China's Big Secret

An interesting story in The Telegraph concerning China's credit bubble amazingly led to an offer to buy online Viagra, Cialis, and Levitra.

Obviously there is something that China doesn't want the rest of the world to know. Maybe Jim Chanos is onto something . . . China is sounding more and more like a short.

First, some explanation. The article was written by Ambrose Evans-Pritchard who is known to stir up some good controversy. It starts off well enough, with a refreshing lack of fawning over the China Miracle. It's great stuff actually . . .

Diana Choyleva from Lombard Street Research said China drew a false conclusion from the global credit crisis that their top-down economy trumps the free market, failing to see that the events of 2008-2009 did equally great damage to them – though of a different kind. It closed the door on mercantilist export strategies that depend on cheap loans, a cheap currency, and the willingness of the West to tolerate predatory trade.

China is trying to keep the game going as if nothing has changed, but cannot do so. It dares not raise rates fast enough to let air out of the bubble because this would expose the bad debts of the banking system. The regime is stymied.

"The Chinese growth machine is likely to continue to function in the minds of people long after it has no visible means of support. China’s potential growth rate could well halve to 5pc in this decade," she said.

As it happens, Fitch Ratings has just done a study with Oxford Economics on what would happen if China does indeed slow to under 5pc next year, tantamount to a recession for China. The risk is clearly there. Fitch said private credit has grown to 148pc of GDP, compared to a median of 41pc for emerging markets. It said the true scale of loans to local governments and state entities has been disguised.

The result of such a hard landing would be a 20pc fall in global commodity prices, a 100 basis point widening of spreads on emerging market debt, a 25pc fall in Asian bourses, a fall in the growth in emerging Asia by 2.6 percentage points, with a risk that toxic politics could make matters much worse.

It is sobering that even a slight cooling of China’s credit growth led to economic contraction in Malaysia and Thailand in the third quarter, and sharp slowdowns across Asia. Japan’s economy will almost certainly contract this quarter.

And then came these two paragraphs, which is where the fun began:

If there is a hard-landing in 2011, China’s reserves of $2.6 trillion – or over $3 trillion if counted fully – will not help much. Professor Michael Pettis from Beijing University says the money cannot be used internally in the economy.

While this fund does offer China external protection, Mr Pettis notes wryly that the only other times in the last century when one country accumulated reserves equal to 5pc to 6pc of global GDP was US in the 1920s, and Japan in the 1980s. We know how both episodes ended.

I found the claim that China's reserves could not be used internally to be quite astonishing, so I decided to check up on Mr. Pettis and see what his source was.

I Binged then Googled his name and the same results came up: Buy Online Viagra, Cialis, and Levitra.

Huh?

The web address, http://mpettis.com/, per this Bloomberg article, was his. But somehow I doubt the title is.

Could it be that Mr. Pettis is saying something that the Chinese government doesn't like? It seems so. Apparently, Mr. Pettis has some influence in China, as explained in the Bloomberg article. And that might be why it looks like he's being hacked.

I don't know if the Chinese have the expression "Where there's smoke, there's fire." But I'm all the more inclined to listen closely to any observation Mr. Pettis shares from here on out. That is, until he's thrown out . . . or snuffed out.

What's the point here? Pettis is a whistle blower. Always pay attention to information that comes with a price.

What is China's big secret? Maybe it's not so "big" after all.