Steve Keen's Debtwatch

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As I set out in The Fall of the Communist Dynasty, and a HT to John Hempton’s piece within which he contends that the entire Chinese economy is a Kleptocracy , this week we have news from Citron Research who reports that  Evergrande Real Estate Group Ltd is ‘a deception on a grande scale’ .

Citron quote ;-

‘Evergrande who ranks among the top 5 Chinese property companies. Our analysis and primary research reveal that: 1] Evergrande is insolvent; and  2] Evergrande will be severely challenged from a liquidity perspective. The Company’s management has applied at least 6 accounting shenanigans to mask Evergrande’s insolvency. Our research indicates that a total write-­down of RMB 71bn is required and Evergrande’s pro forma equity is negative 36bn.’

What sparked Citrons interest in Evergande was the mail order doctorate the chairman claimed from the University of West Alabama, a small college 230 miles north of New Orleans with 2300 on-campus students. Evergrande’s is one of the top 5 players in the Chinese property market that fell for its 8^th consecutive month in May. My experience with these types of matters is that small things can be excellent markers to greater problems. Small examples of dishonesty in one area of life are often reflected in larger undiscovered examples in other areas of a person’s life.

Meanwhile, Chinese Postal Bank, the country’s 7^th largest bank in terms of assets, had its President led away by investigators. The remarkable  aspect of this story is that is that it is not remarkable ; billionaire senior party figures get taken away for questioning  on a weekly basis.

Elsewhere , Zoomlion the concrete and industrial machine giant is seeking Rmb140bn ($22bn) in fresh credit, fuelling fears the company is at the centre of a growing debt bubble. Zoomlion only has a market capitalization of $12.5B and is one of the most shorted stocks on the Hong Kong market with over 30% on loan at any one time to short-sellers.  This company certainly lives up to its name, we know we have a bubble when a company with a business model like this one can raise just less than twice as much as the Facebook who raised $12.B by selling 12.3% of the company.

Zoomlion has an interesting business model, it is similar in many  of ways to Caterpillar, except whereas Caterpillar report falling sales, Zoomlion reports astounding sales growth with a fivefold increase in revenue since 2007. Zoomlion customers sometimes buy ten concrete mixers when  they planned to initially by one or two. They have a perverse incentive to buy more than they need because these concrete trucks are purchased via finance packages supplied by Zoomlion.

Then the machines can be garaged and used as collateral to borrow further funds from other lenders. Zoomlion continues to grow while cement sales have plunged. In May, cement output increased 4.3 per cent YoY, down from 19.2 per cent recorded last year.  Zoomlion’s new debt of $22.5B buys roughly 900,000 trucks which could produce enough concrete (at six loads a day) to build over thirty Great Pyramids of Giza a day .

Every sector is infected with these kinds of perverse business practices, steel traders used loans meant for steel projects to speculate in property and stocks , it has been common (apparently) for steel traders to secure loans to buy steel then use this same steel as collateral to borrow funds to invest in property development and the stock market. In many ways this is the steel version of the Zoomlion model.  A fundamental foundation of any lending market is the ability of the lender to ensure title and guarantee ownership of collateral.

There is $400B in debt spread across the steel market, this debt simply can’t be serviced even with more stimulus, a fall in the price of steel could render much of the market segment insolvent.  The money is being funneled to mainland banks via Hong Kong then it leaves via Macau casinos.

There are dissenting opinions that China has a problem. Even though Chinese PMI is falling at a faster rate than at any time in the last 3 years . Michael Pascoe tells us it is  only the economically illiterate that would read this data unfavourably.

Despite Michael’s assurances that everything is super ok, a falling PMI is yet another signal of prices and orders falling right throughout the  Chinese economy . Pascoe is typical of the highhanded media economists who will chant CCP propaganda all the way over the edge. Pascoe leads cheerleaders against American exceptionalism, all the while embracing the Chinese variety with both arms and few questions.

One of the core elements of the Russian revolution was the Bolsheviks expropriating the capitalist assets using them to fund the revolution. In communist vernacular of the times, it was referred to as the “expropriation of the expropriators”.  This term originally belongs to Marx and provides an effective finale to the first volume of his Kapital:

The monopoly of capital becomes a fetter upon the mode of production which has flourished alongside and under it. The centralisation of the means of production and the socialization of labor reach a point at which they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.

All revolutions have class and economic matters at their core. Ironically, the difference in a future  Chinese collapse is that the  expropriators in China in this cycle have been the Communist Party political class. The CCP have become the Kleptopreneur  bourgeoisie who have expropriated from China’s proletariat (the industrial working class), via corruption and theft from the state and state owned enterprises. The Ka-Ching Dynasty is responsible for the greatest looting of a nation in history.

Marx wrote that modern bourgeois society (Capitalism) has conjured up such gigantic means of production and of exchange, that it is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells (Karl Marx)

The CCP ‘sorcerers’ have summoned up a political and economic nether world that is so systemically corrupted it is in the process of spiralling into same revolutionary physics that destroyed the original Chinese merchant bourgeoisie that Mao overthrew.

The Chinese government has set saving rates at excessively low levels. Overtime this takes savings from depositors and transfers wealth to borrowers. In China this wealth is then mal-invested in projects that have limited real economic value, in the process transferring large amounts of worker savings to the kleptopreneur class , who then often take the capital out of the country.

The entire Chinese economy has been captured by looters who conceal their crimes behind fraudulent reporting.  Like their corporate brethren,they rely on fraud to continue the Communist Ponzi System.  Chinese fraudulent economic data is hiding the scale of the slowdown and this is becoming evident right across the economy. In an astounding example of Chinese productivity,  the economy is managing to grow GDP by 7-8% per annum but only using slightly more oil, coal or cement than in the same period last year. Oil consumption as reported in May only grew by 0.5% year on year at the same time as coal in Qinhuangdao is hitting record stock piles of  9.5 million tons, which is 0.2 million tons over the previous 2008 record. Also,  thermal coal stockpiles at utilities is up over 60% from a year ago

The current political leadership of China represents the greatest looting of a country by the political class ever seen in history. In the Hurun Report released in March 2012—the richest 70 members of the government have a net worth of $89.8 billion, an average of over $1B each. This compares to $7.5 billion for the 660 for the US government, an average of  $11M each. China’s Billionaire People’s Congress Makes Capitol Hill Look Like Paupers. In a country so indoctrinated in the works of Marx, it seems only a matter of time before the current Chinese proletariat, suffering under extreme wealth distribution, will rise up. One only has to look at the geographic distribution of wealth to see where the problems might begin.

Furthermore, this does not take into account the wealth held by the families of these politicians. Nor is this corruption limited to politicians. The military, according to John Garnaut’s report, has become one of the most corrupt state enterprises of all.  China’s wealth distribution is becoming completely one sided  The success of 300m Chinese who live in western level prosperity depends on the continued exploitation and good nature of one billion people who live on an average of $5000 per annum. This week Chinese military leaders have been ordered to report assets under the following CCP directive – The General Political Department, Discipline Inspection Commission: Leaders Must Report Income, Real Estate Holdings and Investments. This is likely to be met with extraordinary resistance. This could result in a standoff between the CCP and the PLA , where both bodies equally riddled with corruption struggle for the upper hand. The great

The corruption was genetically imprinted on the system from the early 1990s. Cadres (party officials) and entrepreneurs, combined to take previously state owned enterprises during an increasingly relaxed Chinese hybrid economy encouraged by Deng Xiaoping. Cadres were intentionally encouraged to leave the CCP and set up businesses, many deciding to keep both roles, becoming what was known as Cadre-entrepreneurs.

There were sound reasons for this , letting party cadres to set up businesses was the only way of opening up the government controlled system. Whereas a non-cadre entrepreneur might not be able to navigate the complexity of government support and approval, a CCP cadre had, in the early days, all the understanding and influence to move an opportunity forward.  This paper expands  further on the on the nature of the early corruption –  Institutionalized Corruption and Privilege in China’s Socialist Market Economy: A General Equilibrium Analysis Ke Li, Russell Smyth, and Yao Shuntian.

Capital flight has started; 60 per cent of about 960,000 Chinese people with assets of over Rmb10m ($1.6m) have already begun the process of emigrating or are considering doing so.  Are the Chinese top 1% losing confidence and taking their money out? In the article “High Wealth Concentration, Porous Exchange Control, and Shocks to Relative Return: the Fragile State of China’s Foreign Exchange Reserve“,  Victor Shih underlines how fragile China is to a loss of confidence by Chinas business elite.

If this business elite is predominately made up of Kleptopreneurs and Cadrepreneurs   , then capital flight might be bought on by a flight to safety by the political class fearing a purge rather than coming about as loss of confidence in China.

The greatest assumption that the world makes is that the CCP can control and avoid  this by implementing more stimulus. When this assumption ultimately proves to be false then Marx’s nether world will rise up

As Marx observed of the collapse of the Roman Empire

Originally, they were free peasants tilling, every man for himself, their own piece of land. In the course of Roman history, they were expropriated. The same movement which separated them from their means of production and of subsistence, implied not only the formation of large landed properties but also the formation of large monetary capitals. Thus, one fine day, there were on the one hand free men stripped of everything save their labor power, and on the other, for exploiting this labor, the holders of all acquired wealth. What happened? The Roman proletarian became not a wage-earning worker, but an indolent mob

Never in history has a government at this scale , been so completely captured by a political class intent on enriching itself, serving not the best interests of the people but their own ends. When and in what form the indolent mob rises up is hard to say. The reality, though, is that the Chinese political class is losing control. Guanxi the essential system of trust that holds the Chinese system together is breaking down, as is the Leninist vanguard system of controlling state affairs through the CCP.  A system of mutual trust and a central party vanguard is impossible to maintain in a Kleptocracy.

Craig Tindale is the Vice President of the Centre for Economic Stability, Professor Steve Keen’s non-profit research initiative.

Twitter #ctindale