IBD: China’s systemic cooked books problem
We have talked many times — and with some concern — in the past of China’s cooked books and its trillion dollar mountain of bad debts — and the corruption in its stock market and at its banks. Investor’s Business Daily takes the matter several steps further. While we have tended to see China’s issues as those of a rapidly developing economy with its myriad problems, IBD asserts that China’s cooked books come from its totalitarian roots as a Communist dictatorship — and are as flaky, though not as bad, as the USSR’s used to be:
Beijing has wisely opened up its economy to Western investors to fund its military ambitions…But we still don’t know fact from fiction when we talk about China’s “miracle” economy.
“You can’t trust their GDP numbers. They’re at least 2% below what they advertise,” said Roger Robinson, former chairman of U.S.-China Economic and Security Review. “So when they say 9% growth, it’s really 7% or less.” Other estimates say growth is even lower — 6.2%, according to the University of Chicago, and 3%, according to the University of Pittsburgh. Robinson said that, without the cushion of foreign capital, China would implode even with 5% to 6% growth.
He noted that Beijing has artificially devalued its currency and continues to heavily subsidize its manufacturing sector. Bad debts have piled up, many of its state-run banks are insolvent, and now China’s rulers fear an inflation spike.
The whole system would collapse if we didn’t prop it up through massive flows of trade and investment. Yet Wall Street can’t get enough of Chinese IPOs — even debt-laden dogs like China Construction Bank, whose shares were snatched up last year in the world’s biggest offering…
As we saw from this week’s sell-off, all of America may be overinvested in a monumental fraud. We know Beijing’s defense numbers are bogus; the Pentagon has proved it. If the Chinese lowball those data to hide military outlays, how do we know they’re not inflating growth figures to attract more Western investment — the lifeblood of China’s economy? Both come from the same dubious source: the Chinese Communist Party.
It is not beyond reason that these suspicions were subconsciously behind the great unease among investors created Tuesday worldwide when the Shanghai market cracked. If China’s numbers are in fact riddled with systemic fraud, as IBD asserts, the results, in all likelihood, would be highly detrimerntal to world markets.
On numerous occasions, this space has praised China’s economic miracle of two decades of 10% GDP growth. Pity if it was mostly smoke and mirrors.