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China Hits the “Great Wall”: Massive Industrial & Real Estate Slowdown

Updated on August 5, 2016

Despite “claims” that China’s GDP grew 6.7% in Q2 from a year ago, most intelligent analysts believe the growth rate is actually much weaker than the data suggests. The chart below shows that the difference between China’s official GDP numbers and real economic activity is growing substantially.

If you look beyond the headline number, you’ll see that both imports and exports are shrinking, private investment growth shrank to a record low, promised structural reforms remain undelivered, deficits are climbing, and the level of national and corporate debt is rising fast. This all suggests that the impact of stimulus over the last few years is already fading, which could pressure the government to roll out even more support measures to prevent the house of cards from collapsing.

In an attempt to delay inevitable widespread job losses and debt defaults, Chinese officials are calling on state banks to lend more. But the problem is that most of the new credit issued is actually going to struggling state owned industries and real estate speculators, rather than entrepreneurs and established private companies who could help put the economy on a more balanced and sustainable path. The state banks tend to favor state-owned companies because of the implied guarantee that Beijing will bail them out if and when the bubble bursts.

An example of these struggling state owned companies with vast overcapacity is Zoomlion Heavy Industry, a major Chinese construction equipment maker. The company warned investors that this year’s first-half net loss would more than double last year’s, partly due to collapsing demand for construction machinery.

The IMF and World Bank have both publicly called on China to stop its fixation on phony growth numbers and instead focus on threats to the economy such as reducing its reliance on debt and artificial economic stimulus, in addition to moving away from the manufacturing and infrastructure industries.

The situation in China remains extremely fragile and any shocks to the global financial markets, such as lingering banking problems in the EU, could start a wave of economic turmoil that investors will not be able to ignore. We have been telling our readers that despite what you hear on main stream media outlets, China’s massive economic and political issues will cause a crisis that will spread like a tsunami, impacting the financial markets around the world.

Read more in our complimentary July Market Contrarian Newsletter:


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