US Press Misfires Over China Disaster
By Staff News & Analysis - January 21, 2011

Human rights? Hu will hear none of it … Something about human rights just doesn't translate for Chinese President Hu Jintao. President Obama (left) granted him the full state-dinner treatment that President George W. Bush denied him five years ago – but in return, Hu had to put up with a news conference, which he had refused to do when Obama visited China. For a repressive ruler, facing a free press is about as pleasant a prospect as attending the Nobel Peace Prize ceremony. After the leaders' standard opening statements full of the blah-blah about bilateral cooperation, the Associated Press's Ben Feller rose and asked a gutsy, forceful question. "Can you explain to the American people how the United States can be so allied with a country that is known for treating its people so poorly, for using censorship and force to repress its people?" he asked Obama. And to Hu: "I'd like to give you a chance to respond to this issue of human rights. How do you justify China's record, and do you think that's any of the business of the American people?" – Washington Post

Dominant Social Theme: The Chinese simply must do more to protect human rights.

Free-Market Analysis: The Washington Post was proud of the US press corps yesterday. Having the opportunity to ask Hu four questions, two reporters chose to ask tough (but thoughtful) ones about human rights violations in China. (See article excerpted above.) In this article, we'll argue the reporters asked the wrong questions, and that Hu should have been asked about China's increasingly disastrous easy-money policies.

"Bloomberg's Hans Nichols, gave Hu a lesson in press freedoms," the Washington Post staff writer reports later on in the above article. "'First off, my colleague asked you a question about human rights which you did not answer,' the lanky newsman advised the Chinese strongman. ‘I was wondering if we could get an answer to that question.'" Hu answered "the lanky newsman" as follows: "China is a developing country with a huge population and also a developing country in a crucial stage of reform In this context, China still faces many challenges in economic and social development, and a lot still needs to be done in China in terms of human rights."

This was a quote repeated endlessly on TV; it was taken not only as a triumph for American journalism but as a triumph for the West itself. The leader of a resurgent China, soon to be the most powerful country in the world, had been humbled by the Western system of press freedom. A lanky reporter for a hard-scrabbling, reputable broadcaster (Bloomberg) had faced down the most awesome of Oriental powers and come away triumphant. "No wonder Hu doesn't like questions: He might have to give an honest answer," the Washington Post story concluded with relish.

Of course had one of the Bell's elves (or heaven help Hu, one of its gnomes) been at this important press conference, perhaps another question might have been asked: "With nearly US$2 trillion in monetary stimulus in two years and annual growth rates exceeding 10 percent a year, how on earth is China going to avoid a debt-based implosion that will shake the world?" (We would then have tried to disengage the gnome from Hu's leg so he could answer.)

We believe such a question is almost as important as China's admittedly terrible human rights record. To be fair, the Chinese have never come right out and endorsed torture as the American federal government did under Bush; but what China is setting up for – and we have been covering this subject for nearly two years – may be the single hardest-landing since the Great Depression. Recently, hedge fund legend Jim Chanos has come to the same conclusion, as follows:

Jim Chanos, the hedge fund manager who famously made millions by uncovering and betting on the demise of Enron, has said he is now betting against China. His view is that China's growth is based on a huge credit bubble backed by inflated property prices – and that the bubble is now so big that the Chinese government will not be able to engineer a soft landing. He backed by Mark Hart, of Corriente Advisors, the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, who started a fund based on the belief that rather than being the "key engine for global growth", China is an "enormous tail-risk". (UK Telegraph)

The above article, which appeared yesterday, also informs us that Hugh Hendry from Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management. What do these clever men understand about China that others may not? The possibility of a once-in-a-lifetime opportunity to garner riches on the short side of the popping of the biggest monetary bubble ever blown.

Of course, one can predict generally that a given economy is going to implode, but getting the timing right is a great deal harder. That's one reason why Austrian economics can provide a functional paradigm of the world without imparting great wealth to users. In the long run we're all dead, John Maynard Keynes famously said. Investors certainly can go broke waiting for their intuition to be validated by a market "event."

But in the case of China it gets ever harder to avoid the suspicion that a bust may come sooner rather than later. We note that Goldman Sachs just announced it has cut its China exposure. And then there is the pesky question of all those empty cities – at least the vast empty apartment projects – that China has built. Many are apparently purchased by nouveau-riche Chinese convinced that the only investments worth-owning are gold and real-estate. Hey, one of out of two ain't bad.

Always, when we write these stories we inevitably get one or two feedbacks pointing out that Chinese fundamentals are good because it has so many people to take care of and they need so many things. This is a puerile way of looking at investing. In America it led to predictions at the turn of the century that the 21st century would soon see a Dow 40,000 based on the many baby-boomers that would need to invest in the stock market to gild their old age. That didn't work out so well, either.

What investors who ascribed to his projection probably forgot was that the West's economy is based on fiat-money central banking. Investing in the West is basically monetary. Studies have shown that being in the right asset class at the right time is far more important than being in a particular "promising" investment. Had one been in stocks in the late 1990s, one might have enjoyed considerable tech-boom profits. In the 2000s, precious metals (and perhaps some commodities) have proven the place to be.

But how about China? Certainly China has been a powerhouse throughout the 2000s. We read articles daily pointing out that China has "survived" the Great Recession of 2008 and come out stronger than ever. But as we learn from another article in the UK Telegraph, the real story of China is how much of its growth is based on easy-money. "An enormous wave of new money and easy credit," is how the Telegraph puts it. Hey, didn't they do that last year?

In fact the article confirms it with the following extraordinary observation: "For the second year running, Chinese banks loaned out more money than the UK's entire public debt. Their extraordinary largesse helped the Chinese economy maintain the near 10pc growth it has recorded each year, on average, for the last two decades."

Alistair Thornton, an economist at IHS Global Insight in Beijing is reported as making the following observation: "It is not difficult to grow at double digits if you are pumping money into the economy like there is no tomorrow. The banks are lending more than twice as much as they were before the financial crisis and they are also printing new money – money supply is up 50pc from a couple of years ago."

It's not just China. The Financial Times reports that "Japan hits ‘critical point' on state debt … where it risks losing investor confidence if politicians fail to reach agreement on how to rein in the ballooning national debt. Kaoru Yosana, the new minister for economic and fiscal policy was forthright about Japan's economic situation in an interview with FT: "We have to be very careful [to] ensure the credibility of our economy and the credibility of our government."

Having diagnosed the problem, Yosana comes up with a predictable, bureaucratic solution: "His stark comments highlight government determination to introduce a sweeping reform of the tax system that would include a hike in the 5 per cent consumption tax," FT reports. Sure, tax ‘em to death. It's why Japan will continue to struggle in our view. Politicians know nothing else but to spend and tax. "Balancing the budget," never ends up including much cutting. Apparently it is easier to tax more rather than rein in the system.

This goes for Brazil, too. Rather than move to a saner monetary policy, such as backing the currency with gold (and printing less of it), Brazil is raising rates along with India in order to try to contain price inflation. Meanwhile, a reported flood of dollar liquidity has pushed the real up 40 percent against the US dollar (and nearly as much against the yuan), which is likely intolerable for an emerging economy with goods to sell. Unfortunately for Brazil – and India, too – when rates go up, money pours in, which in the case of Brazil only bids the real up further. It's a vicious circle.

So there you have it, dear reader. Regarding China, we might have gone about the questioning differently. Of course, China's human rights policies are dreadful – though one might point out that the US has the highest level of incarceration in the world. The West, the world's real economic engine, is already close to ruin. If and when the bust hits the BRICs, the downturn will be magnified. Where will one turn for prosperity? Africa?

The power-elite controlled media continues to celebrate China's economic resurgence. Europe begins to borrow from this might country. The US pleads for trade and further capitalization. The media in many cases resists coverage of anything else. It's like watching one long coronation. In fact, it has turned into a sub-dominant social theme of sorts: The arrival (and soon-to-be) dominance of the East. They last time we saw this hype was in the 1980s when a flood of books and articles predicted that Japan was about to overwhelm the world's economy.

China's economic numbers are probably as phony as the perception that its larger companies operate independently of the communist party. There's probably no real free-market in China – or none at the top anyway. So … the US press should be given credit for valiantly persisting in asking questions about China's human rights record. But we would have preferred to hear a question about China's incessant monetary stimulation and how, after 30 years of manipulated growth, Chinese leaders can possibly expect to engineer a "soft landing." A hard landing in our view will bring on a worldwide depression that will make the current environment look prosperous.

After Thoughts

Is this what the powers-that-be are counting on to help usher in a new currency, perhaps offered via the IMF? Do they want people to be caught by surprise regarding China's almost inevitable unraveling? We're not sure this is a logical expectation in the 21st century. Too many people already understand what is going on thanks to the Internet. The power elite may soon find themselves in a position of "being careful what you wish for." The austerity riots in Europe are fairly significant. We cannot imagine what they will be like if Brazil, India and especially China are not able to prevent "hard" economic landings.

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