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:
What 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:
It 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:
(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:
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.”