By MoneyMorning.com.au
What’s the latest news on the Chinese economy…?
“Chinese authorities have barred the world’s largest rare earths producer from exporting due to ‘environmental concerns’, in a move likely to significantly affect global supply.” – Sydney Morning Herald
We’re sure it will affect supply. As the SMH notes, the barred company – Baotou Steel – “accounts for nearly half of the world’s rare earths production.”
But is it really due to “environmental concerns”?
Of course not.
The Western media often forgets dictators are masters in the art of spin. Think about it. If the Chinese economy cut exports because it wanted to prop up the price… or to disguise the fact that economic growth is hitting the skids… it would play havoc with the markets.
Hence the need for a convenient yarn… which is exactly what China has come up with.
Look, you don’t need to be Joseph Goebbels to figure out the environment is a hot topic in the West. So what better way to disguise a slowing economy than to claim it needs to cut rare earths exports to stop pollution?
It’s perfect.
China isn’t worried about polluting the water supply or digging up things it shouldn’t. It couldn’t care less.
Its bigger concern is stopping the Chinese economy from going into free-fall. The fact is people aren’t buying as much as they used to… the 40-year credit boom has run its course.
So the Chinese economy needs a way to suck more money into its manufacturing sector. The simple way is to make it harder for non-Chinese manufacturers to get hold of rare earths.
Remember, rare earths are one of the world’s most important elements. You can’t make flat panel TV screens, missile guidance systems, wind turbines or electric cars without them.
The kind of things China makes. The kind of things the Chinese economy would like to make more of.
Just three weeks ago, Bloomberg News reported:
“China’s manufacturing contracted for the first time since February 2009 as the property market cooled and Europe’s crisis cut export demand…”
Remember how bad things looked in 2009? And if you think the European debt crisis is a problem, just wait until China’s debt bubble pops.
As reported by Bloomberg News this week:
“A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing…
“The planned 15.2 million square meters (164 million square feet) of office space by 2020 in Yujiapu and across the Hai River in Xiangluo Wan, or Conch Bay, is more than one-third of the 450 million square feet in Manhattan.”
These are the type of projects the China needs Aussie iron ore and copper to build. These are the type of projects that have supported Australia’s economic boom for nearly 10 years.
If the building program was sustainable it would be fine. If it was supply meeting demand it would be fine. But it isn’t. It’s supply hoping (praying) that the demand occurs.
Ah, but China is a net saver, it has cash invested in all those U.S. government bonds – is the classic argument.
There’s one problem. Speculating Chinese local governments have most likely spent any savings China has in U.S. government bonds. How do we know? Read on…
According to the U.S. Treasury, at the end of October, China held USD$1.134 trillion-worth of U.S. government bonds.
Bloomberg reports, the debts of 231 local government financing companies (there are 6,576 in total) amount to USD$622 billion.
Who knows what the total debt is for all 6,576 financing firms… USD$1 trillion? USD$2 trillion? $4 trillion? More?
Of course, the mainstream China bulls still believe China uses capital and resources effectively. China is a miracle – they say. China is a centrally planned economy and can therefore control its economy… It can engineer a soft economic landing.
Funnily enough, we heard a similar argument when the U.S. tried to slow its economy in the 2000s. In that case, they argued the central planners at the U.S. Federal Reserve could lift interest rates to cool the economy… and then drop them to stop a crash.
It didn’t work for them.
And it won’t work for the Chinese economy either. Any economy built on a credit bubble will eventually have to pay the consequences.
The U.S. and Europe are facing the consequences of their credit bubbles right now. Next is China and Australia… two of the last big economic bubbles to pop.
More on what to do about it later this week.
Cheers.
Kris
P.S. Many investors mistake credit for innovation. The truth is: real innovation doesn’t need credit. In fact, the best innovators are funded with equity rather than debt. Simply because investors who really believe in the company would rather take a slice of future profits rather than earn a few dollars from a loan repayment. That’s why I look for genuine innovation and entrepreneurship in the stocks I tip for Australian Small-Cap Investigator. If you’d like to take out an obligation-free 30-day trial to my small-cap stock tips, click here for details…
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