The Off-Balance Sheet Financing in China
Recently we discussed the enormous debt of government controlled Investment Corporations in China, and we warned that this debt, combined with other government debt in China, was approaching 87% of GNP.
This is an astounding figure, unmatched in recent history. Comparisons to other nations’ growth in recent years reveal than even Japan at the height of its expansion, before the current malaise set in, was in 25% range.
Never in history, has this type of borrowing been sustainable. As with everything else, will this time be different? I think not.
The following is some commentary that sheds more light on the matter.
WASHINGTON – China is going broke faster than the U.S., according to economic planner Kirk Elliott.
Here are some shocking facts economic planner Kirk Elliott discusses.
China’s debt is about $36 trillion yuan (or $5.68 trillion USD). This number is astronomical considering that it is just a little more than one-third of the U.S. total debt, but the difference between the U.S. and China is that the U.S. national income per capita is $47,140, whereas China’s national income per capita is $4,260 – not even one-tenth of the U.S. amount. To be on par with the U.S., China’s total debt should be around $1.5 trillion USD, but it is three times that!
Considering that the U.S. has an unsustainable debt position, China’s is ridiculously out of control and puts that country in extreme danger of a financial collapse of epic proportions.
China’s officially published interest rate of 6.2 percent is fabricated. In reality China’s inflation is 16 percent. This is eerily similar to the United States as well. The U.S. official inflation of around 3 percent is nowhere close to unofficial inflation estimates of 10-13 percent.
What does this mean for China? This means that cost of living, wages and cost of goods sold in China will have to rise, and instead of exporting deflation, China will be exporting higher priced goods, thus affecting the rest of the world that purchases its goods.
Since China’s growth is dependent on the rest of the world purchasing its goods, a global slow down does not bode well for China’s economic future.
China’s officially published GDP growth of 9 percent is fabricated. China’s robust GDP has always been a pipe dream, as the country has been building infrastructure (railroads, highways and real estate development – including ghost cities).
Since personal spending is only 30 percent of China’s GDP, roughly 70 percent of China’s GDP can be attributed to this massive build-up. It will dry up, as has already started. The regime is about to be exposed, as people are starting to wake up to the fact that the “emperor has no clothes.”
Elliott concludes: “There is an economic tsunami about to engulf China, and because of the size of China’s economy and its manufacturing might, the impact of the tsunami will be felt far and wide.
Some Histrionics Here
We are not so fearful as economic planner Kirk Elliott. We agree that China will have some heavy slogging ahead, but our conclusion is different.
The Strength of the USA Economy
The USA has suffered dramatically since 2007, and the financial crisis has hurt the USA in every aspect of that society. Yet, the powerhouse that is the USA is still the leader in every aspect of economic measurement.
As with every economic cycle in history, as the cycle ends, the healing begins, and slowly but surely, the next economic cycle begins. While China is building empty cities on borrowed money and expanding its infrastructure, the USA is slowly stabilizing. As time passes, the basic advantages of American capitalism are reasserting themselves – the rule of law, the rights of property ownership, the freedom of the individual, the admiration for individuals who succeed economically, the distrust of government, and much more.
Where To Invest
Common belief is that investors should have emerging nations in their portfolio. Common belief is that the USA is declining as an economic power. Nothing could be farther from the truth.
Ignore USA investments at your own peril.
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Views expressed are opinions and not investment advice. Persons investing should retain a licensed professional to guide them and not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.
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