The Chinese financial system, along with the rest of the emerging market, exist as an extension of "the world is flat monetary policy" on a scale never seen before. It is equally a giant leverage play on the last remaining resources for a population that has overproduced its stay.
The financial blog Zerohedge.com recently presented a summary of a BBC program featuring a report from Robert Peston, who traveled to China to investigate how the mighty economic giant could actually be in serious trouble.
We've excerpted and commented below...
"China is now the second largest economy in the world and for the last 30 years China's economy has been growing at an astonishing rate, wowing the world, as spending and investment has been undertaken on a scale never seen before in human history - 30 new airports, 26,000 miles of motorways and a new skyscraper every five days have been built in China in the last five years. It is all eerily reminiscent of what happened in the West... the vast majority of it has been built on credit."
Credit equals fiat or currency backed by faith. It is held up by law and force by proxy or by fiat. And while this currency can be created at the will of issuing authorities, it is readily exchangeable and/or replaced by another of the same quality or nature. While exchange rates give rise to the perception of relative value, and massive trade arbitrages the differences, in the end it is all an illusion hanging by a thread of confidence. This confidence, by definition, is unstable and obviously unsustainable.
"This has now left the Chinese economy with huge debts and questions over whether much of the money can ever be paid back (spoiler alert: it can't and it won't)".
Faith is pure emotion. Emotions rise and fall with the tides and the winds of change. It is just a matter of time before the tipping point arrives, driving the masses toward a kind of fiat agnosticism.
"There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years."
They will print for the sake of the financial system, an entity that could be a part of the economic engine but has morphed into THE economic system. Again, this vast financial cancer that feeds from the bottomless trough of fiat is universal. The illusion is that there is a separation between East and West when there is in fact only one, making the next world war a civil war that enriches those closest to the printing press.
"The ‘eerie resemblances” - as Soros previously noted - to the US in 2008 have profound consequences for China and the world. Nowhere is that more dangerously exposed (just as in the U.S.) than in the Chinese shadow banking sector as explained above".
"Of course, the situation has become critical now as reform-imposed credit crunch is rapidly spreading up the food chain, proving that China has no painless way out and can only stoke the fire more in their already burning house..."
Sadly, there is no sinister evil at the heart of this. Those who have risen to power and influence on this latest abuse of money have done so without reflection or inspection of their beliefs - or skin in the game. Their school has ultimately crystallized into a zealotry many orders of magnitude removed from the seed that originally informed them. They are as oblivious to the inherent fragility in their policy as Keynes was to 19th century monetary history.
"January's (surging loan and liquidity) data was simply the final exclamation mark in a decade-long series in which China's prosperity has been simply the result of an exponentially increasing amount of loan and liquidity creation by the Chinese semi-national and government backstopped financial system".
Sound familiar? Serial bailouts too big to fail and regulatory capture; all a part of the natural course that leads to the bottom and sadly, destroys the capacity to create the organic growth desperately needed and morally imperative for the world's decedents.
It may not be that the planet cannot physically support the world’s population. It is the misallocation of capital and or savings denominated in a false currency fungible. This has created massive disconnects and allowed systems to evolve and become fragilized to the point of brittleness.
"Here's the problem: One can't put the January lending surge aside, as it came at a time when for the second time in six months the PBOC tried to taper, only to be forced to not only bail out its money markets, but is on the verge of a bankruptcy tsunami involving its shadow banking products, the first of which it also bailed out despite repeated warnings. This time it means business and would let it die."
And now they've had two technical defaults over the last couple of weeks. One small - the other not so much.
To the surprise of many, they have papered over them, bailed them out - much like what has been done in the West.
Again, it is all very connected. Fiat is fungible. The emerging markets have simply taken the other side of the massive dollar export trade.
The world will continue its printing experiment and we may look like the cleanest shirt for a while - as long as confidence and brainwashing can hold.
It’s all or nothing; there are two options from here and more and more are waking up to it every day. They keep printing more money at a faster and faster pace until it comes unglued and crashes into the ground. Or they stop printing money and the whole thing comes unglued and crashes into the ground.
When the levy breaks, prices will become out of reach almost instantly. Buying precious metal bullion now is a cheap option with a very low premium.