“The Economist” Mocking China

WASHINGTON – It is no surprise that The Economist‘s cover this week is about China. The Shanghai Stock Market is almost in free fall, notwithstanding highly publicized state interventions (unthinkable in real market economies) to stabilize share prices. And we know about the zigzagging yuan, China’s currency, in the midst of what appears to be policy confusion at the Central Bank.

“Everything’s under control”

But what is interesting is that The Economist chose mockery, as opposed to a serious, even dramatic title, to depict the situation. The cover shows a drawing of a dragon with a totally terrified expression racing downhill (to nowhere), while a disheveled President Xi is struggling to stay in the saddle. The title says: “Everything’s under control”. 

This is important. The Economist‘s editors could have chosen a different cover to introduce a story of serious economic troubles in the world’s second largest economy. For instance: a picture of a stern looking President Xi, with a title saying something like: “China in peril?”.

Satire, not reverence 

But no, they chose mockery instead to portray a deteriorating economic situation. Well, this may not be the most irreverent satire. But it is satire nonetheless.

And I think that this needs to be noted, because of the sharp contrast with the almost reverential tone of most China coverage that used to be the norm until recently.

In awe of China’s leaders 

Indeed, until not too long ago, most western media were almost in awe of China. After all, this was the country that had done the impossible: 30 years of uninterrupted growth. Imagine that: 10% a year added to GDP, year after year. No other country had done that.

The Chinese technocrats in charge of economic policies were depicted as all-knowing, super smart technocrats, armed  with refined long-range strategies that we mere mortals could not even begin to comprehend, and the super human gift of infallibility.

Show the cracks 

Well, now there seem to be huge cracks in the splendid Chinese economic edifice. The meteoric rise is over. In fact, more and more western business media openly say that most likely the real rate of growth in China is much lower than the still more than respectable 7% (if it were true) officially declared by Beijing.

Publish the bad news 

There seems to be less reluctance to publish “the bad stuff” that at least indirectly contradicts official rosy numbers. For example: in 2015 there have been 2,774 unauthorized strikes in China. This is up from 1,379 in 2014, according to The Economist. These strikes (all of them illegal) are a sign of growing restlessness, possibly of major troubles brewing. And, by the way, the authoritative Caixin survey of the manufacturing sector just recorded the 26th consecutive month of decline.

Clueless leaders 

Let’s be clear. Nobody is suggesting that China is about to fall apart. But it is suggested, in fact declared, that China’s heroic days are over. It is also argued more or less openly that the Chinese leaders are sometimes clueless, especially when it comes to managing financial and monetary affairs. As The Economist put it in the same issue:“The past six months have been hard on the reputation of China’s economic managers. Their attempts to bring troublesome stock markets to heel border on slapstick”. “Slapstick?” Yes, this is comedy, not tragedy. Hilarious levels of gross incompetence.

And, finally it is taken for granted that the Chinese publish inflated growth statistics that nobody believes anymore.

Now it is alright to mock 

Well, I think that when it becomes alright to make fun of completely humorless leaders who want to be taken very seriously all the time, then we enter a different dimension.

The cartoon message is that these stern looking people who want to appear in serene control of everything in truth do not know what they are doing, while they deliberately lie about the extent of their problems. Sure “Everything’s under control” –they tell us– while the scared dragon races downhill, towards nothing.

Meaning: “Sorry guys, we do not buy the old super-performing China story anymore”. 

This hurts 

I believe that this scared dragon cartoon on the cover of one of the most influential news magazines in the world hurts more than any title that would criticize the merit of specific economic choices.

This cover story does not say that China is pursuing wrong-headed policies. This funny cartoon says that this a bunch of clueless amateurs, clearly out of their depth.

I am sure that to be dismissed with a laugh hurts a lot more than to be criticized.

The China Myth is officially dead; and Thank God for that!

China Worries Fostered By Unreliable Government Data

WASHINGTON – What’s going on in the Chinese economy? Nobody knows, really. We get bits and pieces; but not the complete picture. There is a real estate glut in the secondary cities. There has been slow growth. We know that imports and exports are down. We know of massive over capacity in some basic industrial sectors, especially those that support construction and infrastructure (cement, steel and copper).

Ponzi Scheme? 

But we do not know the whole story. There is no open debate on the economy, or policy choices, let alone a clear depiction of the actual state of troubles sectors. In fact, independent reporting on the economy and financial markets is expressly prohibited.

And precisely because nobody knows, when something strange happens, like the recent Shanghai stock market mini crashes, (that now amount to a significant correction), at the very start of the new year, many analysts fear the worst.

The truly scary (still hypothetical) scenario is that China has now become a gigantic “Potemkin Village”, a Ponzi scheme, a make-believe place of fake growth based mostly on unsustainable levels of debt. Just like in other Ponzi schemes, for a while everything looks great, but then it all comes crashing down.

Pessimistic picture

Here is how The Wall Street Journal sees it:

“[It is] more likely that Beijing will continue to prop up growth, steering more capital to money-losing companies, unneeded infrastructure and debt servicing, depriving the economy of productive investment and leading to the sort of protracted malaise seen in Japan in recent decades. But China is less prosperous than Japan.”

“Some state firms remain in business despite massive debt, several years of loss-making operations and a weak business model—Chinese officials have dubbed them “zombie” companies. Earlier this month, during a visit to the northern industrial city of Taiyuan, Mr. Li railed at the drag of “zombie” companies, according to a government account. He said they should be denied loans to reduce excess supply in the steel and coal industries”.

Not a flattering picture. This WSJ piece talks about money-losing state owned companies, costly but unneeded infrastructure, zombie companies, increasing levels of debt, and a lot more. This is nasty stuff. But is this just a crazy exaggeration? Maybe.

Unreliable data 

However, the fact is that the dark scenarios and the extra worry about China are due in large part to an opaque system that produces dubious, and mostly self-serving information. We simply do not have all the facts. Therefore, it is much harder to understand what’s really going on.

And here is at least one key root problem about China. In large part we do not know what’s really going on because we cannot trust official Chinese economic statistics.

It is an almost universally acknowledged fact that Beijing releases only optimistic, doctored economic data. In other words, “they cook the books”. Their data on GDP growth, productivity, unemployment is fake.

Big lies? 

What we do not know is how deep these lies go. Are they doing just a little “air brushing”, some minor embellishments? Or are we talking about massive data fraud? We simply do now know.

And precisely because we do not have a vetted, reliable baseline regarding GDP growth, inflation, unemployment, productivity, manufacturing growth and more, when something really strange and unusual occurs, like the sudden and deep Shanghai Stock Market losses, some are inclined to think the worst.

No transparency 

Well, is China’s government going to become transparent any time soon? Don’t count on it. Don’t count on a privileged Communist Party oligarchy that owes its unchallenged supremacy to its reputation of infallibility to show poor data revealing that the leadership is delivering below plan these days. They will never do this.

Given all this, we are left with a lot of questions. We know that China is slowing down, but we do not know how much. We know that there is a lot of bad debt, but we do not know at what point this becomes truly toxic. We know that most State Owned Enterprises, SOEs, do not perform well. However, we do not know whether this is a manageable problem or a crisis. We know about huge environmental problems caused by past unchecked growth, but we do not know at what point grass-roots protests about severe pollution may morph into organized political opposition.

Not a market economy 

One thing we do know. Despite all the incredible changes, and despite its ability to lift hundreds of millions out of poverty, China has not completed its transition to market economy status.

In a real market economy it is assumed that the government publishes accurate economic data in a timely fashion. It is also assumed that the private sector leads development, while all publicly traded companies publish balance sheets audited by third parties with reputable credentials. Finally, it is assumed that independent media freely report on economic issues.

None of this exists in China. I repeat: “none of this”. 

China’s Economic Slide And Its Political Repercussions

WASHINGTON – The big 7% Shanghai stock market loss right at the start of the new year is surprising. It should not have happened. Indeed, we know that last year the Chinese government spent a small fortune (about $ 138 billion) in a major and highly publicized effort aimed at propping up share prices.

Major intervention 

After a mid summer major sell-off, Chinese brokerage houses were forced by Beijing to buy and hold stocks. Short selling was stopped. Other market-supporting measures were taken. And, sure enough, thanks to this massive state-sponsored intervention, the Shanghai stock market stabilized and regained some altitude.

Of course, this “recovery” is preposterous, for it has nothing to do with market fundamentals. But, after these well publicized large interventions, at least some investors kept their stocks with the confidence that the government somehow would keep prices stable. (And we call this a market economy?)

Why the sell off? 

Well, given all that, then why the New Year’s 7% sell off? With all the protections and props put in place last year, this was not supposed to happen.

Well, chances are that many in China are beginning to understand that the national economy, while not in crisis, is probably in far worse shape than advertised.

Chinese officials talk confidently of a progressive, smooth transformation from capital investments and exports to services and stronger domestic consumption. They tell China and the world that they are expertly leading this transition that will result in a better economy, with stronger foundations.

Manufacturing slow down, or crisis? 

Well, it appears instead that the manufacturing sector is not just being “reorganized’. It is in fact in truly bad shape. There is massive, in fact colossal over capacity in almost all industries that was created by the stimulus launched to fend off the impact of the 2008 global financial crisis. In a real capitalistic economy, over capacity would be eliminated by painful but necessary plant closings, and massive lay-offs.

But this is China. Closing thousands of factories would be an admission of real problems, perhaps failure. Not to mention the social unrest that could be created by massive unemployment. Therefore, it cannot be done.

Money losing (many of them state-owned) industries will keep going. But this means extending cheap credit to them via state-owned banks. And this means a lot of bad debt piling up, while the state-owned enterprises keep losing money without any prospects of any turn around.

Decline, not a crisis

It is hard to gauge the depth of this industrial decline. But it is serious. On the plus side, we know that China has trillions of dollars in reserves. Therefore there will be no “China collapse”. Holes, even big ones, will be plugged.

But it looks as if China has lost altitude, probably for good. This means that the actual rate of GDP growth is closer to 5% or less, rather than 6.9% that the government claims.

Just an ordinary rate of growth 

This means that after its incredible thirty year ride, China’s rejoins the ranks of middle of the road, middle-income countries. True, hundreds of millions are now out of poverty. And this is a real achievement.

However, it came at a very heavy price, as the positively toxic air in many large northern Chinese cities demonstrates. The environmental damage caused by unchecked development is colossal. The negative public health implications enormous.

Political impact? 

But there is more. If China’s economic performance, once phenomenal, goes down to average, what does all this mean for the prestige of its leaders? The Chinese Communist Party claims to have the right to lead because it can deliver high rates of growth. Well, when growth becomes unremarkable, and most people begin to understand that this is the new trend, what happens to this leadership claim?

Restless middle class 

Is it possible that the newly minted Chinese middle class will become restless? We already see tens of thousands of unauthorized public demonstration in China, mostly focusing on environmental crises affecting local communities.

A new era? 

Here is the question. Can these local protests morph into something bigger? Well, not now. Indeed, any thought of an organized Chinese political opposition is just a fantasy, at this stage. But later on? Who knows?

Much depends on the economy. If the slide is bigger than anybody imagined, we may enter a new era in Chinese domestic politics.

Stay tuned.


Can Beijing Heavy Smog Become A Political Problem?

WASHINGTON – Can an autocracy be challenged by heavy smog? This sounds like a silly question. But it isn’t. Very heavy air pollution is now a major political enemy of China’s Communist Party. Beijing’s air is toxic, at times extremely toxic. And in other major cities in North Eastern China it is the same. 

Heavy smog in Beijing 

After several days of heavy smog, although reluctantly, the Chinese capital authorities had to declare a “red alert”. This is a big deal. This is an admission that air pollution has gone beyond hazard levels. This is a crisis. Indeed, on December 8 the air quality index had reached 300. By contrast in New York City on the same day the level was 49. According to the US Environmental Protection Agency, EPA, a level of 300 is unheard of in American urban areas. In Beijing people have been advised not to go outdoors, or do so only wearing face masks. Schools are closed. There are heavy restrictions on the use of automobiles.

A political issue?

But how can this become a political problem? Very simple. Heavy air pollution is the dark side of the mad race towards higher GDP numbers that China started about 30 years ago. Well, now the economy is not doing so great anymore, while the legacy of development without any environmental safeguards is here to stay. People know that this development policy was devised and managed by the Chinese Communist Party. They are in charge. They bear responsibility.

Now, will anybody try to hold them accountable? This will be very difficult in a country where there is no room for any kind of legal political opposition. However, now millions of people know that their lives have been endangered. And this widespread awareness is new.

Silence on pollution 

In the past, anything dealing with pollution levels was virtually a state secret in China. The authorities were silent on the health hazards caused by runaway industrial development. When they published data, it was incomplete and false. The unaware people in Beijing and much of Northern China were told that hazy days were due to “fog”.

Well, now they know better. This is not harmless “fog”. This is smog, at times extremely heavy, produced by thousands of coal-fired power generation plants and countless polluting industrial plants.

New awareness 

This new awareness of the health hazards posed by heavy pollution one day can turn into a political phenomenon. Please note that about half of China’s public demonstrations have to do with protests about environmental issues.

So, here is the thing. People may accept restrictions to freedom of speech if the leaders can deliver prosperity. But air quality is not negotiable. In the past the silent deal was that China’s leaders had “earned” the right to rule by showing their skills as competent economic stewards. But now it turns out that they were not so smart. Do they still have a “right” to rule?

Growth, at a price 

Yes, the leaders delivered growth. But at a huge price. And the price is paid today and will be paid in the future by the common people. Unlike the rich and the top leaders, they who do not live in mansions equipped with scrubbers and air purification systems.

Health statistics indicate that anybody living in Northern China on average will live at least 5 years less that people living in the less polluted south.

Not fixable 

The problem is that in the short term, this gigantic pollution mess is not fixable. It will take years and heavy investments in expensive renewable energy and other clean tech applications to substantially improve China’s air quality. And air pollution is only one part of the larger environmental degradation problem. China’s waters are polluted, and so is much of its soil.

Tens of millions of unhappy citizens 

The fact is that smog and heavy air pollution cannot be hidden or explained away any longer. And the 20 million Beijing residents are not happy. Add to them tens of millions of city dwellers in the many industrial regions of North Eastern China and you have a lot of disgruntled citizens. Thanks to growth, they have more income. They bought apartments. They own a car. They have more disposable income.

But now they know that their health and life expectancy are in real jeopardy. Now there are several protests here and there, triggered by major environmental concerns. Are they going to morph into a real political movement?

Not today. But, in the future, who knows?

All Is Well In China?

WASHINGTON – A detailed report prepared by a major Western international economic consultancy pointed out that the doomsday predictions about the Chinese economy about to fall apart are truly exaggerated.

All is well

The analysis maintains that China may be experiencing some problems now, but it is nothing out of the ordinary. The author points out that it is not true that the Chinese economy is dragged down by a bloated public sector. On the contrary, private enterprise is dominant and the long term trend indicates that it will continue to get bigger. (No mention that the state controls all the key strategic sectors, like energy and banking).

Plenty of innovation 

It is also untrue that the Chinese cannot innovate. There are plenty of examples of successful innovators. So much so that many western companies want to partner with them.

And it is also not true that rapid industrialization destroyed the environment. China went through phases quite similar to those experienced by other fast growing economies. Yes, there has been some environmental damage. But it is not catastrophic.

Besides, the government is acting fast, and remedial action is underway. (No mention about the lack of publicly available, reliable data on pollution. No mention that until a few years ago the government released false data on air pollution with the clear objective of hiding the extent of toxic emission in large urban areas).

Debt is manageable

It is also untrue that the massive amount of debt created to counter the effects of the 2008 global financial crisis has undermined the foundations of the Chinese economy. Yes, the author concedes, there is a lot of bad debt. However, China has massive cash reserves. The government can intervene and fix all the financial problems.

There are some issues, but no crisis 

Anyway, you get the picture. Yes, there are issues. But, hey, every country has got issues. And China’s shortcomings are pretty much the same as those experienced by Taiwan or South Korea at comparable times during their successful economic development.

Alright. So, here we have an optimist. Yes, China’s economy is slowing down. But, in truth, the glass is half full, and not half empty.

Fair enough. When dealing with such a large country it is not easy to get it absolutely right. May be the author is closer to the truth than other, more pessimistic observers.

No mention about the political and institutional context 

However, reading this rather upbeat China analysis you are bound to notice something really important. At no point is there is any mention of China as a non democratic one party state in which any political dissent is actively repressed.

No mention about routine media and internet censorship. No mention about a judiciary system that operates according to political instructions. No mention about a massive anti-corruption campaign orchestrated in secrecy, according to secret rules, by the Chinese Communist Party leadership. No mention that this fight against corruption, in a country where corruption is endemic, can be used as a tool to destroy political enemies.

In other words, there is not even the slightest mention about the fact that lack of political freedom, political pluralism and individual freedoms may have an impact on current and future economic performance. This is not just a small detail.

This connection between political freedom, economic freedom and eventually good economic performance is at the core of what we believe to be the underpinnings of modern, self-renewing societies. Free societies allow the free expression of human talent. And this talent is at the source of innovation, and ultimately prosperity.

Democracy and Capitalism 

Indeed, we say in the West that political freedom is the oxygen that allows private enterprise to exist, flourish and unleash a virtuous cycle of growth. It is not an accident that we call our system “Democratic Capitalism”.

We passionately argue that innovation is predicated upon the freedom to search, to pursue unorthodox paths, to go out of the box, to seek new partners, and so on. Hard to do this consistently in a top-down society in which few dare to go against the rules, written or unwritten as they may be.

Illiberal China will thrive 

It would appear that this China expert does not think that political freedoms have any connection whatsoever with the quality and long term sustainability of economic performance. In other words, a one party state can deliver prosperity just as much as a democracy in which basic individual and economic freedoms are constitutionally protected.

Although this point is not openly made in his analysis, implicitly we are to understand that China, a one party state, is doing quite well and –going forward– there are no major issues or minefields its self-appointed leaders will have to deal with. This means that you can have censorship and innovation. Political prisoners and social media. Non transparent judicial proceedings and intellectual property protection. No problem.

It never happened

In the final analysis, we are told that the Chinese economy, while not booming anymore, is basically fine; and all looks good. Which is to say that one party rule can create the necessary conditions for sustained prosperity.

Again, the author does not openly say this. But by implication this is precisely what we get. The numbers (according to him) look good, and so the system must be good. I find this scary.

The fact is that in the modern era we do not have other examples of one party states that produce self-sustaining innovative economies.

But this simple fact does not seem to bother the author. Again, I find this scary.



Who Believes China’s Official Economic Statistics?

WASHINGTON – We all know that China’s economy is slowing down. The Chinese government itself announced this. What we do not know, however, is how significant the slow down is, and what exactly is causing it. Is this a small issue, or is it a big, systemic problem just beginning to manifest itself? Who knows really. And much of this uncertainty is due to the fact that we cannot rely on the information released by Beijing about China’s economic performance.

A little slow down 

Chinese officials calmly admit that GDP growth at 6.9% is a little less than the 7% they expected. And they have recently hinted that probably next year growth will be a bit lower. May be 6.5%. Premier Li Keqiang said this much during a recent visit to Seoul.

What we are told is that this gentle slow down is part of a general reconfiguration of the Chinese economy. Under the expert guidance of the Communist Party, China will gradually move away from its traditional reliance on large-scale investments and exports, while more consumer spending will be encouraged. At the same time there will be more innovation, more green initiatives and improved sustainability.

The message from Beijing is simple and reassuring. All is well in China. May be a few adjustments will be needed. But all is going well, and according to plan.

Not true 

Yes, except that most likely none of this is true. According to some Western analysts, China is on the verge of a major collapse. They have created a gigantic, debt-funded bubble that is about to burst. There is monstrous over capacity in every major industrial sector linked to construction. There are tens of thousands of empty buildings. Several state-owned corporations are losing money; but they keep going thanks to easy financing coming from state-owned banks. Is this an exaggeration? May be.


Still, as a minimum, the optimistic official GDP numbers collide with other official Chinese figures related to electricity consumption, (down), cement production, (down), and steel production, (down). Hard to believe that China manages to keep the same rate of GDP growth when key indicators that should move up along with GDP are instead going in the opposite direction.

And there is more. The Singapore economy, a good proxy for what is going in China, is down, significantly. Recent export data from South Korea show a huge drop. Simply stated, China is buying a lot less from a key supplier. Not an indication of a growing Chinese economy.

Well, what is the point of all this? There are two points, actually. The first one is that the deterioration of the Chinese economy is most likely a lot more severe than anything that has been officially admitted.

False data routinely released 

But the second point is probably even more significant. China clearly releases false economic statistics, and it has been doing this routinely, for who knows how long.

Now, this is no detail. This is not akin to the White House Press Secretary trying to paint today’s events in a favorable light that will make the US President look good. We call this spin. Not laudable, perhaps unethical, but not utter fraud.

However, what China does is akin to the White House Press Secretary announcing from his podium that the US economy grew at a rate of 2.5% when it grew instead by only 1.5%. He goes out there, speaking to the nation, and he knows he is lying. There is a distinction between spin and falsehood.

And yet we accept that China does this.


This situation is unprecedented. After 30 years of impressive growth, China wants to be treated as a mature world power and a major economic player, now fully integrated in the world economy. This is not a country akin to the old Soviet Union that lived in its own universe. And this is not Mao’s China either, a country run into the ground by its leader’s bizarre ideology. And yet the government of this modernized and vastly more productive China lies about fundamental economic data. And how do we react to this?

Well, we do essentially nothing.

Look, I realize that this is an awkward situation, and that there is no easy solution. How do you say this? Well, for the moment we do not say it. Indeed, as far as I know, no Western Government is on record stating that the Chinese release false or at least not fully reliable data. Ditto for the IMF or the World Bank.

Business media reporting on China

And what about Western business media? Well, they are becoming a little more assertive about producing the evidence and the work of private forecasters and analysts that contradicts official Chinese data. Almost all China watchers agree that China overstates its growth figures. The disagreement is on the degree of the lie. Some argue that real GDP growth is 6% and not 7%. Other claim that it is even lower, may be 5% or even 4%.

But the media are careful in how they phrase all this. They know that this is potentially an explosive issue. Think of the consequences. Does The Wall Street Journal want to see its Beijing bureau closed down, and its correspondents expelled from China, guilty of producing slanderous stories about China? Probably not. Hence extreme caution when reporting on any analysis of Chinese official data.

A major economic player? 

That said, all this is absurd.  The fact is that no one believes the official data. But it is not polite to say this openly. Talk about the Emperor having no clothes.

So, here is the thing. China wants to be treated with respect. And yet it behaves just like the old Soviet Union when it comes to releasing false data and distorted information. All this smells just like the old-fashioned Communist propaganda. And what do we do about this? Essentially nothing. We listen to the releases, and we politely nod.

Sure enough, in private government leaders and financial analysts make calculations based on what they believe is really going on in China, or at least I hope this is what they do.

But in the meantime most mainstream media keep publishing or airing the false data released by Beijing, in most cases without any cautionary note about the reliability of these figures.


As the terrible crash of 2008 revealed, here in America we got into major trouble because people chose to overlook alarming signs. And this happened in a country with a lively free press and hundreds of capable analysts, not to mention laws that require detailed disclosures and full transparency.

The idea that we can deal with China as a regular business partner when we have no clear understanding as to what is really going on in this vast economy simply because we cannot trust official data is totally preposterous.

Basic rules apply to all, China included

At some point the Chinese need to be told that rule number one for those aspiring to be at the head table in the global economy is full transparency and publishing accurate information.

Somehow the Chinese believe that they have become so big and so important that basic rules do not apply to them.

They should be told otherwise.




WSJ: Chinese Economy Not Fixed

WASHINGTON – “Chinese factories continue to pump out too much steel, glass, cement and other items even as they battle mounting debt, slumping prices and weak demand. Factories in the world’s largest manufacturing nation have suffered 43 consecutive months of deflation. And loan demand among manufacturers in the third quarter turned negative for the first time since a central bank index started in 2004”.

–The Wall Street Journal, October 31, 2015

Commodities Exporting Countries in Deep Crisis

JOHANNESBURG (South Africa) – Renowned oil expert Daniel Yergin recently observed that the collapse of crude oil prices is just the last act of the commodities ongoing tragedy. Commodity prices exploded in recent years mostly because of historically unprecedented demand from China. But China’s boom is over. And commodity prices are essentially in a free fall, due to lack of demand.

The consequences of this collapse 

Yergin noted that this collapse is bound do have serious economic and political consequences in countries such as Brazil that for a long moment believed that they had become really rich by selling to China. Now the leaders, and the mining conglomerates that operate in their countries, know that it was only a dream. Except that many of them (very unwisely) borrowed a lot during the go-go years, using that dream as collateral.

How bad is it?

Well, how bad is it? Bad enough. According to a BBC report, copper dropped another 2% in recent days. It is now “at its lowest level in six and a half years”. 

Indeed, copper is now at $ 4,995 a ton. We are back to the depressed levels copper reached in 2009, when the world was right in the middle of the Great Recession. And here is the rest of the BBC report:

“Demand for copper, which is used across industry from construction to car manufacturing, has suffered from the slowing Chinese economy. 

Investment bank Goldman Sachs warned investors this week that prices would continue to fall. In a note entitled, “Copper’s bear cycle still has years to run”, its analysts predicted copper prices would probably drop to $4,800 a tonne by the end of December and to $4,500 by the end of next year. The decline in copper is only a part of a global meltdown in commodity prices caused by China’s economic downturn. 

Crude oil has fallen some 60% from June last year, thermal coal has been on a long 60% slide since 2011, and iron ore is down even more, close to 70% since 2010. 

The effects are rippling out into other sectors. On Tuesday, Japanese shipping business Daiichi Chuo Kisen Kaisha filed for protection from creditors, caused by the collapse in Chinese demand for iron ore and coal.

Unsurprisingly the collapse sent a shiver through the rest of the Japanese shipping sector. Nippon Yusen, Mitsui OSK Lines, Kawasaki Kisen Kaisha saw their shares fall between 4% and 8%.

And the effects spread far wider than the mining companies and their support services. Any economy dependent on commodity exports is seeing its currency punished. Australia, whose iron ore, coal, oil and natural gas fueled the Chinese boom, has seen its dollar lose more than a quarter of its value against the US dollar over the past year. [Bold added]

Chile, where copper makes up 30% of the value of its exports, is expected to announce on Tuesday that public spending, having grown almost 10% last year, will rise by half that amount this year. Economic growth there has slowed along with the fall in the copper price and a decline in investment in the mining sector.”

China’s binge

So, here is the thing. China engaged in the construction equivalent of a historic drinking binge. Its leader really thought that they could counter the 2008 Recession through gigantic debt-driven investments in “everything”: shopping malls, luxury condos, high-speed rail, ports and airports. In pursuing this construction extravaganza, the Chinese generated an unprecedented wave of commodities imports.

But now the enormous debt created to finance all of this construction is catching up with China. The boom is over. And the commodities sellers now know tow things. Number one, going forward China’s buying will be modest –at best. Number two, they will have to deal with the massive debt that they contracted in order to finance the growth of their sectors, so that they could meet China’s appetites.

Massive malinvestment

Well, China’s growth was driven by malinvestment. Sadly, it turned out that malinvestment was contagious. Everybody invested in additional capacity hoping that China’s absurd levels of demand for iron ore, copper and what not would continue essentially for ever.

South Africa will suffer, along with Australia, Brazil, Chile, Zambia, and many other commodities exporters. Add to this troubling picture the well publicized afflictions of all oil exporting countries, and then you cannot be surprised when reading that the IMF just revised down its global economic growth projections.

Still, please note that, if there are going to be negative economic repercussions in Germany because of the global slow down, in Brazil and elsewhere it is going to be a lot worse. Brazil and most of the other commodities exporters do not have a “Plan B”.


Chinese Communist Party Instructs Media To Stress “Superiority of China’s System”

WASHINGTONThe Financial Times reports that the Chinese Communist Party gave detailed directives to all Chinese media about how they will have to report economic news.

Bright future 

Here is the story they must tell, in the aftermath of the Shanghai stock market crash and other bad developments, regarding the overall economic slow down in China: “The focus for the month of September will be strengthening economic propaganda and…promoting the discourse on China’s bright economic future and the superiority of China’s system”.


Got that? A dramatic loss of momentum becomes “China’s bright economic future”. A mercantilist model that run its course is in fact “a superior economic system”.

Look, these efforts to manipulate the message are not shocking revelations. The Communist Party runs China and in a broad sense it “owns” the economy. There is no question that a large part of the party’s prestige and overall legitimacy rests on its reputation as competent economic steward.

Therefore, it is no surprise that, confronted with a sustained bad economic trend, the party orders all media to publish only “happy news”. The point is to preserve the party’s image. Negative news hurt politically. They tarnish the party’s prestige.

Most official data is fake 

That said, all this active effort at manipulation tell us at least one thing. Most likely, the real situation in the Chinese economy, (data about growth, unemployment, and bad debt), is worse than what we think. Based on this revelation, we can count on the facts that all official statistics are routinely doctored, so that things will appear far better than they are.

Again, nothing too surprising here. With all its years of reforms and partial liberalization, China remains an autocracy. Those in power must be depicted as capable and wise. They make no mistakes. They steer the country in the right direction, and at the appropriate speed.

We bought the story 

The problem is that Western policy-makers and media bought this fake story. They swallowed this propaganda as if it were legitimate news. They bought the exaggerated growth statistics.

So, what do we make of all this? Even if we discount the fluff created by the “happy news” ordered by the authorities, in the end, China is not a disaster. Far from it. We are talking about a loss of momentum, not about an economic collapse. With its immense cash reserves, China will pull through.

The glitter is gone 

However, the glitter is gone. A debt-driven growth model based on ever-growing exports, and a never-ending construction boom, has run its course. Most likely for good. China still has impressive resources. It will continue to grow, probably at a respectable 4% to 5% rate.

But it will soon become clear to the entire world that China’s leaders did not invent “a superior economic system”. Far from it. And, in the long run, this fall to earth will hurt them politically. They built themselves up as invincible economic geniuses. It turns out they are not.

Defensive battle

Yes, the party propaganda machine will do its best to force Chinese media to tell a different story. But this is a defensive battle, damage limitation.

Again, the glitter is gone.

US Hit By Global Slow Down

WASHINGTON – Will US stocks recover? Or are they headed even lower? The optimists tell us that Wall Street panicked in the last few days. Forget about China. The fundamentals of the US economy are solid. There is no reason to liquidate stocks. Therefore:“Be smart. Buy the dip!”

Over valued stocks 

This is almost unbelievable. We all know that US stocks are over valued because of an unprecedented stretch of zero interest rates decreed years ago, at the time of the financial crisis, by the US Federal Reserve. As traditional savings accounts became non viable, most people went into stocks, therefore inflating valuations. We know that. Besides, we also know that many major companies, instead of investing in additional capacity, have been busy buying their own stocks. Obviously this provided extra support. However, it is clear that IBM and others cannot inflate their share price for ever by propping up their stocks in this way.

Modest GDP growth 

More broadly, there is an obvious disconnect between modest US GDP growth (about 2% a year) and stellar stocks valuations. And this modest growth is not going to improve. The Congressional Budget Office (CBO) just revised down its own optimistic projections for 2015. According to the CBO, the US economy will not grow at 2.9%. Most likely the rate is going to be only 2%. Well, that is 30% less than estimated only a few months ago. So, no improvements.

All this should be enough to tell us that a major stock market correction was indeed in order. In fact, whatever the daily gyrations, probably we are not quite done with that.

China: worse than you think 

That said, if we look at the global economy, there is reason to be even more pessimistic. First of all, the China story. Well, it looks that it is much worse than it appears. For starters, for the first time major business media are openly saying what many have been suspecting all along. The Chinese authorities falsify their growth statistics. China says that it is growing at 7% a year. Well, make that 5%, or even less, according to many analysts. This is no mere detail. This tells us that China’s problems are most likely bigger and deeper.

And since most of China’s growth comes from fixed investments, especially in construction, a major slow down of this gigantic engine has and will have an enormous negative ripple effect across the global economy.

Excess capacity 

Consider this. In the 1990s China steel production was about 100 million tons a year. Today it is 1.1 billion tons! However, because of the slow down, this capacity represents double its current demand. That’s more than  500 million tons over capacity!

And what is the effect of this rise and fall of production on world iron ore prices? Iron ore used to be $ 30 a ton in 2008. Thanks to China’s demand, it went up to $ 200 a ton. Now it is down to $ 100.

This means that major producers made huge investments to increase their capacity, counting on continuing Chinese demand. Well, now they are in big trouble. BHP Billiton, a world mining giant, just announced its worst results in 12 years. Profits are down 86% .

End of the BRICS

So, thanks to China, commodity prices are down, way down, hurting many producers across the globe. To make matters worse, commodities happen to be abundant in poorly managed emerging countries. So, falling economic fortunes have to be added to garden variety mismanagement, incompetence, corruption, and political crises.

Mix this nasty brew and you see that all the famed BRICS are out of luck, (India is probably the only partial exception). China aside, Brazil is in very poor shape, while there are mass protest against President Dilma Rousseff. Under performing South Africa just announced a GDP contraction. Russia has been hit by the double blow of low oil prices, and economic sanctions due to the Ukraine crisis.

Dismal prospects almost everywhere 

You want more? Abenomics failed in Japan. The economy is anemic at best, and there is no plan to diminish the burden of a monumental public debt. Saudi Arabia will run huge deficits because of lost revenue due to low oil prices. Turkey is in political turmoil, while its economy is sputtering.

Almost the entire Arab World is in chaos, with civil war in Libya, ISIL in Iraq, and self-destruction in Syria. Europe is barely treading water. Its southern periphery is and will continue to be in bad shape. France is doing poorly. Coming into the Western Hemisphere, Canada is also suffering because of low oil prices.

US to be affected by the global economy 

Given this rather uninspiring world scenario, the idea that the US will continue to do well because of our “good fundamentals” is just crazy. First of all, our fundamentals are rather weak. Secondly, we live and operate in a global economy.

Because of its insane investments binge, China used to drive growth. Now it is dragging a good portion of the world economy down. And there are no other locomotives of comparable size.

The idea that America can keep chugging along all by itself, even if at a modest rate, while the rest of the world is losing speed or worse is a complete fantasy.