Thursday, 7 July 2011

Relying on the Chinese economic miracle? You’ll have to have another one shortly afterwards to keep you going

Our local economic geniuses, such as Senators Terry le Sueur, Philip Ozouf  Alan Maclean and Geoff Cook, seem to rate the joys of attracting finance industry business from China/Asia. Here’s an account from the BBC of their recent (June) £20,000 trip to China, which they seemed to think was a jolly good wheeze!

Le Sueur in China

They were, as the road to hell is well known to be paved with, full of good intentions because the purpose of the trip was to proactively address local unemployment, declining tax receipts and economic slowdown. What’s not to love? Fat tail risk chance!! - that’s a clever economic joke, BTW. What Le Sueur and co have just done, all bright eyed, bushy tailed and full of yuppie over-confidence, was the equivalent of going to Wall Street looking to drum up new finance business. In 1929. Before October 24th…

If anyone promoting the joys of unending exponential growth (which anyone with their heads screwed on should realise is a sure recipe for disaster) directs you to look at the Chinese economic “miracle” to back up their ideology, consider that it is always brightest before the storm.

Perhaps the following might be the proverbial “cloud no bigger than a man’s hand” that foreshadows that storm.

A US hedge fund manager has just (November 2010) launched a fund (Corriente advisors) that bets on the imminent implosion of the Chinese economy - click for link to Telegraph article.

Most of the Chinese GDP is in fact spending on building infrastructure such as new cities, airports etc. This article from the New York Times (July 6th) lays the true nature of the “miracle” bare. With all the apparent success of someone with access to a huge credit line that enabled buying fast cars and foreign holidays, jewellery and mansions just before the bills came in and their house of cards collapsed, Chinese municipalities have taken out gigantic debt obligations, kept discretely off their balance sheets using arcane financial instruments.

As municipal projects play out across China, spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70% of the nation’s GDP. It is a ratio that no other large nation has approached in modern times. In absolute terms, it’s an Armageddon amount that, as far as I am aware, the world has never seen before.

How might things start to collapse? The collateral for many loans is local land valued at lofty prices that would collapse if China’s real estate bubble burst. As an example, in Wuhan - China’s ninth-largest city - land prices have tripled in the last decade. But the land is only highly valued because there is an expectation that there will always be new building projects to initiate. It is widely documented that there are shopping malls and even whole cities that are virtually empty, with no-one to live in them or use them. Click here for the ghost cities of China. Clearly one of the biggest bubbles ever blown. Probably the loudest bang is due.

According to the following rather mixed messages will blow your minds…

China’s dominoes of destruction

15 factoids about China that will blow your mind

15 more factoids about China that will blow your mind

When China falls, probably Australia will be the first domino (scroll down the page about half way) in the rest of the world to directly collapse. Après moi le deluge, cobber.

But no, Nick, I hear you cry with all the yuppie uber-confidence shared by our glorious leaders, surely the glass must be half full – we’ve lived our lives – we’ve built our lives - quoting this – all our friends know this is the attitude to have because we live in Jersey – we have a charmed and cushy life – nothing can puncture our happy optimistic bubble? Can it?

Sorry to burst your bubbles. Reality is starting to intrude.



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