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November 14, 2011

The China Bust Case

Jim Quinn makes the case that China has been inflating an economic bubble and that collapse is imminent within two years.

The Chinese government has created a commercial and residential real estate bubble in an effort to keep peasants employed and not rioting in the streets. In the case of the US subprime mortgage bubble, critical thinkers like Steve Eisman and Michael Burry figured out it was a bubble three years before it burst. Jim Chanos and Andy Xei have been warning about this Chinese bubble for over a year. They have been scorned by the same Wall Street shills who denied the US housing bubble

Jim Chanos has been calling a China bubble for over two years.

Jim Quinn made the same case 18 months ago and there has been no major collapse yet.

The supposed pieces of China house of cards do not add up to an economic collapse





All of the major ratings agencies are warning about an impending banking crisis in China. Fitch downgraded the country’s credit rating and warned there was a 60% chance the Chinese banking system will require a bailout in the next two years.

Shanghai Stock Exchange is the world's 5th largest stock market by market capitalization at US$2.7 trillion as of Dec 2010.

China's stock market crashed in 2007 and has not recovered

The US stock exchanges have a combined valuation that is greater than the US DGP and the London Exchange is larger than the UK GDP.

The Shanghai Stock exchange is less than half of China's GDP and when the hidden economy is included the Shanghai exchange is one third of China's GDP.

Air pollution and other pollution is a problem in China and has curbed growth by a few percent of GDP. However, air pollution was similarly rampant in the US and UK in the 1950s and it did not cause an economic collapse. I am adamantly opposed to air pollution, so this is a problem that should be fixed as soon as possible. It appears that by 2020-2025 China should be about where the US is on air pollution now.

The case of the ghost cities and overbuilt property would be far more of a problem when it happens in the United States. However, China is urbanizing at 18 to 30 million people per year. So China can absorb real estate equal to a Los Angeles in less than one year.


A lot of the GDP growth is from the urbanization. People in the cities are 3 times richer than the rural people. By moving 1-2% of the population to the cities each year, over a few years they are fully absorbed into the urban economy. This provides an extra 3-6% boost to the GDP growth. It is a series of people get moved up over time to urban levels.

Urbanization is also the difference for a delay in any impact from an aging workforce. The urbanized workforce will continue to expand because of people coming from the rural areas. The urbanization what will continue for 15-25 years will counter any reduction in workforce from an aging population.


China's hidden economy means that the rich are richer than official statistics indicate and thus the property is more affordable to the top ten percent.

India's inflation has been over 9% for 11 straight months and there has been few cries about an Indian bubble.

Although some have indicated that cities like Mumbai could see a 10-15% drop in real estate prices.

The predictors who have been calling for a China bust for over two years did not seem to be that early on the European debt problems. The Europe debt problems have hit now and seem to be breaking up the EU. The one and two year old China bubble articles did not seem to include anything about the current EU problems.

The biggest and most vocal predictors of a China bust are in the markets betting for a China bust. So they are explicitly jawboning for a bust which will enrich them.

There has been talking of economic slowdowns and declining economic growth all through the 1980's, 1990s and 2000s.

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