by Bill Sardi
Predictions that economic bubbles would pop in an ever-growing Chinese economy have been frequent over the past 10 years. But prognosticators failed to realize that Chinese bankers are more conservative than the colleagues in the US and require 30-60% down payment on home loans. Furthermore, as China captured trillions of dollars in US money, it set much of it aside to guard against run-away inflation and to pour into the economy as the meltdown in the US economy beginning in 2008 resulted in a decline in exports from China to the US.
Certainly China over-responded to this crisis and went so far as to build whole cities that remain unoccupied. However, incomes there are simply not sufficient for people to move into these modernized communities.
China is cunning. It holds over $1 trillion in US treasury bills that may never be repaid in full value. It has begun to seek tangible wealth rather than hold US T-bills and has conducted a worldwide search to buy minerals, oil, unprecedented amounts of gold in the form of US bullion coins, or to obtain long-term contracts for the same, and to barter without using the US dollar as the medium of exchange. Marc Faber, financial commentator based in Asia, says China puts its money into building infrastructure whereas the US puts its newly printed money into consumption. American consumption also boosts China's exports.
What all the analysts missed, while they predicted the huge expansion of credit in China to result in uncontrolled inflation, was that much of China's money was covertly leaving the country, serving as a counterbalance in its economy.
Gordon Chang, a writer and commentator on Chinese affairs, wrote a largely overlooked article (just 3 posted comments on it) that was published online at Forbes.com in June of 2011. Chang's report, entitled "Chinese Entrepreneurs Are Leaving China," said wealthy Chinese are leaving the country in droves and taking their money with them. How much money? (Are you sitting down?) An estimated $2.18 trillion exited China in hidden cash transfers between 2000 and 2008. Whoa!
We know the Greeks are funneling their money into overseas banks, but that amounts to a vacuum of just $16 billion. But what is going on in China is a game changer for the whole world, especially if covert methods to move Chinese money offshore is put to a halt, as it is predicted will occur sometime soon with a leadership change and accompanying financial reforms in China.
The US has benefited immensely from the entry of Chinese money into its economy. According to Chang, in the last five years there has been a 73% increase in Chinese investment to the United States. Chinese people are seen on bus tours in California, visiting real estate properties and paying the full purchase price in cash money. But just exactly how do the Chinese funnel their money out of the country?
A US real estate executive gives us a hint at the answer to this question when he said in a 2009 interview published in China Daily that he didn't think most Chinese individuals would qualify to purchase property in the US "unless the money is already here."
The Chinese have had centuries of practice to side-step government confiscation of their money. One method is to export goods from China to the US in a shipping container where, in this example, the bill of lading cites 1000 cases of widgets being shipped. But there are actually 1400 cases of widgets inside the container. The profits from the sale of 1000 cases of widgets is returned to China, but the extra 400 cases are sold and Chinese goods are converted into US money where a Chinese counterparty here in the US houses it, sometimes in Chinese banks located here in the US. This is how Chinese home buyers get their cash to buy properties at full price. Chinese families send their children to be schooled in America, and the money for their education is already in the US. None of it has been taxed by China or the US.
Chang quotes economic analyst Zhong Dajun to say: "We have been working hard to develop the economy in the past 30 years, but now these elite members of society are fleeing with the majority of the wealth." "The loss may be even higher than all the foreign investment we have attracted."
Xi Jinping is expected to become the next Party general secretary at the end of 2012 and it is rumored that the hemorrhage of money from China will be put to a halt with economic reforms. That will be a game-changing event.
China averted a flood of money hitting their economy and causing run-away inflation in part because Chinese entrepreneurs were siphoning money away overseas. Will a closure of this exit door then result in predicted inflation? My bet is the Chinese will be smart enough to dampen this threat.
China has a bigger default to face — that of the US' inability to pay back over $1 trillion China loaned to America in purchasing US Treasury bills. The Chinese know, if inflation drives up the cost of food that it must avert unrest in the streets. China could be forced to accept pennies on the dollar for these T-bills and receive its deflated money in the form of containers of grain and other foodstuffs from the US, who already supplies China with record sales of foodstuffs now.
China knows it is holding a diminishing asset in US T-bills. So does the rest of the world. The US economy keeps getting propped by its lenders. A US default on its debt would result in an implosion of the world's economies. At some point the US will not be able to pay interest on its debt and be forced to default and the dollar will collapse. That day may come sooner than predicted. John Williams of ShadowStats.com says the outside date for that event is 2014 (ShadowStats report #414). Then what?