STAFF NEWS & ANALYSIS
Economist Mag Shock: Is China Over?
By Staff News & Analysis - January 24, 2014

China loses its allure … Life is getting tougher for foreign companies. Those that want to stay will have to adjust … For the past three decades, multinationals have poured in. After the financial crisis, many companies looked to China for salvation. Now it looks as though the gold rush may be over. – Economist

Dominant Social Theme: China is finished. Goodbye. Better look to the West …

Free-Market Analysis: Why on Earth would The Economist, among China's biggest cheerleaders, become a boo-bird?

We'll answer, but first let us point out that this Economist article – "leader" – is predated by numerous articles that we have written over the past years.

These articles of ours stated most clearly what is wrong with China: China's monetary policies resemble insanity and will likely at some point implode along with the Communist Party.

But here's what The Economist tells us about China in this article:

In some ways, China's market is still the world's most enticing. Although it accounts for only around 8% of private consumption in the world, it contributed more than any other country to the growth of consumption in 2011-13. Firms like GM and Apple have made fat profits there. But for many foreign companies, things are getting harder.

That is partly because growth is flagging (see article), while costs are rising. Talented young workers are getting harder to find, and pay is soaring. China's government has always made life difficult for firms in some sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including Facebook and Twitter—but the tough treatment seems to be spreading.

Hardware firms such as Cisco, IBM and Qualcomm are facing a post-Snowden backlash; GlaxoSmithKline, a drugmaker, is ensnared in a corruption probe; Apple was forced into a humiliating apology last year for offering inadequate warranties; and Starbucks has been accused by state media of price-gouging.

A sweeping consumer-protection law will come into force in March, possibly providing a fresh line of attack on multinationals. And the government's crackdown on extravagant spending by officials is hitting the foreign firms that peddle luxuries (see article). Competition is heating up.

China was already the world's fiercest battleground for global brands but local firms, long laggards in quality, are joining the fray. Many now have overseas experience, and some are developing inventive products. Xiaomi and Huawei have come up with world-class smartphones, and Sany's excellent diggers are taking on costlier ones made by Hitachi and Caterpillar …

Consumers will no longer pay a hefty premium just because a brand is foreign. China is still a rich prize. Firms that can boost productivity, improve governance and respond to local tastes can still prosper. But the golden years are over.

Now, this is good so far as it goes, but is a bit like writing about a "hot night" while the building next door is burning down. You are observing your immediate environment rather than reporting larger truths.

The "reporting" ought to be obvious at this point. Vast empty cities, Internet censorship that is growing more frenzied as China's four-decade-long faux-recovery peaks, ever more authoritarian government practices, a top-down financial sector that mimics the worst monopoly practices of the West … the list is endless and has begun to be noticed by even the mainstream.

Yet the best The Economist can muster in this important "leader" is to bemoan corporate setbacks.

Want a more pertinent view? Take a look at an excerpt from TheAutomaticEarth.com – "The End of Communist Rule in China?" – that puts China into sharp perspective. (Thanks, Danny.)

The more I read about China, the more chaotic it seems to become, and the more I start to doubt the generally accepted notion that the Communist Party (+PBOC) is in control. If we accept that the politburo has little or no control of the shadow banking system, and that the latter is worth $5.86 trillion, or 69% of Chinese GDP, why would we still assume the politburo controls China's economy and banking system?

… Credit default risks with Chinese companies are emerging because of rising borrowing costs and tight liquidity conditions, said the official China Securities Journal in a front page editorial. The government needs policy flexibility to prevent any systematic financial risks. This problem – described as "contained" by one sell-side shop reminds us of the "it could never happen here" mentality in the 2008 US shadow banking system.

Critically, when the PBOC suggests it may let some banks go (to prove its mettle and resolve to fight out of control credit creation); investors will sell first and think later about which are safe and which are not. A 'default' – which looks increasingly likely – may just be the test of just how 'planned' and 'controlled' the Chinese banking system can really be…

… While last night's almost unprecedented reverse repo liquidity injection into the Chinese banking system stopped the bleeding of short-dated money-market rates briefly, the likelihood remains that a shadow-banking system default will occur …

How much of this will the Chinese people accept before unrest breaks out? If there's a cascade of failing Wealth Management Products – and perhaps the trust companies that sold them -, what are those who put their savings in them going to say? Moreover, what will the effect be on the economy as a whole? The numbers at times are nothing short of staggering.

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None of this is new to Daily Bell readers, who have been exposed to such reporting for years now. We've pointed out quite carefully that the ChiComs may not survive a generalized bust, and such a bust is surely coming.

But you wouldn't know it from The Economist. All you get, in this piece anyway, is generalized bemoaning about a lack of corporate opportunity.

And yet … even this is significant.

It seems obvious to us that the current China is a kind of Anglosphere operation – especially the economy that mimics Western finance and governance closely. China has a central bank, a stock market, investment opportunities for the middle classes, etc.

For the past decade, China has been increasingly important to the West, and certainly during the past decade when its surge of industrial and financial activity partially compensated for the West's post-2008 collapse.

We've noticed a rash of recent articles in the mainstream about a potentially collapsing China. Something is going on. Even this Economist article is decidedly negative about China, though not for reasons we consider the most important.

We can think of several reasons why.

First, it would seem that the widening cracks in the base of China's financial system cannot be papered over anymore. Second, it may be that Western elites wish to begin a game of global polarization again and China provides an appropriate target. Third, it may be that a staggered and staggering China redirects eyes to Western markets. Once again, the West's markets are the cynosure – literally the only game in town.

This last point would make sense within the context of The Wall Street Party that we have been tracking. We believe that top banking elites are seeking a final big blow-off of equity markets and are making a variety of plans to ensure its creation and sustenance.

Easy money, changes in regulation, downward manipulation of gold and silver – all these moves and more are perhaps aimed at concentrating hot money in stock markets, especially US markets.

Will a collapsing China dent an equity uprising in the states? Not necessarily. China makes much for the West. It is less clear how much it consumes – and this Economist article is making the case that US multinationals will need to find other markets anyway – and are in the process of doing so.

After Thoughts

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