China on the Brink?
By Staff News & Analysis - July 07, 2010

Be Afraid – Very Afraid: China's Housing Bubble is Set to Blow … For Westerners, watching China struggling to deflate its giant real estate bubble is like seeing the train rattle around the bend while you're tied to the tracks. Will nobody save us? U.S. fortunes are, of course, hitched to those of the People's Republic, soon to surpass Japan as the world's second-biggest economy. If China's growth stalls, or even markedly slows, we'll feel the pain stateside. One example — a plunge in mainland housing prices would hurt spending by Chinese consumers, damping demand for foreign goods, among other adverse effects. Construction also uses lots of steel, oil and other basic materials. So slowing growth could hurt worldwide demand for commodities. Meanwhile, concerns are mounting that China's real estate bubble is getting ready to blow. Property prices in 70 of the country's larger cities, while still rising more than 12 percent in May, are leveling off. Said Harvard economist Kenneth Rogoff today at a conference for Asia investors: "You're starting to see that collapse in property and it's going to hit the banking system. They have a lot of tools and some very competent management, but it's not easy." – BNET.Com

Dominant Social Theme: There is none?

Free-Market Analysis: Sometimes, as we have pointed out before, news is just news and information is just information. The power elite's dominant social themes are pervasive, but in order to maintain the credibility of mainstream news organizations, a good deal of real information must be reported, both good and bad. Contrary to George Orwell's various literary theses (and we DO have questions about Orwell who was both a socialist and a British intelligence agent) adult propaganda (the sophisticated Western kind) prospers by omission not always by commission. But there comes a point when the news is so bad that it simply must be presented with some level of comprehensiveness. And that is happening today.

How bad are things? Europe's nation states are floundering, the European tribes are rioting and panicked EU leaders are discussing a two-tier euro (which likely won't work any better than the one-tier currency). In America, the protests of mainstream economists and political leaders grow louder. The shrillness has to do with the insistence that America is well on the way to "recovery" and people simply have to wait (in soup kitchens and unemployment lines) for the economy to catch up to them. In China, meanwhile, as we can see from the above excerpt, the housing market threatens to bring down not only the larger Chinese recovery but the world's nascent rebound as well (not that there really is any).

What's the result? Paradoxically, tens if not hundreds of millions of workers and investors including investment professionals are walking around these days with their fingers crossed hoping that the old men who run the Chinese government will engineer what Keynesians call a soft landing. Consider the irony of the situation! The same leadership was involved in the repression at Tiananmen Square and more recently endless attempts at building an effective Chinese Internet firewall. But it is now seen as the last, best hope of the Western world (by mainstream media anyway) for salvaging the West's collective economy from the ravages of the dreaded "double dip."

The Bell's readers and feedbackers will certainly recall the many articles presented on aspects of the above situation and its ramifications. Months and years ago, the Bell dealt with the imminent failures of the American Federal Reserve (both promotionally and from a strategic standpoint), with the incipient foundering of the European Union and the inflationary depression toward which China seemed (and still seems) headed. We never received that much pushback on our Fed comments or even on the European Union, but we do remember protests over our perceptions of China.

Yes, we surely remember the emails and feedbacks explaining to us why China was too big to fail, why its economy was too well managed and most of all why China was not printing too much money because its growth had been funded in large part by outside vendors with non-Chinese currency. (Is that really so? We don't think so.)

From our perspective, 20-years of quarterly growth – mostly 10-plus percent – seems questionable at best. Sure we know the Chinese are hard workers and that Chinese management is a miracle of modern industrial science. We read the mainstream news, too. But something ain't right. China had plenty of ways to inflate the yuan and we have a sneaking suspicion they've done so. And Chinese growth has also been built on the backs of other inflated currencies, chiefly the dollar.

The result is price inflation. It's irrefutable. It's not a new problem, either. Bubbles such as the one that China faces take years if not decades to build. And just as China has "fast-tracked" its economy, so it has fast tracked inflation as well. Here's some more from the article, both optimistic and not:

It's important not to overstate the risks. In most ways, China remains in enviable condition. The country's GDP growth, which fell to a still robust 6.1 percent in early 2009, grew at a rate of 11.9 percent in the first quarter of 2010. As of April, retail sales were up 18.5 percent from last year. And longer term, real estate will recover in China, as rural inhabitants continue to stream into cities.

But the feedback loop among global economies is, as we've discovered, a powerful one. Just as plentiful Chinese capital is necessary to fund our spiraling debt, China needs Western consumers to spend. That equation looks increasingly unbalanced, as fears of a double-dip recession rise in the U.S.

Investors in China, particularly property speculators, are clearly spooked by the government's efforts to cut down on the froth. … The Shanghai Composite Index has plunged this year, closing Monday at a 15-month low. Excluding Greece, that's the worst performance of any stock market in the world this year.

In fact, that will suit the PRC just fine. Officials there don't want to contend with an overheated market along with asset bubbles. Still, it does raise questions about how long the engine of global economic recovery can continue pulling the train.

Can the points in the above excerpt be taken in both ways? Maybe China's six percent GDP growth actually represented a merciful slowdown, which the Chinese government firmly repudiated with its aggressive yuan stimulus. The American economy looked very solid to the mainstream media as we recall in 2006 and 2007. Meanwhile, the idea that an 11 percent growth rate in a mercantilist fiat-money/central banking economy is "healthy" is questionable from our point of view. Central bank economies, unfortunately, can implode virtually overnight.

Yes, China continues to boom. The government just announced plans to build a railroad across the entire country. (We cannot help but be reminded of the Great Wall of China that winds across the country's borders in awe-inspiring uselessness.) Meanwhile an entire million-person-plus city in Mongolia sits idle, without residents. Officials are pleased to report, however, that many of the city's properties have been purchased by speculators who await the inevitable payday when the city finally fills up. The speculators, Chinese reporters tell us, have nowhere to put their money, but real estate is considered safe and even a "sure bet."

China is a model Western economy now. Just yesterday, officials announced a massive drug bust and no doubt those who cultivated and packaged the marijuana will receive stiff jail sentences just as they do in the West. Plans proceed apace to ensure that the Chinese Internet carries nothing that officials find objectionable. There is angst over the underperformance Chinese stock market just as there is in the West. China is generally overbanked, as is the West; there are familiar (Western) questions, internally, about central banking policies and recent policy shifts regarding the yuan.

And yet … is China truly Westernized? One difference between China and the West is that China has had barely a generation of "prosperity" – if you could call it that. The convulsive societal cataclysms of Maoism have been banished for now, but are not forgotten. Perhaps it is possible that long-suffering Western citizens can tolerate ongoing diminishment of living standards over years if not decades. We wonder if the same can be said of China's increasingly energetic middle class and lower middle class, not to mention the rural workers at the bottom of the heap.

If and when China blows, it may blow up hard. For now, the country looks solid and the civil and judicial repressions that China practices look like business-as-usual. The Chinese government is "tough" and the social compact between the people and the government (we provide prosperity/you don't question our authority) remains in place.

But it is possible that what happened in America and Europe could happen in China? Could real-estate reverse precipitously? Could investors be faced at some point in the future with a nation-wide real-estate market that does NOT go up? Could Chinese growth numbers finally falter and fall in a way that is not recoverable? What would it mean for the West?

Conclusion: What will 1.3 billion Chinese do if confronted with the realization that their economy is not nearly so solid as it seems, but is in fact a Western-style financial bubble? Perhaps this won't occur. Perhaps the Chinese are as clever and industrious as we have been told. Perhaps the Chinese miracle will continue for several decades. Or perhaps not.

After Thoughts

That people do not fully realize the havoc the central banks regularly cause is in part because the mainstream media does a lousy job of reporting on it and because the Fed itself spends a great deal of time acting concerned about the damage it has wrought. Public relation is actually integral to the functioning of these banks. It is part of what comes naturally. Yes, perhaps this is an obvious point, but it is an important one. The strategy has worked for such a long time. However, we would suggest that conditions have changed and that the methodology needs updating. More and more people are peering behind the curtain, as more and more is revealed. And more, we would suggest, don't like what they see.

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