China Is in a Recession - Dohmen's Market Views

The following commentary comes from an independent investor or market observer as part of TheStreet's expert contributor program, which is separate from the company's news coverage.

BEIJING ( Dohmen Capital Research )-- The headline on this article is obviously not what you hear from other analysts. They will be shocked. I expect ridicule, just as in 2007, when I wrote the book, Prelude to Meltdown, predicting a "1929 event" in 2008.

My opinion for years has been that you cannot trust economic data from governments. Usually, that's not very important, but with China, it is.

On Sunday, April 01, 2012, China announced that its official Purchasing Managers' Index (PMI) climbed to 53.1 from 51 the previous month. Analysts became very bullish again, assuming that this number is reliable.

However, at the same time the private PMI report from HSBC ( HBC) shows that business activity contracted to 48.3 from 49.6 in February, both below the 50 dividing line.

HSBC's report covers mostly the SME's (small & mid-size enterprises) while the government report covers large firms, which are mostly owned by the government.

Here you can choose: Do you put more trust in the government statistics, or in those of a large, private firm?

Wall Street analysts responded: "The hard-landing view is now off of the table."

The latest report is the sixth consecutive month below 50, which shows actual contraction in manufacturing. I ask, how can manufacturing contract for six months, export growth plunge to almost no growth, bankruptcies soar, housing sales and prices collapse, but official GDP is reported to be growing at 8.1%?

I say that the statisticians in Beijing are working just as hard to fudge the numbers as those in Washington. They are using a false inflation number to adjust the "real GDP." But that doesn't change reality.

On April 12, the rumor out of China was that the GDP growth number to be released that evening would come in at a higher than expected 9%. Well, the actual number was a big disappointment, hitting a 3-year low of 8.1%. The Chinese have learned to play the Wall Street rumor game.

Now the focus of the bullish analysts is that the slowdown would prompt the Bank of China to loosen money, which would be bullish for the China markets. This is ridiculous. If bad economic news is bullish, than a depression would bring euphoria.

More news the same day was that loans have increased sharply in China, as has money supply growth. Well, neither are indicative of anything except that the government has ordered the large banks (owned by the government) to make loans to the insolvent local governments. How does this help the average Chinese people or the Chinese stock markets?

The money put into these banks is not stimulative as it only replaces the money gone "to money heaven" because of defaults.

If faster money growth could prevent a credit crisis, we never would have had the 2008 crisis. U.S. money supply started growing strongly in May 2008 as the Fed started to worry. However, it did not prevent the monumental financial crisis five months later.

China car sales have stalled out. Real estate prices are down 50% or more in the major cities, luxury car makers like Mercedes ( DAI)and BMW are offering 25% discounts on the top cars, many steel mills -- the job creators of many cities -- have been closed. But the government tries to keep a lid on these facts. Some private reports say that there are 40 million empty condos. Another report, puts it at 64 million, counting those which never had their electric meter turned on.

Entire cities built for the future are virtually empty, as is the largest shopping center in China. Sounds like Dubai, doesn't it.

The government knows that confidence is very important. Therefore, the reported numbers are politically influenced.

China's statistics bureau has admitted as much. On its website, it revealed that local officials forced some hotels, coal miners and aluminum makers to report false numbers. Statistics officials in Hejin city gave companies "seriously untrue" numbers to submit for 2011.

The fact is that you cannot trust any of the numbers out of China. We don't even trust the ones out of Washington.

Wu Chaoming, a researcher with the People's Bank of China was sentenced to six years in prison for revealing secret information to 15 people in the securities industry. A former secretary in the country's statistics bureau received five years on similar charges.

The China Banking Regulatory Commission (CBRC) told banks that they had incorrectly placed about 1.8 trillion yuan ($286 billion) of loans to local government financing vehicles in the safest category of lending. Most of these loans are considered bad. This confirms the huge amounts that have been loaned to local governments. That's your money supply growth.

Professor Patrick Chovanec, of the Tsinghua University in Beijing, recently wrote:

"... there is reason to suspect the Chinese economy may be growing substantially below China's reported real GDP growth rate of 8.1% for Q1, and may actually be in contraction (negative growth)."

Well, that's exactly what I wrote late last year. The reason for the erroneous GDP growth number is the faulty inflation adjustment.

My view for more than a year has been that China would be the source for the next global crisis. The government can hide the real numbers, but they can't hide the true consequences of a recession. When 20 million people are out of work, it's an unemployment problem. When 200 million people can't find jobs, it becomes a huge political problem.

More of Bert Dohmen's views on China are available in a special report called The Coming China Crisis.

More from Stocks

Market Can't Handle the Wild Ride: Cramer's 'Mad Money' Recap (Thursday 5/24/18)

Market Can't Handle the Wild Ride: Cramer's 'Mad Money' Recap (Thursday 5/24/18)

Replay: Jim Cramer on North Korea, Oil Prices, Apple and Carnival Corporation

Replay: Jim Cramer on North Korea, Oil Prices, Apple and Carnival Corporation

Canopy Growth: First Cannabis Firm on the NYSE Fails to Generate Buzz

Canopy Growth: First Cannabis Firm on the NYSE Fails to Generate Buzz

Video: This Startup Connects Buyers and Sellers of Legal Marijuana

Video: This Startup Connects Buyers and Sellers of Legal Marijuana

Dow, S&P 500 and Nasdaq Tumble After Trump Calls Off North Korea Summit

Dow, S&P 500 and Nasdaq Tumble After Trump Calls Off North Korea Summit