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Thoughts from the Frontline

Can Central Planners Revive China’s Economic Miracle?

June 8, 2014

For years, when asked whether I thought China would experience a hard landing, I would simply answer, “I don't understand China. Making a prediction would be pretending that I did, so I can’t.” The problem is that today China is the most significant macroeconomic wildcard in the global economy. To understand both the risks and the potentials for the future you have to reach some understanding of what is happening in China today. Last week we started a two-part series on what my young associate Worth Wray and I feel is the significant systemic risk that China poses to global growth.

The first thing in my inbox this morning here in Tuscany was a note from a friend about the growing scandal in Quingdao. For a long time many of us have known that there has been “double counting” in the commodities trade sector in China, where local “entrepreneurs” create multiple warehouse receipts on which to borrow money cheaply, and then invest in what are essentially subprime securities that pay higher rates. Everyone “knows” that…

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June 14, 11:48 p.m.

Thank you for this good and thorough appraisal (attempt) of the economic situation of China. However, like many similar analyses, the views are limited to logical scenario projections without due considerations of all the very real risks (black swan events) that China, and as a matter of fact the whole world, is facing today as China expands its GDP one way or other, just like the views held by the farmer’s turkey in Nassim Taleb’s book Black Swan. The possible black swan events to name a few are: political upheaval, environmental breakdown (fresh water shortage and air pollutions are very real checkers of growth and stability), wide-spread virus or epidemic like a SARS, wide spread terrorisms …etc.

I also want to add that even in the scenario of China achieving a successful reform miracle of slowly moving into a consumer driven growth model, it won’t work not just for China, but for the world! The math is simple. The earth is not sustaining the consumption driven model. This model led by the USA and followed by other developed nations, if copied by China with its much larger population size, will hasten the world’s environmental problems to an unprecedented extent. If you’re to add China into this same model and if it were to be successful, where are you going to get multiple times more production of natural products needed (like grains, meat, fish), not to mention the issues with global warming, air and water pollutions which all adversely affect the ability to provide the natural products required to live? A different kind of development model is required! 

In response to these, you may say “in the long run, we’ll all die”. Yes, but the problem is these might not be “in the long run” any more, but might be just round the corner!

June 8, 11:10 p.m.

Thanks John for an excellent article about China. History allways repeats itself. If the Mongol’s destruction of China, started by Genghis Khan, did not happen in the thirteenth century China would have experienced an industrial revolution centuries before the West. Read “Why The West Rules- For Now” by Ian Morris. In view of past history the present cooperation between Russia and China is interesting.I sincerely hope that China does not follow Japan’s economic footsteps. Egbert Gerryts

jack goldman

June 8, 4:22 p.m.

Dow Index was 750 US Treasury silver dollars in 1964. Dow Index is 750 US Treasury silver dollars in 2014. It’s fifty years of smoke and mirrors and counterfeit currency. The world has been inflated in a massive counterfeit currency bubble. The Chinese are aware of this, they invented paper currency money. The counterfeit currency is all imaginary and fake. The bank accounts we all have are fake pretend counterfeit currency. The infrastructure, the roads, buildings, sewer, water, are all real. We are living so far beyond our needs and means. Fictitious imaginary companies like Facebook or Google create no wealth, do nothing, yet are worth hundreds of billions of dollars? Air BnB, a booking web site, is worth more than existing real hotel chains with real hotels? The world is vastly over inflated in a speculative bubble that begs for a collapse to reevaluate what wealth is. US Public debt has soared from $300 Billion in 1964 to $17 TRILLION in 2014. Are we insane? The private sector is much worse. Debt is 30% of the Federal Budget? This counterfeit bubble needs to pop to bring the 1% down to reality. The 1% are who own all the counterfeit wealth anyway.  There are too many promises that can not be kept. I have to protect myself. No one else can or will.

June 8, 1:52 p.m.

Mr. Mauldin,

With respect to the Chinese governments position concerning territorial rights in the South China Sea, please consider the Panay Incident and its effect on the relationship between the USA and Japan.  The Panay was a relatively insignificant asset of the U.S. Navy.  However, the Panay Incident is often cited as one of the factors leading to policy choices and political decisions by both the USA and Japan that resulted in Pearl Harbor and entry of the USA into WWII.  Hitler may very well have defeated Russia but for Pearl Harbor.

The Crimean dispute between Russia and Ukraine and response to minor sanctions by the USA and EU placed on a few Russian oligarchs and government representatives is not identical to but appears to rhyme with attempts to appease Hitler prior to Germany’s invasion of Poland and the start of WW II in Europe.  The increased commercial ties between China and Russia seems to also rhyme with the increased economic and political ties between Germany and Italy prior to the start of WW II.

It appears to me that we are close to both another major worldwide depression such as occurred during the 1930’s and possibly even another world war which appeared to be very unlikely after the fall of the Berlin wall.

Tom Felger

Michael Thomas

June 8, 6:32 a.m.

The dire analysis ignores one major advantage China has. HUGE FOREIGN/GOLD RESERVES. I would love to see an analysis that compares China’s NET debt (debt owed by all sectors minus foreign reserves) to that of the US, Euro and Japan. I suspect I would rather have China’s “problem” than ours (the good old US of A).
Mike Thomas