It Ain’t A Pretty Picture

I sat down to write what I thought would be a simple column but how this stuff adds up….it accumulates faster than Kangde Xin Composite Material Group Company’s manufacturing of profits; for those of you unaware, they didn’t just manufacture laminating film but also manufactured (sic) profits – from 2015 to 2018, RMB 11.9 billion of them ie. US$1.729 BILLION but, hey, nobody knew, right? Just one of those accounting ‘misunderstandings’. Those share certificates and corporate bond certificates are now expensive toilet paper (at best). Follow that up with a report in Bloomberg that Anbang Insurance, which was taken over by the Chinese Government after its founder, Wu Xiaohui, engaged in excesses that even his friends in government couldn’t abide/ignore any longer is now in the process of being divested of many of its assets and has a new name, Dajia Insurance – Wu is in jail but his mother is complaining that the Government also seized shell companies that were in her name and those of several relatives; she wasn’t forthcoming as to how they got the money in these companies but she knows that it isn’t fair.

The warning signs are everywhere in China – according to an article in Bloomberg on July 8th/19, “Morgan Stanley has now turned bearish on global stocks and said that the outlook for the next 3 months is particularly poor”. Bloomberg also mentioned that the debt default in China is looking to pick up again and, in a separate article, they attribute some of this to the reputed crackdown on shadow banking (which lends to companies who can’t get loans directly from the banks). But no one is addressing that the banks are SOE’s and that the vast majority of their money go to other SOE’s and that the shadow banking companies are related to the SOE’s and that most of the SOE’s, if they have any profits to show at all, get these profits by the selling of land and/or the loaning of money (or signing of notes) to the shadow bankers. Put it another way, when the Government cracks down on shadow banking, it is not only depriving legitimate businesses of the only source of funding that they can get (leaving aside the outrageous interest rates), but it is also cutting one of the SOEs’s major sources of income…..so the claims of controlling and cutting the shadow banking are effectively just that, claims. In reality, plus ça change, plus ça reste la même chose (the more it changes, the more it remains the same).

But there is fallout and, make no mistake, it is going to have a sobering effect on the economy as a whole, and soon. Already, there is a report (refer to SCMP of July 8th/19) that there is a slowdown in the progress of the high-speed rail link from Zhengzhou to Jinan due to “local financing problems” – if you recall, I mentioned in Global Gab #16 that many Henan banks had a ratio of non-performing (ie. BAD DEBT) loans of as much as 40% and that the inter-bank loan market had (understandably) all but dried up. So no one is interested (duh!) in any more Henan bank bonds unless they would be backed by gold held by a responsible third party and, while the Government of China is buying gold (SCMP, July 8th/19), they aren’t sharing and they have also made it clear that they aren’t backing the paper (hey, they know what it’s worth!) The result of this and similar situations all through China will be unemployment on a massive scale and a multiplier effect in a downward spiral that, frankly, is frightening.

According to The Wall Street Journal on July 12th/19, inbound containers (from China) in June 2019 were down 5.1% at the Los Angeles/Long Beach Ports – SCMP, on the same day, reported that, “China’s exports and imports both fell in June due to US trade war tariffs”, and that, “China is struggling to contain the impact (of the tariffs)”. So now you know why Bloomberg reported on July 8th/19 in corollary articles that creditors (of large companies) are being harassed by government agencies and that the latter are trying to compel financial agreements. Moreover, also on July 12th/19, both The New York Times and CNBC reported that China is now harassing some American executives and, in the case of one executive from Koch Industries, he was not allowed to leave the vicinity of his hotel in early June (much less leave China) until the US State Department intervened. And that’s just one example.

Now take this report published in the The China Daily (a Chinese Government-owned publication) also on July 12th/19, in which a spokesperson for the Ministry of Commerce, one Gao Feng, said that, “there is no massive withdrawal of foreign investment from China and that the country will firmly protect the legitimate rights and interests of foreign enterprises in the country”. I guess that, based just upon the issues just mentioned, this begets the question of what do the words, “legitimate rights”, actually mean in China and to whom do they apply? As for the statement that there is no massive withdrawal of foreign investment, any of us who do business there know full well the difficulties of getting money out legitimately – so the statement is, at this point, undoubtedly correct as far as it goes. The reader will notice that Gao did not address the massive shift in supply chain sourcing. Factories are being closed and written off, something that I personally advised would happen in Beijing over 20 years ago – but they wouldn’t believe me because walking away from property is anathema to Chinese thought and culture. I was talking Mandarin and English but, as far as understanding, I could have been talking Martian. They didn’t want to understand because it wasn’t convenient to understand – then they would have to acknowledge the inherent problems. Milton Friedman had the same experience some 20 years before me – SSDD (same shit, different decade).

So now they are at the point where, according to Bloomberg on July 12th/19, China’s national debt is 271% of last year’s GDP, whereas 10 years ago it was ‘only’ 164%. And those ratios are based on the information as they could access/determine/scrounge – what the real figures are is anyone’s guess – and I frankly don’t expect that they have the full story even at the highest levels in Beijing. One thing for sure – it ain’t a pretty picture!

Comments/Suggestions? Please let me know.

Bennett Little