China’s Services PMI for August veered upwards, but that’s not the news. Noting that China’s massive but fracturing bubble in unused luxury apartments (upwards of 70 million are empty) is a serious headwind, analysts for HSBC were quick to plead for more stimulus:
The economy still faces downside risks to growth in the second half of the year from the property sector slowdown. We think policy makers should use further easing measures to help support the recovery.”
Stunning. Even the comrades in Beijing know that China’s credit tsunami has unleashed a dangerous speculative mania throughout the land that has no parallel in human history. For crying out loud, total credit outstanding (which Beijing’s red capitalists are pleased to call “social financing”) has exploded from $1 trillion at the turn of the century to $25 trillion today.
It goes without saying that there is nothing in the financial world more dangerous than easy credit. But when it multiplies by 25X in just 14 years in an economy where there is essentially zero market discipline (because all debts are bailed-out and rolled-over when push comes to shove), you are dealing with a monumental catastrophe in the making. So China’s leaders now hop from one foot to the other, endeavoring to slow down the credit monster one week, while taking steps to goose the macro economy the next.
Beijing’s schizophrenia is at least understandable. If it allows the bubble to splatter, the historical anomaly of a collectivist one-party regime presiding over a wild-west casino would surely suffer a brutal demise at the hands of hundreds of millions of busted gamblers. So it continues to temporize and equivocate, hoping that China’s monstrously inflating bubble will keep on…well, inflating.
But why in the world would presumably financially literate analysts at one of the world’s premier banks egg them on? Why do they not, instead, warn investors to get out of harm’s way while it's still possible?
The baleful reality is that the entire global financial system has been corrupted by two decades of central bank fueled credit inflation. At the end of the day, financial players and advisors survive by plying trades which work—at least for the time being. And credit inflation does work during its expansionary phase—funding a robust “bid” for rising financial assets and booming real investments in housing, industry and infrastructure, alike. So the inhabitants of the financial system learn to buy on the dips and pound their pans for more (credit) stimulus whenever short-term dislocations threaten.
The financial market stimulus chorus is now universal—virtually identical from Hong Kong to London to New York, despite ostensibly deep differences in policy regimes. At the end of the day, however, there is not really a dime's worth of difference between the Bush/Obama/Bernanke model and the economic model employed by the politburo overlords in Beijing. It's all about insensible, contagious, addictive credit expansion, and the phony wealth and temporary prosperity which it breeds.
The tragedy is that when the global bubble finally reaches its breaking point, there will be no warning from the financial market gambling pits by the inside players who ought to know better. They have become trained seals who have no remaining vocabulary except to bark mindlessly for “moar” stimulus.
The zoo at HSBC is proof of the case. Its inhabitants sit up close and personal long side of China’s monumental house of cards, and cannot even see it. So the “ort, ort, ort” of their stimulus barking reverberates around the world and through the canyons of Wall Street.
Call Goldman Sachs. They will tell you that China’s red capitalism is the great white hope of global growth and endlessly rising stock prices. All it takes is just another shot of “stimulus”.