Bogus Economic Statistics - China About To Make History Again
Stock-Markets / Chinese Stock Market Aug 10, 2015 - 09:13 AM GMTBy: John_Rubino
Any discussion of China has to open with the now-widely-understood fact that the numbers it reports are not to be trusted. Knowing this makes it easy to dismiss claims of high and consistently-on-target GDP growth, for instance, as a combination of government-directed borrowing and spending, and simple fabrication.
But how to handle negative numbers? When a serial fabricator admits that things are bad and getting worse, that would seem to imply that someone at or near the top has concluded that either the facts can no longer be obscured or that there’s an advantage in creating negative expectations.
Whatever the purpose, the most recent batch of stories is both strange and scary. For example:
China’s stock crash is spurring a shakeout in shadow banks
Peak insanity: Chinese brokers now selling margin loan backed securities
Some thoughts
There’s a lot going on here: a stock market crash, banking crisis, corporate layoffs, slowing growth, deflation. And it’s a safe bet that the people in charge are unfamiliar and/or uncomfortable with the mechanisms that define markets, which makes the above trends even more confusing and threatening than they would be otherwise.
But most of it comes back to the strong dollar. Since China’s yuan is pegged to the greenback, when the latter rises so does the former. A soaring currency is always problematic, but it’s especially dangerous for an export-driven economy. So add China to the list of developing country victims of the end of US QE. Put another way, China’s massive post-2008 borrowing is analogous to those dollar “carry trade” loans incurred by Brazil, Thailand, et al, which have become increasingly burdensome as the dollar has risen. Put yet another way, the real taper tantrum is happening overseas rather than on Wall Street.
“Economists expect the central bank to cut rates by another 25 basis points this year, and further reduce the amount of deposits banks must hold as reserves by another 100 basis points, according to a Reuters poll last month.” Obviously that won’t help, and will be followed by either (much) more of the same or something different and more dramatic. Devaluing the yuan by adjusting or eliminating its dollar peg comes to mind, as does some kind of explicit “bazooka” QE program (though this is arguably already under way via equity market interventions). But who really knows?
Whatever it does, China’s next step will have to be commensurate with the magnitude of its recent malinvestment, which is to say gargantuan. After the fastest-ever rise from Third World to World Power, the biggest-ever debt binge, one of the biggest, most sudden equity bubbles and subsequent busts, China is about to make history at least one more time.
By John Rubino
Copyright 2015 © John Rubino - All Rights Reserved
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