Bloom of Doom VI: Will China Survive the Crisis?

China. like Japan in the late seventies and 1980s, has been dubbed an economic miracle. What if, like totally bankrupt Japan, this giant just stood on feet of clay, a zombie, a dead man walking? Are any of its statistics to be trusted? Or do we see just another Samuelson fallacy about the resilience and “productivity” of communism?

(Find more statistics and indicators etc. in our References section!)

So which major country, the United States, Japan or Britain, will default first on its foreign debt?

What is it that makes China purportedly so “strong”?

It’s figures on paper probably. Let some facts and headlines of recent articles pass review:

  • Beijing Seen Vacant for 50% Commercial as Chanos Predicts Crash“: Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates. “I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009. Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. … Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. … A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November. … “You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land — not even desirable plots of land — in Beijing to astronomical rates,” Chovanec said. … “The liquidity bubble last year went to the property market,” said Taizo Ishida, San Francisco-based lead manager for the $212-million Matthews Asia Pacific Fund, in a phone interview. … The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas — the 160-story Dubai skyscraper that’s the world’s tallest. … Overcapacity may be looming in manufacturing as well. China’s investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia’s gross domestic product. … “China is the only place in the world that despite having more empty buildings than the rest of the world has yet to reflect those valuations on their balance sheet,” Rodman said. … Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be “Dubai times 100 or 1,000.” Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt.” (Emphasis CrisisMaven) And CrisisMaven, always the devil’s advocate wants to ask: all these good analysts, they’re capitalists still – isn’t there a chance they can’t fully appreciate how a socialist country works? If skyscrapers under construction are “6,800 Burj Khalifas” – may not the crisis be only 1,000 Dubais but 6,800, never underrate China, when they talk famine they also mean ten times the business the Bolshevists meant!
  • China’s “Cooked Books”: Lessons For India“A keen student of Chinese economic polity, Prof. Rowski compared the Chinese statistics on growth for the period 1997-2001 with other instances of high speed growth in the post- World War II era in Taiwan (1967-71), Japan (1957-61), Korea (1977-81) and China itself (1987-91). In all the above cases, (barring China) cumulative four-year growth exceeded 30 per cent, the expansion sparked higher energy consumption, increased employment and rising prices. But though official Chinese data for the period 1997-2001 showed a fall in energy use and employment and no rise in prices, real output in China grew by more than 30 per cent in this four-year period. According to Prof. Rawski, “This odd combination defies explanation”. … The most common view is that national gross domestic product (GDP) figures, arrived at on the basis of reports sent by provincial governments in China, have fallen victim to political pressures. According to Prof. Rowski, “the tornado of deception emerged from a 1998 campaign, targeting 8 per cent growth rate as a great political responsibility”. As a result, provincial and party leaders were afraid of reporting anything less than a 7-8 per cent growth rate, regardless of the reality in their respective domains. … Economic and business experts on China believe that the actual growth rates in the 1977-2001 period were around 4 per cent annually as against the hyped up figure of 7.6 per cent. …” (Emphasis CrisisMaven) See also: “What’s Happening to Chinas GDP Statistics” (the original Rawski article, also here: “What’s Happening to Chinas GDP Statistics“). A critique is here: “Oleksandr Movshuk: The Reliability of China’s Growth Figures: A Survey of Recent Statistical Controversies
  • China: Hot economy or cooked books?” (2000-2002): “Time and again over the past few years have we been confronted with provincial growth figures that, when aggregated, lead to substantially higher national growth rates than the NBS – after unexplained “corrections” – has reported. Survey-based statistical sampling methods used in other major economies to determine GDP growth are in their infancy in China. Instead, the central government still largely relies on reports by provincial authorities, and those reports generally come in at growth levels equal to or higher than those targeted by central government policy makers. Pressure to affirm official growth targets handed down from Beijing overwhelms local and provincial statistical bureaus. Party political careers are at stake. … Thomas G Rawski, now something of a media celebrity for his research and critical conclusions on China’s GDP statistics, points out that official figures show real GDP growth of 24.7 percent between 1997 and 2000, while during the same three years, energy consumption dropped by 12.8 percent. “The implied reduction of 30 percent in unit energy consumption over three years seems implausible, despite the rapid growth of computer manufacture and other activities with low unit energy consumption,” he says. … Other quantitative inconsistencies are as striking, notably that, particularly in rural areas, retail sales rise more rapidly than household income, implying an increase in the share of consumption spending in household income, when at the same time economic authorities complain that “moderate income growth has intensified people’s tendency to save money” and explain that deficit spending “was introduced in 1998 to overcome insufficient domestic demand and dwindling exports”. … ” (Emphasis CrisisMaven)
  • Foreign Policy: How China Cooks Its Books …” (2009) – The equivalent of Germany’s total workforce not accounted for (and, may we add, let’s not forget that people in state-owned factories may well be counted as unemployed as well, in socialist countries, that’s just a massive assistance program!): “In February, local Chinese Labor Ministry officials came to “help” with massive layoffs at an electronics factory in Guangdong province, China. The owner of the factory felt nervous having government officials there, but kept his mouth shut. Who was he to complain that the officials were breaking the law by interfering with the firings, he added. They were the law! And they ordered him to offer his workers what seemed like a pretty good deal: Accept the layoff and receive the legal severance package, or “resign” and get an even larger upfront payment. … Such open-secret programs, writ large, help China manipulate its unemployment rate, because workers who “resign” don’t count toward that number. The government estimates that roughly 20 million migrant factory workers have lost their jobs since the downturn started. But, with “resignations” included, the number is likely closer to 40 million or 50 million, according to estimates made by Yiping Huang, chief Asia economist for Citigroup. … That is the same size as Germany’s entire work force. … “China announces its annual objective of GDP growth rate each year. In Chinese culture, the government has to reach the objective; otherwise, they will ‘lose face,'” said Gary Liu, deputy director of the China Europe International Business School’s Lujiazui International Financial Research Center. “For instance, the government announced that it wanted to ensure a GDP growth rate of 8 percent in 2009, and it has become the priority for government officials to meet that objective.” … China’s domestic retail sales have risen about 15 percent year on year, but that does not really translate into Chinese consumers purchasing 15 percent more televisions and T-shirts. The country tabulates sales when a factory ships units to a retailer, meaning China includes unused or warehoused inventory in its consumption data. There is ample evidence that state-owned enterprises buy goods from one another, simply shifting products back and forth, and that those transactions count as retail sales in national statistics. … China’s economy grew at an annualized 6.1 percent rate in the first quarter, and 7.9 percent in the second. Yet electricity usage, a key indicator in industrial growth and a harder metric to manipulate, declined 2.2 percent in the first six months of the year. How could an economy largely dependent on manufacturing grow while its industrial sector shrank? … China’s provincial GDP tabulations add up to far more than the countrywide estimate. … One private brokerage house, CLSA, compiles its own PMI, suggesting a sharp contraction in industrial output between December 2008 and March 2009. Beijing’s PMI data, on the other hand, indicated that industrial output was expanding during that period. … “ (Emphasis CrisisMaven)
  • Paul Krugman: What you don’t know …“: “Some China analysts are crying foul: If IVA growth figures are being cooked, surely that means China’s recent GDP data have been overstated too. China’s statisticians use IVA output to estimate what accounts for nearly half of China’s GDP. China’s association of electricity generators has a solution: it’s stopped publishing consumption data.” (Emphasis CrisisMaven)
  • What is happening to China’s GDP statistics?” (Abstract, 2001): “This paper argues that official Chinese statistics contain major exaggerations of real output growth beginning 1998. The standard data contain numerous inconsistencies. Chinese commentaries castigate widespread falsification at lower levels and question the autheticity of figures emanating from the central statistical authorities. The author speculates that cumulative GDP growth during 1997/2001 was no more one-third of official claims, and possibly much smaller.” (Emphasis CrisisMaven)
  • China’s Official Statistics: Challenges, Measures and Future Development“, By Li Deshui, Commissioner of National Bureau of Statistics of China (3 March 3 2005) “Official statistics in China is facing severe challenges, we have a long way ahead of us in the course of reforming and developing a efficient statistical system. While we are confident that we can work hard to improve Chinese official statistics, we need strong support and assistance from our colleagues from other countries and from international organizations.” Read through the lengthy paragraphs and if you are only a little familiar of how socialist jargon is worded you notice: they don’t even have statistics!
  • Why China Cooks The Books” by Melinda Liu | Newsweek | April 1 Issue 2002: The reputation of the People’s Republic as an economic powerhouse is based in part on pure bunk – Many of the white-hot numbers emerging from the People’s Republic in the 1980s and 1990s are now thought to have been cooked up by eager-to-please cadres. The pressure on Chinese officials intensified after the 1997 Asian financial crisis, when Beijing decided that the country had to grow by at least 7 percent a year in order to create enough jobs to forestall social unrest. Not surprisingly, reported growth rates have not dipped below that level since then. … Thousands of the laid-off workers who took to the streets don’t even exist in China’s jobless statistics: they are considered xiagang , laborers who are offered a tiny monthly stipend from their former companies and who are thus not counted as unemployed. Protests most often stem from the fact that even those meager benefits have vanished into thin air. … industrial output numbers have been inflated. The official jobless rate is seriously understated, as are the billions in nonperforming loans that are dragging down Chinese banks. Don’t even try to pin down China’s military budget. Officially it was $17 billion last year, but the actual figure could be up to five times larger. … Guangzhou Daily reported that a township official in Hunan province had fudged GDP and profit figures-and was promoted to chief of a county statistics bureau. … In statistics unveiled before the Chinese Parliament this month, every province but Yunnan reported GDP growth rates that exceeded the national figure of 7.3 percent. … The official jobless rate of 3.6 percent in 2001 does not include xiagang workers, who are estimated to have numbered 10 million last year. Nor does it include farmers who have left their fields to find work in the cities-a “floating population” of around 150 million migrants who are at least seasonally unemployed. Tsinghua University professor Hu Angang has researched the problem using definitions of joblessness more in line with international standards. He concludes that China’s unemployment rate was 7.6 percent in rural areas and more than 8.5 percent in the cities last year-well above the breaking point at which Beijing claims social turmoil is inevitable. “We’re facing a flood of laid-off workers,” warns Hu. … An even more urgent time bomb may be hidden in China’s debt numbers. Central bank governor Dai Xianglong confessed to Parliament this month that national domestic debt was much higher than the official numbers-16 percent of GDP in 2001-suggest. Dai said the figure was closer to 60 percent if unfunded state pension liabilities, local government debt and major banks’ nonperforming loans were thrown in. Dai’s unusual candor is the good news. The bad news is that independent economists say Dai’s statistics are still based on China’s yearbook GDP growth statistics. A more realistic figure is higher still-closer to 100 or even 125 percent, according to economist Rawski. The bad-loan numbers at state banks alone are terrifying. The Bank of China has reported two different figures for its nonperforming loans in 1999-one based on Chinese methodology, the second more closely in line with Western accounting standards. The latter is 2.6 times bigger than the former. … Gordon Chang goes one step further by predicting “the coming collapse of China” within a decade in a book of the same title; he believes the regime will soon be unable to finance the deficit spending that has propelled China’s recent growth. … even if Beijing were interested in accurate, thoroughly transparent statistics, authorities would not have the means of producing them. …” (Emphasis CrisisMaven)
  • China’s data are suspect” (21 January, 2010): “For instance, the government there considered loans issued to companies by the government as part of the GDP ! In other words, billions and billions of dollars worth of stimulus loans suddenly helped to bump up China’s GDP This questionable way with statistics creates a false image of growth.For instance, the government there considered loans issued to companies by the government as part of the GDP ! In other words, billions and billions of dollars worth of stimulus loans suddenly helped to bump up China’s GDP This questionable way with statistics creates a false image of growth.” (Emphasis CrisisMaven)
  • Now it has often been said that all the socialist society’s problems in China are dwarfed by the extreme success of its capitalist sector. Well, CrisisMaven begs to differ: how can you know that if the macro-economic data are highly unreliable? But even the financial reporting within the “capitalist” sector is not without flaws: “False Financial Statements: Characteristics Of China’s Listed Companies And Cart Detecting Approach“: “False Financial Statements (FFS) have long been a serious problem in China and other Asian countries, which significantly dampen the confidence of the investors. Regardless of listed companies or non-listed companies, the percentage of financial statements that contained false information is quite high, which is one of the major reasons why China stock markets moved in the opposite direction towards its wonderful economic growth over the past few years.”
  • Is China getting its act together now? CrisisMaven doesn’t believe so, because the government’s face must be kept at all cost and if they declare 8% growth then statistics better show 8% or a little above. So take the following with a grain of salt. They may have passed a stricter statistics law, but only for the reason that before the government equally lost face internationally because regional reports added up to more than 100% of national figures. So we think, this is all that about: “China: Data fraud officials will be sacked“: “Former NBS director Li Deshui said the cumulative gross domestic product data submitted by local governments for 2004 was 3.9 percentage points higher than the NBS data for that year – a difference of nearly 2.66 trillion yuan ($380 billion). … The NPC uncovered serious frauds during inspections into the implementation of the old statistics law, including in Chongqing municipality, where two officials asked workers to add a “0” to the production value of a local enterprise, which saw it jump to “30 million yuan” from the previous “3 million yuan”, in order to achieve its annual economic development goal. Analysts believe a blinkered view of economic growth, once the measure of an official’s performance, was the major reason behind the faked figures.” (Emphasis CrisisMaven)
  • Blinded by China’s false statistics“: “Even if we use Chinese statistics, the overall rate of progress between 1978 and 2003 is not overwhelming. In that period China’s per capita GDP grew at a compound rate of 6.1 percent. This gives an increase of 337 percent over a quarter of a century. Compare this with Japan’s, which increased by 490 percent between 1950 and 1973. Both South Korea and Taiwan have done even better the former with 7.6 percent compound growth a year between 1962 and 1990 and Taiwan with 6.3 percent between 1958 and 1990, the years when they were bursting through the industrialisation sound barrier. The statistics we do have show up some near-insuperable problems. One is that 40 percent of Chinese bank loans are considered “bad”, a gigantic misallocation of capital. Another is that China could grow old before it grows rich. Not very long ago China was one of the world’s most youthful countries. But the one-child policy has had an enormous impact. As early as 2015 China’s working age population will begin to fall. By 2040, just a decade before China hopes to be a middle-income country, it will have 100 million citizens over 80. That is more than the current worldwide total. Arnaud de Meyer, deputy dean of INSEAD, the European business school, author of a study on Asian innovation, writes that in relation to its huge development needs, China may already have too little skilled manpower. McKinsey, the management consultancy, reports that only 10 percent of China’s graduating engineers are good enough to work for foreign companies. It is not surprising that China’s software industry lags behind India’s because of its fragmented structure and poor management.” (Emphasis CrisisMaven) China may be good at making toays, but they are definitely not yet very productive in the area of high-tech. But exactly this is what may determine future competitiveness, q.v. India.
  • China’s GDP Statistics Questioned: U.S.$205 billion discrepancy shows up in calculations“: “Zhong Dajun, the founder of the Beijing Dajun Economic Observer Center said, ‘It is clear that the GDP alone does not correspond to the well-being of China’s economy. Investment in useless construction might pull up the GDP figure, but does not improve the livelihood of the public. In this case, no one cares about the GDP.'” (Emphasis CrisisMaven) That goes for most state activity in the economy – “cash for clunkers” or the German “Abwrackprämie” were net value destroyers. (Emphasis CrisisMaven)
  • China is the worlds statistician’s Alcoa if you compare the speed their data are released: “Growth (trend) you can believe in“: “Certainly, China is among the earliest of the major economies in releasing its key numbers. While the economic growth numbers for the fourth quarter ending Dec. 31 were released by China just 20 days later, Japan will not be offering its preliminary data for the same period until Feb. 15. And revisions to the Chinese stats can come long, long after the original release.” Any similarities with Greece are of course by accident. But what is even more striking: the Chinese rural statistical offices still by and large have no computers! Now, how on earth does an nation so vast and populous but technologically so backwards, mired in political infighting, produce their figures far faster than smaller Japan with certainly one of the technologically best equipped statistics organisations? CrisisMaven would rather believe in saintly apparitions before illiterate farmer children. (Emphasis CrisisMaven)
  • China, Cuba and Castro: Education and statistics“: “The Chinese regime systematically lies to suit its advantage (remember the article on bogus fishery catches or my citation of the Beijing authorities even lying about the outdoor temperature in summer (see Jasper Becker’s The Chinese for confirmation). Local authorities regularly inflate (or deflate as shows them in the best light) numbers sent to the center. Beijing often is clueless as to the truth or prefers not to know. Xinhua, the OFFICIAL Chinese news service recently carried an article admitting that 62,000 official statistics were false last year. I don’t know why we should believe this number either! What can you say about a regime that is so afraid of facts and so steeped in mendacity that it fudges the facts about things easily checked, be they literacy (one gives a reading test) or the outdoor temperature (grade schoolers can make a simple alcohol thermometer)?” (Emphasis CrisisMaven)
  • Or look at “China Taxes Reveal Spending Slowdown, Goldman Says“: “‘Tax data show much sharper deceleration in income and consumption in the past few months than suggested by official retail sales or income growth figures,’ Goldman Sachs analysts Joshua Lu, Caroline Li and Fiona Lau wrote in a note today. Value-added tax has “de-linked sharply” from retail sales figures, the analysts wrote. VAT rose 1 percent in the fourth quarter from a year earlier, while retail sales gained 21 percent, according to the note.”
  • Let’s not forget, there are also voices that claim China actually systematically underreported the size of its economy! These CrisisMaven even finds plausible, however believes on closer inspection to have found that these were figures where equally the size of the population was underestimated so that these figuresstill mean that the numbers are the same in relation.
  • From the horse’s mouth: “Chinadaily BBS » News Talk» Chinese economy» there are a lot of fake numbers in socioeconomic statistics in China“.
  • ANDREW PEAPLE: Making Sausages, Data in China“: “Laying aside the obsession with electricity consumption still leaves a further problem. As Standard Chartered research points out, the IVA measure –overstated or not – itself has recently fallen faster than overall GDP. Usually the relationship is the other way round: So this is another clue suggesting the headline data are rather too punchy. Ignorance is bliss when it comes to sausage-eating, but investors want to be wary of trusting in China’s economic rebound until clearer patterns start to emerge.” (Emphasis CrisisMaven)
  • China Economic Review – “John GILES: What is China’s True Unemployment Rate?“: “Using data from a unique survey conducted in five large Chinese cities that employed an internationally comparable definition of unemployment, we find that the unemployment rate of urban permanent residents was 14.0 percent in 2002. Comparing unemployment rate estimates across time and space using data from the 2001 China Urban Labor Survey and China’s 2000 population census, we estimate that for China as a whole, from January 1996 to September 2002 the unemployment rate of urban permanent residents increased from 6.1 percent to 11.1 percent, and that of all urban residents, including temporary residents (e.g., migrants), increased from 4.0 to 7.3 percent.” (Emphasis CrisisMaven) Please note, these are findings distilled by a Western researcher solely from data already, albeit maybe a bit hidden, in the official Chinese statistics! Those who knew people from communist countries or visited there, know that often three people share the “job” one person could do, so unemployment by rational standards would be anywhere from twenty to sixty percent. And if you count that what they produce actually often no one wants if they could choose, it’s approaching 80% or more. Bakers are no use if they don’t have a regular supply of flour, mechanics no use if they can’t get the spare part needed to do a job etc.
  • And as if that were all the problems with scientific probity China has: Hepeng Jia: China ‘must act on rising claims of scientific fraud’, 10 May 2006: “Since November 2005, several Chinese scientists have been accused of plagiarism, faking data or lying about their academic achievements (see Top Chinese academic under fire from ‘science police’). Most of the allegations were first made public on a US-based Chinese website called New Threads, and were then widely reported and debated in the Chinese media (see Out to debunk: China’s ‘science police’).”

As for the socio-political structure of China, check out Patrick Chovanec’s “The Nine Nations of China” in his blog “An American Perspective from China“.

What could make China weak? Now that we’ve looked at how the official figures may be misleading, we may have to take a small leap of faith: the majority of voices contends that even if China cooked its books, still there is positive growth and China is strong and resilient. With a communist regime it is always difficult to tell, as any opinion that goes against the government’s grain can land you in jail for several years. So, for anyone living there: would his or her situation improve if they told us the truth? No, it would stay as it was. Would their personal situation deteriorate? You bet, there’s nothing more catastrophic than having five to ten years eaten out of your life and loosing a career, see your family destroyed etc. So, while dissidents may protest gross maltreatment, either because they’re in a situation so bad it can only get better or because they hope international pressure may weigh in and help them with their agenda, nothing would ever change if someone just reported how wrong the figures are – the real life is already bad and they know it without looking up the statistical yearbook. So let’s face it: communist regimes are largely Potemkin villages, but you can hardly prove that until they collapse. And until they collapse the very same epigones of the schools of thought that maintain they can’t see a bubble or that fires are best put out with gasolene will swear the socialist economy is not only healthy but that probably some things can be managed better centrally and if only they had a similar instrument in times of crisis, but alas, aren’t we a democracy (sigh …). So let’s see if we can lift he veil a little: “Economist Speaks Out About China’s True Economic Situation“:

“Cheng Xiaonong, an expert on the Chinese economy and chief editor of Modern China Studies. … Cheng indicated that the Chinese economy is already on the verge of collapse, but that the CCP’s deception combined with economists’ lack of courage to speak up has led the outside world to be deceived about the true economic situation in China. … Cheng points out that the “statistics” used to assess China’s economy are released by China’s National Bureau of Statistics, and due to the CCP’s authoritarian system, the Statistics Bureau can do nothing but cooperate with the CCP’s deceptive propaganda to create the illusion of prosperity. … ‘The National Bureau of Statistics is an economic mouthpiece of the government. Any data that the Bureau releases is only for the purpose of propaganda. Any data they think would be harmful to the government would be suppressed from disclosure, or manipulated and released as false data instead.’ … ‘The CCP considers all this data to be ‘state secrets’ and not to be disclosed. Only on rare occasions, for example, in a media report or an official speech, one or two points have leaked out. The CCP has never systematically released such data. It is known that the unemployment rate exceeded 30 percent five years ago.’ … migrant workers already had no way to support themselves, … ‘The current situation for migrant workers or university graduates could not be worse! For example, look at the employment rate for this year’s university graduates in Guangdong Province, the province with the best economic condition. The employment rate for students who graduated this year has not exceeded 8 percent to date. That means that 92 percent could not find a job. Similarly, the number of unemployed migrant workers has reached 30 million.’ … Cheng also mentioned that many economists inside and outside of China often do not want to speak the truth because they have personal interests or close ties to the CCP. Hence it is quite difficult to assess the true condition of China’s economy.”

So whom do you believe? Official statistics from a country that suppresses the truth about its system everywhere but in statistics it is probably “understating”? Huh? Let’s quote from “Alan Ebenstein: The Poverty of Samuelson’s Economics“:

“Early in his career, Samuelson predicted that after World War II there would be a worldwide depression, contrary to what actually happened. In the 1973 edition of his famous textbook Economics he predicted that though the Soviet Union then had a per capita income roughly half that of the United States, it would catch up to the United States in per capita income by 1990, and almost certainly would by 2015 because of its superior economic system. … … In the 1976 10th edition of this work — which is perhaps the best-selling economics text of all time — Samuelson wrote that it was a “vulgar mistake to think that most people in Eastern Europe are miserable,” … In the 11th edition, four years later, he removed “vulgar.” … in the 1985 edition of Economics, “that entire passage had disappeared. Instead, he … substituted a sentence asking whether Soviet political repression was ‘worth the economic gains.’ This non-question Samuelson … identified as ‘one of the most profound dilemmas of human society.’ In the face of looming Soviet economic disaster the 1985 Samuelson text offered these paragraphs: “But it would be misleading to dwell on the shortcomings. Every economy has its contradictions. … What counts is results, and there can be no doubt that the Soviet planning system has been a powerful engine for economic growth.’ ” [By that time even the CIA knew better!] In the 1989 13th edition of Economics — as Soviet-style socialist command economies were in collapse around the globe, and as eastern Europe was aflame in revolution that would spread to the Soviet Union two years later — Samuelson opined that “contrary to what many skeptics had earlier believed”: “The Soviet economy is proof that … a socialist command economy can function and even thrive.” Skeptics indeed — in 1989!”

So shall we laugh or cry? Most economists that today see how marvelously China rides out the current crisis are from this very school, Samuelson’s textbook was a must-read in their studies and if they wanted to become tenured they better copy his mathematical models or else … we could go on with a host of others, Irving Fisher for example who in 1929 saw everlasting high stock prices (at least he put his money where his mouth was and lost a bundle so he shall be forgiven, and don’t mention the war the consumer price index). When you do a little research you find dozens of articles that point to problems the general argument about China’s alleged strength seems to miss, e.g.: environment360 – Christina Larson: “China’s Grand Plans for Eco-Cities Now Lie Abandoned“:

“… the much-touted projects have largely been scrapped. … Today, almost nothing has been built. Some residents have been moved off the island, many of them becoming cab drivers in bustling Shanghai. Although the project was widely publicized internationally, most locals knew little about it. The political leaders who championed the project were ousted in a corruption scandal, and their successors have allowed construction permits to lapse. … ‘What I have always found amazing about these eco-towns is how seemingly easy it is for people to, first, tout these as a sign of China’s commitment to the environment and then, second, be surprised when things fail,’ writes Richard Brubaker, founder and managing director of China Strategic Development Partners. … Among the problems besetting the project were ‘technical inexperience, faulty materials, lack of oversight, and poor communication,’ says May, who has studied the site. Oddly, some of the homes were built with garages, although villagers don’t have cars. … While disappointing, these results shouldn’t be surprising. In China, hype comes easy, as foreigners dearly want to believe that anything is possible in this booming country. … So why did these plans not come to fruition? … feud over who would actually fund the project. … a lack of sound oversight: no one effectively ensured that plans on paper were consistently translated into projects on the ground. …” (Emphasis CrisisMaven)

USA Gold Market Update – “Adrian Van Eck’s Hotline on Money and the Economy“, Thursday, May 6, 2004:

“… Well, now fast forward to 2004. The problem has not been inflation these past three years. In fact, no one even believes inflation is possible these days. Fed chairman Alan Greenspan has persuaded all who will listen to him that he has sprinkled a magic potion over the economy and has generated productivity increases greater than have ever been seen before in the world. Combine that with a popular belief that communist China is going to grow so big and so fast that it will flood the whole world with cheap products, causing inflation to be relegated to the museum of economics. It is an updating of the Soviet premier — who once told us that his planned economy would bury us. You know how that turned out. … Wall Street has created the myth of a communist China converting to capitalism. … The REAL Red China was sucking into its vortex every bit of American money and technology it could muster, whether by lying, cheating or where necessary by stealing. It had chosen 35 giant state-owned corporations as its vehicles for a planned takeover of all the world’s industrial production. … It was seen by them as prudent to follow the same path trod earlier by Japan and then South Korea. First they would perform the most menial assembly tasks, gradually demanding and getting more and more complex duties and the high-tech know-how and equipment that went with them. When they were ready they would brush aside the U.S. brands and promote world wide their own brand names. You are already seeing the start of that with the one million Chinese-brand computers being sold through their favorite Chinese “factory-outlet”, WAL-MART. In order to push its program, China had cut the value of its money in half against the U.S. dollar and then locked it in tightly to the dollar [CrisisMaven has already shown how that does have harmful side-effects the Chinese planners obviously overlooked]. They did this ten years ago. A few years after they carried out this plan, much of Asia collapsed financially. They had tried to compete with Chinese prices and had lost so much money doing so that they went broke. … their plague brought on the Russian and Latin America defaults. American big business, in its greed and ignorance of the fundamental principles of capitalism, fell in love with China’s planned economy and assumed that its workers would put up with slave labor wages and working conditions for two more generations. So dozens and then hundreds of American manufacturing plants moved there. … … China was absorbing $120 billion in trade surplus and another $50 billion in direct corporate and Wall Street investment per year. For an economy that totals only one and a quarter trillion dollars a year (about one-tenth the size of ours) that was a way-out-of-line sum of money. That money largely went into China’s four big government-owned banks and then was distributed via a constant series of make-believe “loans” (really subsidies) to Chinese corporations, especially the state’s BIG 35. The result was that the banks were increasingly holding worthless loans equal to two-thirds of their deposits, a number no civilized nation can tolerate. Once, twice, three times China announced “reforms” that consisted of gigantic government cash infusions into their banks, to help them get solvent. But bad loans have been building faster than the bailouts. They were getting cash transfusions while bleeding out 1000 holes. Then came the climax. China has few raw materials. To build new factories for Americans and themselves, they purchased iron ore, copper, aluminum cake and a host of other commodities – plus advanced machinery and more recently food to feed the millions of farmers who had flocked to cities and had given up growing foods. The volume of imports grew so high that Japan, Asia, Europe and Latin America were living off China, taking from China the money flowing in from America. I knew it could not last and in a recent Forecast I said so. I predicted that one day soon the bankers would call their biggest borrowers into their office and say: “The party cannot afford these huge subsidies we call loans. You will have to raise your prices to cover at least most of your costs.” That is exactly what happened a week ago. Wall Street is desperate to hide the fact that its investments are at risk and that it peddled worthless junk to pension funds and mutual funds. They are using a pile of lies and are claiming all is well in China. … the proof … appeared in Barron’s this past weekend. China has been buying U.S. Treasuries to fund a portion of our debt. That alone kept the Treasury from blowing the whistle on them and their big American CEO friends, who have shipped three million jobs to China and falsely called it productivity increases. (The ISM [Institute of Supply Management] does not ask members where new orders are being produced.) But guess what: American banks have stripped their loan portfolio dry, cutting back every category except purchase of Government securities, which rose a shocking $15.7 billion. Over at the Fed, foreign holdings of U.S. Treasuries (which had been rising by $6 billion a week for a year actually fell by $1.86 billion). And Fed credit, which had only increased by $23 billion in the previous 51 weeks, jumped an astounding $5.7 billion in one week. In addition, the Fed bought outright $753 million worth of Treasury securities. We had been warned over a year ago they could and would do this when it was necessary. Greenspan had flown to Asia and told them he had a bottomless checkbook and a bushel basket and would buy any T-debt they wanted to sell. And Governor Ben Bernanke – a genuine scholar of both the Depression and the decade-long period ending in 1951 when the Fed had printed money and brought as much Treasury Debt as needed to keep both long and short Treasury rates very low, had pledged to send helicopters aloft all over America and dump cash out to the public, … SO BRACE YOURSELF. If this is the beginning of the move that I think it is, America will experience a new round of inflation. It will be denied on all sides, as it is being denied now. ( I know of no one who believes the government’s inflation numbers. If the real inflation data were subtracted from nominal GDP, it would be seen that both growth and productivity are well below what they claim today.) Nevertheless, while denying there is inflation, the government and the ISM are boasting that prices paid and received by businesses are climbing at the steepest rate in years, and they say this new pricing power has come just in time to save many businesses that were starved for funds before. So forget whether the Fed dropped the word “patient” from its new announcement. And don’t worry about a quarter-point “tightening” at the end of June or the middle of August. You are seeing the first bales of money dropping from Bernanke’s helicopters. Before they are done, true inflation will be up to 8%, although the government will claim it is either 5% or 6%. And everyone in the financial media, especially the Wall Street Journal and Investor’s Business Daily, will brag about how modest and benign inflation is. …” (Emphasis CrisisMaven – You can see how no one in the establishment can have an interest in exposing the Chinese blunders.)

Of course, we can’t see a bubble: China Economic Review – February 12, 2010: Sector brief: Property, “China house prices jump by 9.5% in January“:

“Rising property prices continue to create policy concerns, but fears that Beijing will pull the cord on the housing market are overplayed … Housing prices in China’s 70 largest cities rose 9.5% year-on-year in January, 1.3% higher than December, according to the National Development and Reform Commission. Prices of new home were up 11.3% from the same time last year and up 1.7% from the previous month, while secondary market prices increased by 8% year-on-year and just under 1% month-on-month.” (Emphasis CrisisMaven – notice the acceleration here – usually that spells “end game” in huge letters; of course, by US Fed standards, it’s hard to spot a bubble before it bursts … and even afterwards.) “China’s hidden debt problem“, July 27, 2009, BEIJING (Reuters):

“Thanks to successive years of fast economic growth and even faster government revenue growth, the official debt-to-GDP ratio was 17.7% at the end of last year, far lower than almost any other major economy. … that excludes local government borrowing, the current surge in loans backstopped by Beijing and bad assets cleared from the banking system but still floating about. … analysts estimate that China’s debt may be closer to 60% of GDP … China’s finances are deteriorating more quickly than the government expected, fueling a rise in the stock of both explicit and disguised debt … the real worry is the thickening morass of indirect debt. … Ministry of Finance estimated earlier this year that local government debt already topped 4 trillion yuan, or 16.5% of GDP … Above and beyond that are 400 billion yuan in bad loans in banks’ hands and at least 1 trillion yuan in non-performing debt hived off their books and assigned to asset management companies. The buck stops with Beijing on all of these. … Green said he “conservatively” estimates that Beijing’s bill for covering loans issued this year alone will be 1.75 trillion yuan, enough to push its 2009 deficit to 10% of GDP. … lower levels of government as officials engage in financial engineering that is both opaque and highly leveraged. … Local authorities, … are piling debt on top of debt. …” (Emphasis CrisisMaven – again a probably nauseating caveat: do we trust these numbers? Why should they not be understated?)

Update 2010-03-17: Mr. Paul Van Eeden of Cranberry Capital, a private holding company and renowned for his substantial and predictive work on gold price movements, argues too that “China’s Economy May Collapse“:

“… we hear a lot about China and its impact on markets. Chinese residents are now allowed to buy gold. China buys vast quantities of all sorts of raw materials such as copper, iron and oil and hope has been pinned on China’s revival since the economic crisis began. The Chinese economy barreled ahead as if nothing happened while North America, Europe and Japan’s economies collapsed.
Exports represented 35% of China’s GDP last year, according the World Bank website. China’s exports fell approximately 30% since last year, which means we would have expected China’s GDP to decline by more than 10% this year. Instead, the Chinese economy grew by 8%! How is that possible?
The Chinese government announced a massive stimulus program, much larger than the US stimulus package as a percentage of GDP. Yet it is almost certain that only a portion of the stimulus plan has been executed. A more likely source for China’s growth is the expansion of its bank credit this year. Bank credit in China has increased by 28% of GDP since January. To put that in perspective, that is equivalent to a $4 trillion increase in the US money supply, more than ten times the amount by which the US money supply actually did increase since January this year. Anyone concerned about inflation should be concerned about the inflation of the Chinese renminbi.
… we were talking about the Chinese economy’s miracle growth. The theory goes that the credit expansion in China is fueling a consumer binge to such an extent that China’s internal consumption has replaced the lost export markets and then some. Before we just take this on blind faith, we should note that China’s economic numbers are not calculated in the same way as equivalent figures in North America. Specifically, in North America GDP is measured by expenditures while China’s GDP is based on production; and that is a very material difference.
For instance, the manufacturing of products is a component of Chinese GDP and not the sale of those products. Consider that if China wanted to increase its GDP all it had to do was produce more goods without regard for whether there was a market for those goods. Of course, manufacturers cannot continue to produce more and more without selling their products – they will rapidly run of money. But they could if the banks are willing to lend them money to build inventories of manufactured goods. I have a sneaky suspicion that the explosion of Chinese bank credit was used to finance a massive increase in production so that GDP growth would meet the Party’s expectations.
It would explain why China continued to buy large quantities of raw materials that could not be reconciled with the collapse in the market for its goods (exports). An economy cannot sustain itself if debt is used to manufacture products for which there is no market. Either the banks, or the manufacturers, or the retailers have to eat the losses. Regardless of where those losses come home to roost such an economy as a whole is rotten to the core.
The inconsistency in the Chinese data and the anecdotal evidence that China is building vast inventories can only be reconciled if one assumes that there was a surge in the production of goods that now decay in stock yards and warehouses. That means that China’s economy has the potential to implode with a reverberating bang unlike any other that has ever emanated from the East.
The Chinese Communist Party apparently learned from America that debt financed consumption was not a sustainable economic model. Their solution, it seems, is even more absurd: debt financed production in the absence of demand.
While such an economic model is flawed, China has vast resources, such as approximately $2 trillion in reserve assets, with which it can finance its folly. That implies that the Chinese conundrum could last much longer than we may expect. Even so, just like the debt financed US consumer spending spree had to come to an end, so too must China’s debt financed demandless production spree.
…  the massive inflation of China’s money supply can cause the renminbi to collapse and send another currency crises rippling through financial markets. …
… consider what could happen when the Chinese miracle economy is unveiled to be no better than the US miracle economy had been.” (Emphasis CrisisMaven – Hat tip Shocked Investor Thursday, October 15, 2009: “Van Eeden: Gold to Drop, U.S. Dollar to Rise, China’s Economy May Collapse“)

This is just the line of argument that fits in with how communist regimes “measure” their “economies” – they have therefore (kind of) full employment right up until collapse and … after the collapse this spawns new socialist movements that declare how well managed the just collapsed economy had been, now that “under capitalism” everyone lost their job. Either you have an economic theory to guide you or you’re lost. The Chinese as well as the US and other OECD governments are totally lost.

There’s a nice Al Jazeera video about the Chinese situation on Youtube with some mixed impressions (and the usual positive outlook from the World bank whose foresight of course saved us from the current depression too). You need only to watch up to about 6:50 min, the rest are other reports. Why CrisisMaven put it here is the honest example the TV anchor gives: “Relatively speaking China is lagging behind Albania or Angola“. So there’s the biggest and strongest and fastest economy for you:

(Source: AlJazeera English: “Counting the Cost – China’s impact on the global economy“) Update 2010-02-18: Just as CrisisMaven had hoped by publishing this “bait” of an article, some more anecdotal evidence begins to show up (if anyone has more observations, please leave a comment; if you want it treated confidentially, say so and I will not publish it – comments are moderated): China’s start-ups comparable to the 2000 dotcom bubble (?): The Asia Healthcare Blog runs a story “Wanna be doing health in China – beware of red flags of the minesweeper variety, expect lots of improvisation” (some quotes):

“A week before I was scheduled to leave for Chengdu, the night before New Year’s Eve, I received an email from my contact there. The startup company I was to work for, XXXX, had encountered a series of issues. Their goal is to open 100 health clinics in rural areas of the Sichuan province – at international standards of care – in the next 5-10 years. .. The first was that the doctor responsible for overseeing and training the medical staff was forced to take a one to two year leave of absence due to a family emergency. The second was a delay in the opening of the first clinic. The executive team had sought to open this pilot clinic in September 2009. But, due to some bureaucratic issues and because they wanted to find the best possible location for this clinic, they had not yet been able to open it. …There were a few other minor issues that combined with these two larger ones caused the Board to call an emergency meeting, culminating in a decision to cease operations, effective January 1st. This decision was quite unexpected and threw many lives, including mine, into disorder. After extensive conversations with members of the executive team, we decided that the role we had initially discussed for me was no longer plausible, and that it would be best for me to pursue an opportunity with another organization.” (Emphasis CrisisMaven – See the rest of the story and what he explains about the red flags – after all, quite befitting a communist country.)

An excellent resource is the “HaoHao report” (do I hear laughs?) a Chinese “meta” blog where other blog posts are referenced. Another good one is the “China Law Blog” – any more pointers greatly appreciated! In ABC News/Money James Pomfret and Lee Chyen Yee in “Social, Economic Dilemma for China as Home Prices Soar“, (February 16, 2010) tell us:

“taxi driver Zhang Bo’s ambition to buy a small flat for his young family has slipped out of reach for now. … “People can’t afford new flats anymore,” said Zhang, 28, who drives a taxi to make ends meet after his small electronics factory went belly-up during the financial downturn last year. … takes home around 6,000 yuan ($880) in cab fares a month. He likes to joke that he now has to work three months just to buy one square meter (three feet) of residential space in the city’s suburbs. … millions of workers gravitating to China’s major cities in search of work and opportunity, … ‘The affordability is deteriorating because of the rapidly rising prices and increasing mortgages for home buyers, particularly for investors,’ said Xavier Wong, head of research for greater China at property consultant Knight Frank. In December, urban property prices rose 7.8 percent from a year earlier, the fastest pace this year, with prices in Shenzhen up almost a fifth, outpacing second-tier cities like Qingdao, which grew 4 percent during the same period. Stephen Green, a China economist at Standard Chartered notes that at least seven cities saw land prices triple in 2009.” (Emphasis CrisisMaven)

This Chinese bubble is worse than the one that is just in the process of deflating in the US (prolonged by the US government trying to bankrupt itself for good measure in the process) and about as hot as Japan’s in the 1980s – and look what became of Japan after that – it is by now bankrupt at (admitted!) debt exceeding 200% of GDP; but Japan started out as an industrialised country! However, China is not Japan, not by far. Even the government itself compares itself – relative to the size of its population – with Swaziland: “China’s economic inequality” (BBC News). Cf. the story in “China Law Blog“, “Giving China Due Diligence Its Due“:

7. Fake due diligence can be worse than no due diligence at all. This is doubly true for China, where fake documents are so often employed.” (Emphasis CLB)

Another nice one is “Beware The Potemkin Chinese Company“:

“He was hired right out of college to the sales department of a state-owned import-export company. … he decided he wanted to branch off on his own but he needed capital and clients. He solved that problem by basically poaching the clients he made working at the import-export company. As for capital: he basically ran his company from his desk in the import-export company drawing a salary, making use of the company’s resources (cars, dinners, gifts) to fund his personal initiative. If company officials knew or cared they didn’t make him aware of it [CM: . … Mr. H was able to build his company until it could sustain itself without the “shield” that the import-export company unknowingly provided it. At that point, he simply quit the job at the import-export company … registered his own with the relevant authorities, rented a space elsewhere and continued doing what he had been doing over the last several years.” (Emphasis CrisisMaven – Can you imagine this “as a matter of course” in any “capitalist” company?)

For all those who put stock in the cost of environmental destruction, China has some issues here as well:

China’s environmental woes are mounting, and the country is fast becoming one of the leading polluters in the world. The situation continues to deteriorate because even when Beijing sets ambitious targets to protect the environment, local officials generally ignore them, preferring to concentrate on further advancing economic growth. … Water pollution and water scarcity are burdening the economy, rising levels of air pollution are endangering the health of millions of Chinese, and much of the country’s land is rapidly turning into desert. … As China’s pollution woes increase, so, too, do the risks to its economy, public health, social stability, and international reputation. As Pan Yue, a vice minister of China’s State Environmental Protection Administration (SEPA), warned in 2005, ‘The [economic] miracle will end soon because the environment can no longer keep pace.‘ Unfortunately, much of this enthusiasm stems from the widespread but misguided belief that what Beijing says goes. The central government sets the country’s agenda, but it does not control all aspects of its implementation. In fact, local officials rarely heed Beijing’s environmental mandates, preferring to concentrate their energies and resources on further advancing economic growth. …”

(Source: Foreign Affairs September/October 2007 – “Elizabeth C. Economy: The Great Leap Backward?” – Elizabeth C. Economy is C. V. Starr Senior Fellow and Director for Asia Studies at the Council on Foreign Relations and the author of The River Runs Black: The Environmental Challenges to China’s Future. Hat Tip Globalisation and the Environment Blog: Elizabeth C. Economy on “The great leap backward?”) See also China Briefing: “The world’s chimney: A pollution crises looms in a land of big statistics“:

… the spectacular growth the country has seen has resulted in a burgeoning environmental disaster. … a scorecard of waste and pollution that stands out and asks to be written down. By the numbers, China’s environmental cheat sheet

  • As much as 90 percent of China’s sulfur dioxide emissions and 50 percent of its particulate emissions are the result of coal use, making China home to 16 of the world’s 20 most polluted cities.
  • China’s urbanization plans call for the relocation of more than 400 million people [A similar scheme contributed to the downfall of Romania’s Ceaucescu.] – more than the entire population of Germany, France, Italy, Spain and the UK combined – to brand new cities between 2000 and 2030. To make this possible, China will have to put up half of all the buildings constructed in the world during the period. [Does anyone believe this to be feasible?]
  • The Gobi Desert spreads by about 19,000 square kilometers annually, a growth that has hurt more than 400 million Chinese, turning tens of millions of them into what Economy calls, ‘environmental refugees.’
  • As much as 10 percent of China’s farmland is believed to be polluted, and every year 12 million tons of grain is contaminated with heavy metals absorbed from the soil.
  • Water is also a growing concern; 660 cities have less water than they need and 110 suffer severe shortages.
  • Aquifers in 90 percent of Chinese cities are polluted.
  • 75 percent of river water flowing through cities is considered unsuitable for drinking or fishing, the result, 700 million people drink water contaminated with animal and human waste.
  • The Yangtze River receives 40 percent of the country’s sewage, 80 percent of which is untreated.
  • Nearly two thirds of the Yellow River is considered unsafe to drink and 10 percent of its water is classified as sewage.

… It is the sheer amount of statistics that Economy uses to build a picture of the environmental degradation occurring in China today that becomes overwhelming.” (Emphasis CrisisMaven)

See also: ASOCIACION ECOLOGISTA RIO MOCORETA: “CONTAMINACION EN CHINA aumento muertes por cancer” Still not convinced? Maybe you should read China Briefing – I.B. Bogard: “From the Edge: Hand on the Till (China Version)“:

“I understand that the company later moved their manufacturing business to Malaysia. …”

And the truth is slowly leaking: FT Home > World > Asia-Pacific > China – Jonathan Bell: “China at risk of a home-grown financial crisis“, Published: February 22 2010:

“… Chinese banks may be facilitating a home-grown version [of the western financial crisis], especially as they plan to raise $30bn-$50bn in capital in the coming year. The particular concern is the estimated Rmb3,000bn ($450bn) of local infrastructure loans extended in 2009, representing 30 per cent of the record new bank lending last year. Many were non-recourse loans to provinces, municipalities and counties through shell companies, known as Urban Development Investment Corporations (UDICs). Some went to fund projects backed by assets, such as commercial real estate, others to projects with future cash flows such as subways and toll roads. Still others are social in nature and backed only by an implicit guarantee of the City/Provincial Investment Holding Corporation (CIHC). Most UDIC loans have sparse local equity and limited cash flow prospects for repayment.For the time being, local governments and CIHCs can plug interest payment gaps with healthy land sales, which totalled Rmb1,600bn in 2009, as well as central government transfers. The UDIC liability is estimated at close to Rmb6,000bn or 14 per cent of the outstanding loan base. A 30 per cent default rate would in effect wipe out the paid-in capital of top banks such as China Construction Bank and Bank of China. Chinese state entities have a poor record in preventing faulty provincial lending practices and low quality asset formation. During the 1990s Asian financial crisis, the Guangdong International Trust went bust, in spite of an implicit Guangdong state government guarantee. Today’s robust balance sheets of the listed, state-controlled banks are the result of a $800bn carve-out of non-performing assets by four state-backed asset management companies, which are reportedly recovering about 20 cents on the dollar. … most infrastructure loans have no principal due for several years, well beyond the tenure of most local officials. Furthermore, banks can cover up outstanding problems with additional credit; municipalities may issue bonds to banks, creating a circular reference; … … regulators should encourage banks to move towards risk-based pricing: 60 per cent of loans last year were at or below the policy rate. Even bridges to nowhere will eventually lead somewhere as 15m new cars come on the road every year. [that’s if the numbers are correct – CM] … Conventionally the investible universe of Chinese banks is inexpensive at 1.8 times book value and less than 10 times earnings, but this may be discounting poor asset quality. … Jonathan Bell is a senior investment manager at Pictet Asset Management” (Emphasis CrisisMaven)

More “anecdotal evidence” in this brilliant post at Brendan’s posterous: Geoff Dyer – “China: No one home“, February 21 2010:

“Chenggong is a new town near Kunming, one of the main cities in the south-west of China. Construction started in 2003 and the results are now apparent in 13 immaculate local government buildings, each clad in marble tiles. A high school boasts an impressive indoor swimming pool and several of the region’s main universities have built large campuses. Pristine high-rise apartment blocks stand in rows, their new windows glinting in the subtropical sun.
The one drawback: at the moment, Chenggong is almost completely empty. Its wide streets are all but bereft of traffic, a bank branch has no customers and leaves collect in the foyers of the municipal offices.

It is places such as Chenggong that are starting to divide opinion about what is really happening in the Chinese economy. …

While some regard China as having made forward-looking investments in infrastructure and urban planning that will lay the foundations for a new burst of growth, others fear last year’s recovery is really a mirage based on an investment bubble. It is also a crucial question for the fragile global economy. If China’s rebound were to fizzle, it could easily drag the rest of the world into a double-dip recession.
… Anthony Bolton, the prominent British investor, recently announced he was moving to Hong Kong to manage a China fund and purred about “the effectiveness of the centrally run economy”. Yet Jim Chanos, the hedge fund manager best known for seeing the fiction in Enron’s accounts, says the very same centrally planned system has created “an unprecedented bubble” in investment, especially in real estate. Both sides can find ammunition for their arguments in Chenggong.Three sets of worries are in evidence. The first is that investment is now carrying too big a load in the Chinese economy. … investment that was once about 25 per cent of gross domestic product is heading towards 50 per cent.Historical comparisons suggest there is something unprecedented in China’s investment boom. Even before last year’s surge, the Economist Intelligence Unit notes, China’s investment-to-GDP ratio was the same as Thailand’s on the eve of the 1997-98 Asian financial crisis, or Japan’s at its peak during its high investment phase in the 1960s. Prof Yu says the system encourages local governments to invest in trophy projects, such as gleaming new towns and administrative centres, because officials sometimes do not care if the project is barely used in five years’ time as they will by then have moved to a different job. …
The second worry from the stimulus is thus that it creates financial bubbles, especially in real estate
… the third fear is that the flood of new lending will end up as bad debts. …… mainland local governments now have debts of Rmb11,400bn ($1,670bn, €1,235bn, £1,085bn), which is more than double the official estimate and is equivalent to one-third of GDP. Banks have agreed to lend a further Rmb12,700bn by 2011 to these local government companies, he says, some of which are bound to struggle to repay the loans. ‘… there are probably a lot more loans out there that we do not know about,’ …

Hoarding empty flats in the hope of price rises is one indicator, but there are others. According to Standard Chartered, the average land price in China increased by 106 per cent last year. That includes an increase of more than 200 per cent in Shanghai, nearly 400 per cent in Guangzhou and 876 per cent in Wenzhou. … sharp drop in prices, which could also cause a great deal of collateral damage in the economy. …
In the southern China island of Hainan, a property rush in the first few weeks of the year sent prices up 18 per cent and by more than 50 per cent for some buildings.

Yet even though all these risks are present, some economists believe that the actual threat is being vastly overstated. For them, places such as Chenggong are not waste but a much-needed upgrade for the poorest parts of the country. [Shall CrisisMaven laugh or cry? Letting property sit somewhere unused is a good proposition? What about accruing interest in the meantime??? How would it ever be recovered? To what good uses could the same money have been put in the meantime? Drawing-board economists that!] …
Peng Wensheng, an economist at Barclays Capital in Hong Kong, says sceptics worrying about excessive investment in infrastructure forget that in development terms China is more like Japan of the 1950s and 1960s, not the bubble-era 1980s. In other words, large parts of the country are still in dire need of infrastructure. …Prof Yu says this is already evident in the figures for the incremental capital/output ratio, which measures the efficiency of investment. (A higher number means a country needs to invest more to generate additional output.) In Japan during its investment boom, this figure was about three, and in China from 1991-2003 it was 4.1. Yet as a result of the stimulus it is now above six, he says, which is a large red warning light. …
The other question is will the financial system become clogged up by bad debts? … given how little is known about how the money was really spent. ‘There is so little transparency, so little visibility – that is what is worrying about the investment boom,’ says Bill Adams at the Conference Board in Beijing.
With $2,400bn in foreign exchange reserves, [China] can easily recapitalise the banks if they run into problems. [Sounds like prudent investorship to CrissMaven – waste on one hand, replace from somewhere else …] Indeed, that is exactly what it did in the early part of the last decade after the main banks became technically insolvent from a previous credit binge. [Right, one does repeat mistakes so long as to become perfect at them.] (Emphasis CrisisMaven)

Patrick Chovanec, “… associate professor at Tsinghua University’s School of Economics and Management in Beijing” in an article “Bubble in Shangri-La?” on March 02, 2010 in Seeking Alpha :

“… could be monuments to pointless excess … What I worry about, … given that investment made up 50% of GDP last year, is that there are plenty of such “monuments” being built where they make no sense, just to hit growth targets …” (Emphasis CrisisMaven – much abridged, follow the whole story in the original article.)

On his blog “An American Perspective from China” Patrick Chovanec writes in “China’s Real Estate Riddle“:

“‘The end is near!’ That was the message top government expert Cao Jianhai delivered in April [2009] when he predicted that residential property prices in China will plunge by half in the next two years. He reasons that China’s recent run-up in housing—average prices have tripled over the past five years—is unsustainable given the huge volume of new apartments sitting empty throughout the country.
Mr. Cao’s forecast is pretty scary, and not just for homeowners. China’s banks may not have invested in risky mortgage securities like CDOs, but they make most of their business loans based on collateral in companies’ real estate assets, which frequently are pegged to the going price of nearby residential developments. If that collateral were suddenly cut in half, China could face a banking meltdown that makes the West’s financial crisis look like a walk in the park.
The problem with such predictions, as sensible as they may be, is that informed observers have been making them for over a decade, yet the “bubble” never seems to pop. … according to official figures [!], China’s inventory of unsold apartments hit 91 million square meters at the end of last year [2008], up 32% from the previous year. But this number pales in comparison to the 587 million square meters that investors happily purchased over the past five years, only to leave empty.
there is no secondary market. … we tried to rent the place, but we couldn’t find takers at any price that could remotely cover the mortgage, despite a prime location. When we decided to move in instead, we discovered that while the building was sold out long ago, hardly anyone actually lives there.
… seemingly endless rows of luxury megaliths … sprouting up in every provincial capital or third-tier Chinese city …, with nary a resident in sight.
China has taxes on real estate transactions, but no recurring tax on holdings.
In China, there is no cost to holding property indefinitely.
Apartments in China aren’t for living in, they’re for investing. That is the real source of demand.
… without adequate maintenance (recall the need to minimize holding costs), any practical utility these units might have had as residences will deteriorate rapidly.
China’s property market may well crash. … because the Chinese lost faith in real estate as a form of tangible savings, or found a better alternative.” (Emphasis CrisisMaven – you may want to study more of his articles on his blog as mentioned.)

Another article on Patrick Chovanec’s blog “An American Perspective from China” titled “China’s Quality of GDP” makes very interesting reading too and ties in with what we’ve said in “How GDP betrays the Economy“:

“Last week was full of good news for the Chinese economy, at least according to official statistics.  … government reported that China’s GDP grew at an annualized rate of 8.9% in the 3rd Quarter, … industrial production had expanded 13.9% in September, compared to the year before, while retail sales had grown 15.5% — both on an upward track from previous months.  Profits at State-Owned Enterprises (SOEs) jumped 13% in September from a year earlier, the first increase in 13 months. …
… my main concern lies in a concept I’d like to introduce called “quality of GDP.
… My concern is how even true-blue GDP figures can sometimes paint a misleading picture of the real health of an economy.
… A good analyst will figure out how to separate the wheat from the chaff, and produce an adjusted earnings figure that better captures how the business is performing on an ongoing basis.  There’s no tried-and-true method, however; for arriving at the right answer; it’s all a question of applying experience and judgment to evaluate what’s really going on.
Back in March, I was asked on Chinese TV whether I thought China could achieve its target of 8% GDP growth for 2008.  I said I didn’t see any reason why it couldn’t.  All the government had to do was take all the laid off migrant workers and hire them to dig a hole in the ground one day and fill it up the next. Since the total would be added to National Income, the government could simply pay them enough to hit whatever GDP target it had in mind. … Focusing exclusively on GDP, as a number, is a distraction.
… GDP tells you how much the economy is producing; it doesn’t tell you whether that production is actually creating real value or not. … when the State is either directing economic activity without regard to prices, or when it is artificially influencing the conditions of supply and demand in a way that distorts prices, Production may actually consume more value than it creates, destroying wealth, or divert resources from more productive pursuits, yet in the short term, still count positively towards GDP.
… what, … if the government simply went out and bought 10 trillion paper clips that nobody needed at $10 a piece? … In fact, the more the government paid for each paper clip, the better. … GDP would rise, but our quality of life would fall.  The same reasoning can be applied to a war economy that produces tanks, planes, and ships that blow each other up.  U.S. GDP surged during World War II, but don’t kid yourself: real wealth was being destroyed and/or supplanted.
What I’m concerned about — particularly in regards to China — is … the fact that GDP may overstate the real benefit of government spending or policies designed to artificially stimulate economic growth.
The “resilience” of the Chinese economy right now is based, at least in part, on several factors that I find cause for concern:

  • … many seemingly redundant projects or vanity projects, or ones where the returns are far from clear (such as the construction of entirely new cities to replace perfectly good old ones);
  • reconstruction in the aftermath of the Sichuan earthquake …;
  • construction of large-scale luxury condo developments that go entirely unoccupied;
  • easy state-provided credit that has kept businesses — many of them poorly run and financed — from exiting sectors (such as steel) that have chronic excess capacity;
  • a massive shift in resources towards the State Owned sector and away from private enterprise (including the acquisition by the State of controlling stakes in successful private companies);
  • misdirection of business loans into stock market and real estate speculation …;
  • direct investment by government ministries…. to speculate in … the real estate market …;
  • the possibility of “channel stuffing,” where wholesalers and retailers are forced to build up unsold inventories to keep factories (particularly state-owned factories) running.  … this shows up in China’s official statistics as “retail sales” because in China, retail sales are counted when the manufacturer ships, …

… I don’t see anything in the “8% growth” story that is moving China in [the right] direction.  It’s more (a lot more) of the same …” (Emphasis CrisisMaven)

Another good article on Patrick Chovanec’s blog “An American Perspective from China” is titled “SCMP: China’s Wasteful Stimulus?” and further corroborates some of these points.

If it were just China alone and on its own, all this would be half as critical, however, there are mounting frictions all around: MoneyAndMarketsBryan Rich: “Why You Should Be Worried About China“:

“… the biggest threat will likely come from growing trade tensions between China and the rest of the world …”

And you might also want to check out MoneyAndMarketsMartin D. Weiss, Ph.D.: “Transcript: Nine Shocking New Predictions for 2010-2012“, 2010-03-01!

Update 2010-04-29: China’s lending boom, illustrated Posted by Joseph Cotterill on Apr 29 [2010] 16:32 on (q.v. their charts there):

“As Fitch’s analysts write: …
‘Loan growth in China in 2009 far outpaced that in other EMs, and by year‐end Chinese banking assets exceeded those of the other 23 systems covered in this report, combined. Although Chinese loan growth is likely to slow in 2010, such a rapid expansion gives rise to significant asset quality concerns in the medium term, in Fitch’s view. Globally, loans/GDP ratios look high in China, Taiwan, Latvia, Estonia and Ukraine relative to sovereign rating levels, while penetration is moderate in Mexico, Peru, Indonesia and Colombia.’
Well, well — being mentioned in the same breath as the blown-up banking systems of the Baltic. That’s a slightly rum deal. …
And note that Fitch believe they may be understating matters. Quite. For example, the reach of China’s Local Government Funding Vehicles may go well beyond the five big state-owned banks. Municipalities seem to use the vehicles to borrow from banks for infrastructure projects — which, coupled with uncertainty over how transactions are being reported, is something to watch.
This is especially true amid the earnings season for private Chinese banks, such as China Construction Bank on Thursday. As Caing notes, these lenders are straining to meet government liquidity tightening via stronger capital requirements.
Oh dear. It would be most unfortunate to have banking problems in this part of the world, just as Europe teeters on the brink.” (Emphasis CrisisMaven)

We’ll soon follow up with more material.

China’s lending boom, illustrated

  1. leigh
    2011-04-12 at 08:28

    WOW we were just saying today how lucky we were, because we had just heard that China was going to power away for the next 20 years, and, because we in Australia are major suppliers of Chinas base materials, thought we would not be totally affected by the doom and gloom in the rest of the world- looks like we may be rethinking that idea- thanks for exploding our disillusion. Very enlightening article. What a lot of trouble you have gone to.

    • 2011-04-12 at 09:21

      Well, one can never be totally sure. But, while China has a private sector, a lot of that particular “capitalist” economy is based on very low qualifications, like just assembly work etc. A lot of that even and the tinier sector of high-tech are likely financed by the bloated credit sector, for which the government has a communist planning agenda. So, all in all, the state sector must be as bankrupt as the Soviet system was, though financed a little from the private sectors; but that finance is -on balance- likely offset by the credit inflation from the state sector. But most of the growth the latter sectors show seems to be delusional like the dotcoms were. The statements are so eerily similar when you look at the hype then and the hype now. Then “” was meant to be the coming global petfood supplier, only because they had a synonimical name! As if it takes nothing but a name to make a global player! And who bought into it? The then big six! And who buys into the China hype – what is left of these big six after the last hypes they bought into (Enron being one as well, the derivates being another) killed a few of them. With such advisors you need no enenmies …

  2. 2010-08-06 at 04:13

    China is not the Soviet Union. At one point in time, the economic system was structured on the Soviet model and the things you presumed existed really did exist. That has not been true for many years. China is very Communist in some ways (i.e. finance, control of information, and democratic representation or lack thereof) and very capitalist in others.

  3. 2010-08-06 at 04:06

    in particular Americans, don’t realize that China’s local version supports a billion desperately poor, unemployable people. It’s a catastrophe.

  4. Stevie b.
    2010-03-26 at 07:41
  5. Stevie b.
    2010-03-21 at 16:06

    Crisismaven – just discovered your blog – gobsmackingly good! I like in particular the force of your thought-provoking & indeed opinion-changing logic.

    Two small thoughts – you mention Anthony Bolton and he is not a dummy; and nor is Steve Roach – and together they both seem to be singing a different tune. Roach may now have vested interests at the heart of his perspective (i’d be surprised, cos i’ve always had immense respect for him/his views) & these 2 guys can of course be wrong (especially in light of your marvellous piece), but their (prospectively waning) reputations still merit respect.

    • Nieel
      2010-04-26 at 12:08

      The legendary Anthony Bolton is managing a new fund for fidelity UK, its going public soon, its holdings will be mostly China A list companies.

      I’m not touching that with a 10 foot pole.

  6. 2010-03-04 at 22:38

    Amazing article and quite opposite to common wisdom of masses. The exaggeration in data and deliberate tampering with statistics to give false impressions is a thing majorly neglected by majority of economists. The lack of courage of economist to speak truth can be well understood by communist regime. I have few doubts:

    1- Can you tell me about the effect of Chinese companies taking large projects in dictatorship governed African countries, Tibet, Burma and Pakistan on chinese economy? I assume that Chinese economy will be largely benfitted by such ventures.

    2- Chinese manufacturing companies are flooding Indian (don’t know about World) market with cheap and pirated appliances. Local manufactures are highly devastated here in india as no innovation can bar the mass piracy. Does such policies are deliberately done by chinese authorities or this piracy can be neglected easily?

    It would be much helpful if you write an insightful views on Indian economy. Thanks in advance.

    • 2010-03-04 at 23:48

      Thanks yayaver for your kind comments. I haven’t looked into Indian affairs yet since I don’t see any crisis in the sense of the word looming there and my blog is, first and foremost, about crises. However, I do not believe that swamping India with copyright infringement products is deliberately done to harm India, rather the Chinese authorities would turn a blind eye because they see this as giving work to parts of their economy that would otherwise not be competitive – exactly in line with my feeling that a central command economy cannot, by and large, fully compete with market economies, so they have to resort to dumping practices to keep their workforce employed. The same happened in the former Comecon as well.
      As for Africa, China may have taken on the role of the former Soviet Union which also tried, directly or via proxies such as Cuba, to gain influence in Africa, again for two reasons: for once to secure access to raw materials but also because nowhere else would they be competitive enough to wield much power. Imagine China trying to teach Singapore about business administration … But let’s not forget, when apportioning blame, that the European Union and the United States are directly responsible for millions of deaths from starvation in Africa esp. due to their exclusive agrarian policies, something I will write about in detail at a later date.

  7. wumingzi
    2010-02-23 at 18:53


    One thing which you may want to look further into if you want to pull at this pile of spaghetti (or chow mein as the case may be) is to investigate the role of the People’s Liberation Army in business matters.

    The PLA is obviously in the government sector, but their involvement has very little to do with the old Soviet command-and-control model.

    (I should note that I haven’t looked at this for some years, so while what I will recount absolutely happened 10 years ago, how much it is going on today would require going back and spending more time in the Middle Kingdom).

    Approximately 20 years ago, the PLAs commanders were given a mandate to turn their units into profit centers. The national budgets were simply too strained to allow the world’s largest standing army to stand around defending small islands in the South China seas and threatening Taiwan. A fair quantity of leeway was given as to how exactly profits were to be generated. While weapons sales and engineering services were obvious low-hanging fruit, there were also several other ways to turn a buck.

    A friend from Taiwan set up a clothing manufacturer. He brought a bunch of workers in from the countryside, trained them, set up a manufacturing and quality control process and started cranking out shorts and t-shirts for sale on the export market.

    A few months later, all his company’s male employees were drafted into the army. Shortly thereafter, the organized and well-trained Fifth People’s Provisional Clothing Manufacturing Company was up and running!

    • 2010-02-23 at 19:30

      Thanks very much, wumingzi, that’s exactly the kind of comments I had hoped to elicit!

  8. Nieel
    2010-02-19 at 13:31

    Very beautiful patchwork.
    I’m as always impressed by your work.
    From my personal experience having lived in Shanghai for a whole year, I can fully back up most of the above.

    Chinese are really hooked onto building luxury apartments and shopping malls, well thats the only thing they do build; even though there aren’t that many rich people in china and those that can afford them are already building their own.

    The epic failure of the Chinese property sector I believe is not focusing on the growing middle class. Everyone wants to sell expensive goods, no one wants to sell to middle class and below.

    Not to mention the banks that literally throw loans to everyone, kinda hard to resist the the gun barrel of the government thats caressing your forehead.

    The chickens are going to come back home to roost.

  9. 2010-02-18 at 14:13

    Hi Chris,

    Big post. Appropriate for a big country.

    In some ways its easy to predict whether the Chinese boom is going to end. We look at the property bubble, cooked books, and the global economy around China melting it’s not a crazy prediction to say that all of this will eventually catch up with China.

    Then again, there is no one out there except for maybe China homers like Shaun Rein who would claim that China doesn’t have a major recession coming.

    Is it going to be a catastrophe? This is a tougher call, but only because there are so many internal factors that one would have to be aware of in order to correctly assess it. All most people can do – and this group includes ALL foreigners/non PRC folks – is look at trends in various industry and private/public sector perspectives and make a very low accuracy guess about whether or not this means ‘catasrophe’ for China. So a person looking at the real estate market might certainly say that catasrophe is on the way, while someone looking at education might be more optimistic.

    I fall in the very optimistic camp because I’m looking at things based on China’s ability to make high impact decisions quickly. We have seen it in health reform, and with the economy. This makes China different from virtually all other countries with large economies who are either limited by broken government (russia) or politically stangnant government that is too slow to respond to this eras global-sized crises (America, and all other democracies).

    Going forward, this advantage will likely become more clear, especially if China can preserve this nation-level decision making mechanism while promoting democracy in society as a whole.

  10. jeff
    2010-02-17 at 17:44

    Are we just using those poor dumb bastards?

  11. Rick Alexander
    2010-02-17 at 11:21

    Amazing and more than scary! I’d heard of this issue previously, of course, but I really had no idea it was on such an unthinkable scale. If factually true, it would appear to be rather under-reported even among the non-mainstream commentators. Good work, Mr Maven!

    • 2010-02-17 at 13:21

      Well I’ve studied reporting in the Eastern bloc states and the Soviet Union as it was done from the beginning right after the revolution. There are several striking features, one being that they don’t account well for technical obsolescence, so the state of their machinery is always far worse than any reporting reflects. Then they count production, not actual sales. Once a kombinat has fulfilled its production obligation, that’s it, they don’t depend on successful sales to “refinance”. Credits are often just subsidies, i.e. they just remain on the books, however, state enterprises never pay them back. Then there’s no rational way to plan centrally, contrary to popular belief: state kombinats will always try to “over fulfill” the plan with the most ludicrous schemes, e.g. since resetting machinery costs time, a plant in the former German Democratic Republic (GDR) produced left-hand locks for cupboards for a full half year, then right-hand ones for the remainder of the year. That way they could nominally churn out more locks, but … all over the GDR furniture production came to a standstill since most cupboards with two doors required two opposite locks to function. Can you imagine: shops empty, storage fuller than planned, all cupboards half a year later have to be yanked back into the workshop to get the missing lock fitted, then shipped to stores which then all of a sudden sit on a glut of cupboards and so on. That’s a true stoy and not a single event, rather that was normal under central planning. Only China is about a hundred times bigger.

      • 2010-02-18 at 00:47

        What does this have to do with anything? China is no longer a state planned economy. Companies have a domestic shareholder stake besides the government, which only owns controlling shares in certain vital industries. Production is no longer controlled by any state apparatus. In fact, in some ways, China is now the Wild West of capitalism even moreso than the West itself. They require almost nothing of unregulated companies associated with multinationals, so what one has is an even more extreme example of the gangsterism pioneered in Europe and America. As for their future: Think the banking crisis, only compounded many times over. This is a crisis designed by economic engineers from America, specifically Milton Friedman’s sociopathic school of thought.

        • 2010-02-18 at 01:04

          Well TOG, with my repeated caveat that we don’t know what the real numbers are: the majority of Chinese are still employed in state industries. These are not only inefficent, they produce mainly junk, if proven experience with the imploded former East European states is any guide. They only “sell” because they can force their produce on the population. I remember how euphoric the Western German planners where when the German Democratic socialist republic was taken over – they thought of how the former “DDR” could market to all these former Comecon countries in the East due to their well developed marketing ties of old. And what followed? From day one the other Eastern Europeans wanted modern Western gadgets, not Eastern clunkers. The produce of almost each and every state owned factory was junk! The Eastern “Intel” called Robotron works was (in a popular joke) hailed as having produced “the world’s biggest microchip”! Microchip rejects from production were about 80%! And they were simple chips, years behind Intel! And that was under the regime of what were called the “Red Prussians”, i.e. that was still the highest quality in the whole of Comecon! They would have “polytechnic education” where school children were brought into factories every so often “to learn about production”. In one case that I know of they were assembling generators for cars. The result was of course so poor, it had later to be dismantled and reassembled. Half the time workers would sit idle due to lack of parts. In order to avoid unemployment workers were given a “position” but the work of three could easily have been done by one. And so on and on. That is why I believe China is a complete catastrophe. And with the unsustainable building boom farmers are leaving their fields to help out in cities, now there’ll be food shortages. Imagine, they shut down all dirty factories in and around Beijing for the Olympics for weeks! If these factories were doing something useful, it would have been noticed!

        • 2010-02-18 at 05:12

          How can one still call these “state enterprises” in any sense when their product is entirely determined by Western conglomerates and the needs of Western consumers, and their profits revert to private investors? The Chinese government not only has less and less say about what type of investment takes place, they’re finding that their ability to control production has almost been eliminated, too. I fear you’ve only paid attention to the corporatist propaganda that is stuffed down people’s throats in American and Europe, where China is pictured as both a capitalist threat and an old-style communist country. Nonsense on both counts. China is a failed experiment in exactly the same type of overreach America just collapsed under. Finis.

        • 2010-02-18 at 07:09

          Hi TOG, we are talking about two different things: it is hard to determine the actual weight of state enterprises in China today after much “reform”. One little source is from Gao Xu, World Bank economist in their Beijing office: “State-owned enterprises in China: How big are they?“. Again, let’s not forget, the figures quoted anywhere are almost all from the communist-party dictated national statistics office. If you switch on the Kreml astrology intuition that you would have become accustomed to in Europe, you immediately notice: the guy stresses enjoying playing with his son etc. – typical of mainland Chinese under the one-child policy and a witness I would not accuse of reporting about the People’s Republic of China critically, him falling under their jurisdiction and probably also imbued with national pride. And so it goes on and on with each and every source one digs up. If the Soviet Union and the other Eastern European Comecon satellites are any guide, most of such figures tend to be for political propaganda, in both over- as well understating (the latter in some growth areas to allay fears of overheating, but equally, I’m sure in areas of e.g. bad debt!). That makes it very difficult to establish true growth (or decay!) rates, true amount of (un)employment and so forth. I am still trying to figure out the exact details and in fact I have published this post one could say “prematurely” precisely to elicit responses that might help us along here. Still then it would be anecdotal evidence. But if my life experience is any guide, I was in one then emerging country for quite a while and I saw the amount of corruption and slack there only to be astonished to find a decade later it had become “a tiger” so to speak only to find it another decade later on the very brink of bankruptcy. Now, that was (or is) a capitalist country and its statistics weren’t forged, unlike Greece’s or China’s. So, if I multiply that by a few hundred, add in the still vast state sector in China (and I’m not talking about the export oriented side you alluded to but also the domestic sector we “in the West” see absolutely nothing of) , then I still come to the conclusion we are not only talking about an imminent disaster, but, if the 6,800 Burj Khalifas are any guide, a catastrophe of the size of 6,800 Dubais. And there is no Au Dhabi to help out. But I am hopeful to come up with a clearer picture soon.

  12. 2010-02-15 at 09:34

    Really fascinating post again, really super comments as usual!

    I am currently following the Robin Hood Tax campaign [see and am observing what, I think, applies to Anglo-Saxon imperialism in general: a topic is being created through “news” companies, i.e. countries are set up against each other, and the media framing continues to be impressed on people’s mind sets.

    The next level consists of ‘grants’ and other governmental support levels, while bankers cream off and continue their long term centralisation strategies.

    What happens on the ground is irrelevant.

    The only “reality” that matters is the illusion created by the media. That’s how another kind of “Zeitgeist” is created.

    All we can do is to wake up and “fight” for ourselves [and others]…

    Cynically yours,

    Sabine [in Cassandra mode]

  13. 2010-02-15 at 00:35

    As a frequent business traveller to the Middle East (esp. Dubai) it was apparent to many, a number of years prior to the crash, that things were going to go awry predictably soon. Line ups to buy inbuilt condos contracted, months would go by without Emirate business paying what was owed to contractors, Brits and the assorted middle-management began to move their families then themselves to safer shores, and as in the Clash’s song “But as the wind changed direction/Then the temple band took five/The crowd took a whiff/Of that crazy Casbah jive.”

    Likewise, although more persons are becoming aware of the financial and commercial shenanigans of the PRC, there will always be those who say otherwise.

    If and when the great Chinese unravelling does occur, will there be anyone left to bail it out? Not everyone can count on a Sugar-daddy like Abu Dhabi or Ben Bernanke. So does that mean the Great Recession is merely a harbinger of things to come? As Yoda said, “Difficult to see. Always in motion is the future.”

    • 2010-02-15 at 00:49

      Yes, I fear the worst, so to speak. Thanks for sharing your experiences in the Middle East.
      I was always flabbergasted by the 1,001 nights stories the press printed and they sounded much like what they thought was happenng in the USSR at the time when it was meant to outgrow the US, and that France would soon overtake everybody, then Japan, then South Korea. Now it’s China. In each case there was a state planning authority behind the myth and each time it blundered. China came from a level below Russia’s (at the respective time of the communist overthrow) but started forty years later, then during the Great Leap nearly killed itself and now they’re meant to be the … capitalist powerhouse of the world. That sounds rather religious to me, but I will keep researching, the article is still too much guesswork for my liking.

  14. 2010-02-14 at 04:19

    China is eating itself alive from the inside out. All we see is the glittering facade. They can never employ more than a fraction of their workers. But, raised on the fallacy that capitalism works in exactly the same way everywhere, Westerners, and in particular Americans, don’t realize that China’s local version supports a billion desperately poor, unemployable people. It’s a catastrophe.

    • 2010-02-14 at 09:47

      Yes, indeed, TOG, the problem with the West, as in the case of the Soviet Union and its satellites as well, is they had no hands-on (daily) information but what was released from the communists excellent foreign language networks. I was in Poland on a relief mission in 1981 just days before martial law set in and we wandered through the old part of Gdansk when I saw a queue building in front of a shop (there were always queues, but this was particular: the shop was closed, it was totally empty and it was small). So I asked our interpreter and guide (not state-supplied, but from the relatively independent Catholic church), what they were queuing for and the lady came back after a while after inquiring saying “There’s a rumour there will be wallpaper”! Now, to make the point clear: none of the people (mainly women) in that queue had any particular need of a non-descript wallpaper on that particular day … they just happened to walk past when the rumour began and there and then had decided to queue … they needed the little they could possibly get to barter somewhere else in the near future! The former husband of last year’s literary Nobel prize winner Herta Müller described how in Romania he lived in a flat overlooking the backyard of a shop. The shop was always closed, however, every so often there would be a queue in the backyard to be served from under a half-closed shutter because the situation was so dire shops were ordered to pretend (on the shop front) not to exist at all because officially there was no scarcity, but then to serve the little they had got every so often clandestinely from the back! China, by and large, can not be much different! Like in Russia they scrape by probably because many have their own little garden patches, do the odd repair job themselves and other than that rely on e.g. soup kitchens in a kombinat where they’re formally employed as you allude to.

      • 2010-02-17 at 23:04

        Who was talkin about this? We’re talking about China and their failed experiment with capitalism.

      • wumingzi
        2010-02-18 at 14:35


        First, thanks for a good article. Lots of useful information here.

        China is not the Soviet Union. At one point in time, the economic system was structured on the Soviet model and the things you presumed existed really did exist. That has not been true for many years. China is very Communist in some ways (i.e. finance, control of information, and democratic representation or lack thereof) and very capitalist in others.

        State-owned enterprises, which have generally been assumed to soak up large amounts of money to provide make-work and add very little value have been scaled back a lot in the last 20 years. How large a part of the economy they are at this date I couldn’t say.

        I think the crux of your analysis is correct. The books have been cooked for a long time. The Chinese economy has undoubtedly been exposed to the global recession and a lot of people are unemployed. The Bank of China and other state-owned financial institutions are absolutely holding both internal and external securities which are non-performing, etc. etc.

        One of the sources of this is not a mystery. China is a middle-income country. It is at the level of development where you should start seeing a lot of internal consumption as people start buying consumer goods. Less of that is going on than would be expected, which forces the country to rely on export-oriented growth.

        Why is that? Well, the Chinese people know the problems in the system. As a result, they forgo buying goods and instead stuff huge quantities of money under the mattress in case something bad happens.

        You have made a very impressive blog which does its level best to use a reality-based inquiry into the issues in the markets. In the absence of the sort of hard data you’re looking for, making up stuff that’s not happening does a grave disservice to you and your blog.

        • 2010-02-19 at 12:03

          Hi wumingzi,
          thanks for your detailed comment! I value consent as well as criticism as I want to establish the truth, I don’t represent any vested interests. You have many valid points and probably you are much closer to the scene than I could ever be. You argue that China is not the Sovet Union. I know that China has tried to establish market mechanisms in large parts of its economy whereas the Soviet Union, with a short exception following the 1923 NEP or new economic policy, has done its utmost to suppress market forces.
          However, while I acknowledge these differences I make my points on other circumstantial evidence: I assume that if a European country manages to misreport its GDP and its deficit on a large scale directly under the nose of a controlling authority such as the European central statistics office Eurostat and the central bank for that matter, while in the case of the People’s Republic of China there is not one single safeguard against misreporting (but great political interest to have everything look perfect), I do not see why the reported figures shouldn’t be way out of line with reality.
          Let’s just assume that the reforms began to kick in 1979 after beginning in 1978. Then that are thirty years by now. What if the economy had indeed grown steadily at 8% (the exact figures don’t matter here) each year? The economy would then be TEN times bigger than in 1979. I believe that is what many are ready to believe, even people in China. BUT what if growth all the time was only 4% (still positive! – Taking my cues from other socialist experiences I doubt you have 30 years of unwavering growth!) then the economy would “only” be three times as big! Still, no one could deterrmine the truth until the whole thing breaks at some inflection point, for the simple reason that e.g. a bank’s balance sheet is “in order” as long as credits don’t have to be written down. So as long as a central bank and a strong political will are prepared to fuel an expansion by credit expansion the good times continue, but once the plug is pulled all hell breaks loose. We saw it in the US recently (and this is far from over!) and my gut feel is that China is far worse. But I will follow this up “doggedly”.

  1. 2010-02-16 at 02:31

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