Quote of the Day: The Chinese miracle is officially labeled a “big burden”

But the massive construction site within China’s borders defied the laws of economics and plain old rationality.  It is literally impossible for an economy to record double-digit GDP growth year-upon-year in which 50% of the gain is due to “fixed asset” investment in public infrastructure and private real estate and industrial capacity. The reason is that no society could sustain the level of consumption forbearance and mass austerity that would be required to fund such massive investment out of honest savings.

Instead, the party overlords got lured into a dangerous economic Ponzi. They sent more and more freshly minted credit—-20-35% more in some years—down the state controlled banking system where it was parceled out to state controlled enterprises, local party rulers and independent entrepreneurs.

These recipients turned it into cement, rebar, fabrications, office towers, coal mines, power plants and port facilities—-without regard for sustainable rates of return. And when returns disappointed or failed to materialize at all—such as in the empty new cities, malls and luxury apartment buildings— more credit was advanced to keep these “investments” solvent. That is, new debt was issued to pay interest on the old.

So parallel to the downward cascade of credit was an equal and opposite upward back haul of fixed asset GDP.  In short, Beijing could hit its national GDP target nearly to the decimal point year after year because its was printing GDP through the machinery of a credit driven command-and-control economy, not presiding over anything that resembles a sustainable capitalist economy.

In a sense, after the disastrous failure of Maoism, the party dictatorship has maintained its lease on life only be synching-up with the global central banking swindle that has been underway for four decades now—but especially since 1994 when Greenspan panicked after that year’s bond market route. 

The giant issue facing China, however, is that it is at the end of the money-printing chorus line. It has now absorbed so much excess debt from the West and thereby inflated its credit Ponzi to such an insensible extent, that even its current rulers can see the hand-writing  on the wall.

In a recent speech, in fact, Premier Li let the cat out of the bag, calling China’s massive hoard of foreign exchange for what it is—-a vendor loan to foreign customers who buy but do not sell; who consume but do not produce. Suddenly, what has been ballyhooed for two decades as evidence of the Chinese miracle is officially labeled a “big burden”.

Actually, it has been a burden all along. The comrades have presided over the erection of a Ponzi of such immense and convoluted magnitude that they have no hope of unwinding it without a thunderous “hard landing”

(italics original, bold mine)

This is from David Stockman at his Contra Corner website in reaction to Premier Li Keqiang’s recent speech at Kenya where the latter said “Frankly speaking, foreign exchange reserves have become a big burden for us, because such reserves translate into the base money, which could affect inflation.”

As I have been saying here and here, in contrast to the mainstream faith on forex reserves which they see as a "talisman" against the risks of a crisis, forex reserves are NOT free passes to bubbles. Even Premier Li understands this. Instead they are manifestations of massive imbalances or bubbles.