|
While the world fixates on Europe,
signs of a China crash are mounting behind the scenes.
Imagine you run a business with 3,000
employees. Your factories churn out 20 million pairs of sunglasses per year
-- the best-selling brand in China. You are a celebrated businessman in your
region, with expanded interests in real estate and solar energy.
Oh, and one more thing: You are flat
broke.
As it turns out, your company borrowed
huge sums at high interest -- more than cash flow could justify -- and you
have no hope of paying the loans back. Now the business is insolvent. What do
you do?
If your name is Hu Fulin,
you run away.
"The east China city of Wenzhou is battling
its own subprime crisis," Shanghai Daily reports, "after
seven local business owners fled." Wenzhou, the "cradle of China's
private economy," is China's latest ground zero for a credit boom gone
bust.
Hu Fulin is
one of the seven "runaway bosses" who, faced with insurmountable
debts, decided to hit the road this month, "leaving thousands of
employees in a state of shock and enormous unpaid loans in hundreds of
millions of yuan."
When Mr. Hu
disappeared, his suppliers panicked too. Large payments were owed, along with
two months' salary for thousands of employees.
The Wenzhou crisis is dubbed
"subprime" because the state-owned banks pulled back, allowing
private lenders to step in at sky-high rates. The loans being defaulted on
had subprime rates of interest.
The Chinese government attempted to cool off
reckless lending by putting restrictions on the state-owned players. All they
accomplished was a juicy handoff to others to take on more risk, in exchange
for subprime lending terms.
And the net result? Bosses fleeing as
loans implode. "Thousands of employees in a state of shock." A
ripple of destruction all down the supply chain... and a possible tipping point
in the whole Ponzi-financed boom that counts Chinese real estate as its
white-hot center, as greed morphs into fear.
The Wenzhou bust comes against a
backdrop of warning signs for China's broader economy. The dragon had already
lost a step, as evidenced by manufacturing data declines.
"The country's huge manufacturing
sector is starting to slow," the NYT reports, "and orders
are weakening, especially for exports. The real estate bubble is starting to
spring leaks, even as inflation remains stubbornly high."
(This isn't the first time I've spoken
about China. Sign up for Taipan Daily
to receive more investment
commentary.)
But what about the rich?
As in the United States, it's the
wealthiest portion of Chinese society that drives spending (and thus equity
valuations). Those who can afford luxury apartments and Hermes scarves matter
a lot more than subsistence farmers.
Here too there is trouble.
"Sounding the latest alarm about slowing economic growth in China,"
the WSJ reports, "Mercedes-Benz on Friday said luxury-car sales
gains slowed in what has been its fast-growing major market."
After 60% growth in the first half of
2011, the pace of Mercedes sales decelerated in July and August. The rich are
paring back.
Yet more warning signs abound. Last
week, Chinese property stocks were hit hard on fears of a financing crunch.
Various Hong Kong-listed developers fell more than 10% in a single day.
"Initially, people were worrying
about earnings," said Agnes Deng of Baring Asset Management. "What
happened is that people started to worry about balance sheet problems as well
as cash flow and funding."
Cracks in the façade are
widespread. Property prices are dipping in many cities after "a sharp
decline in sales volumes," the Financial Times adds. Shanghai
real estate transactions are down more than 50% year-on-year.
Guess who is in the middle of all this?
"China's economy is very
distorted, and the banks, as ever, are at the epicenter
of the distortions," says Edward Chancellor of Grantham Mayo Van Otterloo. "If China runs into problems with the
banking system, which I think it will, I cannot see a situation in which
foreign investors are the main priority of Beijing."
It is hard
to pinpoint the bursting of a bubble. But for China the warning signs abound,
with free-falling copper prices a quiet confirmation. Even as the world
focuses on Europe, a full-on China bust could have greater impact than many
realize.
Justice
Litle
Taipan
Publishing Group
Article
brought to you by Taipan Publishing Group. Additional valuable content can be
syndicated via their News RSS feed. www.taipanpublishinggroup.com. Don't forget to
follow Justice Little on Facebook and Twitter for the latest in financial market
news, investment commentary and exclusive special promotions. Article
originally published here
|
