Implosion: The Coming Crash in China.

The Chinese economy is in for an enormous crash. It will be unlike anything else seen in modern history.

Charles Hugh Smith has written an interesting article which shows us something important for the future:

Few question the importance of private credit in the global economy. When households and businesses are borrowing to expand production and buy homes, vehicles, etc., the economy expands smartly.

When private credit shrinks–that is, as businesses and households stop borrowing more and start paying down existing debt–the result is at best stagnation and at worst recession or depression.

Courtesy of Market Daily Briefing, here is The Chart of Doom, a chart of private credit in the five primary economies:

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The chart makes sense. Japan is already deep into recession. The Eurozone is arguably in recession, perhaps just the beginning.

The USA continues to expand private credit. But this took place after trillions of dollars in bank bailouts, deficit spending, and a 800% increase in the monetary base. As Hugh Smith points out, for what? Private credit has barely expanded. The US economy is mired in stagnation, at best.

Notice China: shooting through the roof without hesitation.

He goes on:

This chart makes it clear that the sole prop under the global “recovery” since 2008-09 has been private credit growth in China. From $4 trillion to over $21 trillion in seven years–no wonder bubbles have been inflated globally.

Combine this expansion of private credit in China with the expansion of local government and other state-sector debt (state-owned enterprises, SOEs, etc.) and you have the makings of a global bubble machine.

In other words, the faltering global “recovery” and all the tenuous asset bubbles around the world both depend on a continued hyper-velocity rocket rise in China’s private credit. What are the odds of this happening? Aren’t the signs that this rocket ship has burned its available fuel abundant?

I have previously called China “the World’s Greatest Bubble”. I continue to believe this. That is what this chart depicts: relentless credit expansion from the People’s Bank of China.

THE COMMUNIST PARTY

The Communist Party of China rules the country. But they ceased to be communist in December of 1978, when Deng Xiaoping began liberalizing agriculture in the wake of Mao’s death. By the end of the 1980s, the Chinese economy had been effectively de-communized. I sincerely doubt that any Chinese leaders actually believe in Marxism anymore. But they still hold on to power. This is what the Tiananmen Square Massacre was supposed to demonstrate: “We may be giving you more freedom, but we are still in control here. Do not test us.”

The Chinese economy is no longer dominated by state-owned industry. Less than half of the economy is state-owned by this point, at roughly 35%. It is no longer communist. The Chinese economy is technically capitalist by this point. But in practice, it is a fascist economy. Most people do not understand fascism, which immediately brings up thoughts of Hitler. Militant nationalism aside, fascism is simply government domination of private enterprise. Instead of owning industry directly, the government heavily regulates industry to move it in directions they want it to go, for whatever reason. If they want to encourage the production of steel, they’ll use the regulatory state to encourage the production of steel, either through incentives or other means. This is in contrast to a truly free market, in which steel producers will make steel only in accordance with consumer demand.

In China, this free market process has been utterly turned on it’s head by government intervention. The People’s Bank of China, the Chinese version of the Federal Reserve, has been wildly printing money and expanding credit. Prices and interest rates in China no longer accurately depict real supply and demand. How can we tell this? Look below to see the answer:

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Notice anything peculiar about this? There are almost no people in any of these photos. You are looking at China’s famous “ghost cities”, entire urban areas complete with condos and shopping malls that never move in a single resident or store. Entire cities are invested-in and built without seeing a single cent of revenue from residents or storefronts. The photos look like something out of a post-apocalyptic zombie film.

This is economic insanity on a scale unseen in world history. There is no consumer demand for these cities, yet they are being built. Long story short, this is the result of government encouragement. The Chinese government encourages this behavior in order to prop up domestic industries and keep the stock market afloat. This is why they have been expanding credit on a massive scale: to keep the whole thing going.

David Stockman, former director of the Congressional Budget Office under Reagan, has called this “price distortion.” In a recent article, Stockman had this to say:

…In China the financial madness has gone to a unfathomable extreme because in the early 1990s a desperate oligarchy of despots who ruled with machine guns discovered a better means to stay in power. That is, the printing press in the basement of the PBOC—-and just in the nick of time (for them).

Print they did. Buying in dollars, euros and other currencies hand-over-fist in order to peg their own money and lubricate Mr. Deng’s export factories, the PBOC expanded its balance sheet from $40 billion to $4 trillion during the course of a mere two decades. There is nothing like that in the history of central banking—–nor even in economists’ most febrile imagings about its possibilities.

The PBOC’s red hot printing press, in turn, emitted high-powered credit fuel. In the mid-1990s China had about $500 billion of public and private credit outstanding—hardly 1.0X its rickety GDP. Today that number is $30 trillion or even more.

Yet nothing in this economic world, or the next, can grow at 60X in only 20 years and live to tell about it. Most especially, not in a system built on a tissue of top-down edicts, illusions, lies and impossibilities, and which sports not even a semblance of financial discipline, political accountability or free public speech.

To wit, China is a witches brew of Keynes and Lenin. It’s the financial tempest which will slam the world’s great bloated edifice of central bank fostered faux prosperity.

The Communist Party of China is filled with engineers and scientists holding Ph.D’s from elite Western universities. They think they are capable of building the Chinese economy on the backs of their sheer genius. Looking back on the last 20 years, they probably think they’ve succeeded.

But as the old phrase says, “The bigger they come, the harder they fall.” China is in for more than just a falling economy. They are in for a nose-diving economy. Over 300 million migrant workers living in enormous Chinese cities are either going to lose their jobs or have their pay severely cut back when the Chinese bubble pops. This is going to produce an economic convulsion unparalleled since the Great Depression.

The worst problem that China faces in this regard is that they are a manufacturing-based economy. Recessions, by their nature, obliterate capital industries like construction and manufacturing. Manufacturing in the USA accounts for around 10% of economic activity; that is, not very much. I am not certain exactly what percentage of China’s economy is in manufacturing. But considering that nearly everything on Walmart shelves has a “Made in China” sticker, I can assure you it is a heck of a lot more than just 10%. Probably closer to 80% at the very least, if not more. Hundreds of millions of Chinese workers are in manufacturing. When the Chinese bubble pops and millions of Chinese workers lose their jobs, this is going to rock the Chinese social order in ways not seen since the Communist Revolution.

CONCLUSION

The Communist Party of China would love for you to believe that they’ve figured out how to make a working government-dominated capitalist economy. This is why they are desperate to maintain the illusory bubbles at all cost, even at the expense of their own people.

Don’t believe it for a minute. The empty cities are a testament to their failure. When government bureaucrats try to decide how your money should be spent, this is what happens. Nobody can decide how to spend your money better than you can.

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