- The Hollow Threat Of China

The following comment was put up on my post about the euro from ‘Hell Is Like Newark’, a frequent contributor. It raises an issue that I think is important enough to reproduce here, to make sure you all see it. Here it is unedited:


Its not only in Europe that things are getting interesting...

Some posts back you stated concerns that China might have a hard landing. My wife job requires her to deal with China based firms on a daily basis. Observations she has made:

The company she works for stopped ordering textiles from China. The prices are getting very high and the factories are having additional difficulty guaranteeing deliveries as pricing pressures (inflation)sometimes means a factory cannot deliver the final product at the price quoted a year earlier.

Garment manufacturers in China are under major wage pressures as the can no longer keep workers with low wages. This has caused major problems with the factories missing delivery dates. Production is now being shifted to India, Vietnam, and Indonesia.

China has been instituting currency controls which has made it at times, impossible for a mainland based factory to pay for materials made outside of China. The factories my wife deals with have now setup shell companies in Hong Kong (which special status makes it exempt from the controls). All payable and receivables are now going through the shell companies.

I am starting to believe China is much more economically fragile than she appears.


The Chinese economic threat is another one of those issues that some in the political class are making much hay from, but few are seeing it as it really is. The problem of course is that all the statistics they release are lies, or at the very least… wild distortions. No one knows what’s really going on in China except the Chinese, and given the level of efficiency typical of communist systems, the Chinese probably don’t know either. But one thing is pretty clear – hard landing or no, they are by no means the great threat to American sovereignty that many depict them as.

To Discover the truth about China you need to do what some might think of as forensic accounting. You need to look for the things that don’t show up anywhere. I have an old friend who is an Economist with a major Swiss bank, and is a frequent guest on CNBC’s Squawk Box. He’s put some work into it and one thing he found was that much of the Chinese banking system is supported by nothing more than IOU’s from the PLA (People’s Liberation Army). That's not the kind of thing that leads to a solid balance sheet. There have been many other stories about the vast empty cities that China has used it’s mercantile policies to build, but no one can affords to live in. There is one linked to the photo above.

My point is, once you open the hood China does not seem to be the vast economic powerhouse that it seems from a greater distance.

Some, Mark Steyn comes immediately to mind, have raised the spectre of China doing to us what we did to the British during the Suez crisis – using finance to drive foreign policy. I don’t deny that they might try it, but we are not the British. I think it’s entirely possible that if they tried to force our political hand in that way we would ‘selectively default’. And even if we didn’t, the Fed would be more than capable of buying up the entire portfolio of Chinese held US debt. Since the Chinese know that, I think they're unlikely to try it - in the near term at the very least.

Anyway – comments like the one above are very important where China is concerned because they tell you something real. They give you a window into what’s really going on there that can’t be hidden by government statistics. My experience has been that these small stories scale much better than you would expect. If one person is having this experience, then many others are too. And if it turns out that the experience above is typical, then we should see confirmation of it on the macro scale in short order.