A few brave experts and I such as Jim Chanos, Gordon Chang, and David Stockman (speaking at our upcoming IES conference) have been arguing for years that China has the greatest investment and overbuilding bubble in all of modern history. We’ve also warned that its economic statistics are not real – they are purposefully overstated and then revised later…if at all.
I don’t see how this top-down dinosaur of a centrally planned government can continue in power. I don’t even know how it can exist in a free market/democracy-driven age that already saw the centrally planned economy of the Soviet Union fail miserably. This is their current strategy to stay in power: Hiring low-skill workers to build more infrastructure and real estate than is actually needed, and keep moving unskilled immigrants from rural to urban areas on a scale never before seen in history.
The demand isn’t even there! They’re just building things no one’s going to use just to keep these people employed and happy. It can’t continue, and when it doesn’t, I don’t see how China will be able to stop these people from revolting. Since 1983, over half a billion Chinese have moved to the city, and 220 million of those just since 2002!
As of today, there are now over 220 million urban residents that are not legal citizens where they live – like illegal aliens from Mexico here in the US. Do you see a problem if this overbuilding and debt-fueled strategy of over-expanding finally ends? There will be hundreds of millions of unskilled workers stuck in cities, and they won’t even be able to go back to their rice paddies. By now, those rice fields are probably paved over with empty condos!
China’s government thinks that if it keeps the people employed then they won’t question the corrupt, crony capitalist system in place. That’s why it continues to push its top-down planning through local communist governments that almost totally drive infrastructure and business investment – with no regard whatsoever for free markets!
Does that sound like a success strategy?
An “Economic Miracle," or Merely Snake Oil?
Economists call this an “economic miracle.” The new “state-driven” capitalist model.
I call it absolute BS! Pardon my French. Adam Smith and the founding fathers of American democracy would have a conniption fit if they heard this!
So let me just add a few charts to the conversation. You might have seen them in other pieces I’ve written. They suggest China’s economy is already failing beyond its recent 35% stock crash – which, by the way, would have been more like 50% if the all-controlling bureaucrats had not totally stepped in and manipulated the markets for their best interest once again.
The Mafia would have worshipped the Communist party of China. I mean, what’s not to love? Total top-down control and power. Crony wealth in a closed economy. Secrecy, piracy, I could go on forever. This is heaven for crooks!
Here’s the first chart from Macquarie Research via businessinsider.com, one of our very favorite websites:
After the downturn of 2008, growth in railway freight surged to 20% into early 2010. Why? Massive government stimulus in China! But since, it’s faltered back into negative growth between mid-2012 and mid-2013 and back again since early 2014 – now down 12%! That doesn’t bode well at all for manufacturing and exports.
A growing economy?
Not by my watch!
Then take a look at this one:
This is another statistic that is hard to manipulate – and by “manipulate,” I mean hide! Kind of like the statistic that showed how many buildings weren’t using electricity that revealed how many urban condos were empty. Something like 27%!
This one shows that power consumption also surged 28% into early 2010 but has declined systematically ever since. It went negative in July 2014 and again in March of 2015. Now it boasts a mere 1.8% growth. Does this sound like an economy that is growing at 7%?
Finally, my favorite, one that is so fundamental to middle- and upper-class growth. Not to mention major exporters from the US to Germany to Italy to Japan – and even South Korea.
Again, a surge into early 2010.
And surprise surprise, much slower since. As you can see, auto sales have steadily declined in 2015, currently down 3.4%.
China’s economic model is one of the most unsustainable things in the global economy today. Worse, it’s heavily contributed to a massive real estate bubble that will burst with global consequences.
Do you think this economic model will sustain its mega bubble and the world’s bubble?
I didn’t think so.
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