China: The World's "Rich Pauper"

Let’s face it – most Chinese growth is the result of overheated investment, and removing the sources of overheating without eliminating growth is going to prove impossible. I have been making the same argument for at least two or three years, and so far we have seen how Beijing veers between stomping on the gas when the economy slows precipitously and stomping on the brakes when it then grows too quickly. I don’t believe anything has changed. _Mish

While broadly seen as the heir apparent to the US' global hegemony, China has some deep problems which are rarely considered by more mainstream journalists and analysts.

Only a decade ago, China's GDP of US$1.1 trillion was only one quarter of Japan's US$4.2 trillion. And, as late as 2005, China's GDP, at US$2.2 trillion, was half Japan's US$4.5 trillion. Some analysts predict that if China's economy continues to surge at its current pace, it could surpass the United States as the world 's top economy in 2020.

Such sanguine prospects, however, do not obscure the fact that China is still a developing country, with a per capita GDP of US$4,500, which about one tenth of Japan's and one quarter of Taiwan's. China's new ranking as No. 2 contrasts starkly with the per capita ranking of No. 95 among the 182 countries ranked by the International Monetary Fund.

The plain fact is that the Chinese people are still poor, with 100 million people living below the U.N. poverty line of US$1 a day. The number of poor is nearly equal to the entire population of Japan. That's probably why we have not seen an official expression of elation over the historic event. _ChinaPost

In fact, the number of poor in China is far larger than the population of Japan. Clearly, even the "realists" are unable to face the stark reality of China today.

Here is more from Mish's Global Economic Analysis:

China has spent $750 billion on rail lines, much of it wasted.

The culprit is not design, but rather shoddy construction accompanied by fraud, greed, and unrealistic growth targets. If that sounds familiar, it's because it was one of the factors in the US housing bust, and indeed every huge bust in general.

...China's problems go far beyond high-speed rail, to construction and malinvestment in general.

I have talked about China's Vacant cities before but here is a quick recap from Chinese Bank Lending Spree Continues; $75 Billion New Loans First Week in January Alone; Inflation Gone Amuck

...Not only do I believe that the combination of very low cost of capital, socialized credit risks, and strong short-term political incentives to fund massive projects always leads to capital misallocation, but I also believe that the explosion in NPLs [Non-Performing Loans] a decade ago, and the fact that total SOE [State Owned Enterprise] profits are just a fraction of the interest rate subsidy they receive, is strong evidence that misallocated capital has long been a serious problem in China.

... _Mish

China's increasing reliance on overbuilding and speculation is causing several old China hands to look for ways to short the communist government's economy.

China's government is getting worried over the spreading contagion of unrest across MENA (middle east and north africa).

China’s rulers are caught between fear of a Soviet Union-style collapse if they begin political reform, and an Egypt-style overthrow if they do not, the political analyst said.

“Some say, if you don’t engage in political reform, there will be disaster ahead,” he said. “Others say, if you do, there will be disaster ahead.”

The government has not responded to the Arab uprisings with a political reform program. But an emergency meeting of the Communist Party leadership last Saturday — played up the next day on the front page of People’s Daily, the party’s mouthpiece — suggested it was badly spooked. _NYT

Even in Africa -- a continent thought to be in Beijing's pocket -- there is a spreading restlessness regarding China's willingness to bribe African leaders in order to carry out projects that are not in the best interests of the African people. Other nations -- particularly Brazil -- are moving into African economic territory.

Since the collapse of its export market in 2008-2009, China has implemented a policy of fevered construction to boost its economy. Unfortunately, a large proportion of this construction is of a shoddy nature, which will lead to a premature collapse of a wide variety of structures -- including China's vaunted high speed rail and wind power infrastructure.

If you are invested in China, you may need to take a closer look at the underlying realities on the ground there. China's continued use of US treasury instruments as repositories of wealth should tell you what shaky ground China's economy rests upon.