China, the Miracle Economy

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China, the Miracle Economy

China, the Miracle Economy

By Bill Bonner • August 13th, 2009 • Related ArticlesFiled Under

About the Author

Bill BonnerBest-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

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Filed Under: Market

Tags: bear marketbubble erachinadepressiondoweconomyemploymentgdprecessionRob Parenteauworld economy

Man's hope!

Yes, it's the 'miracle economy.' China, that is. Many analysts think it has 'decoupled' from the rest of the world economy. While the rest of the world sinks into the 'worst recession since the '30s,' it is said to be growing at 8% per year.

Go figure.

Well...when we go figure we figure there's something fishy about it. In fact, we figure it's a fraud.

In America, the bear market bounce took a little jig downwards yesterday. Stocks - measured by the Dow - fell 96 points. Oil fell below $70. The dollar and gold remained almost unchanged.

But China's revved up so hot she seems likely to throw a rod. We've been telling our Dear Readers to stand clear.

At least, that's the case with the Chinese stock market. It's a bubble. And it's getting ready to pop.

As for the economy...we figure it's a fraud...

Chinese officials have a funny way of counting. When products are shipped from the factory, for example, they are counted as 'sales' even though no one may actually buy them.

There are some other ways of keeping score that tend to tilt the game in China's favor - at least, on paper. When you add up all the scores - it shows China a big winner. But by the end of the day, it isn't at all clear that China's economy is growing at such a breakneck speed. In fact, it isn't clear that China is really growing at all - not in a genuine and helpful way.

And here...perhaps we should pause. We are about to tell you that China is a scam. It's not really becoming more prosperous. But before we do, we have to explain what prosperity really is.

Do you remember the Bubble Years? Of course you do. They just ended scarcely 24 months ago. Well, during those years we were told that we were getting richer. Two forms of evidence were presented - one statistical...the other observational. The numbers told us that GDP was growing. Since economists figure GDP growth is the same as prosperity...they thought Americans were getting richer.

There was also the evidence available to anyone with eyes. You could look at any driveway; there you would find two or three cars - new cars...big cars. And behind them was a brand new McMansion...Bubble Era vintage...

Yet, both forms of evidence were misleading. Americans were spending. The spending showed up as GDP growth. The faster they spent, the more new cars and new houses they had too.

But they were not creating wealth...they were consuming it. They were spending money they hadn't even earned yet. In other words, they were not only consuming their current wealth, they were consuming wealth that didn't even exist yet - it was tomorrow's wealth. You couldn't see this happening by looking at the GDP numbers; instead you had to look at balance sheets. And even then, you needed to look at them with a suspicious eye. On the one side, debt was clearly swelling up; it doubled during the 2001-2007 period. On the other, assets were swelling up too. But the assets were of the overpriced, Bubble Era variety...houses and stocks that were subject to easy correction. And when the correction came, assets declined...and debt grew heavier and heavier. Now, Americans have twice as much debt...and their assets are back to where they were 10 years before. Net result: impoverishment, not wealth.

Consuming wealth is not the way to get rich. It's the way to get poor. But it would take someone without a PhD in economics to see such a simple and obvious truth. Given a fellow a computer and an advanced degree in economics and he's ready to believe anything...

Yes, dear reader, in His majestic wisdom, God - or whatever wiseacre created this system - set up something so subtle and complex that it is beyond the reach of human tinkering. That's why the meddlers always make things worse. That's how they put the 'great' into the depression of the '30s - by interfering with the markets' natural corrective mechanisms. And now these simpletons think they can stop the correction underway since '07 - with stimulus, bailouts, and boondoggles. Yes, they admit, it was excess credit that put American consumers into such a jamb. But, heck, now we'll let the government do the borrowing. The government will make up for the demand that has been removed from the private sector. The private sector is paying down debt at roughly $1 trillion per year. And now the public sector is adding debt at roughly $1 trillion per year. That ought to do it, right?

Ha...ha...yes...why not? And while we're at it, let's round off pi to a whole number so it will be easier for school kids to remember.

But wait a minute...we're talking about China, not the United States. And we're talking about Chinese meddlers, not the American variety. And we're talking about the Chinese depression...not the depression in the advanced economies.

But wait...you're probably wondering... 'What Chinese depression? China is booming...isn't it?'

Well, here's a question for you: if China were really growing at 8% per year, how come its electricity consumption is going down?

Answer: Because the Chinese bureaucrats can jiggle and jive the numbers for employment, GDP, and inflation. But the number of kilowatt-hours consumed in China is just a number. It is not computed. It is not seasonally adjusted. It is not tortured by statisticians nor tormented by economists. It is just a number. And that number is a smaller number than it used to be.

Oh, and here's another number. China's exports for July were down 22% from the year before. Here's another question: how can an export led economy grow when its exports are collapsing?

Again, we have an answer: when it is not really growing.

According to the meddlers, China is growing because meddling works. China is spending $586 billion (proportionally nearly 3 times as much as the US) to keep its economy booming. The program must be working, say the economists, because China's economy is still growing.

But is it? Most of the money is spent on infrastructure. The Chinese are doing what the Japanese did before them. Japan bailed out its banks and spent trillions on infrastructure. There were years when little Japan was pouring much more cement than the entire USA. - channeling rivers, building bridges to nowhere, and creating highways for no one. What did they get for their money? Well, you could say they got a lot of infrastructure...and the most cemented-up country on the planet. Is that a good thing? We don't know. But one thing they didn't get was durable economic growth.

Why not? The easy answer is because an economic system is too sophisticated to yield to these ham fisted interveners. Another way to look at it is because the economy had already spent too much...creating too much capacity. Adding infrastructure that could handle more capacity was not a solution.

"Keep in mind," says The Richebächer Letter's Rob Parenteau, "China needs at least 9% growth to soak up the 24 million new Chinese workers who come of age each year - something even the Chinese Premier doesn't like to mention."

But heck...it's summer. And in the sum...sum...summertime, we're not going to criticize our fellow man. Instead, we're just going to laugh at him.

In China, for example, the government's stimulatory programs are having the same flaccid results they got in Japan. Prices are going down. The Chinese feds are trying to get people to spend more money - just as they did in Japan. But people do not spend more when prices are falling. They wait for a better deal. And as they wait, consumer demand falls...forcing prices down further. Japan has gone through almost two decades of on-again, off-again consumer price deflation. Now it's China's turn. Consumer prices in China have been going down for the last six months...and are now reported falling at a 1.8% annual rate.

How could prices be going down in a booming economy? Well, because the economy isn't booming. Instead, it's burdened with overcapacity - just like Japan's. And like Japan's it is probably doomed to go through a long period of re-adjustment...before a durable recovery can begin.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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Re: China, the Miracle Economy

DTM

 

Execellent read , thanks for posting that.

 

Ken

 

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Re: China, the Miracle Economy

“CHINESE policy makers are tightening the credit taps to avoid banking problems, asset bubbles and inflation, amid the first signs of deceleration in the resurgent economy.”

” the People’s Bank of China said yesterday that the value of new loans had fallen to 356 billion yuan last month, from 1.53 trillion yuan in June.

While the Premier, Wen Jiabao, and senior policy makers have recently insisted the country’s loose monetary policy settings remain unchanged, Huang Yiping of Peking University said the central bank had been telling commercial banks to slash their lending. The new central directives were not strict credit quotas but “more like window guidance”, he said”

http://business.smh.com.au/business/china-pulls-back-on-bankcredit-throttle-20090811-egzv.html

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Re: China, the Miracle Economy

I think the Chinese are more than aware that the world economy is in shambles and going down.
Unlike our government (US), they are taking real concrete steps to save themselves.
They have secured physical gold reserves, foreign commodities contracts, embarked on agreements to swap currencies with other countries (bypassing the dollar) and, apparently, today they announced they were encouraging the people to buy silver.
Sounds to me like they expect TSTHTF just like most of us.
However, if they manage to do all these things, especially the last, their world can just keep going while the rest of ours falls apart.
When the banks and 'rulers' have all the real money, everyone else is screwed.
They are starting to try to put it in their peoples hands!

Thoughts and comments anyone? BTW I have dial-up now...

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Re: China, the Miracle Economy

Sandman3369 said:

I think the Chinese are more than aware that the world economy is in shambles and going down. Unlike our government (US), they are taking real concrete steps to save themselves  They have secured physical gold reserves, foreign commodities contracts, embarked on agreements to swap currencies with other countries (bypassing the dollar) and, apparently, today they announced they were encouraging the people to buy silver.

Nice call Sandman.  The Chinese government is much more nationalistic and financially viable than the western nations.  I usually like Bill Bonner but he is more wrong than right in this article.

China's government has no debt, instead they have sovereign wealth funds - from prior budgetary surpluses.  They are a creditor nation while the entire west are debtor nations.  

The secret to China's economy is that they spend debt free money into circulation.  They have not allowed the international banking cartel to monopolize the issuance and control of their national currency.  This policy preceded the communist take-over, the new government maintained that successful approach. 

Dr. Sun Yat-sun (father of modern China) copied the model from Lincoln's greenbacks that were used in the United States to pay for the Civil War while maintaining a prosperous and growing economy.  In the 1860's, Yat-sun lived in the U.S. and was "a protege of a group of American nationalists of the Lincoln/Carey faction" - Ellen Brown Web of Debt.

Imagine that powerful economic engine once again under the hood of a democratic republic instead of communism.  That's where we need to be.

China has a problem and no doubt their leaders lie as much as ours, but they have a better problem than we do; while we're dying in debt their problem is - "how can we quickly spend all these American dollars."

Larry

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Re: China, the Miracle Economy

Well, Dr., thank you for the reply. I tend to rant when I type at all. Can't tell if it is just 'AGS' (angry guitar-hand syndrome) or what. A week later I wonder if it really is just their government trying to get the public to spend, like I've read in a couple articles, or if they are truly trying to do what I said that day. Altruism, or the illusion of it, is a deadly weapon in the right hands especially if you add propaganda to it. I will definitely check up on the other good Dr. Yat-Sun. Thank you for the pointer. The Founding Fathers had all the right answers, I think, why didn't we stick to the plan?

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China Will Be A Bigger Bubble Than Japan

http://pragcap.com/china-will-be-a-bigger-bubble-than-japan

Superb analysis out of SocGen analysts this morning.  Dylan Grice says the Chinese economy has many similarities to the Japanese economy before it imploded in the 90’s.  He cites 8 reasons why the Chinese economy is likely to be an even larger implosion than the Japanese economy:

 

Studying the lessons from Japan’s lost decade(s) is key for anyone seeking to understand today’s post-bubble world. But a closer reading of Japan’s financial history illuminates today’s China far more. In the early 1980s, on the eve of its financial liberalisation, Japan was the rising power from the East set to overtake the West. Younger and growing rapidly, it was still a decade away from its climactic and catastrophic bubble peak. This is where China is now.

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China, Not So Miraculous

Watch this video and tell me that decoupling is occurring.

(Sorry, Youtube has found a way to make you watch commercials)

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Peter Schiff Starts Asian Mutual Fund

If this doesn't signal a significant downturn coming for the asian markets then China really does have a miracle economy.

As most of you know, I feel that the most promising economic growth is taking place in China. With its focus on savings, production, and investment, the Chinese are getting right so many of the things that we are getting wrong. As a result, I have come to believe that Americans must invest more in China if they hope to be part of the global economic expansion.

But for many investors, especially those with limited funds to contribute, it's not easy building a balanced portfolio of China-focused stocks. To provide a simpler pathway to make these investments, Euro Pacific has combined forces with Halter Financial Investments L.P., a consultancy and money manager with operations in the U.S. and China, to launch the EPH China Fund, a mutual fund designed to give investors access to companies doing business in China. This is the first mutual fund that bears our name, and I have high hopes for it.

http://www.ephasiafunds.com/

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