Thanks to the Workers’ Daily, we now know a little bit more about how Chinese economic growth translates into jobs creation—or at least how top Chinese officials view that crucial equation.

Speaking at a national congress for China’s official trade union two weeks ago, Premier Li Keqiang said that China needs economic growth of at least 7.2 percent in order to ensure adequate employment, the Beijing-based newspaper reported on Nov 4. “The reason why we want to stabilize growth, in the final analysis, is to preserve jobs,” Li said at the union meeting on Oct. 21.

Li also pointed out how important the rest of the world remains for ensuring adequate employment in China. All told, China has some 30 million workers who are directly dependent on China’s export industries, and an additional 100 million serving in supporting industries, Li said. “If exports fall rapidly, it will create an employment problem,” he said.

China is going to be an exciting case to watch and study over the next couple of years. It is no doubt understandable that Chinese officials want fast economic growth rate, but we don’t always get what we want. Particularly, considering my forecast for the US Economy and its financial markets.

At least at this stage, I do not believe that 7.2% economic growth is feasible for China over the long run. Not even close. The problems stems from the fact that about 25-50% (some claim much more) of Chinese economic growth over the last decade came from capital misallocation and pointless infrastructure projects. Also known as, empty cities, rail networks, roads to nowhere, etc…. That is one of the reasons Chinese banks are sitting on a time bomb called bad loans that thus far they have been able to ignore. The problem for China is, there isn’t that much more infrastructure or capital misallocation work left to do and bad loans increasingly becoming a huge problem. As such, I believe China has no room left for 7.2% economic growth.

Add to that an upcoming global recession (based on my work), subsequent export slowdown and China finds itself sitting on a powder keg of economic trouble. What happens if all of the issues above come home to roost at the same time and instead of 7.2% economic growth China ends up with 2-3% or god forbid even goes negative. With massive unemployment and certain public unrest it would be fascinating to see how China comes through. Will its communist government be able to survive or will Chinas pain be so great that a new political system will be established.

That is why it will be so exciting to watch China over the next few years.

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September 26, 2013September 26, 2013

Chinese Government Cooking Books. No, Really???

Bloomberg Writes: China Beige Book Shows Slowdown, Opposite Official Data

China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed.

The quarterly report, which began last year and is modeled on the U.S. Federal Reserve’s Beige Book business survey, diverges from government figures showing faster factory-output gains in July and August that have spurred analysts from Citigroup Inc. to Deutsche Bank AG to raise expansion estimates. Nomura Holdings Inc. is among banks skeptical that any rebound will be sustained next year.

The results “show the conventional wisdom of a renewed, strong economic expansion in China to be seriously flawed,” China Beige Book President Leland Miller and Craig Charney, research and polling director, said in a statement.

The data “reveal weakening gains in profits, revenues, wages, employment and prices, all showing slipping growth on-quarter — no disaster, but certainly not the powerful expansion suggested by the consensus narrative.”

Read The Rest Of The Article

Continuing our China watch, I want you to read the two paragraphs above very carefully. I have been saying all along that Chinese miracle growth story is anything but true. Yes, I would be the first to admit that China has a bright future and a potential. However, as of right now, that is all it is.

Before China can reach that potential and overtake the US Economy it will have to go through significant economic imbalances, bad loans, capital misallocation and property bubbles that Chinese government has baked into the system in return for seemingly amazing Economic growth. Yet, everything has its cost.

The Chinese government can cook its books all it wants, but sooner or later the reality will catch up to it. With China’s real economic growth slowing down significantly (as per report above), structural issues coming home to roost and global economic slowdown just around the corner, the moment of reckoning might be close at hand.

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September 9, 2013September 9, 2013

China Is A Mess

Reuters Writes: China locks foreign investors out of another bad-debt cleanup

HONG KONG (Reuters) – Chinese banks have a colossal mess of bad debts to clean up for the second time in as many decades, but they are unlikely to call in the financial world’s most efficient mop and broom.

Foreign investors that specialise in buying up distressed debt are queuing outside the industry’s door, but bankers say China’s reluctance to pay the price of a privately funded clean-up means that door probably won’t open — to the cost of Chinese tax-payers and, ultimately perhaps, the wider economy.

Some economists believe the current mess will need a bigger clean-up than was required after the late-1990s Asian financial crisis. From 1999 to 2007, about $323 billion in bad loans were swept out of the banks, according to a PriceWaterhouseCoopers (PwC) review of media reports over the period, in what amounted to a taxpayer-funded bailout.

“Sometimes the door is open for foreigners to come up and make money, and sometimes it’s closed,” said one veteran debt specialist who has bought and sold Chinese debt for global investment banks. He declined to be named due to the sensitivity of discussing China’s sovereign debt.

“Our belief right now is that the door is closed.”

Read The Rest Of The Article Here:

It doesn’t look like it yet, but China is in a huge mess. From outside it looks like an economic marvel growing at 7% per year, yet it is in huge trouble. While a good chunk of Chinese economic growth over the last decade has been export and manufacturing related (which is great), some economist estimate that as much as 50-75% of that growth came from government debt and domestic property misallocation (aka building empty cities and roads to nowhere).

That is the primary reason Chinese banks don’t want foreign investors to look at their balance sheet or their assets. They know that as soon as someone looks at their debt they will be horrified of what they see. At that point the news will get out and the state controlled economy that is China will not be able to control the outcome. The game will be up.

As they say, ignorance is bliss. The Chinese economy will keep moving forward through the minefield until one of those mines goes off. I believe the time is at hand or will be shortly. At that point the jig will be up and Chinese economy will go through a severe correction.

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