I’ve been arguing for a while now that the Chinese Economy is a bubble waiting to burst. And for a number of good reasons
- Although the amount of Chinese labor seems endless with 1 billion people, unlike India the labor market is shrinking and increasingly composed of only children
- Much of the economic growth has shifted from manufacturing as wages come up and manufacturing jobs shift to Africa and Mexico and into real estate development which no one is buying
- Outside of the Special Economic Zones, China’s political environment is rather anti-growth
I’m sure we have all seen the SBS One Dateline report from Australia on the Ghost Cities of China.
But now, it would appear the banks are starting to take a hit as well. According to Forbes, the China Credit Trust Co. is going to default on it’s “2010 China Credit-Credit Equals Gold #1 Collective Trust Product” – and ain’t that just a classic bit of over-compensation – come January 31. Why? Well, the bank loaned the money to a coal mining firm Shanxi Zhenfu Energy Group. In the United States, coal mining is big business. A new coal seam is highly productive. But not in China.
China Credit Trust isn’t the only one in trouble. Jilin Trust is shaky as well. They loaned out a similarly massive amount to yet another Shanxi coal mining firm. And will most likely default on the loan not long after.
I’ll let the folks at Forbes take it from here:
Most analysts don’t worry about a WMP default. Their argument is that the People’s Bank of China, the central bank, is encouraging a failure of the Zhenfu product to teach investors to appreciate risk and such lesson will improve the allocation of credit nationwide. Furthermore, they reason the central authorities would never allow a default to threaten the system.
Observers make the logical argument that “to have a market meltdown, you have to have a market” and China does not have one. Instead, Beijing technocrats dictate outcomes.
That’s correct, but that is also why China is now heading to catastrophic failure. Because Chinese leaders have the power to prevent corrections, they do so. Because they do so, the underlying imbalances become larger. Because the underlying imbalances become larger, the inevitable corrections are severe. Downturns, which Beijing hates, are essential, allowing adjustments to be made while they are still relatively minor. The last year-on-year contraction in China’s gross domestic product, according to the official National Bureau of Statistics, occurred in 1976, the year Mao Zedong died.
Why will China’s next correction be historic in its severity? Because Chinese leaders will prevent adjustments until they no longer have the ability to do so. When they no longer have that ability, their system will simply fail. Then, there will be nothing they can do to prevent the freefall.
And that is going to cause some very real problems. As I mentioned above, China’s One Child Policy has created a generation of Middle Class Only Children. And not just only children, but only children of only children. You think the trophy generation is bad (Link is to Penn and Teller’s Bullshit, mildly NSFW)? Imagine an entire generation of coddled only children in a culture which focuses on Longevity, Prosperity, and Posterity. And what happens when those children are tasked with shouldering the weight of their parents in accordance with the traditionally Confucian value of filial piety? Might Yuan leave his father atop the mountain along with his grandfather? What if he can’t find a wife or a job? With nothing left to live for, young men often become violent. Gendercide kills civilizations.