Dohmen: 'Soft Landing' in China? No Way!

The current China debate centers around a soft or a hard landing. The overwhelming majority opinion is that a communist government can accomplish what no other country has ever done, namely engineer a soft landing from the bursting of an immense, speculative, credit bubble.


I have a different view. Yes, a “command economy” can present the illusion that all is well, but it cannot change the reality of trillions of dollars of loans going bad, of export markets like Europe going into recession, of an avalanche of companies going out of business, of workers ending up in the streets. Hungry people riot.

Therefore, I suggest that it’s better to ignore all official economic numbers from governmental agencies in China. In fact, in the U.S. that might be a good idea as well.

The much vaunted gross domestic product growth of 8.1 percent in China, the lowest GDP growth in years, sounds great but it is fiction. GDP is “inflation-adjusted.” If the governmental uses a fictitious inflation number, in this case much too low, then the GDP is just as fictitious. Some astute observers on the ground in China confirm what I have said since last year, namely that China’s economic growth is now near zero.

Contradicting my statement is the “official” purchasing managers index (PMI) from the government, which shows a positive number, i.e. above 50. But that number focuses on SOEs, the large state-owned enterprises. These of course have an infinite amount of financial assistance available to them. The positive PMI produced headlines like this — Wall Street analysts responded: “The hard-landing view is now off of the table.”

All I can say is, “really?”

The nongovernmental HSBC purchasing managers index shows that nine out of the last 10 months have shown “contraction.” This survey is of the SMEs, the small- to medium-size firms. I prefer private sector analysis to that of the government.

In April, the bullish news was that “steel production” was up strongly. I wrote that this shows nothing about “steel consumption.” The next day, April 19, Reuters had this headline: “Iron Ore-China steel falls … slow demand.”

And on April 30 the headline was: “Major steel firms post first quarterly loss in a decade.” It’s good not to use speed-reading when looking at the first releases.

It’s not popular to be bearish when everyone else is bullish. For me it’s reminiscent to 2007, when I wrote the book "Prelude to Meltdown," predicting a “1929 event” in 2008 to be followed by the greatest wealth destruction in history. It happened!

Professor Patrick Chovanec of the Tsinghua University in Beijing wrote recently:

"There is reason to suspect the Chinese economy may be growing substantially below China’s reported real GDP growth rate of 8.1 [percent] for Q1, and may actually be in contraction (negative growth).”

I ask, how can manufacturing contract for nine months, export growth plunge to almost no growth, bankruptcies soar and housing sales and prices collapse while official GDP is growing at 8.1 percent?

I say that the statisticians in Beijing are working just as hard to fudge the numbers as those in Washington. They are using a false inflation number to adjust the “real GDP.” But that doesn’t change reality.

The motto of the bullish analysts now is that if the news becomes bearish, then just change the story and say that bearish news is “bullish.” The bulls now tell us that the slowdown will prompt the Bank of China to loosen money, which would be bullish for the China markets. Thus, if bad economic news is bullish, than a depression would bring euphoria. The fact is that the central banks are “behind the power curve.” Pilots know that this means disaster.

Wall Street in 2008

It was the same story from Wall Street in 2008: the Fedwas cutting interest rates frantically, starting in September 2007. We heard the worn out cliché’: “Don’t fight the Fed.” I would add to that, “unless the Fed fights the wrong battle.”

Apartments in China
Apartments in China

The Fed was trying to cure the imploding, highly leveraged debt pyramid and insolvency of financial institutions with a Band-Aid. The debt implosion had nothing to do with interest rates.

The China news in April was that loans have increased sharply there, as has money supply growth. Wonderful, but irrelevant! Neither are indicative of anything except that the government has ordered the large banks (owned by the government) to make loans to the insolvent local governments. How does this help the average Chinese or the Chinese stock markets?

The money put into these banks is not stimulative as it only replaces the money gone “to money heaven” because of defaults.

If faster money growth could prevent a credit crisis, we never would have had the 2008 crisis. U.S. money growth started growing strongly in May 2008 as the Fed started to worry. However, it did not prevent the monumental financial crisis five months later.

And if central banks could prevent severe market crashes and financial crises, why have we had all the crises in the past? Why was the Shanghai stock market down 70 percent in the last crisis? Why is it still down 60 percent from the 2007 high?

China car sales have stalled. Real estate prices are down 50 percent or more in the major cities; luxury car makers like Mercedes and BMW are offering 25 percent discounts on the top cars; steel mills, the job creators of many cities, have been closed. But the government tries to keep a lid on these facts. There are 64 million empty condominiums that never had their electric meter turned on.

Entire cities built for the future are virtually empty, as is the largest shopping center in China. Sounds like Dubai, doesn’t it? In 2007, when I wrote that Dubai would become the biggest real estate disaster ever, it was booming and my gloomy outlook fell on deaf ears. Now we know.

The Chinese government knows that confidence is important. Therefore, the reported numbers are politically influenced.

China’s Statistics Bureau reveals on its website that local officials forced some hotels, coal miners and aluminum makers to report false numbers. Statistics officials in Hejin city gave companies “seriously untrue” numbers to submit for 2011.

My view for more than one year has been that China would be the source for the next global crisis. The government can hide the real numbers, but it can’t hide the true consequences of a recession. When 20 million people are out of work, it’s an unemployment problem. When 200 million people can’t find jobs, it becomes a huge political problem.

China’s industrial policy is a failure. Most of the growth the past years has been governmental spending, governmental financing and incentives to speculate in real estate and the markets. Entrepreneurship, intellect and hard work of the average Chinese have met the greatest obstacle to genuine long-term growth, the “Great Wall of Communism.” Eventually, communism always fails because it goes counter to human nature.

Japan’s central government’s industrial policy failed disastrously starting in 1990. After 22 years, Japan is back in recession and the Nikkei index is down over 77 percent from 1990. This experience will now be repeated in China.

Wishing you successful investing,

Bert Dohmen

Bert Dohmen is founder of the Dohmen Capital Research group, editor of the Wellington Letter and China Boom-Bust Analyst and author of "Prelude to Meltdown," "Financial Apocalypse" and "The Coming China Crisis."