Tag Archives: Chinese government

China’s Housing Market Slump Becomes A Real Issue, by Daniel Lacalle

You can’t “central plan” your way out of a devastating housing market slump. From Daniel Lacalle at zerohedge.com:

A few months ago, I wrote that the Chinese slowdown was much more than COVID-19 related and pointed to the challenges coming from the excessive weight of the real estate sector in the economy.

A research paper by Kenneth Rogoff and Yuanchen Yang (pdf) estimated that the real estate sector constitutes 29 percent of China’s GDP.

The problems coming from the slow-motion deterioration of the property sector have extended to the financial challenges of China’s local governments and may create a relevant fiscal problem for the nation’s public accounts.

“Sales at China’s largest housing developers fell 43 percent in June from a year earlier, according to China Real Estate Information Corp,” Bloomberg reported, creating an alarming funding gap for local governments, where finances are heavily dependent on land sale revenues, and a significant problem for the financial sector and the government. China’s central bank has promised to mobilize a $148 billion bailout to complete unfinished real estate projects as anger rises among property buyers that haven’t received their homes after advancing significant payments.

The size of the real estate sector in the economy is enormous, and the impact on gross domestic product (GDP) of a slump in sales may be impossible to offset with other sectors. According to S&P Global, China’s property sales will probably drop by about 30 percent this year due to the increasing number of homebuyers’ mortgage payment suspensions. This could be worse than in 2008 when sales fell by roughly 20 percent, Esther Liu at S&P Global Ratings told CNBC. There’s no sector in China that can mitigate the impact of such a drop in tax revenues and output.

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President Xi Faces An Impossible Dilemma In Shanghai As COVID Outbreak Worsens Despite Lockdown, by Tyler Durden

The dilemma is not impossible, it’s just that the solution requires the Chinese government to admit it was wrong. That’s something governments rarely do. From Tyler Durden at zerohedge.com:

In the span of just over a week, CCP authorities have gone from denying plans for a citywide lockdown of Shanghai to announcing what was supposed to be a two-part staggered lockdown – to simply locking down the entire city and sending in the military and a contingent of medical workers as locals accuse the government of violating its social compact to put the people’s interests first.

Now, as the entire city of roughly 26 million faces what’s already shaping up to be the most punishing lockdown in China since the original three-month Wuhan lockdown nightmare, Nikkei reports that Beijing has found itself in an incredibly difficult position.

On Sunday, Shanghai counted 9,006 mainly asymptomatic infections, more than two-thirds of the national tally.

The reason the situation in Shanghai presents such a difficult conundrum is that backing down from its lockdown in Shanghai would mean admitting that the “Zero COVID” approach has been an abject failure.

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Elon Musk and the Chinese Temptation, by Peter Schweizer

The Chinese market and China’s government pose huge dilemmas for Elon Musk and other U.S. entrepreneurs. From Peter Schweizer at gatestoneinstitute.com:

  • “Other American CEOs have close relationships to the [Chinese Communist] Party. But [Elon] Musk is the only one who loudly praises Beijing while running a space company with incredibly sensitive and powerful defense applications.” — Isaac Stone Fish, Barron’s, November 13, 2020.
  • Musk’s dilemma is not unique. The close technology-sharing relationship between Tesla and SpaceX poses national security risks to his adopted home country, but so do Google’s and Microsoft’s work with China on artificial intelligence. U.S. government policy is predictably slow in catching up to the speed of hard-charging, globe-spanning enterprises like Musk’s, and the Chinese are only too happy to increase that gap.
  • At some point, however, companies such as SpaceX, Google and Microsoft, and the individual Americans who own, direct, or invest in them, will face a similar choice between their obligation to America and their pursuit of more profits abroad.

“Other American CEOs have close relationships to the [Chinese Communist] Party. But [Elon] Musk is the only one who loudly praises Beijing while running a space company with incredibly sensitive and powerful defense applications.” — Isaac Stone Fish, author of America Second: How America’s Elites Are Making China Stronger. Pictured: Musk meets with China’s Premier Li Keqiang in Beijing on January 9, 2019. (Photo by Mark Schiefelbein/AFP via Getty Images)

Elon Musk has fans all over the ideological spectrum. People on the Left love him for popularizing electric cars with his Tesla company, or maybe for openly smoking pot on podcaster Joe Rogan’s show. Conservatives love him for his entrepreneurial dash and penchant for standing up to politicians and Big Tech censorship of the internet. And everyone loves Musk for responding to Russia’s invasion of Ukraine and severing of its communications links by making his Starlink satellite broadband internet service available in Ukraine and donating Starlink terminals to Ukrainians. The Starlink connectivity, according to one report, may even be helping armed Ukrainian drones target Russian military vehicles.

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Doug Casey on the Rise of China… And What it Means for the World

Is China topping out? From Doug Casey at internationalman.com:

Rise of China

International Man: Lee Kuan Yew, the former leader of Singapore, once said:

“The size of China’s displacement of the world balance is such that the world must find a new balance.

It is not possible to pretend that this is just another big player. This is the biggest player in the history of the world.”

What is your take?

Doug Casey: China has united 1.4 billion people into a single political entity, so of course they have a lot of weight. But simply having masses of people under your political control doesn’t mean as much as it used to.

China would still be a poverty-stricken non-entity if it hadn’t been for the reforms that Deng Xiaoping made starting in 1980. Masses of uneducated, desperately poor peasants are more of a liability than an asset in the modern world. Deng transformed China’s economy into something that functions pretty much like those in the West. But now, Xi Jinping seems to be returning to the philosophy of Chairman Mao, with much more centralized control. That’s very negative for the country.

Secondly, China’s demographics are horrible. The average woman today only has 1.4 children. Low reproduction rates are to be expected when a society urbanizes. But China also had a draconian one-child policy starting in 1980 that only ended in 2015. That, and the fact the Chinese prefer males for cultural reasons, compounded the phenomenon.

Few people in the West realize that as a result of these things, the Chinese population is in steep decline. UN projections—which aren’t worth much but are still interesting—find that by the end of this century, their population could collapse to 600 or 700 million. And they’ll mostly be old people, so it’s not going to bounce back quickly.

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Will China Pop the Global Everything Bubble? Yes, by Charles Hugh Smith

China will pop the global everything bubble because to China’s leaders, the only worse alternative would be to allow it to persist and grow ever-larger. From Charles Hugh Smith at oftwominds.com:

The line of dominoes that is already toppling extends around the entire global economy and financial system. Plan accordingly.

That China faces structural problems is well-recognized. The list of articles in the August issue of Foreign Affairs dedicated to China reflects this:

Xi’s Gamble: the Race to Consolidate Power and Stave Off Disaster

China’s Economic Reckoning: The Price of Failed Reforms

The Robber Barons of Beijing: Can China Survive its Gilded Age?

Life of the Party: How Secure Is the CCP? (Chinese Communist Party)

These are thorny, difficult issues: a demographic cliff resulting from the one-child policy, soaring wealth-income inequality, pervasive corruption, public health issues (diabesity, etc.), environmental damage and a slowing economy.

What the conventional analysts do not fully grasp, in my view, are 1) the existential threat to the CCP and China’s economy posed by its unprecedented, metastasizing credit-asset bubble and 2) its incipient energy crisis.

As I explained in a recent blog post, What’s Really Going On in China?, the CCP and the government informally institutionalized moral hazard (the disconnection of risk and consequence) as a core economic policy.

Every financial loss, no matter how risky or debt-ridden, was covered by the state (via bail-out, refinancing debt, new loans, etc.) as a “cost of rapid development,” a reflection of the view that some inefficiency and waste was inevitable in the rapid development of industry, housing, infrastructure and a consumer economy.

What China’s leaders did not fully understand was this implicit guarantee of bail-outs–the equivalent of “The Fed has our backs”–incentivized debt-funded speculation as the lowest-risk, highest-return “investment,” especially when compared to low-profit, risky investments in low-margin export industries. (Recall the average profit margins of Chinese exporting enterprises is 1% to 3%.)

This is the hidden driver of China’s sagging productivity and economy: debt in all sectors is skyrocketing to fund speculation, not productivity.

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How China’s Model of Dictated Economic Growth Blew Up, by Wolf Richter

The Chinese government steered prodigious amounts of debt towards real estate, and now China is paying the price. Perhaps a planned economy isn’t such a great idea after all. From Wolf Richter at wolfstreet.com:

The debt-fueled property & construction bubble that drove its growth turned into a huge explosive mess with an enormous amount of debt.

It’s mind-boggling just how important the residential property sector is to the Chinese economy, to what extent government-dictated economic growth was achieved by building more apartment towers, and it’s even more mind-boggling how much debt residential property developers have racked up, and how much household wealth is tied up in the property sector at multiple levels.

Then there are the demographic headwinds the property sector has been facing for years, that are coming to the forefront.

So now there is a property crisis in China that is making the US mortgage crisis of 2008 look like child’s play in terms of magnitude.

The central government has been trying to deal with rampant real estate speculation and prevent it from going even more haywire and take down the financial system and the economy.

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Jim Chanos: China’s “Leveraged Prosperity” Model is Doomed. And That’s Not the Worst. By Lynn Parramore

Like virtually the entire global economy, China’s economy rests on a rock-solid foundation of debt. From Lynn Parramore at ineteconomics.org:


Famed short-seller is even more concerned with political fallout from Evergrande than economic/financial woes.

Renowned short-seller Jim Chanos, founder of Kynikos Associates, is what you might call the “ever-bear” of China. For more than a decade, he has warned that the country was building a real estate-driven economy on a feeble house of cards. He spoke to the Institute for New Economic Thinking’s Lynn Parramore about how he views the chickens coming home to roost as the property giant Evergrande – now the world’s most indebted property developer — teeters on the verge of collapse.

Lynn Parramore: Back in ’09, when you started looking at China, your real estate analysts alerted you to the mind-boggling amount of real estate overdevelopment there. You warned that this overdevelopment would end badly. After Xi Jinping became president in 2013, you expressed the then-minority view that a different kind of leader had arrived on the scene. What’s your take on what has happened since then?

Jim Chanos: In 2013, we put a slide in our presentation for investors and talks that was very controversial – especially for Chinese nationals. It showed President Xi Jinping in emperor’s garb. People thought we should take it out, that it was offensive. At the time, Xi was widely seen as just the latest in a series of technocrats who had risen through the ranks — one who would follow along with Deng Xiaoping’s reforms. It’s “capitalism with Chinese characteristics.” It’s okay to get rich as long as the country prospers.

But a few things made us think, no, this guy is different. His first speech in China after becoming president was critical of the Soviet Union for being soft on perestroika. They should have crushed it when they had the chance, he said. Xi then set up an institute to study the Soviet Union’s collapse. That was a red flag to us that he was going to be more hardline than people thought. He went on to do an anti-corruption drive, which people dismissed as a typical settling of scores that Chinese leaders do. But it actually extended beyond that. A couple of years later, he began talking in Puritanical terms about social issues. Again, that was different. Nobody had cared about that stuff for 20 years. Do what you want as long as you don’t question the party. Next, we had the book collecting his speeches and writings, which people could be seen carrying around. He started showing up in military events dressed in Mao jackets. This symbolism isn’t lost in China.

We noticed all this, but the real switch occurred in 2019 when he started going after celebrities like Jack Ma [co-founder of Alibaba]. At that point, it was clear that this president was not stepping down at the end of 10 years. He was taking a much harder line on the “flowers of capitalism,” if you will, than past presidents. In 2021, all of this exploded into the open. There’s been initiative after initiative. Redistributing wealth to the masses. Going after other leaders. Overlaid on top of this is the Evergrande saga.

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Contagion! By James Rickards

In a massively over-indebted and interconnected world, financial collapse can spread like wildfire. The Chinese property sector may be the beginning of the conflagration. From James Rickard at dailyreckoning.com:

There has been a litany of bad news recently, including the U.S. August humiliation in Afghanistan, China’s aggressive actions against Taiwan and increased tensions with Iran, North Korea and Russia.

It will take the U.S. years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in U.S. power.

When that happens, a loss of confidence in the U.S. dollar is not far behind.

And, perhaps most importantly of all recent bad news, is a market meltdown and slowing growth in China.

Greatest Ponzi Ever

I’ve long advised my readers that the Chinese wealth management product (WMP) system is the greatest Ponzi in the history of the world. Retail investors are led to believe that WMPs are like bank deposits and are backed by the bank that sells them. They’re not.

They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants.

Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors.

That’s what gave the product its Ponzi characteristic.

The total amount invested in WMPs is now in the trillions of dollars used to finance thousands of projects sponsored by hundreds of major developers. Chinese investors are all-in with WMPs.

Now the entire edifice is collapsing as I predicted it would.

The largest property developer in China, Evergrande, is quickly headed for bankruptcy. That’s a multibillion-dollar fiasco on its own. Evergrande losses will arise in WMPs, corporate debt, unpaid contractor bills, equity markets and unfinished housing projects.

China’s entire property and financial system is on the verge of a world-historic crack-up. And it won’t remain limited to China.

It comes back to contagion.

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Communist China’s Aggression in the South China Sea, by Judith Bergman

Nobody in the US really knows for certain what the intentions and plans are of the Chinese government. Which makes it a good idea to keep a close eye on what it does. From Judith Bergman at gatestoneinstitute.org:

In March, a huge Chinese fishing fleet descended on Whitsun Reef, which lies within the exclusive economic zone of the Philippines. The Philippine government called on China to cease “militarizing the area”. Almost eight months later, however, more than 150 Chinese vessels reportedly remain in Philippine waters. Pictured: Whitsun Reef, as seen from space. (Image Source: United States Geological Survey/NASA/Wikimedia Commons)

Tensions continue to rise in the South China Sea, as China, or, rightly, the Chinese Communist Party (CCP), ramps up its military activities in the region. Within only the first four days of October, China conducted a record-breaking 150 incursions into Taiwan’s air defense identification zone (ADIZ) — after China’s People Liberation Army Air Force (PLAAF) had already, in September, set another monthly record with 117 incursions, some with nuclear-capable bombers, fighter jets and reconnaissance planes. The incursions were reportedly the highest monthly number on record since Taiwan’s Ministry of National Defense began reporting Chinese aerial incursions 13 months ago. In addition, in August, the first-ever incursion of Chinese military helicopters into Taiwan’s ADIZ took place, with experts suggesting that the PLA was probing Taiwanese defense capabilities by using different aircraft.

Also in August and September, China conducted assault drills near Taiwan with war ships, early-warning aircraft, anti-submarine aircraft and bombers. “The joint fire assault and other drills staged by the Eastern Theater Command troops are a necessary action to further safeguard China’s sovereignty under the current security situation in the Taiwan Straits,” Colonel Shi Yi, spokesperson for the PLA Eastern Theater Command said, “and also a solemn response to the interference of foreign forces and the provocation of ‘Taiwan independence’ secessionists.” Shi stated that military exercises would be “conducted regularly” based on the situation in the Taiwan Strait and the “need to maintain sovereign security”. China has conducted 20 naval island-control exercises in the first half of 2021, compared to 13 in all of 2020.

This activity — in addition to diplomatic and economic pressure — is evidently meant to exhaust Taiwan, force it to capitulate to China and relinquish its independence without China firing a shot. “China is pursuing an all-of-party approach that seeks to coerce, corrupt and co-opt the international community,” former commander of the U.S. Indo-Pacific Command, Philip Davidson, recently warned, “in a way in which they may be able to achieve their geopolitical edge… to force Taiwan to capitulate because of extreme, diplomatic, economic, pressure and strain”. Failing that coercion, Davidson estimates:

“the changes in the [People’s Liberation Army]’s capabilities, with their missile and cyber forces, and their ability to train, advance their joint interoperability and their combat support logistics, all those trend lines indicate to me that within the next six years they will have the capability and the capacity to forcibly reunify with Taiwan, should they choose force to do it.”

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Default Of Second Chinese Developer Sparks China Junk Bond Meltdown As Contagion Explodes, by Tyler Durden

This is how debt implosions get rolling. From Tyler Durden at zerohedge.com:

As we expected, Evergrande is only the first cockroach.

With the world waiting to find out the fate of a $260 million bond issued by Jumbo Fortune Enterprises which is guaranteed by Evergrande, and which has no grace period so an event of default could take place as soon as this week (the bond has five business days to make payment subject to administrative and technical error), overnight, stocks and bonds of China’s heavily leveraged property tumbled after a failure by smaller developer Fantasia Holdings Group to repay notes deepened investor concerns about the sector’s outlook.The non-payment forced S&P to downgrade Fantasia (1777.HK) to selective default earlier this morning.

As Bloomberg points out, “Chinese junk dollar bonds were poised for their biggest selloff in at least eight years amid renewed concern that authorities will do little to alleviate the credit crisis gripping the industry.” Yields are near a decade high, and with Evergrande stock still halted, investors took out their wrath on peer developers who still trade and whose shares tumbled, with Sunac China Holdings and China Aoyuan Group falling at least 10%. Meanwhile, as noted on Sunday, Evergrande’s silence on a reported stake sale in a unit left its shares suspended.

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