Chinese Economy Facing a 6.8 Trillion Nightmare?

One of the things we do here on this blog is to record and follow predictions made by those we think have established a solid overall track record of forecasting. No one gets everything right of course, but some do hit on a high %. Here is an example of a very specific problem that Jim Rickards identified in this February 2014 in February this year in the Darien Times.

On Friday (11-28-14) this Business News article runs and is picked up on Yahoo News. This article talks about things that Jim Rickards was writing about way back in February regarding the problems in the Chinese economy. First some quotes from the Jim Rickards article. Then some quotes from this article. We encourage readers to read both the linked articles to get the full context.

Jim Rickards February article:

"Amid weaker U.S. growth and volatility in capital markets, China stands out as a beacon in the minds of many investors. It is widely assumed that China will continue to grow at about 7% without interruption and will, in time, surpass the United States as the largest economic power in the world."

"This China growth story is one that investors take for granted. But investors are in for a rude awakening when they realize how much of the China story is false and how quickly it may come unraveled."

"China’s problem is an over-reliance on investment to the exclusion of consumption. Investment makes up 45% of Chinese gross domestic product compared with about 20% in the U.S. Investment can be sustainable if it results in improvements to productive assets such as ports, roads and other critical infrastructure. China’s problem is that much of its investment is wasted on white elephant projects such as empty cities, monumental train stations, and unused airports."

Now the Business News article dated 11-28-14:

"Empty apartment buildings litter Ordos, one of the "ghost cities" that have characterised China's wasteful investment. The Chinese economy has wasted $6.8 trillion (£4.3 trillion) in investment during the last four years."

"That's according to a report from China's National Development and Reform Commission and the Academy of Macroeconomic Research, written up here in the Financial Times. The report says that amount has been "ineffective investment."

"If reported GDP were adjusted for wasted investment, actual growth in China would be seen to be much lower today. If the costs of massive air pollution and other environmental degradation were also deducted, real growth would be even lower."

"The People's Bank of China just slashed interest rates, and it looks like there's probably more coming. The economy has slowed significantly in recent years: The government now targets a growth rate of 7.5%, well down from the double-digit rates seen before the crisis, and many analysts believe they will struggle to even reach that."

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My added comments:

A couple of points to add here. First, we have a crystal clear example of why we rely on people like Jim Rickards here. Many times he identifies important issues correctly long before they become more widely accepted in mainstream media. Having accurate information as soon as possible is essential given the circumstances we find ourselves in these days. 

Secondly, let's see how this matters to us in practical terms in the real world. If you just accept the widely promoted view that China is on a sustainable high growth path for years to come, it might give you a false sense of security about the state of the global economy. It might cause you to lower your guard and think things are fine. If, in fact, China is actually struggling to sustain growth and some of the growth they are reporting is suspect, that is information we need to know. If China is lowering interest rates because they fear a debt problem and a faltering economy, we need to know that too.

Remember, a problem anywhere can lead to a problem everywhere in the highly connected global financial system. If China gets into trouble and has to liquidate some of their holdings they might be forced to sell off large US bond holdings for example. Or maybe they have also invested heavily in the US stock market. If China (or Japan or Europe, etc) gets into trouble, they might have to sell off US dollar related holdings. And what if trouble in any of these places causes a too big to fail entity to go under? What if that entity is holding huge derivative products that they cannot meet their obligations on? There is simply no way for us to know how big this risk is at any given point in time. Getting the best information on factors that impact this risk is very important.

So it is absolutely vital to be aware of the risks all around the world to the global financial system and to factor that into your plans for the future. It is why we encourage readers to stay informed, stay alert, and have a plan in mind in case the US dollar does get into trouble in the future.

Added note: There are several important issues we will be covering over the next week including the Swiss gold vote results (now posted just above), a proposal that Russia should back the ruble with gold, and another article calling on Central Banks to just print up money and give it directly to people (this one is in Europe in a mainstream publication). All these stories indicate that a lot is happening related to what we cover here so please check back in next week for these articles.

Also, we forgot to mention (and thank) Silver Doctors for running an abbreviated version of our stock car race to devalue article which you can see here on their site. We always appreciate other sites when they pick up our articles here.

Update 12-4-14: Marketwatch runs this article today. Given the information above, it's hard to know what the true numbers are for China. This Marketwatch article notes that, but also says it's hard to know the true numbers for the US too. It says the IMF numbers are the best we are going to get.