Skip to comments.More Signs China Is Going Bust
Posted on 09/29/2011 6:13:17 PM PDT by blam
More Signs China Is Going Bust
Economics / China Economy
Sep 29, 2011 - 12:04 PM
By: Justice Litle
While the world fixates on Europe, signs of a China crash are mounting behind the scenes.
Imagine you run a business with 3,000 employees. Your factories churn out 20 million pairs of sunglasses per year -- the best-selling brand in China. You are a celebrated businessman in your region, with expanded interests in real estate and solar energy.
Oh, and one more thing: You are flat broke.
As it turns out, your company borrowed huge sums at high interest -- more than cash flow could justify -- and you have no hope of paying the loans back. Now the business is insolvent. What do you do?
If your name is Hu Fulin, you run away.
"The east China city of Wenzhou is battling its own subprime crisis," Shanghai Daily reports, "after seven local business owners fled." Wenzhou, the "cradle of China's private economy," is China's latest ground zero for a credit boom gone bust.
Hu Fulin is one of the seven "runaway bosses" who, faced with insurmountable debts, decided to hit the road this month, "leaving thousands of employees in a state of shock and enormous unpaid loans in hundreds of millions of yuan."
When Mr. Hu disappeared, his suppliers panicked too. Large payments were owed, along with two months' salary for thousands of employees.
The Wenzhou crisis is dubbed "subprime" because the state-owned banks pulled back, allowing private lenders to step in at sky-high rates. The loans being defaulted on had subprime rates of interest.
The Chinese government attempted to cool off reckless lending by putting restrictions on the state-owned players. All they accomplished was a juicy handoff to others to take on more risk, in exchange for subprime lending terms.
And the net result? Bosses fleeing as loans implode. "Thousands of employees in a state of shock." A ripple of destruction all down the supply chain... and a possible tipping point in the whole Ponzi-financed boom that counts Chinese real estate as its white-hot center, as greed morphs into fear.
The Wenzhou bust comes against a backdrop of warning signs for China's broader economy. The dragon had already lost a step, as evidenced by manufacturing data declines.
"The country's huge manufacturing sector is starting to slow," the NYT reports, "and orders are weakening, especially for exports. The real estate bubble is starting to spring leaks, even as inflation remains stubbornly high."
But what about the rich?
As in the United States, it's the wealthiest portion of Chinese society that drives spending (and thus equity valuations). Those who can afford luxury apartments and Hermes scarves matter a lot more than subsistence farmers.
Here too there is trouble. "Sounding the latest alarm about slowing economic growth in China," the WSJ reports, "Mercedes-Benz on Friday said luxury-car sales gains slowed in what has been its fast-growing major market."
After 60% growth in the first half of 2011, the pace of Mercedes sales decelerated in July and August. The rich are paring back.
Yet more warning signs abound. Last week, Chinese property stocks were hit hard on fears of a financing crunch. Various Hong Kong-listed developers fell more than 10% in a single day.
"Initially, people were worrying about earnings," said Agnes Deng of Baring Asset Management. "What happened is that people started to worry about balance sheet problems as well as cash flow and funding."
Cracks in the façade are widespread. Property prices are dipping in many cities after "a sharp decline in sales volumes," the Financial Times adds. Shanghai real estate transactions are down more than 50% year-on-year.
Guess who is in the middle of all this? "China's economy is very distorted, and the banks, as ever, are at the epicenter of the distortions," says Edward Chancellor of Grantham Mayo Van Otterloo. "If China runs into problems with the banking system, which I think it will, I cannot see a situation in which foreign investors are the main priority of Beijing."
It is hard to pinpoint the bursting of a bubble. But for China the warning signs abound, with free-falling copper prices a quiet confirmation. Even as the world focuses on Europe, a full-on China bust could have greater impact than many realize.
If china becomes cash strapped.. Will they call the note?
What you do is tell Obama that your sunglasses are “green” and he will you hundreds of millions of taxpayer backed loans.
Whenever I see another article about the Chinese economy, I remember those several stories about the large, newly constructed and almost empty Chinese cities. Those cannot be anything but dead weight on their economy and more investment that is supplying little or no return, more nonperforming loans.
If anyone hasn't taken the tour, check THIS out. Flat out spooky.
Better than yelling for foreign aid, I suppose.
What an incredible waste of resources.
We are paying incredibly high commodity prices because of insane waste like this. (Besides the dollar being debased)
And we are constantly dogged for wasting resources here in the USA. What BS
What do you mean "call the note"?
In American manufacturing, that would have just been a bad morning.
I can understand the concern over China. Any country that uses so little cocoa and coffee just can’t be having a nice day.
A nice mug of coffee or chocolate would settle things right down. Works every time for me.
According to the graph, the Chingchangs are the world’s largest users of LEAD. Not surprising in light of the huge amounts they have dumped on the USA in our food, paint, children’s toys, etc!
“Will they call the note?”
No, because they can’t.
They own bonds. The bonds are worth a certain amount at maturity. They can wait for them to mature or cash them in on the open market. That’s it.
I guess the difference is that China has a way of holding irresponsible business accountable.
Something we cannot seem to figure out how to do in the banking sector.
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