China Is More Fragile than You Realize

By Kevin Massengill

This post China Is More Fragile than You Realize appeared first on Daily Reckoning.

As the headlines about North Korean missile tests and tensions in the South China Sea break, it is important to remember that countries are often less stable and powerful than they appear.

China is no exception.

It is a mistake to refer to them as unitary actors. International crises are often the result of domestic actors who may view external conflict for their own political positioning against their domestic political rivals.

Because of these contending factions, governments can lose their legitimacy and vanish overnight. That fear of losing domestic legitimacy is a major driver of any government’s decision making.

China is faced with a constant need to demonstrate political legitimacy and a divided political leadership with different agendas. The Chinese leadership is also faced with the tectonic pressures of a potential financial collapse and growing regional and international reaction to their military expansion into the South China Sea.

China’s economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces existential risk if they stumble. Given the systemic problems inherent in trying to run an economy in the absence of the accurate price signals only free markets provide (a problem for both Chinese socialism and the West’s corrupt crony markets), their challenges are worsening every day.

Malinvestments the size of ghost cities are not lost on the world’s central bankers who fear a systemic collapse of China’s economy, nor on the brilliant investors who are betting on China’s collapse like they bet against the corrupt banking products in the U.S. housing bubble.

Before the 2008 financial crisis, the Chinese debt-to-GDP ratio was 147%; now, it is at about 250%. Quietly, the Chinese leadership has begun to lower growth expectations but even those numbers should be taken with skepticism.

The methodology used to calculate their GDP figures is not publicly known but uses economic data that can be manipulated for sake of appearances.

Declining growth impacts China’s financial market as well. Local banks are struggling with non-performing debt rapidly increasing. Non-bank financial institutions referred to as the “shadow banking system” are spreading, with little regulation or recognition of the risks.

The government’s attempts to better regulate the system is stymied by local corruption where exaggerated assets and little documentation mask a wave of malinvestments. Like the appearance of no-doc “liar” loans in the U.S. in 2004-2006, the entire shadow banking system is signalling risk of systemic collapse.

Another source of malinvestment is the real estate market. Commercial real estate bubbles are breathtaking and residential real estate values have begun to fall. This seriously threatens social unrest as many Chinese families have put their life savings into real estate believing well intended but nonsensical government assurances of support to an ever increasing housing market.

As is typical with most countries, the Chinese government tries to mask the ravages of inflation by adjusting their public measurement downwards. Doing so conceals the impact it has on households. But …read more

Source:: Daily Reckoning feed

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