China's debt spree returns to haunt … Bail-outs are coming thick and fast in China. In less than a week the authorities have had to step in to prop up the banks, rescue the insolvent railway system and save the near bankrupt city of Wenzhou from a spectacular debt crash … It is proving harder than expected for the central bank to manage a calibrated "soft-landing" after letting rip with credit to counter the Great Recession … The 30pc annual pace of loan growth is unprecedented in any major country in modern history. It is double the pace of America's housing boom and Japan's Nikkei bubble in the late 1980s. It may match US loan growth in the late 1920s. The Communist Party is now struggling to cope with the fall-out.– UK Telegraph/Ambrose Evans-Pritchard
Dominant Social Theme: China will be OK. It's a capitalist country now and the miracle of the Invisible Hand will guide it through any rough waters.
Free-Market Analysis: Ambrose Evans-Pritchard is back and swinging for the fences. For two years now (we keep track) we've been writing about the Potemkin Village that is China's supposed "free-market" economy and with increasing stridency we've been sounding the alarm about China's impending downfall. Along the way we've been joined by other voices, none more insightful and influential in our view than Evans-Pritchard.
He has been traveling in China from what we can tell and his tone has turned even more markedly gloomy as a result, or so it seems. We are not surprised. China is not simply the world's worst economic disaster waiting to happen – the disaster apparently is IN THE PROCESS of happening. Only you won't learn that from the mainstream news media, which is determined to keep China's impending liquidation a "secret" for as long as possible. Here's some more from the article:
On Monday, the state investment fund Central Huijin began buying stakes in China's four top banks to restore confidence and halt the slide in share prices. … [Meanwhile] China's finance ministry is quietly intervening to underwrite China's railway system. This behemoth is drowning with $300bn of debts after breakneck expansion, is in arrears on $25bn of debts to its two largest suppliers and has run out of money to pay workers on the Lanzhou-Chonqing rail project.
The ministry has offered a 50pc tax break on railway debt to be auctioned on Wednesday. This is a signal that Beijing will stand behind the system. It is intended to lure back investors following the high-speed rail crash in July. Meanwhile, Beijing is negotiating a $15bn bail-out for the enterprise hub of Wenzhou south of Shanghai, where panic has set off a credit crunch for small business and builders.
China's press has been riveted by tales of debtors hiding in the hills to evade creditors. Roughly 60pc of the region's loans come from non-bank lending beyond control, some of it Ponzi finance. "It's a tight financial network that interweaves lenders and borrowers collectively, often to their mutual benefit and sometimes to their terrible loss," said Caixin Magazine. "If only a few debt-ridden companies collapse, the financial trouble can ripple through the entire credit-connected community. The domino-effect started to endanger the entire system in July."
Every few days or weeks we check the China "scene" to find out what's going on. It never gets any better; it only gets worse from what we can tell. Thirty years ago, the Chinese began to allow farmers and other trades people to sell their wares in open-markets. Eventually, this sort of capitalism spread upwards. Soon people could "own" real estate and build it as well.
But the real control of China's largest industrial entities seemingly never left the Chinese communist party. In fact, there's plenty of evidence that the larger companies – banks, trading firms, utilities and the like – are controlled behind the scenes to give the look and feel of a kind of capitalism that doesn't actually exist.
The model is much the same in other BRIC countries and throughout South America and many developing countries where the elites own everything that matters while individuals hawk cell phones to each other on the street. Competition is fine so long as it doesn't inconvenienc the ruling classes. John D. Rockefeller used to say that "competition is a sin."
Because there never has been any real capitalism at China's top end, the economy after 30 years of "development" is likely woefully distorted. There are all sorts of explanations advanced for the empty cities, malls and skyscrapers throughout China, but the obvious reason is that China's annual "plans" and "goals" call for a certain amount of growth and the cadres will hit that number even if they have to build an empty city to do it.
The cities are beginning to rot now, or so we've read. Soon, probably, skyscrapers shall start to be dangerous to inhabit. The country's vaunted rail system is subject to continual accidents and generally, throughout China, the quality of the country's 30-year-long building boom is suspect.
Those who continually justify China's industrial excesses point out that the country's apparently shoddy workmanship is a good thing. It allows for the Chinese to create new jobs and new work, as the old infrastructure and unused housing crumbles. This is ludicrous, though. It's a repackaging of the broken-window fallacy.
Those who fancy the Chicoms, infinitely nefarious, have taken to muttering that China has appropriated American dollars and knowhow to build a formidable industrial society and a tremendous, modern infrastructure as well. But, in fact, the infrastructure is suspect and the economy is so distorted and controlled by the Chicoms managed boom that people out of desperation are buying – cash down – apartments in empty cities to hold as "investments."
Anyway, you can't really buy real estate in China, only lease it from the government. There's lots you can't do – or say – in China. Meanwhile … the controlled Western intelligentsia has been using the dysfunctional Chinese model to proselytize for more Western economic interference in the private markets.
The idea is that the Chinese have discovered a better way of doing business – using the state to organize private industry. The same ridiculous notions were floated when Japan was going through the boom part of its boom-bust cycle. The Americans helped Japan build out its "Western style" economy and they've helped with China's as well. In Japan's case, things have not ended well. In China's they likely won't either.
The Chicoms, in fact, have had decades to get this right but they made the mistake of installing the kind of faux-capitalism that Western elites implemented and ran for the past century. It didn't work for the West and it seems to have trapped the Chicoms as well.
Increasingly, the assurances of the Chicom leadership are taking on a hollow ring. Increasingly, they seem desperate to find away out. They've probably run out of chances and they know it. The great leap forward starved millions. And later, Tiananmen Square's violence sealed a social compact in which the Chinese leaders and their billion-plus populace traded political agitation for economic development.
But now that economic development seems suspect. As we've pointed out before, a steep recession – or depression – may well spell the end of Chinese communism, or at least inflict upon it a vast reconfiguration, violent or not. Three strikes and yer out.
And so it falls on the Chicoms to engineer a "soft landing." But there will be no such soft landing most likely, (as there never is) and the sound of a hard one could resonate around the world. The Anglosphere power elite that helped engineer the Chinese industrial "miracle" is surely aware of what may loom in China. If one looks at the world scene with a cynical-enough eye, the future seems to become clearer because of it.
China would be the final nail in the coffin; the subsidence of its economy will surely set off a global, rolling depression of significant breadth and depth. Can it be otherwise? And was thisthe plan all along? Europe is sinking; America is drowning; soon China may join them.
A modest if nightmarish scenario …
Suddenly, the world's economy is entirely under water – savings savaged; jobs non-existent; even food and water in short supply for some reason. Now the elites make their solutions known … Buttressed by the roiling populist protests of Occupy Wall Street, supported by Julian Assange's transparency meme, the powers-that-be take advantage of the starvation and chaos facing not just the West, but the world.
With all the persuasive force of the controlled media, they will offer the globe's tortured billions the vision of a compassionate and efficient global government. They campaign for direct democracy to ensure world government is both fair and equitable.
It will become apparent, eventually, that Assange's WikiLeaks model provides the transparency that is necessary to erect a feasible model of global governance. Handsome Assange himself shall assume a high position in world government (a man other men envy and women hope to marry). Finally, the elites will offer up the IMF's SDRs as the new world currency.
Does all this strike you as far-fetched? Heck, we're just speculatin' …
