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November 15, 2011

Lang Xian ping claims a depression has started in China

Economist (Larry) Lang Xianping had for a long time the most popular talkshow on TV in Shanghai until he was sacked because his mandarin did not meet the official standards. Lang was popular because he told his audience the truth about finance, corruption and the people who were involved, a unique take in Chinese TV.

The research publications list of Larry Lang (Lang Xianping) at Hong Kong University.

Larry Lang seems to be saying things for shock value. Like a Rush Limbaugh or a Bill O'Reilly. China has the currency reserves and resources to bail itself out. The concern of the state enterprises has been around in some form for decades. China grew more of a fast growth private sector and the share of the economy from state enterprises shrank. China can manage around $1-3 trillion of non performing loans.

The high rises, highways, and high speed rail are real and very well functioning. I have been in the buildings and on the transportation. The power is being utilized. China would not be burning 3.2 billion tons of coal if the power plants and industry was running at 30% capacity.

China's Debt level and actual inflation are key to the truth or falseness of the claim

The case that the debt levels are not too high first.

Li Yan, a senior analyst at the China Chengxin International Credit Rating Co, told a conference that China's total local and central government debt combined, at 43.6 percent of gross domestic product at the end of 2010, was well below the international alarm level of 60 percent.

China's state auditor has estimated that local governments had chalked up 10.7 trillion yuan in debt by the end of 2010, about half of which amassed during Beijing's stimulus spending at the height of the 2008/2009 global financial crisis.

Local governments have been servicing much of that debt through land sales and real estate ransaction taxes, both of which are slowing in response to a slew of tightening steps to curb the exhuberant property market and fanning worries of a new wave of debt defaults and bad bank loans.

The weighted-average capital adequacy ratio (CAR) of Chinese banks stood at 12.2 percent at the end of June, up from 11.8 percent at the end of March, while the banking system had a bad loan coverage ratio of 218 percent.






Lang’s assessment that China is bankrupt was based on five conjectures.

Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.

Reuters has a special report on China's debt

Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid -- or about $1.2 trillion to $1.4 trillion.

In other words, the potential debt defaults could be even larger than the $700 billion U.S. bail-out programme during the 2008 crisis.

Reuters reported in mid-year the government was working on a relief plan for local governments, including allowing them to tap the municipal bond market for the first time as an alternative to bank loans, which are becoming harder to get.

The risks of default are rising. Nearly 85 percent of the local government finance vehicle loans in northeast Liaoning province, for instance, missed debt service payments in 2010, an audit report posted on the Liaoning Daily website said.

But in visits and interviews at city-run vehicles around China, officials appeared unworried. They say they were only following Beijing's directives to keep growth on track, and the central government would surely step in to bail them out.

Perhaps their complacency is justified. Beijing, which holds more than $3 trillion in foreign exchange reserves, certainly has the resources to rescue them, and has done so in the past -- it set up asset management companies to help China's top banks clean up mountains of bad loans in the late 1990s.

But China is also vulnerable to a global downturn, and would need every piece of its economy performing well to avoid a serious slump. The infrastructure boom insulated the economy from a collapse in exports in 2008. Beijing has less firepower now. Inflation is uncomfortably high, and dumping more money into the economy would only make things worse.

Barclays Capital has predicted a global recession would trigger a "hard landing" in China, with gross domestic product sinking well below the 8 percent mark seen as the minimum for assuring enough job creation to keep up with urban migration.

A severe economic slump would depress land sales, a vital source of funding for local governments, and make their debt load even more precarious.

Earlier talk of the Chongqing model for Chinese real estate

China Daily 2010, a discussion of the Chongqing model by Lang Xianping "Chongqing model" can save China's real estate market.

On the 2010 China Economy and Property Summit Forum held by sina.com in Beijing, Lang analyzed the problems of China's real estate market, a hot topic for the government and public alike. He likened the market to a volcano crater covered by stones, which may erupt at any time. Lang stated that government's policies could not reduce the price of housing and only the "Chongqing mode" which vigorously promoted indemnificatory housing and encouraged migrant workers to come to the city, is the only hope for the property market.

The "Chongqing mode" has won much support and Lang further explained that it would gradually stabilize the real estate market which would bring a booming stock market.

He believed the "trilogy" of the mode circularly solved housing problems and would be beneficial to gradually eliminate the property bubble. The three parts are as follows:

First, 40 million square meters public rental housing will be built in three years, which will provide living places for one to two million residents. Second, three million farmers will be granted with Chongqing hukou from next year, which means they have to give up their homestead. Therefore, these lands can be farmlands again or used to build more public rental housing. Third, the development of IT industry clusters will be strengthened. Branded enterprises like HP and Cisco have located to Chongqing and 80 percent of their hardware is produced locally, solving the employment problem of three million farmers.



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