Southern Bread

I’ve had my reservations about believing the China hype for a long time. We’re constantly told that China is the next U.S., and that they will own the world before long unless we do something about it. Even people that I really respect are convinced that China is on the fast train to economic global dominance. But, I just can’t buy into it. Don’t get me wrong. I do believe that the Chinese are doing some things right, like beefing up their commodity holdings and investing in mineral-rich areas of the world, like Africa. But, even those things have caveats to them.

For instance, when people say that “China” is doing something, they mean the Chinese government itself is doing it. Sure, they may use front companies to actually strike the deal, but it’s the government that is directing it all and funding it. So, it’s not some truly private Chinese company that is investing in African mining interests, it’s the national Chinese government that’s doing it, with confiscated money from it’s citizens. That can’t last for the long term. It may seem like a really good move for someone to invest in more commodity reserves such as food and metals, but as an aggregate investment by a government, it’s probably mostly wasteful. So, the first problem with the Chinese economy is that it’s not a free market. It’s a tightly controlled communist system with minimal private property rights. Those types of systems don’t endure.

The second problem is China’s currency. It’s just as fiat as any other paper currency, but it’s even more manipulated than most. For years, China has pegged the Yuan to the U.S. dollar in order to keep their exports artificially low priced. That means that every time we inflate, they inflate. Every time we deflate (which is never), they deflate. This would be bad enough if they were simply a clone of the U.S. in general, like Japan. But, having to bear all of the inefficiencies of being a communist state already, it makes their currency even that much more worthless.

Thirdly, China has very limited natural resources of it’s own. Even water is at a premium in Northern China. They are a net importer of natural resources. This is why they have invested so heavily into places like Africa to make long-term deals. On it’s face, their plan looks brilliant. They print money in order to buy our worthless paper debt in return for a massive trade imbalance, which they use to fund the purchasing of natural resources in Africa and the Middle-East. But, as happens so often, things on the outside of a command and control economy look much rosier than they actually are. Everybody was worried in the 70′s about Russian imperialism. Look what happened. Their economy went from looking awesome to being exposed as an absolute train-wreck.

With all of this in mind, I saw an article today where Marc Faber and some other investors are voicing their belief that the Chinese economy is headed for a crash in the next 9 to 12 months:

“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.

The government has banned loans for third homes and raised mortgage rates and down-payment requirements for second-home purchases. Prices rose 11.7 percent across 70 cities in March from a year earlier, the most since data began in 2005.

The government has stopped short of raising interest rates to contain property prices. Within an hour of the central bank announcement on reserve ratios, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.

http://www.bloomberg.com/apps/news?pid=20601010&sid=aMbfBKW.uKn4

I don’t make predictions about stuff like this, so I can’t speculate on when any type of correction in China’s economy will occur. But, I can say that I do fully believe that the China that the media and investment communities have been so high on for so long now is probably fake. Communist economies always look great from the outside because of their crazy GDP numbers and high profile money moves, but they are almost always rotten on the inside. China is no different. And, when they do crash, you can be sure that civil unrest will follow suit.