China Trade Misleading

Central_Bank_China

QUESTION: Mr Armstrong; Can you explain why the Chinese share market has declined since 2007 yet China’s economic trade flows are only now starting to decline? This is extremely confusing when the mainstream press has touted China as supporting the world economy. I suspect you are the only one that can answer this question. Thank you so much.

JF

ANSWER: Well I am not sure I am the only one that can answer that question. I do agree it is very unlikely that you will get an answer from the mainstream press. It takes a bit of digging into the numbers.

China has raised interest rates in an attempt to cool its economy – primarily real estate. You can actually earn 6% on deposits there. The problem China is experiencing is how to also manage a domestic boom in the face of a global contraction. The answer to this dilemma illustrates the old saying applies – no one is an island.

Chinese importers can borrow dollars in Hong Kong at 1% and import those funds because of their status and earn 6% locally on deposits. It has become the dollar carry trade and has contributed to the broader dollar strength as was the case with the Japanese yen. The average Chinese individual cannot import cash like this due to currency controls. Therefore, the amount of money flowing into China APPEARS to be trade flows, but in fact it is really CAPITAL INFLOWS. This has also kept a bid for China’s currency.

The global accounting system is based upon money flows – not actual goods. This has been a huge problem I have been warning about for decades now. We simply need not just political reform, we need a complete overhaul of economic statistics worldwide. It does matter greatly how we account for trade. Calculating just money flows and ASSUMING more money equals more sales is bogus. Currency changes alter trade figures. Even employment is all screwed up. They count total government spending in GDP and total personal income. This amounts to DOUBLE counting of government employees. This is very serious for it illustrates that France in heading into a Greek-Style Great Depression. Private sector job growth is actually hugely negative and the only up-tick in employment is purely government. There is no way out. France is imploding in the precise same manner a Greece.

Economic statistics are HUGELY inaccurate and we desperately need major reform. Politicians keep playing with the numbers to support their careers but have screwed up the world. They simply cannot ever be trusted. This is the very same reason Julius Caesar revised the calendar. The high priest inserted days to make leap-years at his discretion. Politicians routinely bribed the priest to add days to postpone elections in the Roman Republic. When Caesar crossed the Rubicon, what would have been winter was by then summer. This is the very same problem today. Let them have ANY power over ANYTHING, and it will quickly be corrupted to serve their political purposes. Money Laundering, that began to get drug dealers and Mafia, is now applicable to anyone even hiding gold in a safe-deposit box or carrying cash in your pocket. It is illegal to mail cash. They no longer need to prove anything – it is always now your burden to prove your money is even clean to withdraw from big banks.

Welcome to the world of total chaos. Just when you though there was a trade surplus – oops, it’s just never what you think it was supposed to be. China is not stupid. They too understand what is taking place. They have to choose between keep high interest rates and attracting capital inflows as the US did between 1981 and 1985, or backing off and allow its domestic markets to rise.