Wednesday, 31 July 2013

Is China Headed for a Crash Landing?

China's trying to track where all its yuan went, or rather where it disappeared
The buck -- or shall we say the yuan -- stops here.

There are more and more signs coming from the motherland that the economy is going to go bust very soon.

One of them is Premier Li Keqiang recently ordering for a nation-wide audit on how much debt the country has... if you don't know what it is already, that's a scary thought.

Since early 2009 when Beijing pumped 4 trillion yuan ($586 billion) into its economy, growth sustained and even grew, thanks to massive spending in building infrastructure such as highways, airports, roads, as well as property development, and eventually trickling down to corrupt officials who grabbed a piece of the pie that many promptly spent on casino tables in Macau and elsewhere.

That massive stimulus also led to excessive overproduction in goods, everything from plastic basins and clothing to cars and cement.

The Chinese government had hoped that average citizens would mop up the overcapacity by finally stop saving money and start spending; but with the lack of a solid social welfare system in place, particularly health care, the public hardly budged.

Part of it was their skepticism in the government, but also in the goods... were they trustworthy? They'd rather go to Hong Kong or elsewhere to get what they perceived to be higher quality products...

Li Keqiang recently ordered an audit of the country's debt
And because of overcapacity, companies aren't able to sell off their goods, and as a result aren't able to pay off their creditors which means banks are unable to loan more money out and keep the economy moving... the central government recently loosened bank deposit ratios, but that hasn't help that much...

The government has also ordered more than 1,400 companies in 19 industries to cut capacity, and some of these firms will have to shut down. The sectors include steel, copper smelting, cement and paper.

So that is where we are at now... it's a basic sketch of the situation and it looks pretty bleak. And it's going to severely impact Hong Kong very soon since it depends so much on the mainland market for its economic growth.

Already we are seeing property prices fall here, particularly for luxury flats, though moderately-priced ones will probably remain steady since there is a strong demand as young people want to enter the real estate market.

So it will be interesting to see how the rest of the year pans out. The first sign will probably come from Macau's casino profits, followed by luxury market sales figures. Perhaps the rich really are pulling out in droves, or they are stashing their cash elsewhere.

In the meantime we are curious to see what kind of debt figures China will come up with and how its leaders are going to deal with what we expect to be a staggering number...

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