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January 27, 2006

China's Dirty Loans (Part II)
by Alex Wallenwein

This is installment No. 2 to the original article titled "China's Dirty Trick." An "update", if you will. The original can be viewed from the link at the bottom of this article.

As far as I know, it was the first article of its kind, shining the free-marketeer's harsh light of monetary reality onto the Chinese "economic miracle" - a miracle that even Warren Buffet buys into, according to a recent ad you will surely encounter if you follow the link further down in this editorial.

NewsMax.com reports that China's current efforts at constructing an "Olympic City" (for a paltry $160 billion price tag) are funded by the government making "loans" to local business enterprises (if you want to call them that). Loans that are widely expected to never be paid back.

Here's a tidbit for you:

"Jack Rodman is a distressed-property specialist and a partner at Ernst & Young LLP, the second-biggest U.S. accounting firm. He tells Bloomberg: 'The scale of development here is unprecedented anywhere in the world. When I look out of my window at all those construction sites, I see a sea of nonperforming loans looming large on the horizon,' he says. 'The numbers defy logic.' "

That's from a distressed property specialist!

Here is more:

"And another Bloomberg source, James Quille, CEO of Bermuda-based Macquarie Global Property Advisors Ltd., tells the news service that much of the new space is below quality standards and doesn't even meet the specifications set by international companies moving to Beijing. 'There's a lot of stock being developed that will be obsolete before it is completed,' Quille says. Even so, Quille himself has earmarked $600 million for office acquisitions in Beijing."

Amazing. These guys really don't care. They see a disaster of unprecedented proportions building, but are not above "dipping in" for, oh, just a few hundred million or so, in quick - but very shaky - profits. It's a knowing gamble that they'll be able to pull out before the whole thing goes up in smoke. But what else is new?

Those are the people who write your daily financial columns in your regular newspaper - or contribute to them.

They know all of this - and advise their clients to invest in China?

In that connection, it is highly revealing to note that the government/media complex has recently stepped up its attacks on online gold currencies as "facilitating terrorist financing schemes." Of course, if you deal in illusory money, you can't allow the real stuff to resurface. It's simply a matter of 'do or die.' Never mind their own crimes. If you're one of them, just make the little guy on the street believe that somebody else is even worse than you are - and you've won the game.

Back when I wrote the first article on this subject, people read it and e-mailed me with questions like "Could it really be?" Could it really be true that all of this China hullabaloo is only a mirage?

If you have any kind of common sense, yes.

Why should the Chinese - communist - government's statistics be any less suspect than those of the US where GPI number deflation (i.e., minimization) is a matter of the very formulae they use to calculate their so-called averages.

Wonder why the Chinese are so reluctant and soo slow in "normalizing" their currency system so the yuan can be freely traded outside of China? They're even telling you why: China's financial structures are still "too fragile" (speak: even more fragile than those of the West.) Far more fragile! They are a nothing but mountain of nonperforming loans that need to be papered over by even more non-performing loans.

Back in June last year I wrote:

"In the West, there is a government/central bank mandated loans-to-asset ratio that must be maintained. In China, such requirements exist - if they do at all - only on paper. Just like the US Fed is forced to crank out ever vaster sums in "money supply" to keep the illusion of a sound economy going and to prevent any politically sensitive economic backsliding, so the Chinese government is forced to feed its own dragon with ever larger sums of loans to cover up unbelievable imbalances in their state owned banks' loan portfolios. "

Now, we hear this from NewsMax:

"Bloomberg cites Moody's Investors Service, which says that the Chinese government has spent $432 billion (or 23% of its gross domestic product last year) bailing out the country's debt-plagued banks. In the first three months of 2005, the four largest banks in China reported that 10% of their total property loans were 'problem' loans."

(So, that's how they "bail out" their banks. Just print more money - or lend more. Over here in the West, our leaders at least stick it to us taxpayers every time that happens. Aren't you glad you live in the "free world"?)

And further:

"Major lenders facing substantial liability in Beijing as a result of new construction loans include Allianz AG, American Express, Bank of America, Goldman Sachs Group, HSBC Holdings Plc, Merrill Lynch and Royal Bank of Scotland Group Plc."

Uh, oh! That's why the media are so nice to China. Guess who the bosses of Allianz and Goldman Sachs go to dinner with? Yep, the head honchos of the major news outlets, of course. Can't let the truth get in the way of all that money invested in China. Oh well. For those too big to fail" western companies, there is always the ubiquitous taxpayer to bail them out, right?

The name of the game is: On the one hand, yell at them in public to "let the yuan float" (a la the way the US Prez and certain Democrats in Congress are doing it, also known as "grand standing"), and on the other hand do whatever it takes in private and behind closed doors to make sure that China won't move too fast. What do you think will happen to the 'Goldmansachses' of the world when the Chinese economic dragon is revealed to be what it is - a paper snake with a big paper-machee head, held up and moved about by the fiat banker dragon-dance troupes of the world?

I don't know how long it will take until the Chinese fire-cracker economy's fuse runs out and it's debt- stuffed innards go "pop' - but I know one thing: It will happen. It may even happen before some goofy politician and banker steps on the Western economy's land mine and goes "kaboom." Either that, or it will all go "crackedickrack-pop-swoosh!" in one grand finale, just like those Fourth of July displays.

Except that it won't be quite as uplifting to watch.

Wonder why gold is going up like it knows no fear?

Because all of these guys - the Chinese, the Russians, the Muslim countries, the hedge funds (and I'll bet you even the 'Goldmansachses' of the world and most of our own politicos) - are busy "re-balancing their portfolios" in view of what they can see coming right at them.

They are standing on the tracks, watching the golden bullet train approaching. Publicly, they need to control gold (at least the Western variety does). Privately, I'd almost guarantee you they are stocking up on gold themselves, fueling their very own demise. They have no choice.

It's quite a spectacle, no doubt - but it's one I'd rather watch from the sidelines ...

Isn't it great to be middle class?

Isn't it great to have some gold, even just a little bit?

Isn't it great that these kind folks always create another opportunity for you to buy more gold when they engineer one of their desperate price dips?

Isn't it great that your friends and relatives are starting to think that you're not quite as crazy as they once thought you were?

Enjoy it. This is "payback" time.

Got gold?

P.S. Here is the link to the original "China's Dirty Trick" article.

To find the Newsmax.com story I am referring to, you'll need to go to the home page and click on the "Money" tab. On the way there, you'll have to pass through an ad praising Warren Buffet's "secret strategies" (why does NewsMax advertise them, then?) among which you find that "Buffett is bullish on all things China, but he is betting the house on this one company ... blah, blah."

Maybe someone should send him this article? Maybe he's already read it, like Andy Smith read my recent diatribe against him (and actually responded). Not that Andy and Warren are in the same league. Not by far. But the articles you read on this site do "get around" if you know what I mean.

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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