REVEALED…..THE REAL REASON CHINA’S A BASKET CASE, AND THE REAL SIZE OF THE CLIENTELE THAT BENEFITS FROM THE SHADOW BANKING SYSTEM

%2shadowJust 200,000 fatties out of 7.3 billion human beings

Analysis by the McKinsey Global Institute earlier in 2015 showed debt in the Chinese economy had roughly quadrupled. China now has a debt-to-GDP ratio over twice that of Greece.

How did this happen? I wonder if, like me, around three years ago you suddenly found that the MSM was asking you to redefine China as a mega-debtor, having consistently told you for the fifteen years beforehand that China was an Asian Tiger-creditor likely to eat the US alive by 2030. Today The Slog provides all the numbers and timelines to show how the world is being pushed to disaster by just one thirty-seven thousandth of the world population….with the full support of the political class.

The world today – from climate via sexual peccadillo to money – is so complex that nobody (I believe) has a proper steer on what’s really going on. But when it comes to the state China’s in, there are some very clear pointers from past and present to see where it all went wrong. Needless to say, we shall be rounding up all the usual suspects in this analysis.

However, worse still are the portents for the future….and the ramifications of global conflict they suggest.

The Big Two Factors

These are – without much chance of serious debate – the collapse of western demand for Chinese products, and the liabilities that arose from largely internal Chinese banking activities.

The collapse in demand is encapsulated in the two following charts:

ChinaPM1chinaPMI.2What they show is that the financial banking collapse of 2008/09 had a catastrophic effect on western demand for Chinese products, but that by the start of 2010 confidence in all-singing-all-dancing QE was sufficient to get Chinese exports back on track….albeit at a level lower than the lowest point in 2005.

However, during the dire drop, clearly the ancients in Beijng were given a good talking-to by the young bankers in the area of how only financial banking could restore growth given the paper nature of the western paper tigers, and thus the only solution was to start shuffling lots of paper around. Because it was pretty much at this point that the dreaded ‘shadow banking’ sector began its exponential growth….such that, by 2012 and 2013, some confidence was returning to the manufacturing sector – investors having been tempted into Bourse investment growth potential based on….um, paper.

Not long after this (you will remember) Beijing was forced to embark on its very own QE…the excuse being to stimulate the economy, although as usual it was merely the first sign that something was going badly wrong with the Deregulated Bankers to the Rescue shtick.

But then, by late 2014, the banking crisis became the story in and of itself….and the second of the two charts above demonstrates how, from early Autumn 2014, confidence drained away from the manufacturing sector. In a fit of understandable and yet somehow risible panic, even before this the surviving cryogenic experiments in Beijing were encouraging people away from first property to then Bourse stocks investment. In the context of cheap money and asset bubbles, this made for some sense, then huge overvaluation, and then no sense at all. By the end of Chart 2 (less than three weeks ago) the cliff-face of indices began heading towards the figure of 47.8 we saw last week. This is but 10 points above the lowest-of-the-low we saw in 2009. The Shanghai Index is in freefall, and some not very Friedmanite external controls have been brought to bear upon a bear market with an increasingly bare arse.

A more qualitative overlay

If this account seems to some of our pro-neolib followers a little cavalier, the chart below shows the move awy from corporate to financial services (red) and Bourse (blue) investment as a share of China’s gdp for the year after March 2014:

chinagdpfinshareIt reads a bit like the UK economy since 1985 telescoped into 12 months on hallucinagenic steroids, but here comes another one to make the wide-awake among you want to go to sleep for a hundred years:

ChinagdpmakeupThis is a hum-dinger of chart, because better than most it reveals what a black lie the entire QE, Zirp and ‘new banking economy’ has been. Note:

(1) how despite massive investment in 2009, net exports go backwards into huge deficit, and domestic consumption makes barely a dent in that loss

(2) since 2010, Chinese exports have been net zero or in slight deficit

(3) since 2011, both domestic consumption and investment have slumped.

But will this soon sort itself out? Well, US growth is an equivocal sham, UK growth is an unequivocal scam, and the EU is a flatlining economic and fiscal disaster unlikely to consume so much as one Chinese takeaway. Which wouldn’t be so ineluctably bad were it not for these data showing how an ageing China is about to face the same welfare-provision meltdown as us:

Chinademsage

Some very disturbing conclusions

The outrageously idiotic Shadow Banking system so stunted western capitalism during 2008/9, it produced a fear in that hemisphere which immediately transferred itself to paranoia in China.

It is worth noting at this point, by the way, that the very same shadowy system of no use to 99.5% of humanity whatsoever has gone almost entirely unreformed since the near-meltdown of Autumn 2009.

Having totally f**ked up the West, however, this same troupe of 3-card-trick snake oil jugglers and clowns presented themselves in Beijing as the saviours of Chinese growth. Their achievement has been to transform China – in six years flat – from the world’s biggest creditor to the planet’s second most indebted country….without solving anything.

But the real Chinese business economy would still be hugely in credit were it not for the massive liabilities run up in the banking services sector. In fact, had China embarked in 2009 on FDR-style infrastructural investment and business R&D speculation, it would still be well in credit….and far better equipped to justify a position as a better build-quality low-cost supplier of export goods – as opposed to the lowest-cost crap exporter already losing ground to Asian competitors that it is today.

What and Who is this Shadow Banking Sector about?

Over the last 12 years, in order to clear up the leakage from toxic shadow banking, the world’s central banks have had to increase their balance sheets sevenfold from $3trillion to $21trillion as part of the process of buying up the junk the greed-scams ‘created’.

Shadow banks themselves, however, have felt no pain at all. They’re now estimated to have short term, portfolio and liquid assets under management of about $90 trillion.

But these merchant bank subsidiaries and Financial District banking firms, astonishingly, work largely on behalf of rich élite individuals – not pension funds or other conglomerates. And the total global size of this niche worldwide is estimated to be in the region of just 200,000 people.

In order to plough yet more money into the coffers of this minute proportion of humanity – one 37,000th of the total – these leeches have forced China, Argentina, Greece, Venezuela, and Ukraine into a non-stop struggle. Indeed, the BRICS as a whole are at their mercy when these lowlife destabilize asset prices volatility…and either depress or (more often) provoke a rapid rise in government bonds yields (Greece), or currency values (Venezuela, Argentina).

The key thing they “do” for this clientèle is directionalise stocks and then sell at the top, also creating artificial rises in junk bonds, real estate, foreign exchange, derivatives and so forth. Policies like Zirp (also introduced to save the lunatics) remove legal sources of investment income and thus encourage such manipulation as the only way clients can make a profit….on the profit they already made by screwing small investors, entrepreneurs, taxpayers, welfare recipients and the world’s poor.

Where do our political Establishments stand in this struggle between social utility and dysfunctional greed?

The answer, I’m afraid, is obvious: they stand and march at the side of the 0.003%.

Boris Johnson, London Mayor, March 2013:

“It makes no sense for us to attack the City of London with bonus caps or any other ill thought-out measure, because those bankers will go to Singapore or Hong Kong and we will be senselessly degrading one of the EU’s greatest commercial assets.”

This shower are a commercial asset?

George Osborne, UK Chancellor of the Exchequer, June 2006:

“Much of this [banking] regulation has been burdensome, complex and makes cross-border market penetration more difficult. This is exactly the wrong direction in which we should be heading and it threatens the global competitiveness of the City of London”.

Yes indeed George, their “cross-border penetration” has punctured every Treasury in the world.

Ben Bernanke, 15th June 2005:

“”With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

So, $21trillion later, nice one there Benny.
Mario Draghi, August 2nd 2012:
“[indebted] eurozone governments need to go to the EFSF; the ECB cannot replace governments….governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist….”
And let’s pretend that their difficulties had nothing to do with a community of psychopaths, of whom I am a leading light.
Ed Balls, June 14th 2006:
“According to the City of London Corporation our regulatory system is ranked as the best in the world, ahead of both New York and Frankfurt….I believe we are right to avoid prescriptive, heavy-handed regulation in Britain. Indeed, I believe that while it is Bank of England independence that is regularly cited as the Government’s most significant financial reform, the establishment of the FSA has been as important for Britain.”
And then eighteen months later, Northern Rock happened. Later, the Co-Op (Balls’s own sponsor as an MP) went down. Balls stabbed it in the front by facilitating a sale to hedge fund vultures; that is, after all, what hi brother is.
$$$$$$$$$$$$$€€€€€€€€€€€€€€€€€€€££££££££££
There’s no getting away from it: wherever you live in the West – and whoever’s “in power” – they will defend these carpet-bagging cum carpet-bombing moronic mobsters: no matter how blindingly obvious their crimes are, and how disastrously inevitable the end result is.
Forget this drivel about “changing the system from the inside”. It’s their system, not ours: we need another one designed to get rid of them, and work for us.

40 thoughts on “REVEALED…..THE REAL REASON CHINA’S A BASKET CASE, AND THE REAL SIZE OF THE CLIENTELE THAT BENEFITS FROM THE SHADOW BANKING SYSTEM

  1. I got an interesting reply to a direct question on twitter. I asked Frances Coppola ‘Can the current debt based fractional system be replaced with a system of sound money without hardship ?’ the answer came back – simply ‘No’

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  2. A beautiful piece, John, thank you.
    A peer reviewed paper on the network of Global Corporate Control:

    journals.plos.org/plosone/article?id=10.1371/journal.pone.0025995

    The top 50 most powerful corporations do nothing but shuffle paper money around.

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  3. We all will in the end have to face hardship,the question is do you still want to be enslaved at the end of it or free! & that is the choice that can’t be allowed to surface or get momentum for in the political world hence treason being brought against the Greek chap & possible Corbyn should he be elected has leader! (even though he’s never been near policy making so far)

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  4. @tg – ‘We all will in the end have to face hardship’. I agree, but I’m probably in the minority who values freedom enough to put up with considerable discomfort in order to achieve it. Unfortunately, the vast majority of people would probably sell their souls (if they haven’t already done so) to maintain some semblance of normality, even if it enslaves them in process. And they won’t take kindly to having their boat rocked by idiosyncratic / maverick / original thinkers who reaped the benefits of an education system that taught children to think, solve problems and question things as this will be percived as a threat, and VERY DANGEROUS to their survival.

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  5. I agree totally – we have a choice between hardship now or total collapse/anarchy/war sometime in the medium term. You can see that the oligarchy will not let the FRB illusion slip hence the machinations in Greece.

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  6. O/T but, on the face of it, here’s a classic example of how to make things worse and a frightening prospect of what my come:
    A play examining the motives of young Britons who become radicalised by the so-called Islamic State (IS) has been cancelled without warning.
    ‘Homegrown’, which looked at issues such as jihadi brides and attitudes towards Islam in the UK, was to involve 112 actors from the National Youth Theatre.
    Despite claims that the play was running ahead of schedule and that the entire writing and rehearsal process had been completely transparent, the decision was taken to close the show down.
    http://www.theguardian.com/uk-news/2015/aug/04/controversial-isis-related-play-cancelled-two-weeks-before-opening-night?CMP=share_btn_tw

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  7. “Not long after this (you will remember) Beijing was forced to embark on its very own QE…the excuse being to stimulate the ”

    I think its important to understand what QE is. It’s an asset swap where bonds are swapped for Govt Bonds (or other assets). It replaces one asset (reserves) with another one. My understanding is most of the QE reserves have been used to buy Govt bonds. But even if its used to buy other financial assets. So what unless its at an inflated price

    Shadow banking. It sound scary. It may not be necessary. But unless there is evidence of fraud then what is the issue. The sub prime was fraudulent. But it can be easily resolved. And most transaction have two sides. An asset and a liability side so they just cancel out.

    The real issue is the need for ongoing debt increases. And how best to achieve this (it is obvious). And what about China. I read some time back that China was heading for the wall as they have now introduced Western economic logic (aiming for Govt balanced budgets). Whereas this is exactly what is not needed especially as the West starts importing less and the Chinese continue to save. Lots of saving and less exports and not large enough Govt deficits = a depression. The Chinese Govt need to continue running deficits. Funding by CB reserves if need be. Invest massively to improve the infrastructure and living standards.

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  8. As I said before, their game, their rules and their ball. We don’t stand a chance without a radical shift in public perspective of the way things really are.
    And those that matter are going to make damn sure that that doesn’t occur, hence the spewing out of all the bollox to try dislodge Corbyn, the one man who, could, just maybe, be a fly in their ointment.

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  9. Sadly,so many of the Chinese elites’ children are sitting on the boards of international companies that are resident in China;nice to see the American elite disease has now infiltrated China with all its dreadful consequences for China and her people,

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  10. Completely true. The elite’s children are all educated at the top universities in America with graduate and professional degrees. They return as de facto Manchurian candidates acting for American and their families enrichment. I have seen it up close and it is a wonder to behold. Goldman Sachs, Morgan Stanley and the rest have bought and paid their way to success.

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  11. Like most people, I haven’t a clue as to what is going on in the real world.The People’s Republic of China says it is business as usual, despite the slump in the price of iron ore and copper, and shipping rates. As a contrarian investor, I am long Antofagasta (low cost copper, family controlled) and Renishaw (family controlled, high tech, etc, China exposure).Anyone heard from the man that saved the world and abolished the economic cycle?

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  12. Any contrarian investor might consider this for a jackpot around 2028 >
    Shell geologists believe that beneath Burger J—70 miles offshore and 800 miles from the Anchorage command center—lie up to 15 billion barrels of oil. An additional 11 billion barrels are thought to be buried due east under the Beaufort Sea. All told, Arctic waters cover about 13 percent of the world’s undiscovered petroleum, or enough to supply the U.S. for more than a decade, according to government estimates.

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  13. Two things to remember: The communist party still rule China and the chinese economy is largely made up of manufacturing to order for the Western Brand names, therefore the drop in manufacturing reflects the drop in orders from western consumers.

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  14. That $90TN is the marked to market sum of their assets. Not that cutting it down 75% is going to make them beggars. I’m thinking they are thinking they will still own an even a larger portion of everything even if the sum is much smaller but I don’t think they are thinking about the problem of keeping their heads, so to speak.

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  15. All major ‘western’ banks operate in China. China’s economy is now being indebted as the next field in the arable cycle. Next stop India………The Man says so. On a personal level, stay out of debt and live within means. Our current crop of 20-45 yr old’s in the UK do not know how to do this in our materialist world, most will feel pain in the next decade as profligacy catches up with them.

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  16. John I thought I would start my day on a lighter note…
    I caught a bit on TV yesterday!…
    Greg Dik being confronted about missing dosh at some child’s charity.
    He was Al fiasco, having a frothy kofi on the pavement …. He was in that shop so fast ! I thought he was morphing into that TV rodent he’d created some time back! It was the way he moved.
    …cant improve with words on the original visual impact!
    dofornow

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  17. Quite simple really instead of re-balancing the economy,you drive it of the end of the flat earth,game theory says this is illogical like fly planes into buildings so it won’t happen,but what if some decided driving economies of the edge of the world is quicker & easily more attainable than trying to convince fundamentalist that their wrong!

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  18. Another superb article Mr Ward. I have just finished reading Treasure Islands: Tax Havens and the Men Who Stole the World by Nicholas Shaxson. Should be compulsory reading for anyone attempting to decypher the statements of the charlatan high priests of the “Economics” pseudoscience.

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  19. @kfc – Totally agree. Forget the political tags (socialist, hard left, etc.) and listen instead to what Corbyn is actually advocating – bring the utilities and the railways back into public ownership (also a policy of the Greens), universal benefits (so that the better off who pay higher taxes also get something out of the system), increase in tax rate for high earners and a windfall tax on the banks. Give that list to most ordinary people and I’m sure that the majority would support it. I suspect the big problem with Corbyn is that he is not an establishment figure and probably can’t be bought (blackmailed).

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  20. Well, if he hasn’t been rogering anybody he shouldn’t, I doubt that the Security Services have much on him, therefore he can’t be ‘controlled’ which makes him a dangerous man in politics.

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  21. @RJ and add to the debt fuelled extravaganza? Unless a serious deposit is available, then no. Been watching the market over the past 4 years? High LTV mortgages now available. Portends house price deflation in 3, 2 ,1…….. Even less salubrious areas of the UK are experiencing damaging house price inflation. Remember 09-10? The next crash will be worse, much worse. On a personal level, mortgage gone – have overpaid dramatically over the past 5 years despite being stuck on a fixed rate. Foregone luxuries to achieve.

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  22. But where,exactly,are all these trillions?. Answer – 0’s &1’s on some computer’s hard disc.Somewhere.So when it all collapses & you can’t pay ANYTHING,just give’ém a usb stick with loads of fake electronic money on it.Works for them,should work for the rest of us.

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  23. depends what you mean by “fractional system” and “sound money”. For me both these terms are meaningless today.
    Our money today = bank credit. The Govts and banks money = central bank reserves (higher powered money). Both are financial assets. Both are always without exception backed by a financial liability = debt.

    NB Fractional banking no longer applies. All it meant was that bank credit has to be a % of cash or reserves held by a bank. But this lending restriction was largely ignored and finally dropped many years back. But it was still a debt based system.
    Sound money is a term that often means some link to gold. But money was never gold. Its a myth. Money has always been credit.

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  24. I hate to admit that the only kind of freedom we are ever likely to achieve, without the destruction of the current system, is in isolation from ‘normal’ society. The challenges that this poses to the vast majority of people, who live their lives needing to be told what to do, are far too much to bear even in terms of simple cost- let alone know how. The sad fact is that most people need to be led because they are not educated as to how to live independently or think critically- they are educated to be good, obedient workers. Freedom may simply become the right to starve to death alone.

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