Bubble, Bubble, Toil and Trouble

The "powers that be" are like the witches in MacBeth, stewing a nasty concoction for us all to drink. I see Bernanke, Geithner et all, wearing the stereotypical witch's costume, stirring their monetary cauldron, and cackling away incoherently. Everyone is going to drink, no matter what country you live in. 

China is a good case in point. I have an acquaintance who is moving there. His grandfather and my father were good buddies back in the day. No doubt there are many opportunities there. However, they are economically a basket case. (I am well aware that this is not the usual view.) 

Hedge fund investor  Jim Chanos has this to say about China: 

“The Chinese banking system is built on quicksand and that’s the one thing a lot of people don’t realize,” said Chanos, who is shorting the shares of Agricultural Bank of China. “Everybody seems to think it is a free and clear open checkbook. It’s not. The banking system in China is extremely fragile.”

Bloomberg provides us with reasons Chanos might be right:

China spent 3.5 trillion yuan ($550 billion), equal to a fifth of its 2005 gross domestic product, bailing out and recapitalizing state-owned banks since 1998 as their lending to unprofitable state-owned businesses turned sour, according to an estimate by Moody’s Investors Service in 2007. Since September 2008, Chinese banks doled out $3.8 trillion in new loans to offset the impact of the global financial crisis, according to the International Monetary Fund.

Hedge fund investors, or business pundits like Bloomberg have been wrong before. What do the notoriously tight lipped Chinese say? 

China’s economy has a reputation for being strong and prosperous, but according to a well-known Chinese television personality the country’s Gross Domestic Product is going in reverse.

Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. He coined the phrase: “In China, every province is a Greece.”

The restrictions Lang placed on the Oct. 22 speech in Shenyang City, in northern China’s Liaoning Province, included no audio or video recording, and no media. He can be heard saying that people should not post his speech online, or “everyone will look bad,” in the audio that is now on Youtube.

How exactly will China crumble? Lang offers these weaknesses:

Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 51.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.

I am not sure I would want to be a foreigner in China, or anywhere else, when the coming crisis finally hits.