Tag Archives: Chinese government

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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Hedge Fund CIO: China’s Attempt To Crush Digital Assets Has Backfired Spectacularly, by Eric Peters, CIO of One River Asset Management

The Chinese government’s ban of cryptocurrencies is a sign of weakness. From Eric Peters at zerohedge.com:

“Is it your intention to ban or limit the use of cryptocurrencies, like we’re seeing in China?” asked Ted Budd, Republican congressman from North Carolina. “No,” replied Fed Chairman Jay Powell. “No intention to ban them?” asked Budd again. “No intention to ban them, but stablecoins are like money market funds, they’re like bank deposits; they’re to some extent outside the regulatory perimeter, and it’s appropriate that they be regulated,” answered Powell. And as it sunk in that the world’s largest economy would not chase China to stifle private sector innovation in the field of blockchain technology, digital assets prices surged

Getting Real

The US dollar is the world’s reserve currency. 59.2% of all official foreign exchange reserves are held as US dollars. 20.5% are euros. 5.8% are Japanese yen. 4.8% are British pounds sterling. 2.6% are Chinese renminbi — slightly more than the 2.2% of reserves held in Canadian dollars. 1.8% are Australian dollars. The remaining few percent are various other small currencies that don’t matter in the grand scheme of things. Swiss francs would be an example. Some reserves are held in gold. Someday, there will be digital asset reserves too.

For a foreign nation to hold dollars in reserve, it must first acquire them. It can either purchase those dollars in foreign exchange markets, or it can acquire the dollars by selling its goods, services, hard assets, or financial assets. There are consequences to such transactions. One of them is that the dollar’s value relative to other currencies is higher than it would be if these nations were not buying and holding dollars in reserve. Another is that by acquiring so many dollars and holding them in reserve, the US is forced to run a current account deficit.

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What’s Really Going On In China, by Charles Hugh Smith

Is China trying to stop the easy credit shenanigans and fun and games that characterize the US financial system? From Charles Hugh Smith at oftwominds.com:

Losses will be taken and sacrifices enforced on those who don’t understand the Chinese state will no longer absorb the losses of speculative excess.

Let’s start by stipulating that no one outside President Xi’s inner circle really knows what’s going on in China, and so my comments here are systemic observations, not claims of insider knowledge.

Many western observers have noted the centrality of Marxist-Leninist-Maoist doctrine in President Xi’s writings. This is somewhat akin to invoking America’s Founding Fathers to support one’s current policies: if you’re trying to modify state policy in China, you have to explain it in the context of the Chinese Communist Party’s history and doctrines. Never mind if the ideals were not met; what’s important is establishing continuity and resonance with the history of China, the core doctrines of Chinese Communism and the CCP’s leadership based on those doctrines.

That said, we should be careful not to read too much into doctrinal evocations such as common prosperity, which are useful conceptual anchors and slogans but not the full story.

What’s actually happening in China isn’t Marxist or Capitalist–it’s plain old non-ideological human greed, hubris and magical thinking manifesting as moral hazard running amok.. Moral hazard— the separation of risk and consequence, as speculators make increasingly risky bets because they know any losses will be covered by the state–is effectively the new State Religion in China: everyone is absolutely confident that every punter, especially all the rich, powerful, well-connected speculators–will be bailed out by the central government.

Greed knows no bounds when a speculator is insulated from risk, for people have an insatiable appetite for risky bets when the gains will be theirs to keep but any losses will be covered by the government.

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It’s Easier to “Print” Money to Make Refrigerators, by Bill Bonner

Who needs refrigerator manufacturers and other real businesses when you’ve got a central bank? From Bill Bonner at rogueeconomics.com:

What we are wondering today is what’s ahead for the U.S. economy – inflation or deflation? Maybe the Evergrande story will give us a clue.

To fully understand the Evergrande story, you almost have to understand the whole story…

…of how, in 1971, the U.S. switched to a “flexible” dollar that it could print at will…

…and how the switch created a boom in China… and a bust in U.S. manufacturing (it’s easier to “print” money than to make refrigerators).

In an honest economy, pre-1971, the U.S. had to repatriate its dollars by offering equivalent quantities of goods and services to the Chinese…

…or risk having to settle up in gold.

Concrete River

But with the new system… it could just print up more dollars… which the Chinese, bless their hearts, used to buy U.S. bonds…

All this money created a boom in China… which quickly got out its cement trucks. The concrete flowed like the Yangtze.

We saw the construction boom on our trip to China in 2014 – a breathtaking display of human industry and material progress.

The highways were new. The buildings were new. The trains… docks… factories – all new. You could scarcely find a house more than 18 months old.

Never in the history of the world had so many people gone from being so poor to so rich in so short a time. Per capita income rose from $318 in 1990 to $10,500 in 2020.

And never in history had so much money been borrowed to make it happen. From $1.7 trillion of total debt in 2000, China now owes nearly $50 trillion. Its debt-to-GDP ratio now stands at 335%.

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China’s Crackdown on Debt, Tech & Evergrande Sends Frazzled Wall Street Titans to China, by Wolf Richter

The Chinese government increasing intervention in the Chinese economy has a lot of Wall-Streeters upset. From Wolf Richter at wolfstreet.com:

The property sector and its debts are possibly the biggest financial mess in China’s history.

By Wolf Richter. This is the transcript of my podcast of last Sunday, THE WOLF STREET REPORT.

The crackdowns by Chinese authorities on some of the biggest hype-and-hoopla industries have sent investors heading for the exits. There is a crackdown on debt to keep the financial system from imploding. There’s a crackdown on property speculation to tamp down on housing prices and on debt. There’s a crackdown on big tech – mostly internet, social media, and online gaming companies – for their monopolistic size and practices and a slew of other issues.

There’s a crackdown on education tech companies that sell off-campus educational courses that have driven the costs of education into the sky, discouraging Chinese couples from having more than one child. There’s a crackdown on all kinds of other activities that include reporting financial news and analysis in a way that the government doesn’t approve.

There are all kinds of reasons for these crackdowns, including the push by President Xi to create “common prosperity,” which has become a mantra to fight the ballooning wealth disparity linked to the surge in asset prices, including home prices that are now making homes unaffordable for the masses.

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