The Manufacturing Wage U.S. vs. China Gap is Shrinking

How a 17-Year-Old Girl's Suicide Attempt Changed Everything You Knew About Investing

This story will surprise even the most seasoned investor...
and could lead to the most-important investing trend
since the Industrial Revolution

After working 12-hour days for a month, Tian Yu still had not received her salary card. Totally broke, exhausted and frustrated... she climbed to the fourth floor of her dormitory and jumped.

Unknown to anyone, the 17-year-old changed the world economy forever when she took that desperate leap.

Ms. Yu didn’t die, like she had hoped. But 18-year-old Ma Diangqian did. And so did 16 other Chinese citizens who’ve taken these drastic leaps.

In communist China, suicide is considered a crime against the state. It’s the ultimate form of protest. And Tian, Ma and those 16 other Chinese have made the ultimate sacrifice to protest the low wages and sweatshop-like working conditions.

Together, they’ve incited a small, but growing revolution — one that has already begun to play its part in shifting the investing landscape, not only in China, but right here in America, too.

If you understand the shift that is under way, you’ll be one of the first to take advantage of the most-important investing trend since the Industrial Revolution.

Here’s what I mean...

Slowly, but surely, these protests are working. Chinese wages are now on the rise. Just take a look at this chart from the Bureau of Labor Statistics:

As you see, here in America, we’ve seen slow growth in wages. But Chinese wages are increasing at a much faster clip.

Back in 2005, for example, U.S. manufacturing wages were 22 times those of China. Today, that gap has shrunk to under 10 times.

If China wage growth continues at this rate, the U.S./China wage gap will be under five times by 2015.

But wages are just the start of this story. Here’s what I mean...

The Comeback No One Will Believe

It’s no secret that American companies have outsourced production to China for decades. But with Chinese wages increasing, it doesn’t make as much sense to send those jobs overseas now.

Add in high oil prices and the increased cost of transporting goods from China and you could get the great comeback no one is expecting...

The great revival of American manufacturing.

The world, dear reader, is turning.

For you, this turn could change everything about where you should park your money in the coming years...

Certain entrepreneurs, for example, could gain business from this shift back to American production. Other companies will suffer badly as their source of overseas cheap labor vanishes.

Play this global shift correctly and you stand to grow wealthy. Get it wrong, however, and you’ll sacrifice a fortune.

And know this...

The great revival in American manufacturing has already begun to take off, although most people haven’t noticed yet.

Caterpillar, for example, has built a new plant in Georgia where it will manufacture excavators and small tractors.

Intel is investing $8 billion in building and upgrading plants in Hillsboro, Ore....likely the largest capital project in state history. It’s the first new Intel plant built since 2007...and they chose to build it here in the U.S.

The Chicago Tribune reported in 2011, “Nearly written off after decades of stagnation, job losses and overseas outsourcing, the ‘Made in the USA’ label is poised for a comeback.

“A retooled domestic workforce, paired with rising wages abroad, could lead to a renaissance in U.S. manufacturing within five years.”

The trick to profiting from this shift is to not only study the trend on paper, but to put in the legwork and travel required to research the Chinese culture driving this revolution... and trace the steps back to America.

That’s where we can help. And it’s why I’m excited to offer you something we’ve never offered before...

Hi, I’m Doug Hill — Publisher of Laissez Faire Books.

On April 12, we’re hosting a first in our 40-year history: an online event in which we’ll explore five world-shaking events that are sure to impact your financial future.

Tian Yu and her 17 co-workers who’ve incited the revival of the American industry is just one of those trends.

Other trends we’ll explore are...

- WORLD-SHAKING SHIFTS IN POWER: Since the Industrial Revolution, large gaps have existed — primarily in manufacturing might and military power — between the Western world (America and Europe) and everyone else. But since the late 20th century, these gaps began narrowing and continue to narrow today. This shift could change how investors need to act over the next 30 years

- EMERGING MARKETS BECOMING DEVELOPED MARKETS: Emerging markets now account for 50% of global economic activity. Mexico is bigger than Canada. India is bigger than Germany. Turkey is larger than Australia. This trend will end the era of "emerging markets" and put massive pressure on resources for decades as this trend continues

- GLOBAL WATER SHORTAGES: We take clean, drinkable water for granted here is the United States. But for many countries, plentiful water is a luxury. China, Sudan, Iraq, Pakistan and Egypt all need to "manufacture" clean water. This opens up a huge market in emerging markets for global water companies...and investors.

So how can you ride along on this adventure and get the insight behind all of these trends? And what’s the twist behind it being free? Let me first introduce the man behind this story...

Is China slowing down?

AEI/ John H. Makin*

With problems in the manufacturing, housing, and export sectors in China, we will likely see slower gross domestic product growth for the world’s second largest economy in 2012. China’s leadership is changing for the first time in a decade, and its new leaders have suggested that significant shifts in economic and currency policy are unlikely to occur during the transition. However, should China’s leadership remain content with slower growth, the global economy will suffer. If China’s growth loses momentum in 2012 and is coupled with similar losses in the United States and Europe, the recovery disappointment could well exceed that which appeared in 2010 and 2011. Despite these challenges, China has a unique opportunity to demonstrate its maturity as a player in the global economy. Through stimulus measures to its own economy, China could push for a bigger global economic pie rather than increase its share of a shrinking pie and in the process influence global economic growth in 2012.

Key points in this Outlook:

• Slumping Chinese manufacturing, housing, and exports suggest slower GDP growth in 2012, and shifts in policy that would reverse this trend are unlikely to occur during China’s leadership transition.
• In the midst of European economic austerity and looming US tax hikes, China’s slowdown could not come at a worse time.
• By stimulating its economy, China could promote a worldwide economic recovery this year—but whether the country will contribute to global growth or act in self-interest via currency manipulation remains to be seen. 

China’s economy is slowing down, from a reported 9.2 percent annual rate of growth at the end of last year to approximately 7 percent during the first quarter of this year. Whether China’s growth will reaccelerate later this year depends on the global growth driving Chinese exports and on Chinese government policies—especially credit policies impacting China’s housing market and fiscal measures aimed at spending on infrastructure.

The tangible signs of slowing Chinese growth include a March drop in a manufacturing index that accurately tracks overall gross domestic product (GDP) growth. The March purchasing manager’s index (PMI) estimate from HSBC Holdings was reported at 48.3 in late March, a four-month low that is down substantially from last year’s level of 52. Interestingly, in contrast to the HSBC index, the official Chinese March PMI index (which was reported at the same time as HSBC’s) rose sharply to 53.1. Most analysts attributed the rise in the official index to seasonal factors that will subsequently be reversed. The fact that most Chinese stocks were down slightly after HSBC’s PMI index was announced suggests that the official PMI figure is not being taken at face value.

While manufacturing is slowing, China is also experiencing a housing slump. During February, housing prices in China declined in 45 of 70 cities surveyed by the National Bureau of Statistics, continuing a trend underway over the past six months. As its economy has slowed, China’s inflation rate has dropped to about 4 percent from last year’s peak of almost 8 percent. China’s slowing internal growth has been accompanied by a sharp drop in exports.

Perhaps not by coincidence, the steady (about 4 percent) trend appreciation of China’s renminbi (RMB) currency appears to have ended since the start of 2012. An end to RMB appreciation makes economic sense from China’s point of view, because less currency strength makes China’s exports less expensive in global markets where growth is slowing. Less currency appreciation also helps China avoid shrinking its share of the smaller global export market. Furthermore, the drop in China’s inflation rate has lessened the need to allow currency strength (lower prices of imported goods) to blunt inflation pressures.

A Change in Currency Policy?

There are also internal political reasons for China to lean toward a trendless currency during 2012. This fall, China’s leadership will change for the first time in a decade as President Hu Jintao and Premier Wen Jiabao hand over power to their successors. During such transitions, China’s ruling class prefers to avoid abrupt economic changes, especially those tied to currency policy with high external visibility. After the March National People’s Congress, Premier Wen declared that the “RMB exchange rate is probably close to an equilibrium level.”[1]

The premier’s atypically direct statement about the currency underscores the likelihood that the transitional period since 2005—during which the currency’s value has risen substantially—is over. Wen’s declaration that the RMB has reached an “equilibrium” level after substantial appreciation conveys that China’s new leaders may prefer to wait to address the issue of further exchange rate adjustment until after they assume power this November. Going forward, movements in the RMB may be both stronger and weaker, centering on a new equilibrium level.

"More exchange-rate flexibility can help China's economy, notwithstanding the conflicts about currency manipulation a weaker RMB may engender with Cina's trading partners, especially the United States."It is important to recognize that the possibility of two-way exchange rate flexibility also gives China’s ruling Politburo another lever with which to manage the nation’s economy. Should slower growth persist along with falling inflation, a weaker Chinese currency could help stabilize growth and inflation. As China’s economy matures, leaving behind its era of persistently high growth, its leaders are beginning to think of ways to manage the transition. More exchange-rate flexibility can help China’s economy, notwithstanding the conflicts about currency manipulation a weaker RMB may engender with China’s trading partners, especially the United States.

An International Role for the RMB?

China is sending additional currency policy signals consistent with the expectation of somewhat slower economic growth, coupled in turn with the further internationalization of its currency. Internationalization of the RMB would underscore China’s role as a maturing modern economy. China’s efforts to consolidate its newfound prominence include measures to shore up its financial sector to bring it into better alignment with the country’s status as the world’s
second largest producer of goods and services. So far in 2012, China Development Bank has offered a large increase in new RMB loans to Asian countries, to the emerging economies of Brazil, Russia, and India, and even to some indebted European countries. Extending RMB loans to more countries encourages the internationalization and growth of China’s still-nascent financial sector in a number of ways.

If, for example, an Italian, Russian, or Indian firm obtains RMB loans, then paying the interest on such loans (not to mention repaying them) is less risky if the borrower receives Chinese currency for the goods it sells globally. RMB borrowers outside China have an extra incentive to invoice their export customers in RMB; this helps them obtain the necessary currency to pay interest and amortization on their loans without incurring the risk of exchange rate changes that might increase the cost of such borrowing in their own currency.

Slower Chinese Growth Increases Global Risks

We can also look at the Chinese growth question in a broader context. The likelihood of a Chinese growth slowdown during 2012 presents, along with Europe’s austerity-induced recession, a headwind that may more than offset the global boost caused by the modest pickup in US economic growth. US growth accelerated to a 3 percent annual rate in the fourth quarter of 2011, up from a more tepid rate of 1.8 percent during the third quarter. Most estimates for US growth during the first half of 2012 are for a more modest 2 percent rate, with the still-tepid pace relying heavily on what may be temporary wealth gains tied to higher equity prices.

The modest rise in early 2012 US growth is also associated with the extra tax cuts passed by the US Congress late in 2011, amounting to about $160 billion. These tax cuts represented an extension and expansion of the extra tax cuts passed in late 2010. The US Federal Reserve has also attempted to keep interest rates very low with extra purchases of long-term treasuries and further promises of zero short-term interest rates until well into 2014.

As Europe’s economy has suffered from the fallout of the European debt crisis, the European Central Bank (ECB) has further expanded its easing since December with nearly ?1 trillion of additional three-year loans at guaranteed low interest rates to European banks. The ECB’s aggressive monetary ease under its new president, Mario Draghi, aims to help European banks repair their balance sheets in the face of uncertainty about the value of making substantial loans to shaky European governments. This step—along with the February and March “containment” of the acute Greek debt crisis—has helped calm financial markets during the first quarter of 2012.

"The likelihood of a Chinese growth slowdown during 2012 presents, along with Europe's austerity-induced recession, a headwind that may more than offset the global boost caused by the modest pickup in the US economic growth."Adding to the accommodations offered by central banks worldwide, the Bank of Japan chimed in on Valentine’s Day this year with more asset purchases equal to about 2 percent of GDP coupled with a pledge to end Japan’s persistent deflation by targeting 1 percent of actual inflation. The resulting effect has been modest so far with some increase in the stock market and some moderation of the yen’s appreciation.

A striking conclusion about China’s economic growth outlook emerges from this brief overview of the global economy for 2012: it is not a good time for China’s growth to slow down. While US growth was stronger at the end of 2011, the rest of 2012 promises slower growth. The US outlook will become even more problematic at the end of 2012 when already-legislated tax increases and spending cuts take hold. These measures will subtract about four percentage points from early 2013 growth. The measures will need to be considered by a lame-duck Congress after the November 2012 presidential election if any changes are to be made.

Changes in fiscal policy such as not ending tax cuts and not reducing spending from levels specified under current law will add sharply to already large deficits. The American dilemma thus becomes the price of kick-the-can budget policies whereby deficit reduction is postponed and one-more-time tax cuts and spending programs are continued. The fiscal stimulus measures employed since 2009 are meant to provide a temporary boost to growth, yet they will be followed by a growth drag once they are removed. The longer such one-off measures are extended, the larger the fiscal drag will be once they are removed. Hence we will see a prospective large fiscal drag, which will emerge at the end of 2012 under current law when a broad range of tax cuts and some spending measures are removed all at once.

A Leadership Opportunity for China

The questionable outlook for US growth toward the end of 2012—coupled with Europe’s recession and weakness in emerging markets—makes the focus on China’s perspective growth rate over the coming year even more compelling, especially when it comes to determining whether 2012 will witness the same growth disappointments that arose in 2010 and 2011. The supportive policy response in developed markets—more monetary and fiscal stimulus in the United States both in 2010 and 2011 and more monetary stimulus in Europe in 2011—will likely not be repeated. If China’s growth loses momentum during 2012 alongside similar momentum losses in the US and Europe, the recovery disappointment in 2012 could well exceed that which occurred in 2010 and 2011.

What with inflation having dropped well below the 4 percent target set by China’s policymakers and the fiscal deficit having dropped below 2 percent of GDP, China could manage further stimulus. Policymakers should consider additional spending on transportation and rural infrastructure, especially in view of the weakening impact of China’s external sector growth, and tied to the weak growth outlook in the global economy. Whether the desire for no new policy initiatives during China’s current transition to new leadership will prevent new economic stimulus remains to be seen.

China’s new leaders could break with tradition and signal their new outlook on China’s role in the global economy by stepping in to boost growth at a time when the global economy needs help. This kind of initiative would represent an effective way to enhance China’s image as a leading mature economy. Better to push for a bigger global economic pie with extra stimulus than to push for a bigger share of a static or shrinking pie with more currency intervention to keep the RMB undervalued.  More >>

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*John H. Makin (jmakin@aei.org) is a resident scholar at AEI.

Will China's Yuan Rival the Dollar?

The Wall Street Journal/ Eswar Prasad

The Chinese currency invariably provokes overwrought reactions. One view is that it will soon knock the dollar off its pedestal as the dominant global reserve currency. The other is that China is creating enormous risks by letting capital account liberalization get ahead of domestic reforms.

The reality is far more nuanced than much of the overblown rhetoric suggests. As with many other reforms, China is breaking the mold with a pragmatic, selective and controlled approach that I call capital account liberalization with Chinese characteristics.

Irrespective of government policies, China's capital account is becoming more open over time as rising trade and financial integration create more channels for getting around capital controls. Rather than resisting the inevitable, the government has embraced gradual change, relaxing but not eliminating controls on both inflows and outflows. The objective is full convertibility, unrestricted capital flows but with some "soft" administrative controls and regulatory oversight, rather than free convertibility with minimal restrictions.

The government is also positioning its currency for a broader role in global trade and finance. Hong Kong provides the ideal testing ground for putting the yuan in play through trade settlement transactions as well as yuan-denominated deposits and bonds. Some central banks have signed currency swaps with China's central bank and begun adding yuan to their foreign exchange reserve portfolios. Thus, given its sheer economic heft, China is successfully promoting the yuan's international use without fully opening up the capital account or allowing the currency to float.

An international currency does not guarantee reserve currency status, however. For that, an open capital account and a flexible exchange rate are essential. But even that is not sufficient.  More >>

Chinese GDP Slows for 3rd Straight Quarter

Chinese GDP Slows for 3rd Straight Quarter by NewsLook

China’s hard-landing has already begun?

By Sue Chang, MarketWatch

NEW YORK (MarketWatch) — China is heading into an economic storm, and the much-feared hard-landing of the world’s second-largest economy has already started, warned celebrated hedge-fund manager and China-bear Jim Chanos of Kynikos Associates on Monday.

“The numbers are falling faster than we thought,” said Chanos during an exclusive interview with MarketWatch on the sidelines of the 7th Annual New York Value Investing Congress.

History shows that periods of high returns in the market are followed by extended periods of lower returns, says Capital Guardian Wealth Management's Tony Montanari.

“Real estate sales in September and October, which are peak months, fell 40%-60% on-year,” he said.

Chanos also pointed out that Chinese financial and real-estate stocks are down 30% from their peak, while cement and steel prices are declining.

“People are buying into the idea of perpetual growth,” Chanos said. “But they have to ask, ‘Are you really growing?’”

Chanos stressed that investors should understand that there is no bailout without a cost.

“The only way the Chinese government can continue to bail out everyone is to print more money, which will lead to inflation. But people are depositing money [in banks] at below inflation,” the fund manager said.

Chanos had already suggested back in May that there were clear signs of excess supply in China’s commercial real-estate sector.

About 14% of office space in Beijing and 9% in Shanghai was vacant, according to data he cited at the time.

“Western investors must remember that Chinese consumers are not the next big hope,” he said.

1,000 times worse than Dubai

Chanos has consistently said China’s bust will be a thousand times worse than Dubai.

“It’s very hard to let air out of a property bubble without collateral damage,” he said.

Chanos also expressed concerns about the country’s banking sector.

The Chinese economy is adding $2 trillion of new debt every year, and half of that is problematic from day one, he said.

And since only 50% of the problematic debt is recoverable, about $500 billion, or 10% of gross domestic product, is bad debt, he said.

Last week, China’s sovereign-wealth fund bought about $31.5 million worth of stakes in the nation’s “Big Four” lenders — Agricultural Bank of China Ltd. HK:1288 -7.87%   CN:601288 +0.38% , Bank of China Ltd. HK:3988 -4.74% CN:601988 +0.33% BACHY -2.35%  , Industrial & Commercial Bank of China Ltd. HK:1398 -6.05%   CN:601398 +0.48% IDCBF -4.72%  , and China Construction Bank HK:939 -4.39%   CN:601939 +0.22% CICHF -1.52%  . See report on China’s purchase of banking shares.

The move is a likely indication of which banks the Chinese authorities are worried about, according to Chanos.

In his earlier presentation at Monday’s conference, he cautioned Western investors to remember that politics are a big part of business in China, and that in effect, banks are instruments of state policy.

He also reiterated the message that the house always wins when it comes to foreign investors and China. Remember how they treat Western investors, he said.

“History has not been on our side,” he said.

During the interview, he briefly revisited that particular theme. “Corruption is endemic there. Contracts are meaningless,” Chanos said.

Sue Chang is a MarketWatch reporter in San Francisco.

China Currency Legislation Is a Desperate Mistake

Posted by Daniel Ikenson

The good news for those craving harmony in Washington is that that mythical elixir called bipartisanship has been spotted in Congress. The bad news is that it is finding its expression in an outbreak of self-destructive China-bashing.
After 8 years of threatening punitive action to compel appreciation of the Chinese currency at a pace deemed acceptable by U.S. politicians (a period, by the way, in which the Yuan appreciated by 30% against the dollar in nominal terms—and by much more in real terms), lawmakers may just pull the trigger this time. If so, their action should be seen for what it is: a vote of no confidence in themselves as a body capable of producing solutions to the nation’s economic stagnation and monumental budget and debt woes.
China currency legislation is a diversion – a shell game. Despite the opinions of Harold Meyerson and Fred Bergsten, there simply isn’t any evidence that a stronger Yuan will produce a smaller bilateral trade deficit or that a smaller trade deficit will boost employment. Indeed, policymakers shouldn’t be targeting trade deficit reduction in the first place—let alone a bilateral trade deficit, which is meaningless in a world dominated by trade in intermediate goods.
Read more >

A Bunch Of Chinese Manufacturing Bosses Just Defaulted And Fled Their Failing Businesses

Linette Lopez
China's papers are calling it their "own subprime crises."

According to Shanghai Daily, 7 large business owners, mostly manufacturers, fled the city of Wenzhou on September 12th. They left thousands of employees jobless and hundreds of millions in unpaid debt.

This is one of the consequences of China's "black bank," the massive undergound banking system that has been growing at a dizzying pace since the government started tightening credit to curb inflation. Banks favor state-owned businesses when it comes to lending, so when private business owners need to take out a loan, they turn to the alternative, to the underground.

Going to the undergound has two consequences: For those who take out loans, it means having to pay much higher interest rates than they would if they borrowed legitimately. For the lender, it means that if a loan goes unpaid, there isn't much that can be done about it.

In other words, if business is bad for a business owner with an underground loan, they can just walk away. So they do.

One of the runaway employers is Hu Fulin, the owner of Zhejiang Center Group (ZCG). ZCG owns the most popular sun-glass company in China (they make 20 million pairs a year) and employed 3,000 people. He also invested in real estate and the renewable energy industry.

Hu is penniless now, but he owes his employees their August and September salaries (about $1.5 million), and he hasn't paid his suppliers either. The city government has set up a task force to figure out how to track all of Hu's loans and repay his debts.

It's rare that the authorities are able to catch bankrupt business owners before they leave town, but sometimes it happens. Zheng Zhuju, the 49 year old owner of a home appliance store, tried to skip Wenzhou leaving $43.8 million in unpaid, underground debt. She was arrested beforehand, though, and has been incarcerated since September 13th.

Read more: http://www.businessinsider.com/china-subprime-wenzou-bankrupt-2011-9?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Business%20Insider%20Select&utm_campaign=BI%20Select%20Recurring%202011-09-23#ixzz1YorO9Lti

Capitalism, Chinese Style

Is Decentralization China's Secret Sauce?

ForaTv

China's stock market down for fifth week

Not a surprise, but still not good news.

China’s stocks fell, driving the benchmark index toward a fifth week of losses, after U.S. equities plunged on concern the global economic slowdown is deepening and the China Securities Journal reported the central bank will maintain tight monetary policies.

Jiangxi Copper Co. and China Shenhua Energy Co., the nation’s producers of copper and coal, led a retreat for commodity producers after oil and metal prices slid. Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, slumped the most in almost two weeks. Maanshan Iron and Steel Co. fell 2 percent after first-half earnings declined.

More >

China: The Peoples Republic of Capitalism - Documentary

Top Documentary Films

Perhaps nothing crystallizes the theme of Ted Koppel’s excellent Discovery Channel series The People’s Republic of Capitalism like the production of Ethan Allen couches. Over four episodes, Koppel reveals increasing economic interdependence between the United States and China, and daily business for the American furniture maker is a case in point.
While couch bases are made in Chinese factories using cheap labor, those bases are then sent to the U.S. to be assembled with other components. The finished couches are then sent to China to be sold to a growing middle class with money to spare. Such is the cycle of globalization, pushing the U.S. and China into a necessary partnership that has an upside for some and a profound downside for others.
In order to understand that complexity, Koppel tells us, it’s important to grasp rapid changes in China, which has forsaken socialism—the very idea of a classless society—for a fervent embrace of new values and the goal of becoming an economic superpower.
Koppel shows viewers how China, on one hand, micro-manages people’s lives in very real ways, such as the country’s notorious one child policy for families, which is designed to lower the nation’s enormous population in time. On the other hand, Chinese are enjoying the freedom to pursue aspirations toward economic success and the (sometimes illicit) fruits of hard work.
But others don’t manage quite as well: Chinese factory workers who battle fatigue to make the equivalent of $20 per week, and the American workers who lost their jobs to their overseas counterparts. This eye-opening series is truly helpful toward understanding our complicated new world.

Chinese Local Debt Might Be $540B More Than Estimated: Moody's

HUFFINGTONPOST.COM 

China's local government debt burden may be 3.5 trillion yuan ($540 billion) larger than auditors estimated, putting banks on the hook for deeper losses that could threaten their credit ratings, Moody's said on Tuesday.

Addressing the estimate by China's state auditor that its local governments have chalked up 10.7 trillion yuan of debt, Moody's said it found more potential loans after accounting for discrepencies in figures given by various Chinese authorities.

"The potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case," Moody's said in a statement.

Read more...

Is it China's turn to wrestle with a pile of bad debt?

By John W. Schoen 

msnbc.com

The U.S. banking system was the first to get hit by the financial Panic of 2008. For the past year, European bankers have been scrambling to head off exploding debt bombs in Greece and other countries with high debt loads.

Now, it looks like it's China’s turn to face up to a giant pile of bad debt. This being China, though, the story isn’t playing out like an ordinary Western financial crisis.
The source of China's current problem dates back to the collapse of the global economy in 2008 when, like its Western counterparts, the Chinese government unleashed a flood of cash to stimulate its economy. Much of that money was loans from state-owned banks to local governments, which were supposed to spend all those yuan on new roads, railways, power plants and other projects to help China maintain its torrid pace of economic growth.
Many of those yuan didn't get where they were supposed to go. It's still not clear exactly where they all went. But this week the Chinese government announced the results of a nationwide audit of 31 provinces and hundreds of municipalities which found that those local governments are now carrying some $1.6 trillion worth of loans. And a large portion — as much as 20 percent — may have to be written off as bad debt.
Following the blueprint of economic transformation laid out in the early 1980s by Communist Party leader Deng Xiaoping, China has embarked in recent years on massive spending spree. Beijing hopes the spending will expand the economic success of coastal cities to inland regions by stitching them together with vast networks of roads, railways and high-speed Internet. But many of those projects have become mired in debt, with modern high-speed rail lines carrying handfuls of passengers and four-lane rural highways all but empty of vehicles. 

Go to...

Is China's GNP Number Accurate

by James Luko -  Nolan Chart

Of course not. Currently, in real dollars at today's exchange rate average ($/RMB) China's Gross National Product is estimated at between 4.125  4.350 Trillion USD. That's a pretty big economy, it would equal it to Japan or even surpass it making it the second largest economy in the world. It however still pales behind America's 13.5-14 Trillion dollar economy (inclusive of the current recession).

Is the Chinese GNP number accurate ? Of course it cannot not be very accurate since the numbers depend on data submitted by domestic sources- mainly, SOE's, State Owned Enterprises.

SOE's still represent approximately 2/3'rds of the Chinese economy, which makes the overall GNP number highly dependent on the accuracy of data submitted by SOE's. SOE's over the past 20 years have had a great incentive to "cook the books" by submitting "fuzzy math" accounting. By western accounting principles a great number of Chinese SOE's are technically bankrupt. (This is mainly because special subsidies, labor and other costs are NOT included in calculating net profit, assets, etc) .

Read more...

The Bigger #Debt Problem: China’s Local Government Debt vs. US Subprime Debt

Bill Bonner

"We're not bearish enough [on China]." - Jim Chanos

Oh my... China is breaking down. Europe is slipping. And there goes the US too...with stocks down 172 points on the Dow on Friday, closing out a 6th straight week of losses.

Even if the US holds itself together, there's a good chance that either Europe or China will drag it down.

The latest reports show China's property bubble beginning to lose air. The Wall Street Journal reports:

After years of housing prices gone wild, China's property bubble is starting to deflate.

Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.

Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay.

And legendary short seller, Jim Chanos, says China's local government debt is worse than America's subprime problem. Subprime debt in the US never surpassed 10% of GDP. China's local governments have debt (much of it bad) of more than 30% of GDP.

We went to China recently. We were unable to form a clear opinion about it. Yes, there were plenty of buildings that looked empty...but the streets were full of people.

And there is so much money in China! A friend is an antique dealer in Paris. He tells us that the hottest segment of the market is Chinese antiquities. As soon as something comes on the market, a buyer from China snaps it up. Here's an example. In March, an antique China vase was auctioned off at Sotheby's. The auction firm had appraised it at $800 to $1,200. Instead, it sold for $18 million.

With that kind of cash available, why worry about empty apartments? Surely, the demand will meet up with the supply, right?

Trouble is, without the discipline of the free marketplace, you never know what the demand really is. And given a lot of extra cash and credit from the feds, supply tends to overshoot, often spectacularly.

Without the light of real, free markets, buyers and sellers wander around in the dark like blind drunks. They stumble into each other. They fall down. They bloody their noses and make an awful mess.

In the heady air of post-commie central planning, China may have less than 10% of the world's GDP, but it buys more than half its cement - and nearly as much of its iron ore, steel and coal.

What does it do with all that? It adds supply! It builds.

From first hand observation we weren't able to draw much of a conclusion. But theory tells us that there is no way you can invest that kind of money - often with the help of local governments - without making some major mistakes.

Of course, that's why there are corrections. That's why every boom caused by excess, artificial credit is followed by a bust of excess, un-payable debt. Which is also why, here at The Daily Reckoning, we like corrections. They are like soap and water. They help get rid of accumulated debt dirt. And the grease of bad guesses. And the parasites that accompany a plan-gone-bad. So, lather up. Rinse well. And you're fresh and ready to go again.

But the authorities don't like washing up. After all, one man's grease is another man's career path. And the parasites vote.

The Chinese authorities may or may not be smarter than their American counterparts. But they've got parasites to look out for too. Voters? Maybe not...but they've got plenty of officials...and some 100 million young men looking for work; they're desperate to keep them busy.

We don't know whether a Chinese blow up is around the corner or not. But it could happen any minute.

(One of the Chinese stocks in our Family Office portfolio is trading at only 2 times earnings. It was more when we recommended it. And if China blows up, it will go lower still. Perhaps they will give it away at the bottom.)

And more thoughts...

Meanwhile, Europe grows more troubled and more troubling. The Greeks want money. The Germans want austerity. The European Central Bank wants another bailout. Germany's finance minister says he'll support more money for the Greeks only if lenders agree to take a haircut first.

In the streets of Athens, demonstrations have become everyday occurrences. And the government, desperate to raise money, is said to be putting price tags on the Parthenon, the Acropolis, and several islands. "Discount!" "Going out of business!" "Inventory Reduction Sale!"

It is not our place to give advice, but we will give it anyway. It is the same advice we give to underwater homeowners.

It is obvious that Greece cannot work its way through this problem. It would have to increase GDP by 12% a year for three decades in order to "grow its way out of debt."

Since it cannot pay its debt honestly, it should at least default forthrightly. Stop sniveling and complaining. Own up to having erred.

Don't borrow more money, in other words; renege...walk away... Be of good cheer, knowing that lenders will suffer the losses they deserve.

Default and be happy.

*** America is so rich...and so wasteful...that it could probably cut its spending by half and most people would still be fat and sassy.

Here's a report from The Daily Mail in London:

The US is providing hundreds of millions of dollars of foreign aid to some of the world's richest countries - while at the same time borrowing billions back, according to report seen by Congress.

The Congressional Research Service released the report last month which shows that in 2010 the US handed out a total of $1.4bn to 16 foreign countries that held at least $10bn in Treasury securities.

Four countries in the world's top 10 richest received foreign aid last year with China receiving $27.2m, India $126.6m, Brazil $25m, and Russia $71.5m.

Mexico also received $316.7m and Egypt $255.7m.

And yet despite the massive outgoings in foreign aid, the receiving countries hold trillions of dollars in US Treasury bonds.

China is the largest holder with $1.1trillion as of March, according to the Treasury Department.

Brazil held $193.5bn, Russia $127.8bn, India $39.8bn, Mexico $28.1bn and Egypt had $15.3bn.

*** And here's another little item. As we keep saying, man is neither good nor bad, but subject to influence. And what's the real effect of modern communications technology? A report from Miller McCune.com:

From reality television to dumb-and-dumber films, contemporary entertainment often amounts to watching stupid people do stupid things. New research suggests such seemingly innocuous diversions should have their own rating: LYI.

As in: Watching this may Lower Your Intelligence.

A study from Austria published in the journal Media Psychology found students performed less well on a general-knowledge test if they had just read a short screenplay about an idiotic thug. This suggests stupidity may indeed be contagious - particularly if it is presented in narrative form.

"Narratives tend to make people 'walk in someone else's shoes,'" Appel notes. Since that experience can be temporarily transformative, you might want to make sure the characters you follow have IQs higher than their shoe size.

Regards,

Bill Bonner,
for The Daily Reckoning

Will China Housing Market Follow the U.S. In a Mortgage Bust?

By: Hans_Wagner

As the second largest global economy and one that is growing in the high single digits to low double digits, how China goes so goes the global recovery. A property boom is helping to fuel the Chinese economy. Some analysts claim many new Chinese property owners are encouraged to take out mortgages to buy a home that they can ill afford. Sound familiar? Is China following the U.S.’s example, issuing mortgages that they can cover? If this is true it will bring down the rapid growth of China and the rest of the world suffer. After all China is the economic engine for the global growth story.

Here ...

#China Exports Will Continue to Slow This Year

Here...

#US Bankrupting is The Goal!!/ Market Watch

 

By Brett Arends, MarketWatch

BOSTON (MarketWatch) — The International Monetary Fund has just dropped a bombshell, and nobody noticed.

For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China.

IMF sees China topping U.S. in 2016

According to the latest IMF official forecasts, China's economy will surpass that of America in real terms in 2016 — just five years from now. Brett Arends looks at the implications for the U.S. dollar and the Treasury market.

And it’s a lot closer than you may think.

According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.

Put that in your calendar.

It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power.

According to the IMF forecast, whomever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy.

Most people aren’t prepared for this. They aren’t even aware it’s that close. Listen to experts of various stripes, and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s.

But they’re miscounting. They’re only comparing the gross domestic products of the two countries using current exchange rates.

That’s a largely meaningless comparison in real terms. Exchange rates change quickly. And China’s exchange rates are phony. China artificially undervalues its currency, the renminbi, through massive intervention in the markets.

The comparison that really matters

The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies.

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China’s.

Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. But the outcome is scarcely in doubt.

This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s economic hegemony.”

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.

Victor Cha, senior adviser on Asian affairs at Washington’s Center for Strategic and International Studies, told me China’s neighbors in Asia are already waking up to the dangers. “The region is overwhelmingly looking to the U.S. in a way that it hasn’t done in the past,” he said. “They see the U.S. as a counterweight to China. They also see American hegemony over the last half-century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. They don’t see it as a benign hegemony.”

The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.

This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.

“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

The next chapter of the story is just beginning.

U.S. spending spree won’t work

What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun. See: Pentagon spending is budget blind spot .

It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t.

Equally to the point, here is what this means economically, and for investors.

Some years ago I was having lunch with the smartest investor I know, London-based hedge-fund manager Crispin Odey. He made the argument that markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, “paradigm” shifts — whether a rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now.

The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10-year Treasury bond is the “risk-free rate” on money. And so it has been for more than a century. But that’s all based on the Age of America.

No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old deutschemark. If it’s just the Greek drachma in drag ... not so much.

The last time the world’s dominant hegemon lost its ability to run things singlehandedly was early in the past century. That’s when the U.S. and Germany surpassed Great Britain. It didn’t turn out well.

Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for The Wall Street Journal.

China's inflation rises again in March to 5 %

FULL STORY 

China to Unveil Its Strategy to Rebalance Robust Economy

By MICHAEL WINES

BEIJING — The agendas for China’s two quasi legislatures this week include proposals to raise taxes on gas-guzzling cars, crack down on drunken driving and improve food safety, most of them predigested by the Communist Party’s leadership and destined for rote approval. About the only uncertainty involves the one topic that will get the most attention: the future of China’s roaring economy. 

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Economy the Focus as Chinese Legislatures Convene