The China Equation

Includes: CAF, EWH, FXI, GXC, PGJ
by: Jeff Nielson

In my writing, I frequently focus on the U.S. “propaganda machine”: the corporate-media oligopoly which poisons most of our “news” with a slant and “spin” which gets more absurd by the day. However (until now), I have been completely silent with respect to the use of propaganda by China’s government.

In defense of this omission, I point to the dramatically different intent of the U.S.-based propaganda campaign, versus that of China’s government. The U.S. government (or, rather, the banking Oligarchs which pull its strings) are attempting to prop-up the U.S. bond-bubble, prop-up the equities market bubble, and now must deal with the bursting of the second U.S. housing bubble.

In seeking to wallpaper over its insolvency, soaring inflation, massive unemployment, and hollowed-out economy, the U.S. government deceives markets and investors with a mountain of statistical chicanery. This saturation-level babble becomes increasingly absurd, as there is a need to tell larger and larger lies, to hide a rapidly deteriorating economic collapse.

Investors, and Americans themselves are being duped into keeping their wealth tied-up in these grossly overvalued asset-classes, as (like all Ponzi-schemes) a loss of “confidence” will cause this house-of-cards to collapse.

Across an ocean, the government of China stands as almost the diametric opposite of the U.S., at least in economic terms. China’s “problem” is an economic juggernaut whose management is not unlike bull-riding at a rodeo. As long as China’s government can remain on top of the bull, it will take China’s economy to where it wants to go – in a hurry. However, the insane money-printing of Western bankers (in general), and U.S. bankers in particular, combined with exponentially soaring debts and deficits in many economies is making the task of China’s government much more difficult – like goading the “bull” with a hot, branding-iron.

The problem is that the near-zero interest rates which are at the root of this explosive money-printing are extremely inflationary, and (as we have already seen) are like “rocket fuel” when it comes to generating asset-bubbles. With the strongest economy, vast savings, and still under-developed markets, China is inevitably a destination for much of this “easy money” – whether it be domestic consumption, or foreign investment.

Unlike Western governments, China’s government has been endeavouring to act responsibly. While the U.S. financial sector came crashing down in 2007 due to hopelessly corrupt regulators allowing ultra-greedy bankers to leverage the entire financial system at an unbelievable 30:1 level, China’s government raised bank capital requirements five times in that year alone.

Similarly, as Western governments continue to try to goad their debt-leveraged economies into anemic growth through reckless monetary policy, China’s government announces new measures on almost a weekly basis to “pull in the reins” of its own economy – to avoid the problems which Western governments seem dead-set on creating.

As usual, the mainstream media is hopelessly confused. This is demonstrated with the almost perfect split between the “China bashers” who insist that government restraint will cause this juggernaut to suddenly grind to a halt, and the “China bubble” Chicken-Littles, who (once a week) proclaim to the world that this “China bubble” or that “China bubble” is ready to blow.

Neither group of these binary, brain-dead talking-heads is capable of grasping the possibility that (being in the strongest position) China’s government might successfully navigate the rough waters which threaten to cap-size the much less-seaworthy “vessels” of the West. Adding to media confusion, China’s government has not only avoided contradicting the bubble-phobic Chicken-Littles, but it has allowed various talking-heads of its own to “suggest” that there could be bubbles forming in various Chinese markets.

To refer to this situation as “ironic” would be the epitome of understatement. While the U.S. propaganda-machine attempts to seduce as many chumps as possible into ploughing more money into its own asset-bubbles, we have Chinese disinformation aimed at keeping investors away from markets which have not yet formed bubbles.

In a previous, four-part series, I went into great detail about defining and recognizing “asset bubbles”. I pointed out that all asset-bubbles required two components: grossly over-priced assets and large amounts of leveraged debt (which is still absent in China’s markets).

I can now go further, and make a (rather self-evident) assertion: when a government is openly warning investors about the “risk of bubbles”, as China’s government is doing, then it greatly reduces the possibility of a bubble: where over-extended investors are surprised when a market suddenly turns lower. Conversely, when you have a debt-ridden, easy-money government continually broadcasting the message “don’t worry – be happy” to investors, while several markets simultaneously sit at absurd and dangerous valuations, then that is where investors should be worried about “bubbles”.

I submit to readers that with most of the mainstream media having demonstrated their incompetence (on multiple occasions) that the one “fact” we can seize upon in their reporting is that they will likely be wrong.

With half the media warning that China’s economy is about to grind to a halt (or even “collapse”), while the other half warns that its rapidly growing economy is about to explode upward into various asset bubbles, then we can reliably assume that neither of those “visions” has any merit. Instead, as the strongest economy, and with a leadership which has shown itself to be a step ahead of other countries throughout the recent years of turbulence, we should expect China’s economy to continue to steam ahead.

Problems which appear to be bottom-less chasms or insurmountable obstacles to the more-fragile economies of the West will be “absorbed” by China’s much stronger economy – as mere “pot-holes” or “speed-bumps”. In that respect, Bloomberg just reported that China’s industrial output “beat expectations” – registering a very impressive 13.9% year-over-year gain.

On cue, Bloomberg provided a perfect example of this media double-talk, to make my point for me:

The data suggest that domestic demand is withstanding curbs in bank lending and government crackdowns to cool the property market and meet energy and pollution targets. Bank of America-Merrill Lynch forecasts gross domestic product will expand at least 9.4 percent this quarter and 9 percent in the final three months of the year, aiding the global recovery as elevated unemployment caps U.S. growth.

Domestic demand is robust and the Chinese economy is heading for a smoother and softer landing than people had feared [emphasis mine],” said Lu Ting, a Hong-Kong based economist at Bank of America-Merrill Lynch.

Note the use of the phrase “soft landing”. It’s the same phrase which (first) Ben Bernanke and (then) media-parrots used to describe the bursting of the first U.S. housing-bubble: at the time, the largest asset-bubble in human history.

Now, these same talking-heads are referring to 9% GDP growth in China’s economy as a “soft landing” (roughly triple the growth which Western economic statistics pretend to represent). And the only people who “feared” for China’s economy are media propagandists – and the sheep who follow them. Remember what was reported here: “curbs in bank-lending”, “government crackdowns to cool the property market”, and “smooth” growth – it will all be totally forgotten with Bloomberg’s next report (and/or the rest of the corporate media).

The moment new data comes out about “strength” in China’s housing market, we will be deluged with more “warnings” from the Chicken-Littles about “bubbles”. On the other side of the coin, the first economic news which indicates any “softening” from previous readings will result in a plethora of knee-jerk, dire “predictions” that China’s economy is about to collapse.

Through this media circus, we can count on China’s government – not to tell the truth, but simply to say and do whatever is necessary to maintain its own upward trajectory.

Disclosure: None