China

China Already in Recession

The real Chinese economy has been in recession for two or three years.

The Chinese recession has been masked because of inaccurate financial reports from China. Economic data from the People’s Republic of China is unreliable for three reasons:

The first is that the Communist Party regime publishes false data in order to bolster its political position.  The published growth statistics are increasingly recognised by economists to be inaccurate.

Secondly, the Communist Party may not itself know with any degree of accuracy the economic growth – or decline – in the country. Regional and local party bosses are under pressure to report impressive economic growth figures.  They have an incentive to be creative with economic data, and to report false statistics.  Given the pervasive nature of corruption in China, and the propensity for Chinese businesses to maintain at least three sets of books (for the taxman, the shareholders and the owner respectively), official economic reports will always be incomplete and accurate.

Thirdly, most of the economic growth – or at least activity – has been in construction.

The building of vast numbers of factories and apartments, and giant infrastructure projects, has absorbed half of the worlds steel, cement and other materials for nearly two decades. Governors under pressure to report continuing growth are creating it artificially by undertaking vast building projects that no one actually wants. Cities are building new towns on a speculative basis, hoping for investors and home buyers.  However they are not coming. There are literally 75 million empty apartments  alone in China. The largest mall in the world, the South China Mall, remains empty ten years after being completed. Many Chinese cities possess a ghost suburb, of empty apartments.  There are ghost cities too, including Ordos, in Inner Mongolia.  Built at a cost of over $160 billion, it will never be finished and is likely to be reclaimed by the desert. Most of this extravagant and ultimately wasted expenditure is undertaken with borrowed funds.

This economic “growth” is illusory, and not an indication of real economic activity. Since so much building activity is debt-funded, and unproductive, the construction and related sectors should be excluded from statistics when determining real economic activity in China.  When construction is excluded, growth and GDP figures decline significantly.

World commodity prices have been heavily affected by Chinese consumption for over a decade. This is due largely to the unnecessary construction boom. However for the last two to three years commodity prices have plummeted.  This was the first sign that the construction boom was slowing.  The extent of the decline in commodity prices indicated a dramatic decline in orders and a falling off in new projects.  Projects currently underway are being completed, but the number of new projects are declining.  Until the current projects are completed the extent of the decline is not obvious. However there will soon be a dramatic decline in on-going construction.  It will be decades before the surplus housing, factory and commercial building will be occupied. In the meantime construction, property prices and commodities will all suffer an accelerating decline.

Recently Chinese sharemarkets have suffered from panic selling, as the boom markets start to bust.  Shareholders panic when they realise that the value of their investments are declining.  Up to $5 trillion in nominal value has been lost.

When the same thing begins to occur with the property market, the loss of notional wealth will be much more dramatic. Since residential apartment prices are overvalued by some 400%, a drastic correction is overdue. When this occurs some $15 trillion in nominal wealth will be lost.

It is not clear what the Chinese recession will mean for the world economy, but as it accelerates in China the stability of the largest Communist dictatorship may be affected.

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