The Looming China Crisis Is About to Hit

NEW YORK (TheStreet) -- China can't hide the real numbers anymore. Manufacturing has been contracting for about 11 months. Export growth is rapidly slowing. Real estate sales and prices have collapsed in some areas, with declines of as much as 50%.

On Friday, economic statistics out of China confirmed my bearishness of the past 12 months. Here is what we heard:

July export growth was close to zero. Outbound shipments increased only 1% year-over-year versus a 11.3% rise in June. These numbers suggest a screeching slowdown in exports.

Industrial output rose the least since the crisis in 2009 in spite of the government's new investment projects.

China's economy has now decelerated for seven consecutive quarters (21 months). That's almost two years. The rebound after the 2009 crisis, fueled by massive money injections, has fizzled.

As a result of these numbers, some previous China bulls now say China's government has to relax monetary policy quickly in order to avoid a "hard landing."

Until now the bulls refused to even consider a weaker economy, or at minimum stated there would be a "soft landing." My reply was, only if "soft" means in quicksand and mud.

There is nothing that lower interest rates or a drop in bank reserve requirements in China can do to boost orders from Europe. The huge export slowdown is a killer for an economy that's export driven. Lower interest rates won't increase European demand for Chinese products. Europe is now on its way to a deep recession, or worse.

During China's great growth period over the past decade, it was cheap labor and large foreign investments that allowed the government to undertake huge infrastructure projects. But the consumer was totally neglected. In fact, growth was financed by sacrificing the individual. Interest rates on savings were very low, benefiting party officials and well-connected firms who took this cheap money for speculation.

Now China wants to boost consumer demand because demand from abroad is declining. But the consumer is still very poor, and the speculators are going bankrupt. CEOs of large companies that can't repay the debt are fleeing, disappearing overnight.

Most firms probably speculated with their operating cash in real estate or the stock market to boost earnings. Instead of profits, they now have huge losses. They will go to bankruptcy heaven. China's biggest ship-building firm lent billions of its operating cash to the private financing market. But those borrowers can't repay the loans. So the firm is now in dire trouble.

The recession in China (yes, recession) is causing the accumulation of huge mountains of commodities that have no buyers. Don't make the mistake of believing China's claims of 7.6% GDP growth. We can't even trust the economic numbers out of Washington.

Therefore, I look at the truer numbers, like energy consumption, shipments, steel sales instead of production, auto sales instead of auto production, etc.

The stockpiles of commodities continue to grow. The large ports have no place to put the accumulating coal, iron ore and copper. It's estimated that about 100 million tons of iron ore has accumulated as many steel mills have closed because of lack of demand.

Coal reserves are now at a 10-year high. There are huge mountains at the country's largest coal port, Qinhuangdao.

Does all this sound like a booming economy? You don't hear these facts from the conflicted China experts appearing in the media.

The Chinese stock market has been one of the worst performers this year. Investors have lost interest. Volume is down. So the goal is to fuel new buying.

China has learned from Wall Street how to prop up the markets to provide the illusion that "all is well." The communist regime came up with this: First, it cut stock trading transaction fees. That alone isn't enough. So they also made a new rule that employees of publicly traded companies can choose to receive up to 30% of their compensation in stock of their employer.

That alone doesn't boost stock prices. So the twist is that the company has to buy those shares in the market. Smart. The Shanghai index rose 1% the following day.

The Wall Street bulls on China, who say that the government will soon try to end the real estate meltdown, should listen to this unnamed governmental official who says: "There will definitely be no loosening of the housing controls."

The latest word, as of last Thursday, is that the central government is considering new curbs for the property market. June saw the first uptick in real estate prices in eight months. The government doesn't want the speculators to return.

The U.S. solar industry, as well as that in Europe, found they couldn't exist without governmental subsidies because of Chinese price competition. Many of these non-Chinese firms are out of business. But now the Chinese competition is going broke.

A headline on a China news service was: "Solar Industry on the Verge of Bankruptcy." The 10 largest solar makers have a total debt of around 110 billion yuan ($17 billion), which it can't repay.

Hong Kong luxury car sales are plunging. The plunge in car sales in mainland China started over one year ago, but the media ignored it. Now Hong Kong is feeling the pain. Luxury car sales, like Lamborghinis, Ferraris, etc. are down 50% in just the past three months. This is a great indicator of an economy that is contracting at an accelerating pace.

The real estate bubble in Hong Kong is also bursting. It is all so similar to the U.S. in 2008, before the near-meltdown.

Why should all this matter to U.S. investors who would never buy a Chinese stock? Because a serious China recession will eventually hit the global financial markets like a tsunami. Of course, the government will hide the true economic statistics. In our newletter The China Boom-Bust Analyst, we write about the admitted efforts of the government to have companies report much better numbers in order to make statistics look better.

What does a China recession mean?

China consumes:
  • 53% of the world's cement
  • 48% of the world's iron ore
  • 47% of the world's coal
  • the majority of just about every major commodity
  • nearly 500 million Chinese live on less than $2 a day
  • 55,000 cigarettes every second

For traders, this opens great opportunities on the short side of stocks that are heavily dependent on China demand. Often you can make greater profits when stocks decline rather than waiting for the next bull market.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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