Bubble of Historic Proportion
China is the greatest construction boom and credit bubble in recorded history. An entire nation of 1.3 billion has gone mad building, borrowing, speculating, scheming, cheating, lying and stealing….
… in two short decades, China has erected a monumental Ponzi economy that is economically rotten to the core. It has 1.5 billion tons of steel capacity, but “sell-through” demand of less than half that amount— that is, on-going demand for sheet steel to go into cars and appliances and rebar into replacement construction once the current pyramid building binge finally expires. The same is true for its cement industry, ship-building, solar and aluminum industries—to say nothing of 70 million empty luxury apartments and vast stretches of over-built highways, fast rail, airports, shopping mails and new cities.
China’s giant credit bubble is the most massive malinvesment of real economic resources—-labor, raw materials and capital goods—ever known
… There have never been any legitimate financial prices in China—all interest rates and FX rates have been pegged and regulated to the decimal point; nor has there ever been any honest accounting either—-loans have been perpetual options to extend and pretend. __ http://davidstockmanscontracorner.com/chinas-monumental-ponzi-heres-how-it-unravels/
The credit bubble underlies all of China’s other economic bubbles. The real estate bubble, bond bubble, manufacturing bubble, commodities bubble, stock bubble and all the rest are built upon the great credit bubble — often referred to as the great credit mountain of China. And as David Stockman (and many others) explain so well, China’s credit mountain is built upon a great sea of ideological quicksand, which is supported by nothing at all.
China’s Credit Bubble Underlies All of China’s Other Bubbles Within Bubbles
A Credit Bubble is a self-reinforcing but inevitably unsustainable expansion of debt. Money (the contemporary variety) is a financial claim perceived as a safe and liquid “store of nominal value.” Importantly, systemic risk expands exponentially when risky borrowings are financed by an expansion of “money-like” instruments/financial claims. This typically occurs late (“terminal phase”) in the Credit Bubble Cycle.
… Bubble markets and an extraordinarily maladjusted and imbalanced global economy are highly dependent upon ongoing Chinese financial and economic booms. The Chinese Bubble depends upon ongoing speculative excess and asset inflation. And Chinese asset and speculative Bubbles are sustained by cheap “repo” and other short-term “money-like” finance.
Doug Noland’s weekly roundup linked above reminds us of the Russian credit bubble bust of 1998 and the global credit bubble bust of 2007-2009. Each of those recent credit bubble explosions contains eerie parallels to the ongoing Chinese credit bubble — a historic credit problem, as Noland explains.
“The People’s Bank of China is worried that easy money will exacerbate China’s bad debt problem and encourage speculative behavior. Over the weekend, the PBoC’s Vice Governor Chen Yulu said that financial institutions are facing increasing credit risks. China’s total debt rose to a record 237% of its GDP in the first quarter as money supply jumped 13% year-on-year, well above China’s nominal GDP growth rate. Well-respected Chinese financial magazine Caixin reported this afternoon that the PBoC is now asking its banks to pare back lending this month. The central bank is asking banks to lower the amount of new loans to just 70% of what was planned at the beginning of the month. Strategists and analysts are now saying that ample liquidity is driving Chinese investors to conduct speculative trading … __ Doug Noland
Without China’s Debt Mountain, All of the Grandiose Mega-Projects of China and Russia Go Up in Puffs of Dragon Smoke
Beijing has announced grand and massive mega-projects in rail infrastructure, electric power grids, military and weapons projects, outer space expansion, and an endless litany of dragon dreams. Russia is trying to hitch a ride on the dragon’s tail, with only spotty success thus far. China wants it all, but is willing to hold out enticements to the demographically and economically challenged bear for what it can reap from Muscovy’s desperation.
Few People Understand How to Get to the Root of a Nation’s Economic Worth
If a country gins up its GDP via massive malinvestment, bubble schemes, shadow banks, nepotism, patronage, and the total absence of any real accountability, the reliability of that nation’s economic statistics hovers near zero. That is easy to see in the one-trick pony economy of Russia, with its top-heavy centre of crime and corruption in Moscow, and a huge outspread chunk of valuable real estate occupied by increasingly restless natives.
The illusion of China is more difficult to see through, and not just because of all the pollution in the air. Because international investors, speculators, and financial journalists want so badly to have a focus of excitement to write about and bet upon, the rest of the world is willing to pretend to believe Beijing’s numbers just to keep something really bad from happening. But because of this pathetic global pretense, something really bad becomes more and more certain of happening on a far grander scale than an immediate and honest accounting would bring.
This is not likely to end well . . .
For the globalised economy, the bursting of China’s bubble is likely to have tremendously unhappy repercussions — at least for those who are not banking on the fall of the house of bubble. Too many other houses of cards are built upon the Chinese house of cards.
Even so, it will not be the end of the world. It will be another deflationary shot heard round the world. If the US elects a much better government in November, the global economic pain can be mitigated by a long-delayed economic recovery and breakout — hopefully accompanied by a deep and clever streamlining of the US’ global military presence.
Hope for the best. Prepare for the worst. It is never too late (or early) to have a Dangerous Childhood.
Industrial salts marked for human consumption may contain hazardous metals such as lead, arsenic, mercury, or nitrites. The gradual buildup of these substances in the body contributes to nerve damage and cancer.