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Canaries in Coalmine: China, Asia, not Participating in Euro Bailout Lovefest; Beginnings of China Credit, Real Estate Bust

Is China a canary in the coalmine of an impending global slowdown, or is China simply overloved as a beacon of growth as it was in 2008? I think it’s both.

China’s property and infrastructure bubbles are massive; that is for certain. Moreover, China’s biggest export trading partner is Europe, just as Europe is headed for numerous austerity programs.

While it’s doubtful the European austerity programs bring deficits down to where they are supposed to be, those programs will for a while cause a decline in European spending along with much social unrest.

Can China take a double whammy like this without overheating? I think not. And China will have to show things down, whether it wants to or not.

China Overheating, Tightening Coming

Please consider Hong Kong Stocks Fall as China Prices Prompt Tightening Concern

Hong Kong stocks fell as rising consumer inflation and housing prices in China stoked concern the country will act further to rein in its economy. The city’s developers pared losses after a government land sale.

“Domestic concerns are more important in terms of the policy measures coming out in China to cool things down,” said Binay Chandgothia, who oversees about $2.2 billion as chief investment officer at Principal Global Investors (Hong Kong). For Europe, “the question is the credibility of the billions of dollars of government debt that resides with European banks.”

“Domestic concerns are more important in terms of the policy measures coming out in China to cool things down,” said Binay Chandgothia, who oversees about $2.2 billion as chief investment officer at Principal Global Investors (Hong Kong). For Europe, “the question is the credibility of the billions of dollars of government debt that resides with European banks.”

“Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”

Chinese policy makers should focus on preventing excessive gains in asset prices and liquidity as Europe’s rescue package makes another global slump less likely, central bank adviser Li Daokui said in an interview yesterday. The increase in property prices across 70 cities was the most since data began in 2005, defying a government crackdown on speculation that intensified last month.

Cockamamie Theory

Pray tell how is China supposed to “focus on preventing excessive gains in asset prices”?

The idea is ludicrous. In general, Central banks can provide liquidity, they cannot dictate where that money goes, or if indeed it goes anywhere at all.

It is slightly different in China in that when the Central Banks says “Lend”, that is a command, not a suggestion and thus banks lend. However, the only realistic place that money can be lent is more housing, more infrastructure, or more manufacturing, none of which China remotely needs at the moment.

China’s Subprime Real Estate Lending

Meanwhile bad loans are piling up, just as they did in the US with subprime.

The moment China’s property bubble collapses (and it will), the bad loans on the books of China’s banks will be exposed for what they are, in spite of the widespread fallacious belief China’s banks are protected because China’s borrowers are putting more money down.

Europe’s Move Makes Global Slump More Likely

Also note Li Daokui’s statement “Europe’s rescue package makes another global slump less likely”. Once again I beg to differ. The bailout imposes some fiscal restraints on many countries. More importantly, the loans come at the expense of productive portions of the European economy for the misguided notion that the unproductive European countries can be bailed out.

Such policies are never good for long-term growth. All they provide is an short-term illusion that something good is happening. As soon as the stimulus is taken away, more debt remains than before.

Beginnings of China Credit Bust

Please consider China analyst sees beginnings of unfolding credit bust

China’s economy is teetering on the edge of a major slowdown, though it’s not a shakeout in the property market that’s about to spark the distress, according to a noted China strategist.

David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world’s third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge.

“We’ve got the beginnings of a credit-bubble collapse in China,” said Roche, predicting the economy will likely cool from its stellar double-digit growth rate to a 6% annual expansion as a result.

The emerging picture is one of a substantial contraction in credit growth and infrastructure expenditure, he says.

The shrinkage is grim news for an economy heavily dependent on such outlays. China managed to escape recession during the global crisis mainly because of bridges, railways and other infrastructure-project spending, estimated to have accounted for about 90% of economic growth last year, according to Roche.

About 85% of the funding for these projects was arranged by local government financing vehicles “borrowing money they can never repay” from state-owned banks, says Roche. Nearly 3 trillion yuan ($440 billion) of the 11 trillion yuan extended to these entities has been wasted or stolen, he estimated.

“What do you think a bunch of ex-Communist Party officials in Chinese banks … know about growing credit at 30% a year?” he said.

China’s Local Government Borrowing Problem

Hugo Restall at WSJ Interviews Victor Shih of Northwestern University regarding China’s Local Government Borrowing Problem

China’s Economy May Crash in Next 12 Months

Please consider Marc Faber on Bloomberg: China’s Economy May Crash in Next 12 Months

$SSEC – Shanghai Weekly

Finally, I leave you with the following charts I consider to be a canary in the coalmine.

Shanghai Daily

China did not participate in the Euro bailout at all.

Shanghai Weekly

Note that the Shanghai Index is down for the year, and the above chart is technically very bearish. The SSEC may have a date once again with 2,000 if not lower.

The “China Story” that most of the world is in love with is nothing more than excess credit finding a home in malinvestments just as happened in the US.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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