The coming bust of China's credit bubble

I (and many others) have been writing for some time now that China has grown way too fast for it to be something real and sustainable.  Several years ago, Hugh Hendry toured China's biggest cities which had been popping out skyscrapers at an incredible rate for a decade.  His video showed one huge building after the next completely finished but sitting completely empty.  Such things are not possible if people are spending their own money because nobody wants to have hard earned cash tied up in a depreciating asset or one that has high monthly maintenance costs when it produces no monthly income.  Thus, when you see such malinvestment you immediately know that a credit bubble is taking place.  It is only through the ability to borrow money cheaply that speculators can put up buildings like that in the hopes that someday there will be demand for the office space (and housing and shopping malls...) at lease rates which make the whole thing economically viable.  Mish did another piece on the China bubble today where he quotes Nouriel Roubini on the matter.  If you think China is a good long term investment then his article and his links are all well worth your time.

I think the whole massive overbuilding game is not so accidental as it might appear.  If I put myself in the position of the Chinese government then it is actually not an unreasonable strategy given the big picture circumstances.  Look, they have to keep a bunch of people employed or the people will riot.  It's as simple as that.  Sure, you can just maintain a highly agrarian stance with many people living a hand to mouth existence as China has done historically but when the rest of the world is consuming resources as fast as it can, that is a losing strategy.  It means everyone else gets smarter and more capable while you are left in the dust.  It also means that at some point everyone else will have consumed all the resources and then they will come looking for more in your backyard.  Their over-consumption will have fueled the development of a highly technical military which you will not be able to repel.  They will justify everything they do in the name of their national security.  The movie, "Independence Day" comes to mind.  Perhaps another applicable analogy is two different strains of bacteria competing on a Petri dish.  Self control is a losing strategy when others are consuming as quickly as possible.  This is the plague that fiat currency and fractional reserve banking has wrought upon the world: you can't just do the right thing and survive.   You have to over-consume before the next guy does, or else.

So what do you do if you are the Chinese?  Well, they tried being the labor source for the US and Euroland and what they found out was that all they were getting in exchange for their hard labor was colored paper of rapidly depreciating value.  They knew the vendor financed export economy model was a scam but again, what are they going to do?   Chinese people do not have the money to consume the stuff they build (which in and of itself shows the absolute ridiculousness of the global fiat money system).

So China began building massively internally using its fake paper income from the west as collateral for internal loans.  Nobody would have lent them the kind of money they needed to do all this building without that collateral.   Now, if the Chinese government just did all of this building using their dollar based savings directly then the world would be flooded with dollars instead of them being re-invested back into US debt which takes them off the market and slows inflation of the dollar.  China does not want the dollar to inflate because its dollar based savings would evaporate; it would have worked a couple decades for the US for basically free as voluntary slave labor if the dollar hyperinflates.  So instead of Chinese government doing direct investment, it began doing internal investment using a level of temporary indirection in the debt (i.e. a debt shell game).  In other words, it learned from America's experience with Dot Bomb whereby lots of debt based spending was happening by corporations and banks but they were just a proxy for government spending because when they failed their bad debt ended up on the government anyway.

China's banks will eventually need to be bailed out because of massive over-lending and malinvestment (the use of the money to build cities and highways to nowhere).  The unsustainable debt they are taking on will be assumed by the Chinese government (something which now seems to be the recurring norm in the US anymore). At some point the debt Ponzi in China will collapse and everyone who has been riding the back of  China to prosperity (Australia, Canada as commodity exporters, heavy equipment builders like Caterpillar, etc.) will collapse with them.  It's all predictable and thus I have to assume its all preplanned in some form or fashion.  I can't stress enough how none of this could possibly be happening if we had an honest money supply.  Everything else is noise on a relative basis.  Until we fix the scam of fiat currency and fractional reserve lending we will remain on the same path as bacteria on a Petri dish.  We will rush to consume all we can in a very unproductive and unsustainable way until nothing is left and then we will all crash or we will all go to war to fight over whatever natural resources might remain.