The Tell-tale Signs of China’s Phony Growth Economy

The Australian market rallied yesterday in the face of global weakness…because of ‘hope’ the People’s Bank of China will lower reserve requirements…and further stimulate an already historically unbalanced economy.

Meanwhile, over in the land of reality, all signs point to a continuing slowdown in China’s housing market. The chart below shows the year-on-year growth rate of various residential property activity indicators.

Residential floor space sold is down 20 per cent on last year. Total ‘floor space starts’ is approaching zero growth. And while floor space under construction and residential property investment is still strong, the rate of growth is in decline.

Chinese Property Market Approaching the Runway At Speed
Chinese Property Market Approaching the Runway At Speed

Source: Peterson Institute for International Economics

The conclusion? The residential property boom is over. We are now in the bust phase.

But then, we read more conflicting evidence. The Financial Times tells us that following the traditional winter slowdown, steel production in China hit a record high in April. Ore Iron prices have increased nearly 10% this year.

We think of loading up on BHP [ASX: BHP] and RIO [ASX: RIO] as we scan the rest of the article. Then, reality hits:

‘In the first quarter, a group of 80 steel mills monitored by CISA (China Iron and Steel Association) reported record losses of Rmb1bn ($159m) due to low steel prices and weak steel demand.’

China’s importing a lot of iron ore and churning out record amounts of steel but it’s unprofitable – and therefore phony – growth.

And at the foot of the article we notice this quote from ANZ analyst Nicholas Zhu:

‘At Qingdao port two days ago I saw inventory everywhere…It was from India and from Brazil. Pellet and lumps and fines were all piled up.’

Moments later the same paper screams: ‘Bulging Chinese Inventories Undermine Copper’. It’s ominous opening sentence reads:

‘There is more copper in China than at any other time in history.’

We know China buys stuff just to keep the factories going. Profit and loss are of secondary concern to a regime that owes its existence and wealth to an employed and compliant society.

The question for Aussie investors, is when will the music stop in China? When does economic reality set in and force the country to respond to the true underlying signals of supply and demand? How long can a command economy take orders without rebelling?

We don’t have the answer to this or any other questions about what is going on in the global economy. All we can offer at the end of another inconclusive week is more questions.

But we can say this: All is not right with the world. We are not recovering. We are digging a deeper hole for ourselves. Markets are manipulated everywhere you care to look. And if you don’t believe that you’re not looking, or caring.

The manipulation is designed to deceive. And a deceived investor is one that will eventually lose their wealth and with that their freedom.

The reason why nothing makes sense is because EVERYTHING is screwed up. Individually, we are encouraged to spend money we don’t have in order to improve the economy and living standards of everyone. Savings are discouraged. Spending is revered…

…Except if you’ve already borrowed and spent too much. In which case you need to save and be austere…and cut back on essential services so you can borrow in the future.

We have no idea what’s going on. The more we read, the less we know. Our only advice is: work hard, think for yourself, never believe a politician or a central banker…and buy gold.

Hope for the best and expect the worst…

Until next week…


Greg Canavan
for Markets and Money

From the Archives…

What the News on Bond Yields Say About the “Resolved” Eurozone Crisis
2012-04-13 – Eric Fry

The Art of Selling Stocks
2012-04-12 – Chris Mayer

Misguided Faith in an Economic Recovery
2012-04-11 – Joel Bowman

Beware the Big Government Debt Switcheroo
2012-04-10 – Dan Denning

The Discount Rate: Borrowers, Lenders and Bonds
2012-04-09 – Nick Hubble

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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6 Comments on "The Tell-tale Signs of China’s Phony Growth Economy"

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I often get the feeling that commentators miss the fundamental nature of what I would call the El Dorado mechanism for collaterisation and fractional leverage and liquidity expansion. Perhaps taking the example of Bo’s Chongqing (as it is topical) will be illustrative. Before I start to comment let me firstly accredit Bo as more a Soros prototype than a Maoist one. Why did Bo access Maoist rhetoric for populist ends? Because it works with his sheeple audience – nothing more, nothing less. So discounting all the populist backslapping of the western liberal empire’s project in that above report (the… Read more »


Sometimes I cant tell shit from shinola. You need to dumb it done for us.

@Ace, the value of land is increased when it is released or opened up to a bidding process. Increasing land prices has long been the cornerstone trick of expanding debt collateral which is releveraged privately into exponentially increased debt and liquidity. Economic rulers have often set off on this path by stealing productive lands (western imperialism), or latterly by employing government land use policy (eg: coercing people to live in cities or to live in more dense environs). A services economy, consumer demand, and the taxman, clip the ticket of this growing liquidity. Ultimately though, as urban land denuded of… Read more »
>> We don’t have the answer to this or any other questions about what is going on in the global economy. The global economy can only proceed down one of two paths. Either it keeps in line with historical behaviour, or something completely new and different occurs (i.e. it really is different this time.) If we let history be our guide, the Soviets also went through a period of economic expansion. Command economies allow one to move massive amounts of resources to whatever the central government decides. However, central governments perform very poorly compared to the marketplace, and eventually that… Read more »

Ross: “…the value of land is increased when it is released or opened up to a bidding process… ”

This is known as a ‘market’, Ross.

Sure you’re not really a neo-Marxist?!~ :D


@Biker, I have no problem with the market as long as funny money debt or legislatively conjured funny money doesn’t do the buying and the asset bubble blowing in order for the 0.1% to clip the ticket. As long too as the income that services the debt is real and sustainable in the face of long tail liabilities.

The communists took away the land and denied the bid which was equally as destructive.

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