Short-Sell This Economic Empire Today… by Kris Sayce on 6 July 2011

Short-Sell This Economic Empire Today…

by Kris Sayce on 6 July 2011

“Moody’s estimates that local governments’ debt is about a third more than the audit office’s findings last week of 10.7 trillion yuan [AUD$1.5 trillion]. Non-performing loans could reach as much as 12 percent of total credit…” – Bloomberg

It’s called “payback”.

Clearly the ratings agencies are annoyed they copped the blame for the 2007/2008 subprime disaster.

So after taking the rap for rating awful assets triple-A the ratings agencies are now feeding on revenge.

And they’ve just started.

Greece is the hors d’oeurves.

Portugal is the soup.

And Italy is the fish.

As for the U.S. Well, that’s too big to be just a main course… it’s an all-you-can-eat buffet.

When the ratings agencies go for the U.S. debt downgrade they’ll need to bring in the big guns. We suggest they recruit Joey Chestnut – winner of the Nathan’s International Hotdog Eating Contest* (62 hotdogs – sausage and bun – in 10 minutes!)

*Viewer discretion is advised

But there’s another meal for the agencies to tuck in to. And that’s the issue of China’s local government debt…

Why China is the same as the West

One thing most China bulls forget is that debt has built China… just like Western nations.

But what about China’s savings? It’s hard to call it savings when much of it in U.S. dollars… a currency the U.S. Federal Reserve is steadily devaluing.

Let’s clear this up: China isn’t an economic miracle.

With $1.5 trillion of local government debt, it tells you they’ve spent up big. Punting on future revenue repaying the debt.

But what happens if (or as we believe, “when”) those revenues don’t come?

We know it’s a cliché, but any economy is only as strong as its weakest link. And as we see it, China has plenty of weak links.

The reality is China is aping the Western system. Only it does it more violently. If we know the Western economic system is broke, it’s obvious the Chinese copycats will also go broke.

As we say, it’s just a matter of “when” not “if”.

China is just the latest in a string of failed empires. Empires that grow so big they can’t grow anymore.

We won’t give you a history lesson – because we’re not hot on history ourselves. But why should the Chinese empire succeed where Egyptian, Roman, Ottoman, British, Soviet and American empires have all failed?

Can it be true the Chinese government busy-bodies have revealed the secret to controlling an economy? The secret other busy-bodies across the centuries couldn’t find?

No.

Short-selling China

That’s why we’ve got our eye on short-selling China.

Or to be precise, the China Fund Inc., [NYSE: CHN]. It’s a listed fund that trades on the New York Stock Exchange…

And it’s one of the best ways to profit from a Chinese economic crisis.

In recent months, dodgy Chinese stocks have stung many U.S. investors. One of the most publicised is Sino Forest Corp [PINK: SNOFF] which trades on the “Pink Sheets” over-the-counter market in the U.S.

As you can see from the chart below, in recent months it traded from USD$25 to below USD$2:


Source: Google Finance

The price collapsed after allegations of fraud against the company.

This isn’t the only example. There are many others… and it sets the market up for an even bigger slump in Chinese stocks.

Look, we’re not saying all Chinese stocks are frauds or Ponzi schemes. But they are making the same mistakes made during an economic bubble. They’re building the economy on credit… planning for future revenue growth from the new Chinese consumer.

And the bad news for China is it hasn’t learnt the right lessons from history.

They believe they can minutely plan an economy. And that they won’t create a boom or bust. But what they’ve done is what other “cult of the masterminds” do – they believe they have the secret that no-one else has discovered.

That’s understandable. It’s human nature to think they can succeed where others failed. But soon they’ll see there isn’t a secret to centrally planning an economy.

The proof is in the past – central planning doesn’t work and never will. That’s why we’re short-selling China.

Cheers.

Kris Sayce
Money Morning Australia
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Tagged as: china, debt, economy, Europe, Greece, Italy, Portugal, short selling, US
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{ 29 comments… read them below or add one }

← Previous Comments

21 Peter Fraser July 7, 2011 at 5:15 pm

    TRB – debt is being reduced, but it will take years.
22 Roger Guillemet July 7, 2011 at 5:26 pm

    Certainly no debt reduction in the US of A. The American National debt is mind boggling.Apparently if you took all the greenbacks that they owe and stacked them up one on top of the other the result would be a pile 1,537,000 klms high. In other words the pile would go to the moon and back then to the moon and back again.
    And they want to increase the debt cieling even further. Perhaps they are aiming for Mars this time around.
23 bb July 7, 2011 at 6:05 pm

    I love those weird metrics Roger! I heard one about how much the size of a $1 trillion dollar debt is. It was explained that if you were able to pay back $1million per hour, 24/7 it would take you over 110 years to pay it off – that is of course without interest charges factored in! On that basis the US should be debt free by around 3500 AD.
24 Peter Fraser July 7, 2011 at 6:47 pm

    Ah – Roger and bb – I was talking about personal debt in Australia, not public debt in the USA.
25 PT July 7, 2011 at 10:49 pm

    I’m with SV. I want to know who all the money is owed to.

    From what I can make out, all the money was created out of thin air by “the banks” and so can never be repaid because it only ever exists as entries in the banks’ “Money other people owe us” column in their books… until “the banks” go crying to the guvmint that they are about to crash, at which point the “guvmint” orders more money to be printed to keep the banks going while everyone else stays in debt ….

    Is that all there is or is there something else? Can someone enlighten us?
26 peter fraser July 7, 2011 at 11:33 pm

    PT – Central banks can create money, trading banks cannot do that, although they do affect money supply.
27 ben July 8, 2011 at 8:16 am

    Pf: what do you think they are doing when they give you a home loan? The majority of the loans ‘value’ is created from thin air. Notbto mention that central banks and private banks are one and the same, since there are almost no publicly owned central banks!
    Reserve bank quark, fed reserve… Both private. And don’t try to tell me they are publicly controlled either, that is an illusion designed to allow that very ‘defense’
28 Peter Fraser July 8, 2011 at 1:27 pm

    ben – you are wrong ben, but I just don’t have the time to educate you. You know not of what ye speak.

    Do some research and stop reading crap on internet blog sites, it’s bad for your intellectual health. Now you will have to go back and unlearn all of those so called truths that you cling to.
29 Bernard Larcombe September 13, 2011 at 10:56 am

    banks use depositors invested money to lend to borowers for whatever,first checking if the projected use is viable.investors pay debt plus interest.this is used to pay depositors their interest.merry go round of deposit,lend,pay investors,lend etc.

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