Pundits have heralded China's stimulus programs as an effective model for other countries to emulate. Analysts from Forbes to the Reuters have proclaimed their bullish sentiment with very little reservation. Recommendations to purchase China ETFs including iShares FTSE/Xinhua China 25 Index Fund (FXI), SPDR S&P China (GXC) and PowerShares and even small caps we used to like such as Gulf Resources, Inc. (GURE) and Universal Travel Group (UTA) abound.
However, the Chinese government has lit the fuse of its own implosion and many analysts have made the mistake of comparing Keynesian apples to bank lending oranges. As the flow of credit slows, China will not only risk an economic collapse, but a political one as well. It seems a matter of when, not if.
Instead of China's government pumping printed or borrowed money into the economy, its stimulus funds have come from bank lending. Fitch Ratings estimates that 2011 financing will hit 17.5 trillion-18 trillion yuan ($2.7 trillion-$2.8 trillion), more than a third of China's entire GDP. Financing for 2009 and 2010 equated to more than 40% of GDP.
Even with this enormous credit expansion, recent estimates (.pdf) still place the number of Chinese living on less than $2 per day at approximately 480 million, over a third of the entire population. The credit push has lead China to consume more than half of the world's cement, 47% of the world's coal and 48% of all iron ore. This, for a country whose GDP is just 10.7% of the entire global economy and hundreds of millions wallow in poverty.
Sustaining the credit expansion in an attempt to prevent a recession has built the world's largest house of cards. Estimates have put the number of vacant apartments built as high as 64 million. Entire ghost cities have been constructed and sit virtually empty. The homes are simply unaffordable. The average Beijing citizen's entire annual income would purchase just 10 square feet of residential property. In the commercial sector, China holds the record for the world's largest shopping mall. Currently it is 98% vacant.
China's real estate bubble, one of the few remaining, is losing air at an astonishing speed. In just the past few weeks, hundreds of real estate brokerages have shuttered and thousands of workers have been laid off. The private SouFun Group in Beijing announced that the number of transactions fell by more than half in six of the 35 cities it surveyed just this month compared to last year. At least some declines were seen in 80% of the cities it surveyed.
The real estate slowdown has put pressure on copper prices around the globe, dropping more than 20% from a recent 2010 peak. Beijing is trying to curb inflation by slowing and in some instances limiting the credit available. Chinese firms have been using copper as a financing tool. Stockpiling and using copper as collateral allowed many firms to obtain credit outside officially sanctioned channels. While many saw strong demand for copper as proof of a stable economy, at least one research firm has been told by their sources that almost all of the copper imported in the past three months has been used for these financing purposes, not for building.
As the demand for copper subsides, prices will invariably decrease. The copper used as collateral will no longer be enough to service or guarantee the debts of numerous firms. Inventories of the metal will have to be sold. If the price of copper tumbles quickly, an entire portion of China's economy could collapse. Even Beijing will have problems propping up the price of copper with all its other troubles.
When China's economy does begin to crumble, internal strife could plunge the entire country into chaos. Politicians and journalists around the world seem willfully ignorant to the frustration of the average Chinese citizen. Newscasts are filled with stories about a vibrant Chinese economy but the turmoil underneath warrants nary a whisper. Despite China’s perceived economic prowess, the World Bank ranks China’s 2010 GDP per capita in 100th place, below Bosnia & Herzegovina, Algeria and Iran. The frustration and fear is turning into anger at the government.
Just over a year ago, millions watched and prayed for 33 trapped miners in Chile. On average, 13 miners are killed each day in China and the mines are responsible for as much as 80% of worldwide coal mining deaths. China's mines are easily the world's most dangerous. Strikes and protests by miners are becoming more common as anger grows.
Leading the world in another death statistic, China executed at least 1,718 prisoners in 2008. Other estimates have ranged as high as 6,000. Executions are so common, a new "humane" method has been employed. Vans designed and built by Jinguan Motors are used as mobile execution facilities. Now, your executioner can come to you.
Fear of punishment kept a lid on public protests in China for decades. However, a recent wave of protests might be enough to foment into an unstoppable movement. In August, an estimated 12,000 people gathered in Dalian demanding the closure of a chemical plant. In a defeat for the government, the protests ultimately succeeded and authorities announced the plant would be closed. That protest and victory by civilians was just one recent example. While Beijing still has success stifling news of dissent and protests from reaching the outside world, the sheer numbers have been overwhelming. According to Sun Liping, a professor at Tsinghua University, as many as 180,000 separate protests and other unrest occurred in China last year. That is nearly 500 for each and every day of the year.
Beijing has been forced to close off sources of easy credit to keep inflation from running rampant. The tightening brings copper to a tipping point where massive business defaults could occur, pushing prices even lower. In turn, the slowing of China's real estate market could be pushed into a freefall that makes the rest of the world's problems look miniscule. Pile all of those potential economic disasters on a poor and angry populace seeing success in fighting government for the first time in decades and the outcome will be anything but stable. In fact, China may not be the largest country on the planet for many more years. What was once called China could be dozens of smaller states fighting for the scraps left after the fall of Beijing.
I shudder to think of the economic consequences to European and American countries if the scenario plays out.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.