Biggest Story in the World? … China Faces Hard Landing
By Staff News & Analysis - September 16, 2011

China risks hard landing as global woes spread … China's carefully-managed soft landing is turning harder by the day, threatening to deflate the torrid credit bubble of the past three years. Beijing is alarmed by inflation above 6pc and price-to-income ratios for property in the rich coastal cities … "There is a large potential risk," said Zhu Min, the deputy managing director of the International Monetary Fund and a former Chinese official. Mr Zhu said China had doubled the loan ratio from below 100pc of GDP before the Lehman crisis to roughly 200pc today. The danger is that this excess could start to unwind just as the West goes into a sharp downturn, and possibly a double-dip recession. China and emerging Asia are fundamentally in weaker shape this time, having used up their "fiscal cushions", leaving them with little leeway to cope with a fresh global shock. – UK Telegraph

Dominant Social Theme: Europe has a lot of troubles. But, hey, China's always delivered before. Perhaps it can still fix the world once it fixes itself.

Free-Market Analysis: Good on you, Ambrose Evans-Pritchard. There is really no other story that matters, is there? If China goes down, the economic system of the past 60 years may be finished. Collapsed. Kaput. That's because every other major economy in the world is troubled to a degree. China has been pulling the whole boatload. But what if China's magnificent industrial engine begins to sputter and lose traction?

If America is in a recovery, as the Obama administration claims, it's a funny one. We tend to think the American economy more or less resembles a depression. Europe's, too. In fact, Italian political and financial leaders just asked China to buy the country's bonds (fund its deficit). Chinese leaders already own trillions in American securities (that they are about to sell) because China has been acting as the buyer of last resort for the entire world.

This is a really big story. Everybody should be reporting on it! It is more important than the concerted surge of central banking liquidity now announced for Europe, the loss of US$2 billion by a "rogue" UBS trader, or even the determination of the Obama administration to reduce or eliminate french fries on fast-food menus.

Evans-Pritchard is reporting not that China is "risking" a hard landing (as the title of the article suggests) but that China is IN the MIDST of a hard-landing. Here is the "money quote" from Diania Choyleva of Lombard Street Research:

"A hard landing is already in progress."

Now in case you're having trouble seeing clearly, we'll write it again:

"A hard landing is already in progress."

What's a hard landing? In our terminology it just means that a country's central bank has over-printed money to a degree that the economy cannot absorb any more price-distortion and that the business and financial investments that were seen as sound yesterday are suddenly revealed as insolvent. This causes a panic. Stock markets crash. Investor equity is wiped out. Jobs are lost. Banks turn insolvent. A recession (or depression) swings into view.

Evans-Pritchard, of course, analyzes the unfolding downturn from a more measured perspective. He is perhaps the best mainstream financial reporter at the moment, or at least the most fearless, but he values his job (who can blame him?). Thus he presents his conclusions through the veil of socialism and Keynesianism that are taught at such fashionable Fabian schools as the London School of Economics.

This is why he can write that China has no "fiscal cushion" left. What he means is that China and other Asian countries (China is not alone) have already taken steps to raise interest rates and slow the amount of fiat money printing by their central banks. We would simply observe that the money manipulations of China's central bankers have failed and they are running out of time.

"China has actively sought to cool overheating," he writes, "alarmed by inflation above 6pc and price-to-income ratios for property in the rich coastal cities nearing wild extremes of 20. But it does not want the economy to jerk violently from boom to bust …" ("It" being the old men who run the Chinese command-and-control financial system.)

OK, let's take a breather. There's plenty of other news. We're still shook up over the death of Amy Winehouse, for instance. Scarlett Johansson recently said of the phone hacking that broadcast naked pictures of her around the web, "I really felt bad." Brad Pitt, meanwhile, has told the world that he is happier with Angela Jolie than with Jennifer Aniston. Of course, he has a new movie to flog.

But the point is that even these stories – as monumentally important as they are (and flagged prominently on Google) – pale into insignificance when one considers the import of a hard-landing in China.

The China hard-landing story is NOT being featured on Google, however. In fact, when we Googled "China" in the news section, we found this article from Forbes prominently displayed:

Multinationals Rush To China; Foreign Investment Rises 11% In August … The China consumer narrative keeps multinationals pouring money into the world's No. 2 economy even as their home base economies remain on the verge of recession if not outright collapse.

China's economy may be slowing down from its double digit GDP days, but corporate investors aren't letting that get them down. And why should they? China's the No. 2 economy in the world after the U.S., and growth at 7% on the bearish estimate to 9% currently is adding to higher wages. There are problems in China, but its centrally managed government seems to have the trust of many big firms from around the world. …

China's future looks bright. Multinationals increased foreign direct investment (FDI) in China last month by 11% to $8.4 billion, the Commerce Department said Friday. "China's attractiveness as a destination for foreign investment is still strong," Wang Zhile, director of the research center for transnational corporations at the Commerce Department was quoted saying in China Daily on Friday.

This is an upbeat story. But still … are we getting the whole picture? Evans-Pritchard in HIS article points out that China's electricity use – closely watched as the economy's true pulse – was almost flat over the summer.

"Export orders fell 3.3pc in August, with the PMI index down to a 28-month low. Inventories have jumped. The M2 money supply has dropped from its normal growth rate of 18pc to 20pc to nearer 12pc over the past three months (annualised)." Here's some more:

The historic pattern of global crises is that the region emerging strongest is often prey to its own crisis three years later or so, usually because it was able to respond with a blast of credit that stored up problems for the future. Japan brushed off the 1987 crash, only to succumb in 1990: the US dodged the Asian crisis in 1998, only to face the dotcom collapse in 2001.

Fitch Ratings said it may downgrade China if the banks get into trouble, requiring another bail-out from Beijing. The agency said in July that credit growth was still running at a 38pc increase this year, if you include off-books financing such as letters of credit, trust loans and loans from Hong Kong banks.

We wrote about the Fitch report here: Fitch May Downgrade China and Japan: Worldwide Depression Draws Closer.

Charlene Chu composed the Fitch report, and the article quotes her as well. "China's banking system is the largest, fastest-growing, but most thinly capitalised among emerging markets," she is quoted as saying. "That China's economy is slowing while financing is still so abundant illustrates how dependent growth remains on loose funding." More from Mrs. Chu:

She said China's credit boom does not match Iceland – which saw credit to GDP rise from 130pc to 440pc over five years – but is significantly worse than the jump in the US before the sub-prime crisis, or even in Japan before the Nikkei bubble burst. "Such a rapid run-up in leverage is a sign that the incremental return on credit has declined, meaning that borrowers' ability to repay is not keeping pace." The agency fears that non-performing loans could rise from 2pc of GDP last year to up to 30pc.

According to a Chinese business publication, Caixin Magazine, regulators wish to reduce some US$150 billion in available credit. Yet, we learn from the Telegraph that any significant reduction in credit will have a serious impact on the liquidity of regional governments in China that have stored up some US$1.7 trillion of liabilities during China's latest building binge. The localities depend on land sales for 40pc of their income!

Worse … "If we have a hard landing, the government is not going to be able to pay salaries," said Wang Jianlin, Dalian's biggest property developer. And what does Evans-Pritchard conclude? "What is clear is that if Europe and America fall back into recession, China will not be able to buttress the global economy a second time."

We have no quarrel with this, except for the assumption that Europe and America ever emerged from their "recessions" in the first place. The 2000s are looking more like the 1930s than the 1970s – a long slog from slump to slump, in other words, that was only alleviated by resetting the world's economic system after World War II.

We will end with the observation that it is harder and harder to conclude all of this is "zemblanity" (a kind of negative serendipity). We remember the George W. Bush years, when the US federal government began spending hundreds of billions on insane domestic programs ("No Child Left Behind") while funding trillions in expenditures for the wars in Iraq and Afghanistan.

The Bush and Obama administrations purposefully drove the US into a kind of economic depression while counterparts in Europe did the same thing. None of this is an "accident." It is all the result of deliberate policies, both in the EU and in America. Now China apparently teeters on the brink.

One can argue of course that Bush, Obama and the Eurocrats did not KNOW that their policies would result in the current mess. But one can also argue that the brightest men in the world – after some 100 years – did not realize that central banking inevitably collapses economies.

But how could they not know? How could they be so sure that central bank money printing guaranteed endless prosperity? It does not. History shows it does not. And now the old men of China are about to find this out as well.

We are suspicious, of course. We believe there is an Anglosphere power elite that wants to create world governance and will stop at nothing to do it. They control the central banks, the mainstream media and most of the world's national governments. We wonder if the idea is to drive the world into bankruptcy and depression, thus making desperate people malleable and willing to accept anything, even a globally united political and banking regime.

After Thoughts

On the other hand, there is the Internet – and the Internet Reformation. People are more aware of elite manipulations than ever before. It may not be so easy as Money Power has hoped to shove the world toward a final spate of globalism. This remains to be seen. But if China IS in the midst of a hard landing, the world will continue its slide toward economic catastrophe. You can see another article on this subject here: The Coming Chinese Depression.

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