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Is China Next?
And when I talk with Emil Prelic, our new Managing Editor at our sister company, Absolute Rights, he tells me stories of his homeland, the former Yugoslavia, and its collapse that are almost inconceivable.
“Americans,” he told me, “do not know real pain.”
Maybe he’s right.
And, I hope that he stays right; but I’m not so sure about that.
But what I am pretty sure about is that, contrary to what the mainstream media says, China will not be the one nation to “save the world” from financial collapse.
But wait, isn’t China the one nation that can?
Isn’t Europe begging at their door to rescue them?
That is the popular conception; but it is one of the biggest lies of the financial world.
China will not be able to save the world…
In fact, I doubt that it will be able to save itself.
China is Greece
I know that China is a manufacturing giant—but it is a fragile giant, with more going against it than for it.
For one, China is a one party state. This is a huge problem because it makes a nation brittle.
Think about the old USSR; a one party state—totalitarian and inefficient, without the ability to adapt to changing times…
And unable to feed itself, or even raise the money to continue to defend its interests…
By 1989, the USSR was ideologically, financially, and morally bankrupt, but kept up appearances for another couple of years…
Because in a one party state system that oppresses its people, maintaining appearances is an integral part of keep “legitimacy of rule” within the party.
Gorbachev tried to “open” the system and the system fell apart in his hands…
Don’t think China isn’t thinking about that today.
Because today, China, in its race to modernize and appear as wealthy as the West, is doing precisely what the Europeans and the US have done…
Which is build their economy on debt that is really just a house of cards; un-payable and ultimately, unsustainable.
This is what Greece has done; and it is what China has done also.
But don’t take my word for it…
Professor Larry Lang, chair of the finance department at the Chinese University of Hong Kong said last month that China is nearly bankrupt—and that "every province in China is Greece."
The warning signs are all there if you know where to look.
For instance, as noted above, even though the US is heavily indebted to China, (and no one believes that the US will ever really pay it off), China’s internal debt among its provinces and state-owned businesses is much higher than acknowledged by the Chinese government.
The “official number” is $2.5 trillion, but Lang asserts that the fraud and hidden debt of state-owned businesses is really $5.5 trillion.
The interest payments on that debt are about $2 trillion a year and cannot be paid much longer.
Euro-Crisis Will Sink China
In fact, the debt crisis in Europe is causing a contraction in the trade, lowering revenues to China. This will trigger the collapse of the China’s state-owned businesses.
Another area is the excess capacity in the Chinese economy. That is, China’s domestic market is maybe 33% of total capacity.
China relies upon foreign investment and export for its economy to be sustained. Its internal market cannot sustain its economy.
In fact, a recent report says that China’s manufacturing sector is lowest in 32 months; and as of July 2011, China’s economy was already in recession.
A third area of great weakness is China’s inability to control its own currency and rate of inflation. The “official” rate is 6.2%, but this is a charade of currency manipulation…realistic estimates put the inflation rate at about 16%.
How is this false inflation maintained?
Simple, you just put out false numbers. This fraud is rank throughout China, be it in state-owned enterprises, balance sheets of Chinese companies listed on US stock exchanges, or “official” economic numbers.
Fraud is a part of keeping appearances for the sake of legitimacy. It allows the leaders of the Communist Party to say: “See how well we are running the country. Our way is the best way.”
This fraud game is a big part of China big growth in GDP. For example, in July, China’s Purchasing Managers Index—the statistic that measures the health of the manufacturing sector, dropped to just over 50%.
This indicates a contraction of the economy. Yet China’s official growth in GDP is 9%.
How can this be?
Again, doesn’t the domestic market make up only about 33% of GDP?
And isn’t the euroland economy, China’s biggest trading partner, contracting?
Where is all the demand coming from to justify 9% annual growth?
Rise of Ghost Cities
A huge part China’s “9% annual growth GDP” is due to the construction of entire “ghost cities” where whole metropolises are built, including high rise office buildings, apartments, public transportation, shopping malls, schools, hospitals…
In fact, there are 64 million vacant luxury apartments in China right now. That is twice the number of apartments in the United Kingdom.
And no one lives in them. No one.
In 2010, China’s state-sponsored projects comprised 70% of total GDP. Imagine, building whole cities where no one lives to keep your economy going.
How is it of all this paid for?
Where is the revenue?
That is the question.
Part of the revenue comes from an unrealistically high corporate tax rate of 70% earnings. This rate stifles innovation and is cannibalistic in effect.
High taxes on companies that are funded with debt that cannot be paid back to build cities that no one will live in. It’s a charade of the highest order.
Also, individual tax rates are as high as 81%.
All of these factors mean that China is a house of cards. And with the great levels of rural emigration and forced relocation into the cities, there is great levels of dissatisfaction amongst the population.
China is close to massive social and economic crisis and cannot depend upon the US and the European markets to provide demand for what China makes.
In fact, that demand is drying up fast as economies look inward to provide jobs and address their own financial woes.
The reality is that China’s fuse is already lit…
Like the USSR before it, it is financially, morally, and politically bankrupt…
And it is about to explode.
And those are…The Gorrie Details.