As reported in multiple sources, China has already begun reducing its exposure to US Treasury debt out of the entirely reasonable fear that the US economy can’t sustain its current course and the long-term prospects for the dollar are grim.
But in our truncated view of the world, we tend to see China as a juggernaut, an economic colossus of smooth facade, without crease or crack. But as I’ve written here, here and here, that while China is indeed a low-cost manufacturer and exporter currently sitting on a pile of foreign exchange, the country faces nigh-well intractable economic, political, demographic and social problems.
And though it’s happening below radar, China’s own economy may be coming unraveled. From the New Ledger:
In fact China is facing multiple huge financial dislocations of its own. In July the government failed to sell all 35 billion yuan in bonds up for sale, achieving only 25.1 billion yuan ($3.7 billion) sold. One could reasonably ask what China, with more than $2 trillion in currency reserves, is doing selling bonds into a market already flooded by the US desperately trying to fund their government bloat.
In truth, the opaque, communist Chinese managed economy is in worse shape than ours. The government has been desperate to put a shining golden face on what is quickly becoming an unmanageable situation. The bond sales in July that failed were part of a fund raising effort for China’s 586 billion multiyear “stimulus package”.
This stimulus is an effort by China to keep businesses running in the face of collapsing global demand for everything China makes, as the bubble economy of the last 10 years unwinds. Though reports are few outside of China, the country has seen waves of protests by workers who find themselves unemployed and forced to return to wretched peasant life in the countryside.
Though the Chinese state run economy is incredibly opaque, China’s central banks have poured free money into their country. As a result bank lending has surged across China, with the total amount taken out in loan being roughly 7.3 trillion yuan (about $1.1 trillion). By figures released by the Royal Bank of Scotland, this is roughly two years worth of lending under normal circumstances.
Where is this money going? Why, China’s favorite pasttime: gambling. This free money is pouring into China’s stock exchange and into real estate speculation. This is reflected by the dramatic rise in property values in all of China’s major and second tier cities. Like in the US, any scarcity in the market is simply a function of speculators lacking a property to use as an appreciation vehicle; the true market is highly over-saturated in almost every segment.
In addition, communist China’s state-run industries have gone on a raw material and commodity-buying binge. In the face of imploding demand world wide, China is hoarding basic industrial goods such as steel, oil, aluminum and copper. This has helped pump worldwide commodity prices back towards some of their highs of 2008. . . .
Read it all. The true state of China’s economy and social dislocation is one of the great under-reported stories of the day. Ambrose Evans-Pritchard of the UK Telegraph has been working this story and in a recent article described the insane, stimulus-fueled speculation in the Shanghai markets and real estate – all of it aided and abetted by China’s major banks.
And as the little old German rocket-maker used to say, “Vat goes up, must come down”. With a crash.
