Is China a Bubble?

Hedge fund manager Jim Chanos (among others, including Nouriel Roubini) says that China is a giant wreck due a hard landing.

From Zero Hedge:

On the Chinese government’s balance sheet:

“The Chinese government’s balance sheet directly does not have a lot of debt. The state-owned enterprises of the local governments and all the other ancillary borrowing vehicles have lots of debt and its growing at a very fast rate. The assumption is that the state stands behind all this debt. We see that the debt in China, implicitly backed by the Chinese government, probably has gone from about 100% of GDP to about 200% of GDP recently. Those are numbers that are staggering. Those are European kind of numbers if not worse.”

On how a Chinese property bubble will play out:

“I think that will be the surprise going into this year, and into 2012 – that it is not so strong. The property market is hitting the wall right now and things are decelerating. The CEO of Komatsu said last week that he is having trouble getting paid for his excavator sales in China. Developers are being squeezed. They’re turning to the black market for lending, this shadow banking system that is growing by leaps and bounds like everything in China.

“Regulators over there are really trying to get their hands around the problem. In the meantime, local governments have every incentive to just keep the game going. So they will continue with these projects, continuing to borrow as the central government tries to rein it in.”

Chanos on his long and short positions:

“We are short Chinese banks, the property developers, commodity companies that sell into China, anything related to property there is still a short.”

“We are long the Macau casinos. It’s our long corruption, short property play. We feel that there’s American management and American accounting. They are growing at a faster rate even than the property developers.”

On the IMF lowering growth estimates for China:

“A lot of people are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero.”


Is he right?

Absolutely not.

China has a property bubble, resulting from excess supply. It is also the world’s greatest industrial behemoth, controlling the world’s supply chains in many key components, and is becoming an increasingly powerful player in energy markets thanks to its buy-out of Venezuela and its close ties to authoritarian Eurasian energy powers like Russia, Iran and Pakistan. This means that it’s probably not the best place for Westerners to park capital in the short term. But it has no bearing on China’s strategic standing in the medium to long term.

A comparison with America is inevitable. The United States destroyed its industrial productive capacity, has a zombified financial system , a stagnating labour market, stagnating infrastructure, a clueless establishment, and its currency is about to lose global reserve currency status.

Every day, America becomes more dependent on foreign oil and resources.

America needs the global resource and trade infrastructureThat’s why America is in Iraq, Afghanistan, Yemen, Pakistan. That’s why there are hundreds of bases around the world and why America spends trillions policing the world.

The counter-argument I often hear is “but America has nukes, America can order other countries to do things and they will do it”. But ever since mutually-assured destruction that hasn’t been true.

If you don’t control your supply chains, you have a geostrategic problem. China grasped the importance of supply chains, and through cunning use of long-term planning has made itself the spider at the centre of the web of global trade. America grasped they could get a free lunch with US treasuries and that free lunch destroyed their productive capacity.

China has a cold. America has congential haemerrhoids, restless legs syndrome, diabetes, and autism.

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China’s Trillion Dollar Bluff

Is China outsmarting America? Since I began writing this blog, I have paid keen attention to the strange and tempestuous relationship between the world’s greatest industrial behemoth, and history’s greatest debtor. Of course, any student of international relations or history could tell you that diplomacy is a game of bluff and counter-bluff. From Reuters:

China is confident the U.S. economy will get back on the track of healthy growth, China’s Premier Wen Jiabao told visiting U.S. Vice President Joe Biden on Friday during his five-day trust building mission to the United States’ largest creditor.

Earlier in the day, China’s vice president and heir apparent Xi Jinping gave a ringing endorsement of the resilience of the debt-ridden American economy during a second day of talks with his U.S. counterpart.

Continue reading

Pentagon Plans for War with China

Has someone at the Pentagon been reading azizonomics.com? While I recognise that all great powers will devise contingency plans, it should come as no surprise that Pentagon resources are being directed toward devising a strategy to fight none other than the single largest Treasury creditor, China. After all, as I have pointed out time and again, they are not happy that so much of their productive output is going to stock Wall Mart, Target and J.C. Penney in exchange for the increasingly devalued dollar. From Salon:

This summer, despite America’s continuing financial crisis, the Pentagon is effectively considering trading two military quagmires for the possibility of a third. Reducing its commitments in Iraq and Afghanistan as it refocuses on Asia, Washington is not so much withdrawing forces from the Persian Gulf as it is redeploying them for a prospective war with its largest creditor, China.

According to the defense trade press, Pentagon officials are seeking ways to adapt a concept known as AirSea Battle specifically for China, debunking rote claims from Washington that it has no plans to thwart its emerging Asian rival. A recent article in Inside the Pentagon reported that a small group of U.S. Navy officers known as the China Integration Team “is hard at work applying the lessons of [AirSea Battle] to a potential conflict with China.” Continue reading