more debt… so some of the net asset holder (creditor) regions in the table below have become like the rest of the US: net debtors.
|Net Assets by Region||2000|
|District of Columbia||-0.28||Tennessee||-0.47|
|New Jersey||-0.18||West Virginia||-0.38|
source: Duczynski, http://duczynski.czweb.org/swork.php
So, the US plans to inflate means the US is planning to expropriate the wealth of people who live, for example, in Florida and Montana (not to mention China and Japan). Does the rest of the nation care about those people? Nah -we are a Robin Hood nation… But do people who live in China and Japan care? Can they do anything about it? What do you think?…
FT: China stuck in ‘dollar trap’ – China is still buying record amounts of US government bonds, in spite of Beijing’s increasingly vocal fear of a dollar collapse…
Bloomberg: Housing Hitting Bottom by June Means Fewest Starts Since 1945 - “There are very few V-shaped recoveries in the history of real estate, and this one is likely to be even slower because of the size of the bubble,” said Robert Shiller…
Bloomberg: JPMorgan $29 Billion WaMu Windfall Turned Bad Loans Into Income – more funny money…
Bloomberg: Lowest Libor Hides ‘Exceptionally Wide’ Bank Spreads – all is not what it seems…
AP: Saudi oil minister: OPEC to hold output steady- new leg down?
WSJ: Obama Administration Sparks Battery Gold Rush – a gold rush to power new environmentally friendly cars…somebody usually gets frozen to death in gold rushes…
CNBC: Home Prices Tumble by Record 19.1% – housing bottom?
Bloomberg reports that RBC is calling China’s stockpiling of commodities its “new sovereign wealth strategy”:
“It’s part of an overall desire to decrease its exposure to dollar assets,” said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong, in an interview today. China fears the hundreds of billions of dollars the U.S. is spending on bank bailouts and stimulus will cause “higher inflation and a weaker dollar,” he said.
“Increased spending on commodities represents a reallocation of China’s sovereign wealth away from the accumulation of financial assets,” Jackson said in a May 15 research note.
China, the world’s biggest consumer of iron ore, boosted imports of the material to a record 57 million metric tons in April. China’s purchases of copper and copper products reached a record 399,833 metric tons last month, compared with 374,957 tons in March.
…China, the world’s second-biggest energy-consuming country, increased crude imports by 14 percent in April.
As the FED engages in at least $300B of QE (probably much more before they are through), it’s buying Treasuries from the market that China can sell into the market (or at least not buy) without prices changing substantially. The big fact in this article is this:
Without this stockpiling of strategic commodities, China’s trade balance likely would have risen in the first quarter instead of falling $51.8 billion to $62.51 billion…
That’s $50 or $60B per quarter of commodity stockpiling…in another 4 or 5 quarters, China will have up to $300B in commodity reserves… So what else are the Chinese buying? Ambrose Evans-Pritchard reports:
“There is a significant shift taking place in China. They are concerned about the stability of the global financial system so they are not going to sell US bonds they already have. But they are still accumulating $40bn of fresh reserves each month, and they are going to be much more careful where they invest it,” he said.
Hans Redeker, head of currencies at BNP Paribas, said China is switching into hard assets. “They want to buy production rights to raw materials and gain access to resources such as oil, water, and metals. They know they can’t keep buying bonds,” he said
So…in addition to stockpiling commodities, China is scarfing up real assets that produce these commodities: coal, copper, iron and gold mines, oil fields, timber lands… In another 4 or 5 quarters they will have as much in hard assets as they have in dollar denominated financial assets. Then, if the dollar falls in value by (say) 50%, their hard assets will rise by a like amount, leaving them insulated from the dollar’s decline. Will the decline wait for China to get into position…or does China control this timing?
“The long-term deficit and debt that we have accumulated is unsustainable. We can’t keep on just borrowing from China or borrowing from other countries,” Obama told a town hall meeting event in New Mexico.
“What’s also true is at some point they’re just going to get tired of buying our debt,” he said.
“And when that happens, we will really have to raise interest rates to be able to borrow and that will raise interest rates for everybody.”
The key words here are “when that happens”. So…we can 1. cut spending, 2. raise taxes, 3. monetize the debt, 4. sell the debt to US citizens instead of China, and others. Of course it will be some combination of these 4, but how much will each be emphasized? Swamp Report sees little political appetite for 1 and 2. Option 3 is already being used aggressively. To utilize option 4 to absorb much of the debt, while continuing to use option 3, requires a resurgence of panic.
WSJ Can China’s Consumers Replace the U.S.’s? …bad news not only for the trade balance, but also more specifically for export-dependent U.S. companies.
WSJ Ford to Sell New Shares in Show of Strength Ford believes raising the cash is worthwhile despite any backlash from current stockholders who fear their shares will be diluted.
Bloomberg Paul Krugman Says Rapid Economic Recovery ‘Extremely Unlikely’ “It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely”
NYT G.M. Says Bondholders Have its Final Offer on Debt Exchange G.M. plans to give 89 percent of the company to the Treasury and to a new retiree health care fund for the United Automobile Workers union, 10 percent to bondholders and 1 percent to existing shareholders.
WSJ Was It a Sucker’s Rally? You can have a jobless recovery but not a profitless one.
A China Business New survey shows that about 71% of Chinese economists believe China will favor gold over US debt:
“In a survey of major Chinese economists, more than two-thirds are reportedly bearish on the prospect of China increasing its holdings of US government bonds, and believe instead the nation should putting more of its hard-earned into gold.According to a China Business News survey of 70 Chinese economists (including one foreign economist), the exact figure is 71.4% anti-bonds and pro-gold.
75.7% of the economists asked believe that China should increase its holdings of gold, with 48.6% opting for a slight increase while 27.1% think China should pile in.”
The survey also brings to light the question of whether China’s gold reserves should be increased.”
Oh well, the Federal Reserve will just have to buy all those T-bonds, the administraion will be selling this summer…no prob.