China Fantasy or China Reality

It’s become popular to theorize that China is smarter than the US, that China’s economy is doing better, that China will rise to surpass the US, etc.  This theory is false, in our opinion.  China has massive government controls and intrusions into the market throughout the economy.

This article ( enumerates some of China’s problems:

– credit bubble of unknowable but staggering proportions

– moral hazard encouraging perverse and destructive behaviors

– fraud, corruption, nepotism, and opaque bookkeeping practices

– borrowing short to lend long with endless “rolling” of liabilities

– dependent on rising asset prices

– rampant overbuilding of real estate assets

According to Chinese-American friends of ours who currently live in China, a few other trends are:

– second passports

– selling a home in China to buy one outside

– bypassing capital controls

– brain drain, especially in high-value fields like engineering

As always, it is difficult to predict the timing of a credit bubble collapse, but it does not seem so far away to this observer (admittedly an outsider).

2 replies
  1. says:

    The changes and growth here in China are staggering, but since they are implemented by now 7 people who’s sole desire is personal enrichment and maintaining power, they have only 1 option. Keep the masses happy so they maintain power. If they can continue to lift the masses out of poverty, as they have been doing that can be a net positive, but as I am sure you have observed, some of that “wealth” has been imported inflation from the US. The side effect is of course higher costs of living for the poor, thus an unhappy populace living under the poverty line which is a magnet for communism.

    There are a lot of things that have happened here in the banking, credit and real estate sector that I am not sure made the news. The govt knowing that the costs of real estate is flying out of control have begun (a few years ago) slowing the market via dictate. Many of my clients had real estate development loans recalled before term. When they of course could not meet the demand the government removed every last RMB from their banks. This left my company and many others with debts in the millions we have yet to fully collect. It left workers on the streets when factories could not pay salaries because some of the factory owners were also real estate developers who’s banks went instantly dry.

    In many cities, especially Shanghai real estate prices dropped 30%. They have since gone up but are still over prices. A new luxury complex next to where I live has halted construction because now with the softening market they have no more capital.

    All of this is simply a band aid wrapped around a broken leg. The government charges too much for land they sell to developers, then they go on the news and protest that greedy developers are charging too much for the apartments they build. Again avoiding the real problem.

    1 small step in the right direction, but not nearly enough is that China has been the world’s largest gold producer since 2008. They are still way too far off from being able to de-peg from the dollar basket and back the RMB with real money, but they are moving quickly toward a stronger position where they can eventually tell the US to stop their container load shipments of inflation to China. Eventually they will want real goods in return for the real goods they send to the US. Eventually if they revalue their currency they will be able to raise living standards here for many more people, but there are too many things holding them back as they are still too focused on exporting to the US and not enough on consuming their own production, and exporting to countries that can actually pay them with something that was not simply run off a printing press managed by Timothy Geithner.

    Ultimately there are so many nuances to the economy in this semi-open economy that it is hard to tell what will happen. China does have a massive mini capitalist economy when you look at the small micro businesses that support hundreds of millions of people, and these are largely untouched by government regulation.

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