This article was first published by The McAlvany Intelligence Advisor on Friday, May 8, 2015:
Wolf Richter is one observer of the present world economic scene who hasn’t had his mind altered by drinking the Kool-Aid ladled out in Washington and in the economics departments of so many colleges and universities. After holding a number of C-level positions (CEO, COO, etc.) in large and successful private companies, he chucked it and went to live for a while in Switzerland. He started a blog with the ghastly name of Testosterone Pit, which he thankfully changed to Wolf Street last summer.
He has been watching economic events unfold (and unravel) in China for some time, but the latest from the Shanghai Containerized Freight Index (SCFI) so startled him two weeks ago that he thought it was either a misprint, or that the index would bounce right back from its precipitous fall.
It was no misprint.
The SCFI tracks the spot shipping rates from Shanghai to every other port in the world. Richter likes it because it can’t be manipulated by the Chinese government the way every other economic number is. The SCFI component for Northern Europe had dropped an eye-popping 67 percent in just the last year. Two weeks later it had fallen another 14 percent, setting a new all-time low.
Wrote Richter: “Something big is going on in the China-Europe trade.”
What is happening is the greatly anticipated implosion of the Chinese economy that observers like Richter have been predicting for years. What’s different this time is that the SCFI is being confirmed by other indexes looking at the same data.
For instance, there’s the China Containerized Freight Index (CCFI), which, although being manipulated by the Chinese government, could no longer hide the truth. In the last two months it has declined 16 percent, from 1070 to 899.
The Worldwide Container Index tracks routes from Asia to Europe and the US. It has plummeted by more than 40 percent since January.
Each was confirmed by the Baltic Dry Index (BDI), considered as a leading indicator of future growth (or contraction) because it measures the rates charged to ship raw materials such as metals, grains, and fossil fuels around the world in sea-going containers. It has fallen from 1,484 in late December to 575 on Wednesday, May 6. Say it right: that’s a sixty-one percent decline in four months.
These indices confirm China’s “official” [read: manipulated to hide reality] manufacturing purchasing managers’ index, which came in on May 1 at the lowest rating since April, 2005.
Richter has plenty of highly credible company, including one Anne Stevenson-Yang who served in the distant past as a People’s Liberation Army intelligence officer, dutifully carrying around with her Mao’s Little Red Book. She came in from the cold and now provides unique insights into what’s really going on in China. In a phrase, she thinks China’s boom times are behind it. In an interview last December with Barron’s, she said:
For all the talk about economic reform, China is in big trouble. The [Keynesian] model of relying on export driven growth and heavy investment to power the economy isn’t working anymore.
That export growth has been goosed through currency manipulation, and that heavy investment has come from government spending. That’s the Keynesian formula: tax, spend, invest, and the consumers and investors will take it from there.
But those Chinese citizens and investors didn’t get the memo. Seeing that the yuan is losing its purchasing power, those with investable capital are either taking it out of the country or buying fractional shares in apartments in empty cities, hoping the anticipated and predicted influx of workers from the countryside will materialize. They’re also pushing the Shanghai stock market index to new highs: since December it has nearly doubled, from 2,500 to 4,500.
Part of the problem is that China, in the interest in keeping the myth of inevitable eternal runaway growth alive, overinvested in basic industries providing cement, aluminum, steel, and electricity. In addition the government has invested in “vanity” projects: highways to nowhere, airports without planes, cities with no people, stadiums with no teams, etc.
Stevenson-Yang told Barron’s:
I’d be shocked if China is currently growing at a rate above, say, 4 percent….
Think about it: property sales are in decline, steel production is falling, commercial vehicle sales are continuing to implode. Much of the growth in GDP is coming from huge rises in inventories across the economy….
We track the 400 Chinese consumer companies listed on the Shanghai and Shenzhen stock markets, and in the third quarter [of 2014] their gross revenues fell 4 percent from a year earlier.
This simply cannot continue, and it isn’t. Chen Xingdong, chief economist at BNP Paribas put it well:
[These] practices are simply not sustainable: you can’t tell banks to make risky loans with just political motivations [read: threats and pressure], banks won’t lend if returns can’t cover risks.
It’s a perfect storm: the meeting of Keynesian ideology with reality. The result is predictable: China’s economy will continue to implode. Just watch those indices.
YouTube of Anne Stevenson-Yang: China Reality Check: Has the Hard Landing in China Already Started?
The New American: China’s Economic Bubble Ready to Burst?