http://albertpeia.com/theresnoengineforglobalgrowth.htm
‘I’ve been skeptical about China for some time. While
I do believe China has made some serious economic progress as a country, I
remain thoroughly convinced that ultimately its economic “miracle” will be much
like that of the Soviet Union powerhouse in the late 20s: apparently awesome in
scope at the time, but a total fraud after the fact.
For one thing, China remains a control
economy. There is no history that I know of in which a controlled economy
works. The primary drivers of macro-economic growth are innovation,
technological adaptation, and increased efficiency.
In order to have this, you need to have
rule of law, strong education, openness to trade, and quality institutions to
establish credibility and uphold the rule of law.
China is big on trade and education, but
sorely lacking on quality institutions and rule of law. Just a few of the more
glaring items include:
1) China’s obviously
fraudulent economic data.
2) Rampant corruption of
Chinese Government officials (no rule of law).
3) A lack of individual
rights for Chinese citizens (again no rule of law)
4) A total lack of credible
institutions to maintain accounting standards, quality control, protection of
Intellectual Property, and the like.
One could easily argue that the US
suffers from some of these issues (indeed, every country in the world does).
However, the US remains, for the most part, a dynamic and open economy with
semi-credible institutions and which generally upholds the rule of law (I
remain convinced that those who committed fraud and broke the law leading up to
the Financial Crisis and since then will eventually be brought to justice).
China on the other hand experiences
corruption on a scale that is truly staggering to understand. More importantly,
the corruption is deeply intertwined with the economic growth story itself.
Consider the following story I recently
came across.
The Chinese Government wanted to build a
bridge in one of its many rural provinces. However, the retired government
officials (who happened to reside in the best real estate over looking the area
in question) complained that doing this would block their view. So the
Government… built a far more expensive tunnel instead. It boosted GDP, kept the
officials happy, but made absolutely no sense what-so-ever.
A few other items of note:
1) In 2010 alone, 146,000
cases of corruption were launched in China (that’s 400 PER DAY).
2) How much these officials
stole is unknown. But… of the 14 cases that were actually reported in
the Chinese media, the average amount stolen was 18 MILLION RMB (for
perspective, the average college graduate in China earns 2,500 RMB per year).
Now, no one knows how much money the
146,000 officials stole in 2010, but one report that was verified
stated that just 29 officials were caught stealing 647.18 million RMB that
year. Between that figure and the average theft of 18 million RMB the media
reports, it’s safe to assume that the 146,000 officials engaged in corruption
probably stole a staggering amount of loot.
How staggering? Well let’s look to
history:
Between 1991-2011, it’s estimated that
between 16,000-18,000 Chinese officials fled China taking 800 BILLION
RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP
was just 2.1 trillion RMB in 1991.
With this kind of insane corruption
combined with a desire to maintain ridiculous GDP numbers at all costs, quality
goes right out the window. Case in point, it’s estimated that on average bribes
comprise 5-10% of a given project’s costs in China today.
Let me say that again… if you are
proposing a construction project in China, on average you’ll need to allocate
5-10% of your costs towards bribing officials.
Small wonder then that many of the
“projects” behind China’s growth “miracle” are falling to pieces… literally.
Collapse of New Bridge Underscores
Worries About China Infrastructure
One of the longest bridges in northern
China collapsed on Friday, just nine months after it opened, setting
off a storm of criticism from Chinese Internet users and underscoring questions
about the quality of construction in the country’s rapid expansion of its
infrastructure.
A nearly 330-foot-long section of a ramp
of the eight-lane Yangmingtan Bridge in the city of Harbin dropped 100 feet to
the ground. Four trucks plummeted with it, resulting in three deaths and five
injuries.
The 9.6-mile bridge is one of three built
over the Songhua River in that area in the past four years. China’s
economic stimulus program in 2009 and 2010 helped the country avoid most of the
effects of the global economic downturn, but involved incurring heavy debt to
pay for the rapid construction of new bridges, highways and high-speed rail
lines all over the country.
Questions about the materials used during
the construction and whether the projects were properly engineered have been
the subject of national debate ever since a high-speed train plowed
into the back of a stopped train on the same track on July 23 last year in the
eastern city of Wenzhou. The crash killed 40 people and injured 191; a
subsequent investigation blamed in particular flaws in the design of the
signaling equipment.
True, the US suffered a bridge collapse a
few years back, but in China these kinds of disasters are far more commonplace
than you would imagine.
Spate of bridge collapses trouble Chinese
netizens
After three large bridges collapse
in a single month, Chinese internet users say “I told you so”.
A complete section of the Wuyi mountain
bridge in Fujian Province collapsed on July 15, killing a bus driver and
injuring 22 bus passengers. The following day, gaps appeared in the middle
section of the third Qianjiang River Bridge in Hangzhou, injuring a truck
driver…
All three bridges were built in the
mid-to-late 1990s. The Qianjiang bridge in Hangzhou was refurbished in 2005,
but minutes from a meeting of the local transportation bureau showed that an
incorrect ratio of sand to concrete was used in the maintenance, according to
the China Daily newspaper.
Internet users predicted the collapse of
the Qianjiang bridge several years ago. As early as 2007, posts on popular
internet forum Tianya pointed out that the ratio of sand to concrete used to
build the bridge was incorrect, according to the Beijing News. Other posts to
the forum pointed out that the bridge was built by the same company responsible
for a collapsed bridge in Hunan province, and advised drivers to avoid crossing
the bridge.
Low quality infrastructure may be caused
by corruption amongst officials responsible for overseeing construction
projects. The China Daily reports that Zhao Zhanqi, an official
responsible for the Qianjiang bridge project, was sentence to life in jail in
2007 for taking over 6 million yuan in bribes during the bidding for the bridge
project and during its construction.
The world’s longest ocean bridge,
spanning 23 miles, opened in Qingdao, Shandong province last month. Chinese
internet users soon complained about the rushed construction of the bridge,
after pictures of easily loosened bolts and incomplete safety rails along the
bridge were posted online. Last year a bridge in Henan province collapsed,
killing 37 people.
The frequency of bridge collapses in
China leads to an attitude of cynicism among some sections of the public. “If
the bridges didn’t collapse, how else could we rebuild them and boost our
GDP?”, wrote one commentator on Chinese news website Caixin.
http://asiancorrespondent.com/60253/shoddy-bridges-trouble-chinese-netizens/
For those of you who glossed over that
article, the key point is this: three major bridges collapsed in a single
month in China. The reason? Shoddy construction courtesy of bribed
officials.
My point with all of this is that the
China growth story has been dramatically overhyped in the Western media. So
with that in mind, we have to consider what impact this realization would have
on the capital markets.
Put another way, imagine if the world
found out that China’s growth and recovery post 2008 were largely based on
fraudulent data and garbage development projects fueled by easy money and
rampant corruption on the part of Chinese officials?
Imagine a world in which the China
“miracle” turns out to be the China “lie”? The bulls and those desperate to
claim that the world is in great shape would lose one of, if not the
key pillars of their a growth rgument.
Indeed, by some measures China is
considered the engine for the post-2008 recovery. So if this engine turns out
to be not only sputtering, but broken…
China’s steel mills braced for slowdown
Chinese steel traders are short on good
news these days. Prices for steel are falling, demand is poor, loans are hard
to come by, and no relief is in sight.
“There is just no demand,” says one
trader in the town of Tangshan. “It’s much worse than [the last downturn] in
2008. In 2008 at least you had buyers talking to you. Not any more.”
The collapse of China’s steel market has
reverberated around the world: benchmark prices for iron ore, a key steelmaking
ingredient, have dropped to three-year lows of $89 a tonne, down 24 per cent in
the past month alone. China accounts for about 60 per cent of global imports of
iron ore, a market worth more than $100bn annually worldwide and one that is
essential for the profits of global mining houses such as BHP Billiton, Rio
Tinto and Vale of Brazil.
http://www.ft.com/cms/s/0/0db84534-f691-11e1-9dff-00144feabdc0.html#ixzz25cn4xBrh
So… unlike in 2008, steel traders in
China find people are not even talking to them.
We see similar signs of a collapse in
China in the form of iron ore prices, retail sales, oil demand, and on and on.
My point with all of this is that China
is no longer going to be an engine for economic growth. The reason stocks are
not showing this (at least in the US, in China the market is on the verge of
breaking a MAJOR trendline), is because of the Fed’s money printing.
Indeed, this is something we all
need to be extremely worried about… because stagflation becomes worse
not better with money printing… and both the Fed and the ECB have gone “all in”
to prop the markets up.
This is just one example of the slew of
Unintended Consequences we’re going to be facing as a result of the Fed’s
actions. I’ve detailed several more (all of them far worse than this) in my
latest issue of Private
Wealth Advisory,
published just last week.
I’ve also detailed four special inflation
investments designed the profit from the Fed’s inflationary monetary policies.
These are unique investments that will outperform even Gold and Silver as
inflation takes off…
Case in point, two of them are up 8% and
10% this week alone. And I expect all of them to be much higher in the coming
months.
To find out what they are… and take
action to prepare yourself and your portfolio to face the coming Inflationary
Storm, I highly recommend taking out a subscription to my Private
Wealth Advisory
newsletter.
To learn more about Private
Wealth Advisory and
find out more about our Special Inflation Portfolio comprised of extraordinary
inflation hedges that 99% of investors don’t even know about…
Phoenix Capital Research’