Gordon Chang: The Reasons for China's Imminent Bust

I was delighted to see the China topic appear in great length which I think has been underrepresented  on this site thus far. 

Gordon Chang has a wealth of knowledge and information on the Middle Kingdom and the functioning of its political system and I enjoyed the discussion. 

In parts of the conversation, though, some of his analysis of the situation leads me to different conclusions regarding especially the direction of China's economic development.  


Many times in media the difference between a slowing economy and an economy with a slowing growth is not appreciated. None of them positive, but we do differenciate  between stagnation and recession, so we need to be careful about slowing and slowing growth which I think Chris also noted in the discussion.

Officials stealing money and expatriating their wealth and family is not obvious to me to be a phenomena of chinese elite fleeing from home. 

If you are an official stealing money, obviously you want that money to disappear from China as fast as you can. Isn't this everywhere the case all around the world? In my view this has little to do with the growth prospects of China or the lack of it.

Others moving their wealth and families are not necessary bailing out or fleeing. It is an insurance similar to what HK's elite had been showcasing before the handover to China and serves as a diversification tool with auxiliary benefits such as education to children. Measuring the outflow of wealth vis-a-vis the accumulation of wealth domestically is a task hard enough to become a base for broader conclusion.


I could not easily summarize the political reforms 'everybody knows have to be made', and which current and next leaders are too weak to make.

We have to accept that China operates a political system in tandem with an economic governance that none has tried and tested before. How and how fast to reform this operating system? In my view it is rather anybody's guess than being a question of leadership courage or power. 


In time of peak oil, making bad strategic acquisitions in the fossil fuel industry is difficult. Noting that most of these energy sources are already factored in into the peak equation, I think instead of these assets becoming  a burden, they rather serve as an advantage to power the creation and acceleration of new markets.

If we live in a world where we need less resources and they are plentiful, yes, they are a burden, though I think we live in a different world.

The striking energy inefficiency of a nation which understands it in fact is a tremendous reserve in the system, and this is what gives hope that the environment will not entirely give up on this transformation, because clearly keeping the status quo would be unsustainable. 


Regulations to curb demand for property have been ranging from soft to extremely harsh during a period of a year, and this process cannot make buyers just disappear.

Hence stopping an undesired property value nosedive seems to be a question of measures.

Property prices skyrocketed to the extend not welcomed by central government, even if local government income heavily relies on land sales (leases, indeed) a lot. Given the low loan to value ratios, a 30% drop does not send owners underwater. I can't now define a reason why the central leadership, having engineered a stop of price growth and a start of price decline, were doomed to fail at an attempt to further manage prices as need be, under strong demand circumstances given continued high level of urbanization.

Property for rich Chinese is a store of value and an investment, I assume not very different from other parts of the world. The real question is the development of vacancy rates and of property investment yield in China.

Vacancy rates in key cities are low and declining, rental market is strengthening as sales market declines, hence rental yield increases. These are signs of a functioning property market in good health. Home price decline is not necessarily a cause or a sde product of a hard landing.

Housing loan practice is much stricter in terms of loan/value ratio than in the western world, and because of the multi-year run-up in prices, the proportion of mortgages on banks' balance sheets going underwater after a 50% price drop will not be entirely unmanageable.


The constant support for property price is the increase of productivity. We should not worry about whether there is room for productivity increase, rather their ability to apply the necessary pace of increase in productivity and energy efficiency.


Growth of china's export has been only partly driven by the growth of the markets in

Europe and the US; the bulk of their export growth come from their increase of share in those export markets, coupled with the entry of new export markets. China is well set to walk further down that path. The continuation of China's economic efficiency drive will need to step in to compensate for the stagnation or decline of export market sizes. 


 China has tons of problems to solve and tackle ( I name environment and corruption as their key dilemmas),  but in my view a hard landing is not prescribed yet. 

It's growth should not be labeled as threat as it often is. A threat is normally fought against, whereas a competition is competed against.


A friend of mine always reminds me: whatever you say about China, the opposite of that is also appropriate. Indeed a complex enough system for the full understanding of which our perspective sometimes proves insufficient. 

thanks for reading



Wow, a post about China that isn’t just more fear-driven groupthink marketing drama for the goldbugs and inflationists!
What the heck is happening to CM.com

If this sacrilege catches on, Hugh Hendry is going to make a killing. Oh wait,  he already is.


You’ll notice he isn’t loading up on photovoltaic arrays.:wink:

Why would you blame Chinese for it . You got what you paid for . Your decision …

Assuming that everything in the post is correct;They have the largest manufacturing base. They have cheap labour. They are the largest manufacturer of alternative energy components and systems. If every country is going to go through a monetary collapse, they are the one that is going to emerge the least damaged. If they are going to experience peak oil issues the huge infrastucture build up is a step in the right direction with the hydro on the rivers for electricity and water.
On the subject of quality;
You get what you pay for for, caveat emptor.
I bought three chinese( i think) saddlery knives from what i assume was the same batch. 2 were good, one was bad. It’s the slag and scrap steel they mix in when making steel things. It shows up when you bury them. I have learnt to bury all new knives for about 6 months. I then unbury them and polish out the surface rust. You can spot the bad steel a mile away after they have had a few months in the dirt. If you don’t know this trick it was taught to me by a saddler. He said it’s the best way to get a knife that can’t keep a good edge to keep one. All the impurities rust away. Point of the story, is that I bought these three for the same price as one good british knife. I am happy, sometimes chinese is good, sometimes it is bad.

Mish noted possible issues in China in today’s post




I was expecting quality when I purchased a wood burning furnace made in the USA, Minnesota no less. While it is for the most part an excellent furnace, the documentation is poor enough that it could have come from China and some of the add ons are what you would expect from a poor quality Chinese product. The poor quality problem isn’t just in China, it’s just worse in China. Two of the best quality things I’ve owned in the past ten years were a Hyundai XG350 and a Honda lawn mower. Honda engines are becoming so popular that I expect their quality to go down due to the increased demand for quantity, lets hope not.

[quote=jonesb.mta]I was expecting quality when I purchased a wood burning furnace made in the USA, Minnesota no less. While it is for the most part an excellent furnace, the documentation is poor enough that it could have come from China and some of the add ons are what you would expect from a poor quality Chinese product. The poor quality problem isn’t just in China, it’s just worse in China. Two of the best quality things I’ve owned in the past ten years were a Hyundai XG350 and a Honda lawn mower. Honda engines are becoming so popular that I expect their quality to go down due to the increased demand for quantity, lets hope not.
What demand? The way I figure this, the reason why the world didn’t blow up after Fukushima is because there was no demand… no production, but who cares when there is no demand? So anyway, if you have more info about that demand, let me know, thanks

If you look at small engine applications there are more and more powered by Honda engines. They’re also getting into the repower market in a big way, replacement engines in equipment, from log splitters and lawn mowers to garden tractors.

Funny you mention Honda engines.  The Amish near where I live have many Honda engines providing their energy needs for the various shops they have.

One little thing that seems to be missing in Mr. Chang’s otherwise excellent analysis is the possibility that the Chinese might decide to take the course that many growing economies have taken when faced with similar problems of internal pressures and a lack of external markets, that is military aggression.  Don’t laugh.  China has a large, young, majority male population.  It could obviously not happen over night, but unlike the US and other world economic leaders, they are not a declining world power or an ex-power.  Regional military expansion could be viewed by many of their leaders as a solution to domestic unrest, currency problems and industrial underutility.  Don’t know how it could help the housing problem, but 3 out of 4 ain’t bad.
And what other world power would be in a position to block them?  Certainly they’ve been watching the USA’s inability to secure an effective resolution with a couple of pizzant powers like Iraq and Afghanistan.  They also have the ability to cause some havoc in our economy, owning such a large chunk of our debt.

It would take a pretty rapid build-up in the armaments sector, but they are pretty good at that sort of change.  My observations, even down at Harbor Freight, is that their durable goods have improved in quality over the last decade or so.  When an item costs 10x less than a competitor, it doesn’t need to be as good, just better than 10x worse.  How good was our technology in the 1940s, when we kicked ass or armed all of the other world military powers?

Their AKs are much better quality than ony other than the Russians.  They can make a LOT of them fast, along with more 7.62X39 than they will ever need.  If I were in Taiwan, SE Asia, Western Pacific, Australia, I would be worried.

Mr. Chang published ‘The Coming Collapse of China’ in 2001 - needless to say he was as far off the mark as is physically possible, the reality 10 years later is diametrically opposed to his predictions. Now he doubles down withe some more nonesense - why would anybody be surprised by a an author like (from Wikipedia) 'He is a regular contributor to The John Batchelor Show, The Glenn Beck Program on Fox News, and CNN.'Even the general public finally came to detest the drivel of Glenn Beck - through what twists and tribulations did this blog get hooked on such blather?
As for the quality of Chinese made goods - anybody remember ‘Made in Japan’ of 40years ago and the predictions of how far they would get with that cheap junk? or Made in Korea cars of just a few generations (design cycle generations) ago - and what do we have today?  Good luck with the concept of a China imploding, giving America the former glory back - I would hedge against that hope coming to fruition, the simple reason being that the Chinese have an audacity of educating their masses to a level the majority in the USA is way too lazy to compete with. Until that precept is changed, China will raise to dominant world power.

After listening to this interview with Mr. Chang and then the bullish on China’s future FSN interview with Stephen Leeb last week, I’ve got to say that whenever you have 2 extremes in viewpoints, the answer is probably somewhere in between. Perhaps you want to get Dr. Leeb on for a future interview as a counter to Mr. Chang?

I work with China every day…  Sometimes I just want to pull my hair out and beat the newly bald head against the wall.  Their mfg capability just flat out sucks.  I recently paid over 100k to airship some assemblies to the US.  Through some careful (phone pounding) discussion, actually got the parts delivered EARLY.  Which ended up being a moot point, because the US supplier screwed up a part that is deep in the assembly and can not be replaced :(  Sometimes, just SMH at the global stupidity.
Does anybody know how to do their job anymore?

Mirv posted this on a past DD.  It’s too important for it to potentially get lost in the traffic here, so, hopefully Mirv won’t mind, I moved it to here…

If this is true, this is the most important news out there but is not covered/reported here in the west:
Larry Lang, Chinese Economist: China "cooks" its own books, has negative GDP growth and total debt is almost 6 trillion (in dollars)



According to this expert economist in Hong Kong (his speech to party insiders was surreptitiously recorded) China’s 9%  increase in GDP is nonsense and is cooked two ways: 1. 70% of the GDP comes from speculative land deals, and 2. real inflation is (he says) 16%, which inflates the apparent increase in economic activity (sounds familiar-Fed. Reserve here does that).  Further he says that the country is just about to enter an accounting (crash) after which he thinks that China will become the poorest country in the world again.  Hmmmm. if this is even half true, then many of us may want to review our understanding of China’s role in the path of an unraveling world economy.

I wish some people who know more than I do about China and how it fits into the whole world economic situation would discuss it here.  Somehow, the discussion of this very important topic got sidelined by a lot of petty bickering over the quality of Chinese export goods.  I joined in a little in my comment.
To get things started, I’ll ask a few questions:

  1. If China is headed to a major "bust" soon, what does that mean?  A big recession, or the end of China as a world trading power?

  2. What effect on the overall energy and liquid fuels consumption curves would the sudden removal of China as a buyer have?

  3. What effect would that then have on liquid fuels production, development, exploration, and alternatives?

  4. Would a demand-driven oil price slump destabilize oil-exporting countries?

  5. What about all of the underdeveloped countries that China has invested in agricultural land, etc?

  6. As I asked before, could this lead to Chinese military aggression?

  7. If Chang is all wet, would someone give a good argument (other than he was wrong before) as to specific reasons why he is?

[quote=green_achers]Their AKs are much better quality than ony other than the Russians.  They can make a LOT of them fast, along with more 7.62X39 than they will ever need.  If I were in Taiwan, SE Asia, Western Pacific, Australia, I would be worried.
No need to worry about Japan, it’s radioactive! Not even China wants that crap!

This was a good podcast, though it didn’t add any new information, just affirmed a lot of what already circulates out ther.  I don’t mean this to say that it was a waste of time, on the contrary.  I find it interesting when people coming from different perspectives, especially from a localized one, converge in their assessment.
However, one thing was really new to me: state expenditures in domestic security as a leading indicator that the state entertains defending itself from the masses against it.  Well, if I take a look around with this in mind, I think that a Chinese apparatchik would feel at home stateside.  Take the DHS and the TSA as glaring examples and it seems that our worst enemy is not in Teheran or in Beijing, but in DC.  How much has the US increased the spending in internal security?  Surely, all under the guise of protecting us from "foreign terrorists" that are just sigh-unseen, except for those baited by the FBI to justify its bloated size.  Conveniently, the very same apparatus can be easily used against us the people.

I haven’t given much thought to all the civil rights abuses from the perspective of the state preparing to oppress us the people until now.  To me it’s been mostly stupidity and disregard for civil rights and common sense, not a prelude to an aggression on us the people.

We may all be on the way to being Syrians too.  THIS is some food for further thoughts…