The Chinese bubble is bursting with a vengeance as the Chinese economic juggernaut stands on the brink of an abyss. No country will be able to stand outside the global financial collapse that the credit crunch is becoming. For China, the 1930s are just beginning.
The following article, written by Ilargi, is the intro to the latest Debt Rattle over at The Automatic Earth.
Despite all the warnings I've given here about China in the past year, and there's been many, even I am soundly surprised to see the speed with which it unravels. I see 5% GDP growth numbers for the country now, even from "official" sources, and as I've said before, that means chaos, unrest and mother Mary knows what else is soon to come. I'm thinking Greece times 1000. China needs to grow at 8% or more, or the machine comes to a halt. From where I’m standing, I would venture there's a real chance China won't grow at all in 2009. And if I had had the time, I might have inserted the lyrics for the Stones' Street Fighting Men here.
Let's do some numbers first from yesterday's trade report. In November 2007, China had according to its own report a 19.2% rise in exports. November 2008 shows a 2.2% drop. The November 2008 imports are down 17.9%. Exports to the US fell 6.1% in the year, with predictions for 2009 indicating another drop of up to 20%. Exports to ASEAN countries, on the heels of a 21.5% rise in October, fell by 2.4%. Perspective: in the 1990s China’s exports grew at a yearly average of 12.9%; from 2000 to 2006 that rose to 21.1% per year. Once again: it shrank 2.2% in November. Perspective. And there's no-one, not even in the Beijing hierarchy itself, who will claim these numbers won't drop even more in 2009.
Ironically, the fact that imports are down more than exports means China's budget surplus is rising. But that's no reason to throw a party in the Forbidden City. China loses billions of dollars because of the multiple self-feeding crunches in sectors such as steel products, electrical machinery, electronics and shipping. We're not talking Wal-Mart trinkets here, these are core industries. And the plunge in imports can undoubtedly be found largely here, in commodities, pointing to a further export drop right around the corner.
The numbers might lead you to believe that China has simply focused its economic activity towards the domestic markets, with Chinese people buying the products that would otherwise have gone to the US and Europe, which might cause much less need for imports. But stories from the street don't exactly support that nice theory. They speak of millions of newly unemployed. And besides, China may have a lot of people, but not that many are rich enough to buy anything but basic necessities.
Since much of the production capacity is geared towards luxury articles that we westerners buy, there's little reason to presume all the bling and games are now ending up in Chinese hands. Today, over 40% of China’s GDP comes from exports. For the US, the number is 11%. Needless to say that falling worldwide demand and trade will hit China much harder than the US. China mostly still produces goods for foreign markets, and its own 1 billion remaining peasants have little use for $150 Nike’s or $1000 plasma screens.
So you have the huge surge towards cities, and towards increasing wealth. And that is going to stop, or you could say it already has. The image I see is that it’s like trying to stop a high-speed train, or an ocean-liner, on a dime. Mayhem guaranteed.
One of the biggest issues in the Chinese economy will be the bad loans that are on the books of all the banks. As long as growth continues, there'll be enough good loans to make up for the losses on the bad ones. But halt the growth, and you have panic and an insolvent domestic financial system. And let's be honest: anything that grows at a 10% or 20% rate is like a cancer, nothing healthy about it. Whether you look at US and UK home prices, or at the Chinese economy: whatever it is, healthy it ain't.
And I see reports on how great it is that the Chinese inflation rate is down, but I don't buy into that greatness: it simply means that the country has hit deflation, just like the rest of the world. And if you want to know what that means, think for a moment about China's place in global trade, and how much it resembles where the US was in 1930. Got it? Then take the next step: what happened in America in the 1930’s.
Some 150-200 million Chinese have moved to the cities to partake in the new-found riches, the largest mass-migration in the history of mankind. A similar number is or should I say used to be expected to follow their example. Now, many are moving back to the family "farm", only to find the countryside massively polluted, with black stinking water, not enough land to feed themselves, and heads full of broken promises.
How long will it take till the Army takes over? And who will the generals support? The Hu's and Wi's who have brought the country into this mess? I would not bet on that.
The US is about to lose the largest buyer bar none of its debt, its Treasuries, all of its toilet paper. The people in power in China will now have to turn their attention to staying in power. One more game over, one more wall to fall.