China-Forest

China is slowing down. How much we do not know. Macro-economic numbers are not always reliable, but China makes a league of its own. Official growth numbers were still around 10% in Q1 2011, but they were probably closer to 6%.

A story you might have missed, is the Canadian-Chinese version of Madoff. A company named "Sino-Forest" has been accused of cooking the books. One of the high profile investors in this multi-billion company has been Paulson, the famous hedge fund manager that won big time in the subprime crisis. Paulson sold his Sino-Forest stake recently with a loss of 500 million USD. Even geniuses occasionally get caught in a judgmental error.

The report that triggered the Sino-Forest commotion can be found below. The report starts as follows:

To be fair, I am not really surprised by fraud in China. Numbers and China, not often a marriage made in heaven :

• There are no reliable national accounts, the equivalent of the US Z-Statistics on China.
• State owned enterprises are still the majority of the corporate sector, but earnings of balance sheets are as accessible as the US M3-money supply numbers (which have been abolished because of "cost" reasons).
• The balance sheets of the Chinese banks are also non transparent, and their health are often put into question.

Looking for reliable anchors is therefore difficult. China is not a big fraud like Sino-Forest. But, the China economic Forest is certainly a point of concern.

As it looks today, we think that China is slowing down much more than it acknowledges. This can be seen in Electricity statistics (see below), but also in statements by China related companies.

China has become so important for the world economy (almost 1% growth contribution over many years), that it is decisive for its direction. If China slows, so will the world.

6% growth is indeed a decent -unachievable) number for the developed economies. But for China it is around stall speed. This means that a further slowdown would be stressful not only for China (and the Communist Party), but also for the US and Europe (Germany,...).

To be followed closely