More Signs China Is Going Bust

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.

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?

"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."

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.

I am pretty sure the Chinese own not just long-term bonds but shorter-term notes and other paper. The point is that much of what they own comes up for renewal periodically and the simple fact is that if the Chinese and others do not roll over these loans at regular intervals, the United States simply cannot pay them off.

Add to this the fact that the Fed has announced, apparently reluctantly, that it has purchased 95% of this debt since June and one is confronted with the uneasy feeling that we are extremely vulnerable if not already in deep trouble.

I stand back and look at the world picture and ask where can all this growth at around 10% be expected to come from in the world's 2nd economy if it's markets, Europe and America, are on the verge of recession? China is primarily an export economy, its domestic economy is inadequate as yet to carry it or provide it with the growth it needs to prevent civil upheaval. China is the 3rd leg of a three-legged stool and the other 2 legs, Europe and America, are already in big trouble.

If we cannot send money to China for flatscreen TVs they cannot send money to us to buy our bonds and notes. The paper chase finally comes to an end.

That is what the price of copper is telling us and that is what the decline in the value of gold is telling us, that the world is heading for deep recession and probably deflation which the governments will try to cure with inflation. Ominously, Goldman Sachs has come out this week and frankly advocated such a course, citing FDR's new deal in support.

I do not see how any of this ends well.

PLEASE NOTE THAT I AM NOT SAYING I AM A CHINA EXPERT, BUT!!!...

I have been working in Zhengzhou for over a year. Much - at least - of what they purport about the CBD East District development is BS.

Now on the one hand, it is government policy that decides when there will be an addition like this, and the ZZ Economic and Technological Development Zone, where the people I consult for are HQ’d. (Used to be farmland - now an active, growing manufacturing area.)

As near as I can tell, first “they” build it (govt policy and plan, using private contractors and developers) and then “they” (businesses and people) come.

The CBD is more and more crowded, just in the past year I have been here, as people move up in life, and move into newer and more expensive digs.

Of course, this area is nowhere near like the crowded downtown neighborhoods of ZZ, or any typical China city.

(Interesting item - number of cities officially over 1 million population per most-recent census: US-9 CHINA-171+)

The CBD is COMPLETELY not a “ghost-town” part of ZZ - this is just wrong. It is just less crowded, more like the US, actually.

I do not go to the high-rise area shown so don't know about that, but the area near the CBD “circle” has more and more low-rise CONDOS and apartments (note 70-yr China home-leases instead of ownership, this is weird I admit) by the growing upper and upper middle classes. And people live there. (Note, in the US we no longer “own” any property anymore. Don't pay your property tax and see who REALLY owns it.)

Overall, China is an amazing place! Construction cranes everywhere. New developemtns / buildings spring up like dandelions. They do things here more like we used to do things in the US. The last place I worked in the US (a private spinoff of a division of a US corporation) literally took 3 years to DECIDE to adopt one of the first recommendations I made in one technical area.

Here - sometimes when I have made a presentation and proposal - they are acting on it the next day. The next day.

US - 18 months to acquire and install a certain large test lab apparatus. Here - 5 months.

And, at least in the private sector with the Chinese I work with, from owners thru the salaried engineers, and the (admittedly small number) hourly folks I've worked with - they are in MY EXPERIENCE are a fine bunch of people. Friendly. And with a real sense of humor and enjoyment.

OK. This is just my one slice of life/business/people/culture here, 1 set of experiences. BUT it is 100% a real and absolute reality that -I- have seen.

And I am NOT “just” an American - I'm a Texan. AS far as I'm concerned, that is like American-on-steroids.

Some of their government NOW is totally fouled up and bad.

News flash - they don't have a monopoly on this!

WHAT if we do NOT replace Obama next election? We are heading down the slippery part of the slope, going faster and faster toward the precipice!

The US form of government AS CONSTITUTED AND INTENDED is without a doubt the best concept EVER conceived and enacted, and always will be.

But like the guy BF said, “A Republic, if you can keep it.”

http://www.bartleby.com/73/1593.html
http://thenewamerican.com/usnews/constitution/659-qa-republic-if-you-can-keep-itq

AND SOMETHING ELSE:

SEE http://www.lorencollins.net/tytler.html

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years.

Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage.

SO DON”T THINK I AM NOT PRO AMERICA!

But just damn, the place I grew up in the 50’s and 60’s...

the Eisenhower/Kennedy/Nixon(Ford)/Reagan/(Bushes?) USA,

has been / is being overwhelmed and corrupted by the

Johnson/Carter/Clinton/Obama USA.

I added Kennedy to the first list, because between military service, tax cuts, etc. I think that's more where he belongs.

And I was generally disappointed with the Bush Presidencies. OK they are good guys and did good things, but... So while they clearly do NOT belong in the second list, I am not 100% about them in the first. Thus the parenthesis. Texas notwithstanding.

(Ford was not elected President... so that's why he gets parenthesized.)

As far as the second list is concerned? Read it and weep.

SO - back to China.

I think cooperation between the PEOPLES, recognizing their inherent strengths, abilities and potentials of the two countries, is imperative. Because the people are the nation. We at least knew that once. “We The People...”

But clearly, both governments need to be fixed.

If -this- happens over the next 2 generations / 40-50 years, where China and the US a partners, and “well-governed”, then maybe the world will end up being a good deal and a good place for a LONG time. Like centuries to millenia.

For China, it WILL need at least two generations, with their entrenched system, to change in the right ways. But it could happen.

For the US, we need to make a severe course-correction PDQ. ASAP. Like next November.

This next US Presidential election will be the most consequential in my life.

IMHO

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