What’s the latest news on the Chinese economy…?
“Chinese authorities have barred the world’s largest rare earths producer from exporting due to ‘environmental concerns’, in a move likely to significantly affect global supply.” – Sydney Morning Herald
We’re sure it will affect supply. As the SMH notes, the barred company – Baotou Steel – “accounts for nearly half of the world’s rare earths production.”
But is it really due to “environmental concerns”?
Of course not.
The Western media often forgets dictators are masters in the art of spin. Think about it. If the Chinese economy cut exports because it wanted to prop up the price… or to disguise the fact that economic growth is hitting the skids… it would play havoc with the markets.
Hence the need for a convenient yarn… which is exactly what China has come up with.
Look, you don’t need to be Joseph Goebbels to figure out the environment is a hot topic in the West. So what better way to disguise a slowing economy than to claim it needs to cut rare earths exports to stop pollution?
It’s perfect.
China isn’t worried about polluting the water supply or digging up things it shouldn’t. It couldn’t care less.
Its bigger concern is stopping the Chinese economy from going into free-fall. The fact is people aren’t buying as much as they used to… the 40-year credit boom has run its course.
So the Chinese economy needs a way to suck more money into its manufacturing sector. The simple way is to make it harder for non-Chinese manufacturers to get hold of rare earths.
Remember, rare earths are one of the world’s most important elements. You can’t make flat panel TV screens, missile guidance systems, wind turbines or electric cars without them.
The kind of things China makes. The kind of things the Chinese economy would like to make more of.
Chinese Economy Slipping Toward Recession
Just three weeks ago, Bloomberg News reported:
“China’s manufacturing contracted for the first time since February 2009 as the property market cooled and Europe’s crisis cut export demand…”
Remember how bad things looked in 2009? And if you think the European debt crisis is a problem, just wait until China’s debt bubble pops.
As reported by Bloomberg News this week:
“A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing…
“The planned 15.2 million square meters (164 million square feet) of office space by 2020 in Yujiapu and across the Hai River in Xiangluo Wan, or Conch Bay, is more than one-third of the 450 million square feet in Manhattan.”
These are the type of projects the China needs Aussie iron ore and copper to build. These are the type of projects that have supported Australia’s economic boom for nearly 10 years.
If the building program was sustainable it would be fine. If it was supply meeting demand it would be fine. But it isn’t. It’s supply hoping (praying) that the demand occurs.
Ah, but China is a net saver, it has cash invested in all those U.S. government bonds – is the classic argument.
There’s one problem. Speculating Chinese local governments have most likely spent any savings China has in U.S. government bonds. How do we know? Read on…
China Has Blown its Savings
According to the U.S. Treasury, at the end of October, China held USD$1.134 trillion-worth of U.S. government bonds.
Bloomberg reports, the debts of 231 local government financing companies (there are 6,576 in total) amount to USD$622 billion.
Who knows what the total debt is for all 6,576 financing firms… USD$1 trillion? USD$2 trillion? $4 trillion? More?
Of course, the mainstream China bulls still believe China uses capital and resources effectively. China is a miracle – they say. China is a centrally planned economy and can therefore control its economy… It can engineer a soft economic landing.
Funnily enough, we heard a similar argument when the U.S. tried to slow its economy in the 2000s. In that case, they argued the central planners at the U.S. Federal Reserve could lift interest rates to cool the economy… and then drop them to stop a crash.
It didn’t work for them.
And it won’t work for the Chinese economy either. Any economy built on a credit bubble will eventually have to pay the consequences.
The U.S. and Europe are facing the consequences of their credit bubbles right now. Next is China and Australia… two of the last big economic bubbles to pop.
More on what to do about it later this week.
Cheers.
Kris
P.S. Many investors mistake credit for innovation. The truth is: real innovation doesn’t need credit. In fact, the best innovators are funded with equity rather than debt. Simply because investors who really believe in the company would rather take a slice of future profits rather than earn a few dollars from a loan repayment. That’s why I look for genuine innovation and entrepreneurship in the stocks I tip for Australian Small-Cap Investigator. If you’d like to take out an obligation-free 30-day trial to my small-cap stock tips, click here for details…
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M&M @ 17.
As the head of the IMF, I have deemed that the problems of the world are caused by people like you (and Drood) who have no debt. So tough luck, we’re wiping everyone’s debt and you get no compensation.
Of course, after we’ve wiped this debt no one would lend any money to anyone else ever again as the possibility of getting repaid would be zero.
Also, after I’ve magically wiped everyone’s debt, if you earn more money than you need you will have to keep it safely stored – not in a bank account (because that is lending money to a bank who wont give it back).
Sorry guys, this is just my warped sense of humour after a few glasses of shiraz (bought on credit)!!!
DM – Shiraz is inspirational, but sometimes the inspiration needs a little work.
The debts being written off are sovereign debts eg Greece. Your debts and mine are not being written off.
I think that you may be getting confused by Steve Keens notion (also possibly Shiraz inspired) to just print money and pay back everyones debts. That will never happen, it would be a political minefield and could never be administered fairly. You can’t reward borrowers but not savers.
I think you will find steve’s interview on his debt deflation site or youtube. Personally I think that Steve lost the plot, and a lot of support with that idea.
Bloody Shiraz !!!!
They may print to capitalise the banks, and the banks may use the funds to reduce reliance on offshore borrowing
Peter – The sovereign debt would include bailed out private bank debt. So bankster money and those private investors (shareholders) are safe and yet we get stuck with higher taxes.
So it would be nice if we all got a benefit. Write off that future tax obligation from the bailouts.
But Hey, what am I saying it may not happen here.
I guess Aussies will get the benefit from the higher exchange rate. I feel better off with my reasonably priced German car and multiple tv’s and gadgets. Of course some lose out from lost jobs from a high dollar.
DM – head of IMF…. I’m sure a bankster can figure out an IOU system like Droods story and still get us to where we are. In that story the banksters will be the ones with big families in which the children will owe the parents debt for all their consumption of booze and hookers.
I think its me on the shiraz.
Looks like thr printing presses are already rolling.
http://www.bloomberg.com/news/2011-12-21/ecb-will-lend-banks-more-than-forecast-645-billion-to-keep-credit-flowing.html
PF @ 22
Peter, who says I can’t reward borrowers and not savers? I’m the head of the IMF, I can do whatever I want. Rules are meant to be broken and the world is in trouble, drastic action is required.
The (few) savers of this world will whinge and protest in the streets for a while but they will be drowned out by all the noise from all the parties going on as all debt is extinguished – sovereign debt, corporate debt and personal debt (it’s all imaginary anyway).
I’ve read and listened to Steve Keen but he’s too intellectual for a mere banker.
Yes great Steve Keen we must bail out all borrowers and stuff the economy.
Remember DM wiping out the savers comes at a great cost that is extreme Nazi ideas.
Steve Keen is on record saying that way for debtdeflation to be stopped in Japan is to increase wages.
That’s right we are taking advice from academic who has never own a business recieves taxpayers money.
Any small business owner will tell you wages are a real cost and will be pass on to the customer higher consumer prices, thus lower margins on profits.
Higher wages do lose jobs to Asia look at Bluescope steel,retail and airlines?
Steve Keen is fruit loop takes his financial models too seriously!
DM – Steve Keen is not too intellectual for a banker, in fact he is not intellectual enough. I have worked with some bankers who would run rings around Steve and other commentators of our time. He may have made a reasonable teller or batch clerk.
Steve has shown himself to be quite pedestrian of late, and he has lost a lot of supporters.
Since you’re on the red plonk, I’ll give you a tip that will save you money. Go into your local Dan Murphy’s and ask for the clean skins “Soft Red” at about $3.80 per bottle – a great little unpretentious quaffer at a ridiculous low price. Trust me it is better than most $15 bottles.
It sounds like you could save a lot of money with that tip. Perhaps you will be able to pay off your IP, or become wealthy on just that one tip.
Cheers and Merry Xmas DM.
PF….this is the sort of advice we need here. the murphmeisters soft red is indeed a quality vino, much better than the ruin the back of your throat shiraz. I,m told the clean chardo’s not bad either although i’m a red man meself. ( try the Doubs absinthe ).
as for the wan sorry bankers you know its the same as anywhere else at the mo, all led by drongo’s, tell me anyone today who can match the leaders of yore.
Apart from Arnie Schwartz of course.
Ah yes the green fairy – It’s a ritual with the sugar, spoon, and flambe.
Mrs PF tells me the “Soft White” is good although a little sweet – just in case Mrs Drood needs Xmas lubrication – wee Scots like a bargain.
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