Written by The Daily Bell
China's spectacular real estate bubble is about to go pop ... So you thought that UK housing was unaffordable. Try Beijing and Shanghai, where ... prices are off the scale relative to income, the commonly used yardstick for measuring affordability. OK, so these are the boom cities of the Chinese economic miracle, but even on a nationwide basis, affordability is no lower than in the UK. Little noticed amid the furor of the euro crisis, HSBC'S preliminary survey of China's factories, published this week, indicated manufacturing activity in the world's second-biggest economy actually declined in July from the month before, the first such contraction in a year. The HSBC purchasing managers index for China has been falling for months now, indicating a protracted fall off in growth as the Chinese authorities act to rein in rampant inflation. – UK Telegraph
Dominant Social Theme: Don't the Chinese have it under control? The IMF seems certain they've have planned for this.
Free-Market Analysis: The US is struggling with US$200 trillion in unredeemable commitments to the world and its own population; the Eurozone is gradually sinking under the weight of the PIGS sovereign debt; and China, the third pillar of the world's economic faÃ§ade is likely facing a significant bust.
When a country the size of China with 1.4 billion people has a "hard landing," it will come down with a sizable destructive force on the larger global economy. There are only two ways to look at such a landing: Either it is expected or is it not. Western power elites propagated central banking; they put over 100 of them in place run by theBIS. Either they understand the consequences of what they've done or they don't.
Of course, lately we've taken the view they DO understand. The people behind the world's economic and monetary systems are not stupid, how could they be? So as the world's economy collapses into ruin and the Greater Depression extends its hold over the globe like a dark shadow, we would tend to believe the idea is to maximize the results of international financial chaos by attempting to rewrite the rules.
Yes, we are on the lookout for a new dominant social theme, one that will emphasize an international currency, perhaps a basket of currencies including gold. It will be supported by the BRICS and Europe and administered by the IMF. That seems to be the plan. Out of chaos, order. Whether the Pharisees running the world out of London, Washington and Israel can implement such a monetary system obviously remains to be seen.
Meanwhile, the larger diplomatic and financial community remains oblivious – purposefully or not – to the latest unwindings in China. This is where the REAL action is. Europe and America are already slumping into a Great Depression; it is China that shakily props up the stool of world commerce, though perhaps not for long.
But why alarm the masses? The latest IMF opus casts a soothing spell, as usual. Yes, the International Monetary Fund is out with their latest Staff Report on China promoting the meme that all is well with the world's second largest economy. The IMF tells us soothingly that it has examined "the macroeconomic outlook, the potential for a property price bubble, the risks to the banking system, and the policy measures underpinning the 12th Five-Year Plan."
IMF honchos concluded in perfect bureau-speak that "The ongoing withdrawal of monetary stimulus is fully appropriate but a greater weight should be given to the use of higher interest rates and nominal appreciation in tightening monetary conditions."
In other words, the Chinese central bank should keep raising rates. No comment at all about the dysfunctional use of "five-year plans" generally. Instead, the IMF is generally approving. "Financial reform holds significant promise in contributing to the needed transformation of the Chinese economy."
They even have their own ideas about how the Chinese should administer their latest plan: "Over the horizon of the 12th Five-Year Plan, reforms should seek to secure a more modern framework for monetary management, improve supervision and regulation, deepen the channels for financial intermediation, transition to market-determined deposit and loan rates, and open the capital account. In all of this, a stronger renminbi will be an important complement."
Such calming words. China's top technocrats can simply adjust the machinery at the top and the Chinese economy, as vast as it is, will hum like a top. No accommodating the free-market here; no need to mention it. Econometrics rule. The IMF global-crats still haven't gotten around to reading Ludwig von Mises.
Every time the state creates a policy, it changes human action as regards to that policy. This is why laws have unintended consequences. This is why laws and regulations (price fixes) merely distort the economy without making any positive changes. Price fixing only moves wealth from those who create it to those who have not.
China, like America and Europe, is one vast price-fixing shop. Price signals are likely so eroded that when the crash does come, the distortions may take decades to work themselves out of the economy. As in America and Europe, lending and commerce at the highest and broadest levels shall shudder to a stop.
The only way that China can avoid this fate is by letting the coming crash unwind as it must. But the chances of a dying communist empire ceasing to manipulate the economy in hopes of saving itself are slim to none. Whatever emerges from the wreckage of what the Chinese have created in the past 40 years should be different than what has gone before.
Apparently, Western elites must believe they can continue to control events – with the help of China's elite families – not just in China but in Europe and America as well. Or perhaps they are simply desperate. Either way, we'll probably find out.
The meme seems to be shifting, in fact. There are more and more articles about China's distress. This article (excerpted above) in the UK Telegraph, is symptomatic of a change in coverage. The larger press – despite the IMF's calming notions – has begun to sour on the Chinese miracle.
The Telegraph article points out that while slowing price inflation is a good thing, the slowdown in housing appreciation, courtesy of Chinese rate hikes, may ultimately backfire. "As noted in the IMF's latest staff report on China, published this week, the property sector occupies a central position in the Chinese economy, directly making up some 12pc of GDP."
Not only that, China's middle class has invested heavily in empty properties throughout China – and in properties in China's growing accumulation of pre-built and still-empty cities. We are told of course that these empty cities, railroad stations and skyscrapers are merely evidence of the brilliance of China's central planners. It is all part of a "larger plan." Of course, the Soviet Union's planners were no doubt just as brilliant. And they are no more. Here is the crux of the article:
Residential and commercial property development have been such a big component of growth in recent years that anything that damages the property market risks upsetting the entire apple cart. Nobody can forecast with any certainty when the crash will come, but come it will. You cannot cram that much development into such a short space of time without there eventually being a correction. And when it comes, its knock on consequences are going to be extreme, possibly just as seismic as the rolling series of banking crises we've had here in the west.
We've been banging this drum for the longest time. But we've gone a step further as well lately, pointing out that the entire Chinese economy – the part that runs things – is a kind of Potemkin Village. It has been constructed to mimic the West's idea of how an economy should look but behind the faÃ§ade, the ChiComs operate as usual.
A lot of the competition is farcical; the banks neither compete nor lend in the traditional sense and the larger economy that's been touted in the West as breaking away from the rigid Marxist model of development has in fact done no such thing. Now the Wall Street Journal is sounding the alarm as well:
Chinese Banks Are Worse Off Than You Think ... Rosy loan-to-deposit ratios hide a serious nonperforming-loan problem. Investors are worried about the health of China's banks. They're afraid – with good reason – that the massive, state-directed lending binge that was instrumental in pumping up China's GDP figures the past two and a half years will end up producing an equally massive pile of bad debt. Barely a week goes by without new word of a troubled project or impending default. Never fear, say the banks and some analysts. They point to the extraordinarily low loan-to-deposit ratios of Chinese banks, averaging around 65%, as evidence that these banks have plenty of cash to cushion themselves against any future loan losses ...
It's incredible that analysts and columnists talk about "loan-to-deposit" ratios and such when referring to Chinese banks. These terms mean nothing much in Western cultures where, thanks to central banks, banking has become an appendage-function of the state. In modern China, there never even was an independent banking sector. When the crash likely comes, the reality will be ugly indeed.
Who knows what the Chinese and the larger global power elite have in mind. Have they planned a worldwide crash? Are they confident they can manipulate it via war and despair into birthing a new worldwide economy with a global currency? Or have events outstripped them? Are they merely hanging on desperately and trying to put out the fires of a ruined system as they emerge?
Conclusion: We have no answers to these questions. But we don't see how a "soft landing" occurs. The Chinese economy is too big and traveling too fast. And when (and if) such a crash does take place, we don't see any other legs to prop up what may become an economic free-fall. We haven't read or seen anything yet that logically persuades us otherwise.
© Copyright 2008 - 2011 All Rights Reserved. The Daily Bell is an informative compendium of independent economic views and analysis, which is published by The Foundation for the Advancement of Free-Market Thinking (FAFMT).