China may crumble too

As Passport noted a few months ago in our podcast conversation, the Chinese economy is nowhere near as strong as it looks from the outside.

Stratfor has seen anecdotes, from problems with trade credits to issues related to the real estate sector, suggesting that the image of China being insulated from the global crisis is in part a fabrication by the Chinese government. For this reason, we believe China bears closer inspection.

The Oct. 31 announcement by the PBoC is the first official acknowledgment that China could be facing a domestic credit crunch. The bank’s predictions suggest not only that real estate prices are dropping drastically because of falling demand but also that the effect on real estate companies, especially in urban areas, is now amounting to tightened capital flows. Moreover, the PBoC warned that the situation poses “a relatively large risk” to the commercial banks that have made loans to the construction and development companies because these companies use property as collateral and their collateral is now losing value. Anywhere from 20 percent to 40 percent of the total loans granted by these commercial banks have been devoted to the real estate sector, according to the PBoC.

The common assumption has been that China has “room” to grow and will be the beneficiary of any U.S. retrenchment on the world scene. But, since the Chinese government doesn’t allow its citizens to effectively save, much of its investment has been based on the same fraudulent debt basis that America’s was. Also, its cheap labor is far from limitless because production also requires capital to take advantage of that labor.

I’ve always been skeptical that a centrally-directed economy could possibly function as effectively as China’s is supposed to have run. I also know from my contacts in the financial industry that the reason they invest in the West is because the banking and finance systems are very unreliable. So, this may not be the Chinese century any more than the 1990’s were the Japanese decade.