Over recent years I cannot imagine how many presentations and panels I have witnessed where China-bulls (typically selling commodity based investments and strategies) have pounded the podium on how much smarter, better, faster China was compared with America. No offence to the Chinese, but in my humble experience human nature is pretty consistent on planet earth, geographical lines are usually irrelevant in this.
In taking the objective measurements we could month after month, it seemed clear to us that superior intelligence was not behind China’s growth, but rather the same old macro culprits of excess global demand fueled by excess credit and asset bubbles at home and in the west. In micro terms, China has personified the time-old tale of the suddenly rich, where a dramatic boom in one’s business or income causes them to be revered as genius by the masses. Most typically these dramatic boom periods pass, and the “genius” finds themselves swimming in a sea of debt and hubris. Hard lessons are usually learned the hard way.
Today China is doing just that. GDP that rocketed to 10% after China entered the World Trade Organization in 2002 is now reportedly below 7 and is forecast to stabilize somewhere around 5% over the next 5 years. Little understood is that China will now suffer from the ugly demographics of its notorious “one child policy”. Its labor force will be falling from 2013 all the way until at least 2032. Like the west, China has not financially prepared for the weight of its aging population. Worse than the US though, China’s birth and immigration rates remain miniscule. As I have mentioned many times, slower growth does not have to be financially fatal, unless one enters into such periods with high fixed costs and indebtedness. China has both of these.
In the first half of 2012 Chinese profits fell 7% and its capital expenditures fell 16%. Receivables and inventory levels are soaring. The stock market has fallen back to the lows of 2009 and the property market has declined 16% over the past year with still epic inventories to work down. Meanwhile food and fuel inflation, coupled with contracting cash flows are limiting the ability of monetary and fiscal efforts to mitigate the decline. The “China miracle” is moving through its period of comeuppance. This has some predictable economic downside to countries and companies who have been banking on insatiable Chinese demand to keep present price levels rolling. Read more: China’s shadow banking system now collapsing.
“A collapse of property schemes, commodity schemes, and other investments schemes in China is well underway. The Ponzi schemes all had one thing in common: they needed an ever-growing pool of suckers to pay the returns promised to investors.
Well, the pool of greater fools finally ran out, see: Shadow Bankers Vanishing Leaving China Victims Seeing Scams and China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments. The slowdown also is putting pressure on the government to rein in private lending to avoid a spate of defaults that could increase the number of victims and lead to social unrest.”
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