China's Coming Economic Reckoning

...if it turns out China doesn't need all that new stuff it's building, the country will face an economic reckoning, says Michael Pettis, who teaches finance at Peking University in Beijing.

For Pettis, China's economic miracle is just the latest, largest version of a familiar story. A government in a developing country funnels tons of money into construction. This increases economic activity for a while, but the country ultimately overbuilds — and the loans start going bad.

"In every single case it ended up with excessive debt," Pettis says. "In some cases a debt crisis, in other cases a lost decade of very, very slow growth and rapidly rising debt. And no one has taken it to the extremes China has." _NPR

China's boom began with a massive inflow of investment from the outside, which built an impressive manufacturing infrastructure. China grew wealthy from it high flow of profitable exports, facilitated by a skilled but cheap workforce, and big spending customers overseas in Europe and North America.

When the export markets cooled, China's governments made a desperate gamble -- overbuild, overbuild, overbuild -- and hope the overseas markets can pick up again like in the 1990s and early 2000s.

But Europe is dying of debt and demographics, and the US is dying of an overdose of Obamaism.

The problem Mr. Chiappinelli sees is that there's going to be no easy way out of the bubble that exists in China's infrastructure and real estate.

“China is experiencing the mother of all bubbles,” he said today at the Bloomberg Portfolio Manager Mash-up in New York. “We don't know when it's going to pop or what's going to cause it to pop, but there's very little track record of countries successfully navigating a soft landing out of a bubble,” he said.

Another problem for China: The likely recession in Europe, said Lisa Emsbo-Mattingly, director of research for global asset allocation at Fidelity Investments. Europe is China's biggest trading partner and a dip in demand on the continent will be keenly felt in the Middle Kingdom. _InvestmentNews

China has significant problems with corruption at all levels of government and state owned enterprises, including banks. The books are thoroughly cooked, and too many people outside of China seem to be falling for the deception.

While economists are often skeptical of China's government figures, Chanos estimates those numbers are way off..."We are seeing rapid falloffs in demand in things like construction equipment, railway construction over there, housing sales -- so lots of things are slowing down pretty quickly over there," he said.

"It remains to be seen whether that's going to go into a full-fledged recession. I do think the property sector which is where we're focused on, is going to enter -- or has entered a recession." _CNNMoney

China suffers from significant class inequality, with hundreds of millions of people living at near subsistence levels. If China's people discover how their leaders and elites have abused their trust, internal security may soon become the number 1 problem for the CCP, in this important year of a power changeover at the top levels.