Wednesday, October 22, 2014

Is China going to collapse already?

If I had to bet on a black swan, my bet would be on China. The country has defied all experts in continuing down an absolutely insane strategy combining massive mal-investment, shadow banking debt growth, and GDP-metric chasing. They’ve been able to make this work long enough to make skeptics give up and just think that China is different somehow.

At the same time, there has been a massive looting effort by the elite to pull out as much wealth as possible, preferably leaving their less-connected countrymen and foreign investors holding the bag when everything goes to shit.

Each time I think that things are going to fall apart, the country amazes me by doubling down and adding another crazy layer of financial engineering that holds things together for a bit longer.

The latest crazy is their own version of “crowd-funding”, which promises returns of 40% to participants:

“Crowd funding” is the newest craze in property investment. A villa is advertised for, say, RMB 5 mln, with shares in its purchase selling for RMB 300 each. Buyers get returns higher than they can achieve in the money market—5-8%—along with promised capital gain. The return is generally said to be from rental income, although there is reason to be skeptical that such renters exist. The offers are filling up in minutes, and some sites are advertising that funders earned 40% in just 30 days.

I suppose the fact that the country seems to have gone to a pure Ponzi-scheme funding model should be ringing alarm bells somewhere.

Of course, the theory is that what goes on in China, stays in China. To which I wonder, if things really get bad there, exactly where the rest of the world is going to find replacements for the $2 trillion in exports on short notice?

At least it would solve the no-inflation problem…

1 comment:

Juan said...