Have you been following the murder trial in China, where a British businessman was allegedly killed by the wife of a man who was until recently tipped for political greatness? His fall from grace on corruption charges has been made far more vertiginous by the trial of his wife. You can’t say they don’t know how to destroy political opponents in China.
The trial, for those people who watch closely, is all about the power struggle at the heart of the Communist Party to see who is going to be the next Emperor and, possibly more importantly, who is going to be whispering in his ear.
As we wrote here in the column in June, the background noise to this power struggle is a slowing economy. The Communist Party need economic growth because, having dropped all their Maoist rhetoric, all they have is economic growth.
“Equality for all” has been replaced by the slogan of “prosperity for all” and if they don’t deliver they are toast. So the party will do whatever it takes to get economic growth going again. Unlike Mario Draghi, when the Politburo says it will do whatever it can, you can rest assured that it means it.
For foreign investors, who should be mindful of the quip that “you can make anything in China except money”, the slowdown should be watched carefully.
As we pointed out here a few weeks back, the economic evidence in China is screaming a sharp contraction.
Last week, we saw China’s export data for July which makes the “slowdown” there look like something else: a collapse of the export-led economy. Outbound shipments grew by just 1 per cent in July, after an 11.3 per cent rise in June.
Meanwhile, in the domestic economy, new loan growth for July was 540.1 billion yuan ($85 billion), compared with 919.8 billion yuan in June.
What is interesting is not so much that a supply-side, investment-driven boom may be coming to an end based on an inability to sell large quantities of everything to everyone because everyone doesn’t have the cash any more – what is noteworthy is the impact Chinese economic data are having on the rest of the world. Following the news, stocks in Tokyo, Hong Kong, Shanghai and Mumbai all fell back. European bourses are down too as are American ones.
But we shouldn’t be too surprised by this reaction. After all, China is the world’s most populous country, fastest-growing major economy, largest manufacturer, second-largest consumer, largest saver. It is also the US’s banker and the world’s largest holder of money, with foreign exchange reserves of $3.2 trillion (more than double those of Japan and three times those of the EU).
A major slowdown there – which is now clearly coming – will have serious ramifications for asset prices all over the world. It will be particularly serious for commodities whose prices (with the exception of food prices spiking up now due to the drought in the US) have been buoyed up by Chinese demand for the past few years.
Of course the most destabilising aspect is the politics of a slump in China. We are talking here about a country with 1.3 billion citizens. The problem for China is that we, that’s the rest of the world, are not buying. Chinese exports fell by 7.6 per cent in July and exports have fallen for three out of the last four months. Producer prices are falling too and the trade balance in July was $25 billion as opposed to $31 billion in June.
Looking out from China we see that manufacturing output in India was down 1 per cent, too and in Brazil output is down 4 per cent. In Europe, the Bank of France has admitted that the economy there is contracting.
In Germany, industrial orders are down, and now the country runs the risk of an inflated local economy driven by hyper-low interest rates, but a fall in the muscular side of the German miracle, the industrial sector.
Taking all this together, we can see that the global deflationary trends are broadening and deepening. So what should we expect next?
This is where we come back to last week’s article about the reaction of central bankers to all this. We spoke of the “risk on” and “risk off” trade. These are terms used to describe the reaction of central bankers and the investors who watch them to slumping growth. The minute we see economic weakness, major central bank slash rates but it remains to be seen whether all this cash finds its way into the real economy or merely finances yet more short-term rallies in financial markets which peter out.
So we can be sure that the Chinese Politburo is standing by with an avalanche of printing-press money. But will it work? Or will it, like so much of the other monetary stimulus, evaporate in another bubble in asset prices somewhere, enriching hedge fund managers and bankers but having precious little impact on growth, let alone society?
In China, we know that the miracle was investment-led. Anyone who has been there will know of the mega-sized building projects and the thousands of Western firms there – few of whom have made any money. But it is all investment. When investment falters, cutting interest rates doesn’t help you, and may actually may make things worse – if it leads to more investment it will lead to more overcapacity, falling property and asset prices and bankruptcy. So we can expect a new sea of cheap money washing over the world’s financial market, this time for a source that used to be the key saver.
With more European problems in the autumn, Spanish short-term yields are up above 4 per cent again this week, the US election in the balance and now with a slump in China, we are in for a rocky six months to Christmas
With Germany and China in an economically precarious situation, imagine the following. Both countries give financial assistance to the countries in financial problems on the following basis. That each country produces a viable plan which will lead to their long term recovery. The first ten years with zero interest, the following ten years with one % interest, the next with two %, and each decade after that the interest rate increasing by a further 1% . Other than lone forgiveness, this to me seems to be the only way that the world economic outlook can appear to look hopeful, and… Read more »
China no matter what we always seem to end up back there.
The system there is to mass produce and in some way controll the world.
China must now realise the mess the world is in now and pumping money into your trading partners to help us buy there good is a circle that destroys us.
We need real change in Ireland and I want to know who’s going to provide this?????
The ponzi is goosed! Cheap money from everywhere has done nothing only increase debt levels and therein lies the rub. System failure is imminent.
‘Or will it, like so much of the other monetary stimulus, evaporate in another bubble in asset prices somewhere, enriching hedge fund managers and bankers but having precious little impact on growth, let alone society?’ Hold that thought in the above passage. Did you hear David the story about the floppy haired highly talented economist at home with his kids playing the board game monopoly? The local council had to sell the playground to pay for cutbacks because the government was using the money to pay loans taken out to save bankrupt banks. Being very insightful our economist decides to… Read more »
Interesting! , Just yesterday I suggested an idea that is as old as the hills, i.e. that there cannot be stability without sustainability. The basic gearing of modern capitalism and banking requires a boom bust cycle to reward the players the huge spoils they hunger for. Modern banking is just 200 years old and the robbery capitalism we seen now only began in 1987 following the lifting of regulations by Thatcher and Reagan. So, here we are up the pooh creek without a paddle. In history, periods which appear hopeless usually end in war, a truly frightening thought. As for… Read more »
michaelcoughlan , I liked that story ! , nice thinking , that’s the way it works.
China seems to be running into trouble. And I expect similarities between what happened in Thailand in the 1990s and China in the net five years. China opted for a stimulus program when the crisis emerged, and some of this was no well thought out. In Austrian terms, China is guilty of malinvestment. In Keynesian terms there is no such thing. They made the wrong assumption. However their good investments will reduce the cost base of China. In other words, ten years from now, it have been dealt with. Longer term China is going to continue to exert strong competitive… Read more »
China is sitting on a lot of US treasury bills. If it dumps them, they kill the biggest buyer on the planet.
Commodities heading south as well – barring energy and food.
Looks like we have a prisoner’s dilemma on many levels.
Exactly how will the air let out of this pressure vessel?
David Your stats reported are based on a month to month comparison. You do not provide the year over year longer view. The “Contraction” you report is still an expansion, just not as big as the previous month. As far as I have read, the Chinese economy is still growing at a 7% per annum rate. The Chinese population have about the highest savings rate in the world at I believe a 30% of income rate. They are not in debt like the westerners. China has in the last 20 years invested in basic material supplies throughout the world but… Read more »
Neurosis of Economics
From the 15 th August a Moon WOBBLE commences and peaks on the 23rd and to finish on a Blue Moon 31st August .
Neurosis is more apt for this article .A Crossroad is too optimistic as it determines the crossing of the Rubicon .
Neurosis is more akin to a Worm Hole where there is only one direction …SINK.
This is why the West is in a bigger mess than China.
It also shows us that Monti (unelected) as Italian Prime Minister might be even worse than Berlosconi…
http://www.zerohedge.com/news/italys-latest-record-debt-load-bigger-faster-more
Italy needs a massive amount of internal reform, and a massive retraction of it’s massive inefficient bureacratic state system.
Been trying to log onto the web all day, unfortunately I’m with Three.ie so they provide “Mobile Broadband” when they feel like it.
Knowledge Economy my arse. Some guy on Boards.ie started a petition, I think we need more of this. We are being constantly ripped off for services we are not receiving while the regulators are out to lunch with the cowboys.
http://www.ipetitions.com/petition/three-data-contract-breach/
So China is to slow down for a while. Well welcome to the real world China. I hope its a softer landing than the one in this little enclave
China has adopted Franklin Rooseveldt’s approach, a New Deal. The Three Gorges is now fully online, and designed with the head of FDR’s Tennessee Valey Authority, Lilienthal, who worked on this. It was delayed by a Europeana export – Communism. Europe now tried to export Eurobonds, and were met with smiles and a church-like silent collection. Poor Lagarde. So just look at at the internal projects and the deals signed with Putin of Russia, all last year. They are prepared. They are baffled by Japan and Germany’s insane greenie anti-nuclear frenzy. Japan has begun to recover. Korea has pocketed 40… Read more »
One point is correct, a Transatlantic breakdown (forget any illusions of slowdown) would wreak havoc worldwide, especially in China. It is the ultimate economic disaster. Add on top of that a major agricultural disaster in the USA, and never forget our food supply is totally globalized dependent on shipping. Have a look at Barbara Tuchman’s history of the 14th century http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&sqi=2&ved=0CEUQFjAA&url=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FA_Distant_Mirror&ei=bU4pUM6XIuz34QSgyIHABA&usg=AFQjCNFlbiX_WNTr5ureBMnvNOjWwPqy2Q&sig2=gmuVTbZKe9sptdYIKGe9Gw . It started with a banking collapse (Bardi and Perruzzi derivatives), then a complete breakdown in agriculture. Then the Plague hit a weakened population. Result – massive population reduction. China has gone through famine as recently as the 1950’s… Read more »
Cut and paste from the west propaganda machine or if you prefer lazy journalism —– “””””””””””””””””Have you been following the murder trial in China, where a British businessman was allegedly killed by the wife of a man who was until recently tipped for political greatness? His fall from grace on corruption charges has been made far more vertiginous by the trial of his wife. You can’t say they don’t know how to destroy political opponents in China. The trial, for those people who watch closely, is all about the power struggle at the heart of the Communist Party to see… Read more »
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“all they have is economic” “”””””The Communist Party need economic growth because, having dropped all their Maoist rhetoric, all they have is economic growth”””””””. ” ” “all they have is economic growth” ” ” 7.6% growth —It’s seem they have everything you want David—–all we have is economic Debts and lots of greed… for 1% for those waiting for a climax to end the crisis movie you could work this into to script.. “”””””The Obama administration mounts a “pivot” to Asia following the U.S. Withdrawal from Iraq and anticipated exit from Afghanistan.U.S. Navy to shift 60 PER CENT of its… Read more »
Did you misread the blog. What I was trying to say was I hope that they dont fall over a cliff like we did. God help us if they have to endure the contraction that we did. No safety in the enclave , I would agree with you.
Do not worry about China they may save you from the USA The Daily Reckoning Presents When They Come For Your Guns, You Will Turn Them Over Jim Karger “When they come for my gun, they will have to pry it out of my cold, dead hands,” is a common refrain I often hear from the Neo-Cons when there is a threat, credible or otherwise, that the US government is going to take their firearms. And, when I hear this crazy talk, I agree with them openly. “You are right. They will pry your gun from your cold dead hands,”… Read more »
Hang ’em high Crime of the Millennium Jeff Nielson As few people in our societies even know, all of the world’s governments have (foolishly) granted exclusive monopolies for the printing of all the world’s currencies (our “money”) to a cabal of privately-owned corporations called “central banks” — given that name because it is a cabal exclusively owned/operated by bankers. Understand that the monopoly to print money is nothing less than a license for economic rape. These private banks lend us all the paper that they print out of thin air (at zero cost to themselves). The result is that after… Read more »
LIAM HALLIGAN: NOT JUST GLASS-STEAGALL—WE ALSO NEED PECORA Aug. 12 (LPAC)—Prominent City of London economist Liam Halligan once again stressed the urgent need to restore Glass-Steagall legislation, in a commentary today, which begins by denouncing the hyperinflationary intentions of ECB president Draghi – only surpassed by those of the Federal Reserve and Bank of England. “Not for the first time, I’ve ended up writing about the eurozone when my intention was to highlight something else,” Halligan wrote. “That was the recent volte-face by Sanford Weill, the swaggering Wall Street financier who, in the late 1990s, forged the merger of Travellers… Read more »
Hi David, The floppy haired economist the story continues….. Our friend floppy wakes up the next day delighted with himself that he was able to explain in such simple terms to his son what a militarised paper economy is. He now has a new challenge which is to explain to his son the difference between creating wealth, making a profit, and asset stripping (not the unbuckling of the suspenders on a beautiful woman type!). He is inside in the toilet right in the middle of his Dick Cheney when the following idea occurs to him. Now that the playground was… Read more »
Egon Von Greyerz tells the truth unlike so many of the wafflers in the papers. Here is his latest piece which tells us what to expect next. And the funny thing is no mention of Glass Steagall. What a relief not to hear any more shite about that for a while
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/8/10_Greyerz_-_We_Are_Headed_Right_Into_A_Global_Fin
Try this link. That one didn’t seem to work
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/8/10_Greyerz_-_We_Are_Headed_Right_Into_A_Global_Fin
That didn’t work either. Here is the full interview. Start after 1 minute and you will get it all.
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2012/8/5_Egon_von_Greyerz_files/Egon%20von%20Greyerz%208%3A5%3A
….one should not underestimate Greece…..
http://www.telegraph.co.uk/finance/newsbysector/transport/9473476/World-shipping-crisis-threatens-German-dominance-as-Greeks-win-long-game.html
I reckon that the German taxpayers will be furious to see that they are subsidizing Greece while wealthy Greeks pick off cheap German shipping companies…due to…of all things…..bad timing of an asset bubble.
Budget2013 “whats in your wallet”? More money will be “taken from Health,education,p.a.y.e the unemployed,the poor and vital social services around the Country.NO Banks,therefore very few new business,present businesses surviving hand to mouth. World economy contracting but Ireland will grow ? “maybe if we begin weapons manufacturing”? Is this financial War a new way of life ? will it go on as long as the War on Terror ? This crisis is a fraud and one large ponzi scheme destined never to end but to reduce the standard of life and living for the General population,to reduce the desire or ability… Read more »
Maybe we are on the edge of a psychological breakdown or breakthrough. Fundamentally we have a fall off in confidence that seems to be spreading everywhere. So people are now huddling and barriers are going up. Call it saving, call it trade barriers, call it cost shedding – you name it. I look at the recent Bollywood release in India called Ek Tha Tiger which uses Ireland and TCD as one of its main locations. It’s one of the biggest movie releases there. We need to be mindful that we live in world that we have never seen before. The… Read more »
The Welfare state has been a fraud for over twenty years in this country. Each year it becomes more of a fraud. Working people are taxed on the premise that they will get something in return for their contributions. And the money get wasted. That pool of money has attracted the worst elements in our society since the early 1960s, with people climbing over each other, for control of the people’s money. Television turned politics into a gameshow. With an election instead of a phone ins. The “leadership” of the West have bankrupted the Welfare state, in many countries. And… Read more »
Blue Moon River Wobble ( arrives in Dublin tomorrow)
Tomorrow on it’s arrival
Wear a Coat for your Survival
If it is Wet I have won my bet
No longer need I fret
Watch the skies all arise and ask who mighty you
And if you dont hear already then you are blue
Hold still in a moment for nothing inside you has changed
Only the world around you and the words you exchange
Korea has been mentioned, as it must when the subject is China. Some very relevant news : WILL NORTH KOREA OPEN ITS ECONOMY ON THE CHINA MODEL? Aug. 10 (LPAC)–A report by {Radio Free Asia} (RFA), a U.S. Government information agency, buttressed by independent sources, indicates that an “Overhaul scheme seen tantamount to giving up socialist system” may be in the works for North Korea. It reported on Aug. 9 that lectures about the plan have been held throughout North Korea since Aug. 6. The reports center on plans to implement the “June 28 measures,” where new leader Kim Jong-un,… Read more »
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I know i harp on about the role of the big advisors See Grant Thornton now examining role of PWC in hiding black hole in Quinn group which may cost taxpayer 1.5 billion euros. It will of course take a year to see if thereis a reason to take leagal action. Bet there won’t be.
And some posters here blame the reckless citizens for the economic collapse. Hmm
David what’s your view on Sean Quinn .
Do you think he should have been left to run the Quinn group,I think he could have turned things around and made a good honest effort to pay back the best part of the depth.
Who, Really, Is Bankrupt? The question to be asked is, who is bankrupt: Greece or the Eurozone financial system? Greece sold EU4.06 billion of three-month Treasury bills at an astonishingly high rate of 4.43%, when the usual rate should be less than 1%. The funds will be used mostly to pay off EU3.2 billion in bonds held by the European Central Bank, which were supposed to be paid off with funds from the Greek bailout package. The Eurogroup, comprised largely of Eurozone finance and economics ministers, has refused to release over EU30 billion of the bailout which should have been… Read more »
One thing that never ceases to baffle me is the pervasiveness of stupidity in the modern present day Western World. In previous stupidity riven phases there was always some people somewhere who could stand back and see what was going on and stay rational.
But now it is very rare, like a voice calling out in the wilderness.
Germany, Spiegel Online, in English http://www.spiegel.de/international/business/investors-preparing-for-collapse-of-the-euro-a-849747.html Former chief economist Thomas Meyer of Deutsche Bank is quoted as saying : Banks and companies are starting to finance their operations locally. Banks all over Europe have been “reducing their risks” for months now, especially since the summer of 2011. Banks are “severing connections to their own subsidiaries abroad. Germany’s Commerzbank and Deutsche Bank apparently prefer to see their branches in Spain and Italy tap into ECB funds, rather than finance them themselves. At the same time, these banks are parking excess capital reserves at the central bank. They are preparing themselves for… Read more »
I think it is becoming clear to many that belief in magic, an irrational Dionysian assault on the human mind, is the cause of economic disaster. — The head of the Institute for Public Finance at Humboldt University Berlin, Swiss economist Prof. Charles Blanchard, in an essay for FAZ on Sunday, warned of the “Euro-sorcerer’s apprentices,” who can no longer get their own product under control. Blanchard refers to the 1998 appeal by 155 German economics professors, including himself, who had warned “The euro is coming too early.” — The Euro is founded on the wild incantation that economic miracles… Read more »