Thursday, July 7, 2011

The Coming Crashing Ghosts of China

I have been warning  that the Chinese stock market and economy are about to collapse. But this collapse will be like no other. Although some view China as entering a capitalist, free market period, the economy is really now a mixed economy, with much power centered around local political leaders, who are ranked by the political hierarchy based  how much they build, so they build and build, even though there is no demand for what is built. The Chinese are really turning valuable commodities into unused structural waste.

This is not going on in all of China, but certainly in the outskirts away from the major cities such as Beijing and Shanghai. I am getting reports from Shanghai that really big time wealth is being displayed, there. There are more Mercedes, BMWs, iPads in Shanghai, I am told, than is seen in any American city.

But, the ghost cities (which are probably what is supporting part of the wealth in the cities of Shanghai and Beijing. The bankers, developers and architects all live in Shanghai and Beijing) and the real cities are witnessing the first signs of the money supply tightening by China's central bank. The crash in China will be spectacular, unlike anything seen in any of America's crises at any time. The combination of central bank money printing and local central planning is likely the reason the term a "perfect storm" was invented.

Here's Simon Black on his recent exposure to the ghost side of China:

When I left my hotel bound for the new Guangzhou South Station the other day , I didn’t know much about the station– where it was, how far from the hotel, etc. After about 25 or 30 minutes in the cab, I still hadn’t seen any signs for the station and grew concerned that the cabbie was just taking me for a ride.

As we eventually approached the station, I began to understand why it was so far out of town. Clearly, the only way they could find enough contiguous land to build this monstrosity was to go WAY into to the outskirts of the city.

In the end, it was a 27.82 kilometer (17.39 miles) cab ride from my downtown hotel, and took 49 minutes to get there. I know this because Chinese taxis are very efficient and give you a highly detailed receipt.

Guangzhou South Station is absolutely COLOSSAL. By comparison, it is much bigger than any of the 3 international airport terminals in Manila where I live… and I’d say it’s over 8 times larger than the Central Airport Express Station in Hong Kong.

For a start, the Guangzhou South Station is built on THREE levels. I was dropped off at level 2. When I entered there was an “Information” booth straight ahead. It was unstaffed. In fact, the entire second level was completely deserted. Very spooky. It was something out of a low-budget zombie movie.

I went downstairs to the ticketing area where there were a few signs of life. Of the forty or so ticket windows, well over half were closed, and there were only a few dozen people mulling about. To give you an idea of density, imagine the largest football stadium you can think of with only a few hundred people inside. Ghost town.

With ticket in hand, I went up to the departures area… it defies logic that you have to go upstairs to departures even though the trains are at the ground level, but my guess is that the Party really wanted to build a third level just to heighten the grandeur of the train station.

Now, you’d think that if they spent so much money building a station this large, they would be expecting hundreds of trains steaming in and out at all hours of the day. Not by long shot. There was only one train at the platforms. Mine.

It was the same zombie movie theme– areas the size of multiple football fields with hardly any passengers standing around. And yet, throughout the entire station over all three levels was expensive, high quality marble tiles and artistic finishings, all polished to a mirrored shine.

Guangzhou South Station is truly a monument to excess, exemplifying China’s ruinous “build it and they will come” attitude.

When I arrived to Wuhan about 4-hours later (going 300 km per hour on the high speed bullet train), it was the same theme: acres of empty space, hardly a soul in sight, yet all very modern and marbled with dozens of elevators and abandoned information booths. When my train pulled in, it was the only one at the platforms.

Frankly, the whole episode reminded me of Bangkok and Hong Kong airports during the SARS epidemic back in 2003. I observed this firsthand– passenger traffic cratered because most people were scared silly of catching the deadly virus, and major airports were practically empty.

Similarly, it’s what you would expect Grand Central Station to look like after a flesh-eating virus outbreak.

It’s interesting to note that China’s National Audit Office (NAO) recently published a report which says the country’s outstanding local government debt is now equivalent to $1.7 TRILLION. That’s a huge figure — about 27% of China’s GDP in 2010.

Because the NAO’s figure was based only on a sampling of 6,500 local government-backed financial vehicles (out of more than 10,000 such vehicles nationwide), the actual magnitude of local government indebtedness is likely to be much greater. China’s own Central Bank estimates the number to be 30% higher than the NAO figure.



  1. OK, all you smart EPJ readers, what's the short play? The only ETF's I can find are really blue chip Hong Kong funds.

    I'm too green to make a direct play in furrin markets.

    Any tips?


  2. It's from Simon Black's newsletter but it's written by a correspondent, Tim S.

  3. It amazes me at how the financial MSM parrots the "China is growing so fast it will never crash" line. Any honest examination of the true state of the economy when it comes to malinvestment, monetary policy/inflation or living conditions for the majority of Chinese citizen-slaves inexorably leads to a dark assessment of the economic future of the country. Add to that even a passing knowledge of Austrian economics and the situation looks even more dire.

    The empty talking heads that blather on about how wonderfully the communists have run the country remind me of the idiots that predicted that the USSR would one day surpass the USA in economic superiority.

    As it stands, the confluence of China, the EU crisis, the instability in MENA, and the artificially juiced US economy do not bode well for the near future. A serious problem with any of those, or of any number of "unknown unknowns" could be the trigger for a worldwide economic catastrophe.

    Mises' observation that "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." is more relevant than ever. Since the financial world has become so much more interconnected since he wrote that, the disaster that follows will be several orders of magnitude greater than any financial crisis in history.

    Thank God I found Lew Rockwell's site in the late 90s, invested in gold coins, and have prepared myself and my family for disaster. If TSHTF as hard as I think it will, the world will be unrecognizable in the aftermath.

    Thank you, Bob, for providing such a great forum for exposing the diseased underbelly of our State poisoned society. YOU RAWK!

  4. You are spot on, Bob!

    Talking about the short play here, there are numerous ways of taking advantage of the upcoming collapse. China plays a key roll in nearly all sectors of the world economy, so when they crash, so will world stock indices, commodities, etc. China is importing; for example, a great deal of crude oil. So when their economy crash, they will have less demand for crude. However, I believe the down moves in indices and commodities may be short-lived, as the Fed keeps printing huge amounts of money. If anything, the collapse in commodities and indices could allow us to get in to the long side at much lower levels.

    I guess it's difficult for me to give out any specific guidelines, since I'm a trader AND an investor - the line between those two is a narrow one.

    Keep your eye on the Shanghai Composite Index - you'll know when the bottom falls out. We've had a small pullback in the last couple of weeks, but it shouldn't go on for much longer. I guess it the SSE could rise some more - perhaps as high as 2930ish, but we'll see.

  5. The US has higher state and local government debt than China, and its only slightly lower as a percentage of GDP. However, the US has MUCH higher household debt as a percentage of GDP, which means that even though China might appear worse off, they actually have enough savings to absorb the shock from their collapse. We won't be able to absorb ours.