And how are they doing it? This is how:
…The Chinese central bank has a significant advantage over the U.S. Federal Reserve. Chairman Ben Bernanke and his cohort may print a lot of money (and they did), but there’s almost nothing they can do to speed the velocity of money. They simply cannot force banks to lend without nationalizing them (and only the government-sponsored enterprises have been nationalized). They also cannot force corporations and consumers to spend. Since China isn’t a democracy, it doesn’t suffer these problems.
China’s communist government owns a large part of the money-creation and money-spending apparatus. Money supply therefore shot up 28.5 percent in June. Since it controls the banks, it can force them to lend, which it has also done.
Finally, China can force government-owned corporate entities to borrow and spend, and spend quickly itself. This isn’t some slow-moving, touchy-feely democracy…
…Why is China doing this? It doesn’t have the kind of social safety net one sees in the developed world, so it needs to keep its economy going at any cost. Millions of people have migrated to its cities, and now they’re hungry and unemployed. People without food or work tend to riot. To keep that from happening, the government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system stabilizes. It’s literally forcing banks to lend — which will create a huge pile of horrible loans on top of the ones they’ve originated over the last decade.
I put it a little differently – after the near-revolution of 1989, a unspoken deal was struck between China’s rulers and people: as long as economic growth continued, the people would rest content under their communist masters. If China’s economy shows collapse, the deal is off – and that is where I stand: China only seems like it hasn’t collapsed. It actually did, about 9 months ago by my best estimate.
Since then its been a mad scramble in China as the government shovels fiat money in to the economy and simply commands that growth continue at 8%…and who is the Chinese apparatchik who will dare present a report showing that Chinese GDP contracted last quarter? And who in China will actually state what China’s urban unemployment rate is? And which foreign investors – who are so deep in to China’s bogus financial structure they can’t get out – will actually shout “abandon ship”? In other words, we don’t know the full story of what is happening in China, and we won’t know until it all comes tumbling down.
China has massive over-capacity in manufacturing; it is honeycombed with bad debts made at the bidding of China’s ruling class; a great deal of its foreign exchange earnings are used to fund China’s absurd military build up; worst of all, China owns US bonds; a lot of them…they can’t sell them, lest their value collapse along with the US dollar and they can’t stop buying them for the same reason. But they can only buy them with money they make selling low-quality, sweated-labor manufactured goods. But the world is in economic recession and thus there simply is not – and will not be any time soon – the level of demand for Chinese goods necessary to keep the Chinese economy afloat. China can twist and turn and hope that the global economy rebounds, but that is a fool’s hope – with the rise in manufacturing capacity elsewhere in the Third World and lower wages plus greater productivity in recession-hit America, there never will be the demand for Chinese manufactured goods, as a percentage of global manufacturing, as there was in the palmy days of 2005. The party’s over, but China hasn’t admitted it, yet.
When the smash up comes, it will stun the world…because most of the chattering classes and the business class either doesn’t realize how bad off China is, or they are tools of Chinese economic propaganda and thus have a vested interest in making people believe that China is a good investment. As for what we can do – not a dratted thing. We’ll just have to watch, and hope a nuclear-armed revolution doesn’t break out.
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