China’s Economy Becoming a Throbbing Headache

China’s “hard-landing” has arrived. The private sector economy is already in recession. The credit crunch is enormous. When a small firm can’t get credit, the next step is closing down. Governmental efforts to push “liquidity” into the system will be just as ineffective as it has been in Europe and the U.S. And the stock market will be shunned by international investment firms for a long time.

… We hear all the time that China cannot have a crisis because it has $3.7 trillion in reserves. I disagree with that for several reasons. First, who has counted that? Is this Chinese accounting? It may have accumulated over the years, but hasn’t it been spent on extravagant and unproductive governmental project, such as building cities where no one except the street sweepers live? __

After reading reports by Peking University professor Chris Balding on the state of China’s financial sector, I think there’s a possibility that China’s growth is lower even than 3 percent.

Chinese electricity usage is growing at more like 1 percent. Rail freight traffic, though volatile, has suffered some dizzying drops in recent months. These are traditional proxies for heavy industry output. That they are barely growing, if at all, implies that much of Chinese industry has ground to a halt. __

China is facing simultaneous bubble collapses in several economic sectors — including real estate, stocks, bonds, infrastructure overbuild, industrial overcapacity, state owned enterprises, local and regional governments over-leveraged, and banking + shadow banking sectors that are facing significant defaults from large purchasers that borrowed money to purchase stocks that subsequently collapsed in value. China’s vaunted cash reserves may not be as large as advertised, nor as potent when faced with an all-out multi-front collapse.

The former Deutsche Bank strategist who predicted a crash in emerging-market stocks as early as 2010 says China’s economy faces an “irreparable breakdown” that will deepen losses for investors.

The Chinese government is becoming more authoritarian even after proving itself incompetent in dealing with volatility this year in its stock market, John-Paul Smith, who left Deutsche Bank last year to start an independent research firm, Ecstrat, wrote in a report published Tuesday. The shift will leave the country less capable of dealing with “massive and increasing levels of overcapacity across much of Chinese industry,” he wrote.

We regard the Chinese growth model as in a state of almost irreparable breakdown, the implications of which have yet to become fully apparent to investors and policymakers alike,” Smith wrote. __

The economies of several nations are significantly dependent upon China’s economic well-being — including Russia, several African nations, Venezuela, and other 3rd world and emerging states dependent upon exports.

China saw imports drop for the twelfth month in a row in October giving further cause for concern over the Chinese economy. __

This continuous drop in imports portends ever-tightening economic prospects — at least for the rest of the decade.

The investment conclusion now is that Chinese manufacturing overcapacity will put deflationary pressure on prices, which in turn will keep interest rates and U.S. Treasury yields low for the next five years, he wrote. __

It is useful to pay attention to the various markers of China’s economic well-being.

Rail shipments in China (red line) are now down a hefty 15% on year-over-year basis. Look especially at the drop in rail freight traffic. It is now declining at a big 15% rate. That is a better indicator of economic conditions than GDP.

China’s stock markets are now seeing continued liquidation. There is basically one buyer now, the government, through the financial entities it supports. Because selling is now dangerous to your liberty in China, there is no buying. Foreign entities won’t buy into this, and are more interested in getting out than in getting in.

China now has 43 consecutive months of negative PPI (wholesale prices). That’s important deflation, and will spread to the rest of the world.


There are a number of longer term developments that may mitigate China’s decline, including promising research in advanced nuclear reactors, genetic engineering, materials research, robotics and manufacturing, and more. If these projects — largely collaborations with foreign investors and researchers — prove successful, China may achieve a significant leg-up on international competitors.

China has not allowed itself to be hamstrung by political correctness or the faux environmental global crusade. In China, success is considered a good thing, rather than something to be punished as it is under Obama, Hollande, Trudeau, and the other usual suspects.

Nevertheless, China must work through a great deal of legacy economic garbage, and corruption, before it will be able to grow a truly robust, resilient, and self-correcting market economy.

China’s leaders have made economic promises that they cannot keep — just as Russia’s Putin has done. Corrupt and unwieldy governments can postpone taking their economic lumps, only up to a point.

The consensus among economists continues to be that China will have what is for its economy a soft landing; most analysts are predicting GDP growth there of about 6.6% next year.

Should that number drop substantially and rapidly, however, to, say, below 5%, a currency war, civil unrest in China, a crash in emerging markets or all three at once could spark contagion into the developed world, likely starting with the commodity-focused economies, such as Australia and Canada, which have already been affected by China’s softness. That’s not our base case; it’s a Black Swan. __

Depending upon how one crunches the numbers, China’s yearly economic growth may come in anywhere between 7% and 1%. That is a very broad range of estimates.

Capital Economics draws on five indicators to build its proxy for Chinese activity: freight volume, passenger numbers, electricity output, seaport cargo volume, and the area of floor space currently under construction.

… According to this metric, Chinese GDP growth came in at 4.4 percent in the third quarter, the slowest pace of expansion implied by all the proxies featured in the brief.

… Lombard Street employs a novel approach in putting together its estimate for Chinese growth.

The official statistics for real GDP growth have been too smooth over the years, economist Michelle Lam and head of research Diana Choyleva believe, suggesting that the manner in which the data are adjusted might be faulty. As such, the pair uses nominal GDP (not adjusted for price changes) as its starting point, then uses a range of price indexes to deflate the figures into “real” terms.

“Our preliminary estimates show growth at an annual rate of just 2.9 percent in the third quarter of 2015, way lower than the official 7.4 percent,” they wrote.
__ Bloomberg News via Newsmax

For good reason, no one trusts official numbers coming out of Beijing (or Moscow).

Sooner or later, even the mighty dragon will have to take its economic medicine. The longer it is postponed, the more rotten and malignant the whole construct will become.


Tough and Dangerous attorneys needed in China to push back against the “CPC” leadership.

The government’s attempts to break and discredit the rights lawyering movement reflect a deep, palpable fear that rule of law could eventually supplant the “rule by man” which has characterized China’s political system for millennia. The country has a long bureaucratic tradition under which day-to-day activities were governed by laws and codes. Yet decisions at the top of the political structure derived legitimacy from the “Mandate of Heaven.” Chinese emperors were never constrained by a body of law the way that England’s rulers were subject to the Magna Carta or the way many modern leaders must yield to the national constitution and court system. The Communist Party operates in a similar fashion, with the Party effectively existing “above the law.” Indeed, recent clarifications to CPC internal discipline procedures explicitly highlight the need to keep Party rules distinct from the “regular” Chinese legal system.

Beijing’s fear of rights lawyers also shares a common trait with China’s vast Internet censorship program: the desire to suppress and constrain any type of activities which could spark collective action. Unsurprisingly, there are not any official statements which clearly state the motivations for detaining weiquan lawyers. Nonetheless, an innovative study of China’s internet censorship program by Professor Gary King and his research team at Harvard University sheds light on the matter. During the first half of 2011, King and his team downloaded social media posts from nearly 1,400 Chinese websites, ultimately collecting and analyzing more than 11 million discrete posts.

What King and his team found was striking: The most highly censored events were not criticisms of the Chinese government, but rather, events or ideas that had a high potential for stimulating group formation or collective action. For instance, posts about protests in Inner Mongolia, protests by angry migrant workers in Zengcheng, and anger about local lead poisoning of children in Jiangsu were intensively censored.

China’s government is afraid of China’s people waking up and acting collectively to defend their own rights. And they should be afraid. The Middle Kingdom is no longer isolated from the ideas of the larger, freer world.

When China’s economic rules were loosened to allow for greater prosperity, a new set of dynamic processes began to emerge, making a day of reckoning inevitable for the corrupt tyrants of the CPC. It is only a matter of “when?”

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