Sino-Forest Is Leading Indicator of China Disaster?
By Staff News & Analysis - June 15, 2011

Sino-Forest review will take months, shares … Sino-Forest (TRE.TO) said on Tuesday it will take up to three months to debunk fraud allegations leveled by short-seller Muddy Waters, rattling investors and sending its shares down more than 30 percent. Hong Kong-based Muddy Waters earlier this month accused Sino-Forest of exaggerating the size of its forestry assets within its highly complex business structure. Though both analysts and the company have slammed the research firm's report, the company's shares have fallen more than 80 percent since the beginning of June, pulling down its market value by about C$4 billion. At least some of the decline reflects the Sino's inability to give a straightforward rebuttal that disproves the fraud allegations. – Reuters

Dominant Social Theme: This is an exception. Most companies in China are really well run and exceptionally transparent.

Free-Market Analysis: We've been waiting for something like this (see above). Critics are starting to engage with China in earnest and this is just one more sign of it. The Chinese stock market itself is an opaque mess and there is no reason to believe that Chinese "private" companies are any better run. In fact, there is good reason to believe that the Chinese government itself runs most major companies at least from behind the scenes when it comes to major decisions.

We have read stories as well about the stock market, and how even young investors can get rich quickly simply by following the Chinese propaganda sheets that indicate which ventures the Chinese government is smiling upon. Figure out which companies the Chinese bureaucracy is backing and investing becomes simple. It's not capitalism of course. It's just supposed to look that way.

We've compared the entirety of the Chinese economy to a Potemkin Village. It is a façade, designed to mimic Western instrumentalities. The Chinese government, desperate to keep power, has given way in terms of political ideology. But it is still in charge. And is fraudulent as ever.

It may be true that there is a Chinese plan to switch over to silver-backed money as mentioned today in another article on these pages. This would surely revitalize the Chinese economy in the long term. But we would argue that in the near term, the fate of the Chinese economy has been sealed. It's not going to be pretty.

Who believes these Chinese growth figures? Nine and ten percent growth rates month over month – not just for a year or for a decade, but for SEVERAL decades. These are not normal numbers, and no economy transforms so quickly without massive fiat-money stimulation. In fact, the cadres are under pressure to meet central government growth and development demands.

In the US, we have called the process Dreamtime, when the Anglo-American elites seeking to form One World Government imposed a central-banking economy on the United States. In a single century it transformed a predominantly rural and agricultural society into a fully consumerist one. In the process, the country's industrial heartland was turned into the "rust belt" and a prosperous society was turned into nation where up to half of its citizens are on some for of welfare. So much for American wealth.

All this is yet in China's future. The Chinese people are still in the phase, thanks to Western monetary stimulation, where they believe that everything that has happened to them is due to their industriousness and native intelligence. It likely doesn't occur to most Chinese – as it did not to most Westerners – that much of the "progress" they believe they are witnessing is due to monetary inflation/stimulation. Too much money chasing too few goods.

This process of central bank stimulation (combined with deregulation) has been going on in China for decades now. But perhaps only in the past decade have Westerners begun to realize what was taking place in that vast country. The progress was phenomenal as were the skyscrapers, widening cities and broadening, 10-lane highways. What observers didn't see was the monetary madness.

We started pointing out that the Chinese economy was overheating close to two years ago. At the time, investors were still almost unanimously in awe of the Chinese miracle from what we can tell. We received a number of disapproving feedbacks.

The point our feedbackers were making was that China was divided into numerous foreign enterprise zones and that since the yuan did not circulate in these zones there was little possibility for strongly expanding the money supply. Of course that was then, this is now. We knew it was a bubble. Now they speak of it frankly on Bloomberg and CNBC.

Chinese monetary inflation has turned, inevitably into considerable price inflation. It is a classic Austrian bubble. The Chinese created a powerful central bank, flooded the country with fiat money – with no relationship to honest money – and the result has been an incredible building boom coupled with zooming prices in such critical areas as food and raw materials.

We long ago pointed out the empty cities that were being built. Chinese officials in responding to Western questions about these cities have indicated that they are part of a larger planning process and that they will be filled over time. But the Chinese will have to fill their skyscrapers as well. There are more than 200 of them being constructed even now, at a time when the Chinese economy is beginning what seems to be a serious slowdown.

Western elites are considerably invested in China. They have attempted to present the economy as a model Western economy – just a bit more authoritarian than most. This is nothing but a kind of dominant social theme, one intended to enhance the Anglosphere elite's mania as regards one world government.

Have you noticed this? Every society around the globe is similar and some are so similar that they exceed even Western models. China is said to have everything that Western economies have, and more. More skyscrapers, more businesses, more people and of course an exploding entrepreneurial culture.

Of course, China HAS come a long way, especially when one ponders where it was. Today's China is almost incomprehensible compared to yesterday's. But that still does not mean China is what its officials wish to present it as. The Sino-Forest episode is just one more sign among many.

In a conference call on Tuesday, Sino's management discussed the damning Muddy Waters allegations. The Muddy Waters report is no small deal either; one of the company's biggest shareholders is billionaire hedge fund manager John Paulson. Imagine that – the hedge fund genius. Did Paulson fully vet the Sino-Forest numbers, or did he base part of his purchase on executive assurances?

A panel has been appointed to review the alleged difficulties, one that will take several months because of the company's "complex" structure. The company, listed in Toronto, owns timber throughout China and will reduce inventory while the investigation is ongoing. "Later we can always speed-up our expansion plans," Chief Executive Allen Chan told Reuters.

Sino-Forest, in slowing down, is doing what the Chinese government is trying to do: slow down. The central bank has hiked rates numerous times and now it has raised bank reserves as well. The government has even instituted real estate freezes, forbidding people and companies from buying more real estate on speculation.

None of these moves will likely work. China is in a classic liquidity trap; monetary velocity after 30 years of stimulation is impossibly high. Every last dollar the government has printed – and it printed trillions after the 2007 economic crisis in the West – is probably circulating now and the central bank is finding it increasingly difficult to control what may turn into a kind of hyperinflation.

There is nothing much the Chinese fear worse than a hyperinflation. This is an old society with plenty of experience when it comes to paper “flying money.” As a result, the Chinese may err on the side of harsh tightenings. Many are optimistically calling for a Chinese soft landing. We think they are dreaming. This is a country of more than a billion people in the grip of a 30-year-old boom that is creating considerable price inflation. The idea that one can “run” such an economy and ease it down like a jumbo jet on a runway is fairly unrealistic.

What is NOT unrealistic is what happens after the Chinese economy crashes as it must inevitably (unless they manage to pull off the proverbial soft-landing). What will be revealed by the wreckage is the full panoply of central banking deceit. The scales will fall from the eyes. The stock market will be revealed as manipulated; the companies as inept monopolies; the ChiComs themselves as the hands-on managers of their wrecked enterprises.

It will not be good. Not in the near-term, even if China switches to silver-as-money. In the near-term, the great cities and skyscrapers will go unfilled; the 10-lane highways shall remain untraveled. A billion people, newly wealthy will find that their condos are not sellable, that food is not available at almost any price and that their jobs were merely the extended froth of the most powerful central-banking bubble that the world has ever known.

After Thoughts

China will be shaken to its foundations if this scenario unfolds. In fact, a steady trickle of reports have exposed a startling summer surge of urban violence, protests expressing frustrations with China's modern authoritarian culture. Should these continue and expand, especially as the result of a "hard landing," China could truly shake the world once more. Not in a good way.

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