China: "Mother of All Black Swans"

According to Director of Research at Investment Management Associates Inc., Chinese government intervention, corruption and political capital-allocation decisions take things to a new level of financial insanity. If, or when, its economy slows down, China will be the Mother of all Black Swans, Mr. Katsenelson warns.

“The Chinese government lies. The government cares deeply about ideology: it censors media and internet, sends people to jail for writing anti-government articles. Making up GDP numbers is just one of many tools.”

Vitaliy Katsenelson

Chinese late-stage growth obesity have resulted in significant overcapacity, according to the report.  The economy grew at 10% (real growth) for 10 years. When now building new plants,  assumptions are made that the past growth will  continue into the future.

Mr. Katsenelson points out that the natural demand for its goods from the developed world now is lower as the global economy is still contracting.

But demand is driven, in large part, by heavy borrowing by US and European consumers – China provided the financing.

“Similar to Lucent financing dotcoms that were buying Lucent’s equipment.”

“Future growth will be significantly lower– China’s customers (the US and Europe) are overleveraged and are deleveraging.”

Chinese analysis can be divided into three periods, the researcher writes:

1.Pre-crisis –1998-2008 – (Late-Stage Growth Obesity).

2.During crisis –2008 (Q4) -2009 (Q2) – (You Lie!).

3.Post-crisis –2009 (Q2) -today – (SuperSteroids-R-Us).

Will do anything to grow its economy

“Farmers moved to cities in search for jobs. No social safety net – lose a job, no unemployment insurance, hospital only accepts cash. This explains the high savings rate.”

“Hungry people don’t complain, they riot – government is afraid of political unrest.”

“Chinese chose growth at any cost, even if it was profitless, with bad loans and uneconomical projects.”

“Once you look at what’s taking place in the Chinese economy through this lens, the decisions of its leaders start making sense, or at least become understandable.”

“Analyzing the Chinese economy while it is growing at superfast rates is like analyzing a bank during an economic expansion– all you see is reward. But the defaults –the risk – are masked by constantly increasing new business that is profitable at first (or did not have a chance, yet, to default). The true colors of that growth only appear after the economy slows down and new accounts mature.”

Consequences Of A Bust

So, what will happen if (or when) the Chinese bubble bursts? Investment Management Associates paints a pretty ugly picture:

“What happens in China doesn’t stay in China (not any more); it spills over to the rest of the world.”

“China will turn from a windin the sails of the global economy to its anchor.The impact will be felt in many, and unsuspected, places.”

“It will tank the commodity markets, commodity producers, and commodity-exporting nations.(Incremental demand from China collapses, oil prices follow, taking the Russianand Middle Eastern oil-centric economies with it). According to GaveKal Research, China accounts for 15% of Brazil’sexports (up from 1.5% a decade ago).”

“Demand for industrialgoods will fall off the cliff.China consumes a lot of those goods –$550 billion worth annually (according to GaveKal Research).”

“Chinese appetite for our fine currency will diminish, driving the dollar lower against the renminbi and boostingour interest rates higher. No more 5% mortgages and 6% car loans.”

“Political instability in China is a possible outcome from a significantly weakening economy.”

A Chinese Snapshot

“There’s currently 30 billion square feet of Chinese real estate in the works, which would work out to a 5×5 cubicle for every man, woman, and child in the country.”

(Jim Chanos)

Check out the full China-report from Investment Management Associates Inc.

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Filed under International Econnomic Politics, National Economic Politics