TheComingChinaCrisis 10-06-2011

The Coming China Crisis | By Bert Dohmen
ABOUT THE AUTHOR

Youve probably seen Bert Dohmen on CNBC, or Neil Cavutos show on FOX News, Louis Rukeyers Wall Street Week or read his views in Barrons, the Wall Street Journal, Investors Business Daily, Business Week, etc. Over the past 33 years, he has been a favorite speaker at the largest investment conferences. His track record of accurate and sometimes uncanny forecasts have given him a world-wide reputation for accuracy and amazing insights. Bert Dohmen founded the Dohmen Capital Research Group in 1977. The firms investment advisory services have received awards of excellence, as well as #1 ratings. Dohmen Capitals only business is to analyze the major global investment markets for the best opportunities, and then issue forecasts to its clients. There is no conflict of interest, no axe to grind, and no compulsion to just be bullish. The words sell or sell short are used frequently. Over the past 33 years, the forecasts have frequently called important market tops and bottoms within one or two days. And that is documented. Bert Dohmen has forecasted every bear market and every recession. He has shown his clients how to profit from adversity. He uses sophisticated technical analysis for his timing. This discipline measures the change in the supply/demand equation for an investment or an index over different time periods. Logically, only a change in supply/demand can change the price of a stock or the trend of the market.
www.dohmencapital.com | E-mail: office@dohmencapital.com | 1
The Coming China Crisis | By Bert Dohmen The firms eight services include Bert Dohmens WELLINGTON LETTER, now in its 34th year, SMARTE TRADER for short term stock traders, the CURRENCY PRIVATE PORTFOLIO and several other services for investors and traders which have enabled them to profit from the markets, whether bull or bear. He is a member of the NATIONAL ASSOCIATION OF BUSINESS ECONOMISTS and the MARKET TECHNICIANS ASSOCIATION. Bert Dohmen has been warning about the immense future problems of China while virtually all analysts have been preaching about the great opportunities of investing in China. Once again, Bert Dohmen is in the very small minority, just as he was in March 2000 when he wrote that a market crash was ahead, (it was the exact top of that the internet bubble), and in 2007 when he wrote the book PRELUDE TO MELTDOWN, predicting that the globe would see market crashes similar to 1929 the following year. Now Bert Dohmens work shows that the big surprise for investors will be when they realize that what was assumed to be the long term driving force for the global economies, is having its own economic crisis. China was the locomotive of the global economies, the financing mechanism for the immense US debt, the source of incredible demand for commodities and oil, and the economic power of Asia. Bert Dohmen is not a perma-bear, someone who is always negative on the markets, predicting the end of the world. In fact,
The Coming China Crisis | By Bert Dohmen most of the time he is an optimist, especially when gloom and doom hangs over Wall Street. In bull markets he is bullish, but in bear market he is correctly bearish and shows his clients how to make money in plunging markets. His book in 2011, FINANCIAL APOCALYPSE, describes chronologically how his analysis of charts and the credit markets allowed him to precisely catch the important tops of the major markets in the 2007-2008 for his clients. He correctly identified the start of the big recession in December 2007, while Wall Street economists still claimed eight months later that it was not a recession. In his Bert Dohmens WELLINGTON LETTER he called the bull market top within 2 days of the start on Oct. 13, 2007 while most analysts were very bullish. And when oil hit $149 per barrel and a major Wall Street firm predicted $200, he said that crude oil prices had made a peak and would drop to at least $80 and lower later. They actually plunged below $50. In 2007 he predicted a crisis of proportions similar to the 1930s Depression. His time table for the first sustainable bottom was 2017 using long term cycle analysis. That was ridiculed by some analysts. However, now other analysts are talking about 20152016 as a potential bottom. He made these predictions as well in his book, written in 2007, PRELUDE TO MELTODOWN. While virtually no analyst agreed with Bert Dohmen in 2007 that the country would go into the severest financial crisis since
The Coming China Crisis | By Bert Dohmen the 1930s, the attitude is now similar in regard to China. Most analysts point to China as the never-ending growth engine for the world. But that makes the world so much more vulnerable when China goes into crisis. Bert Dohmen says that China has had a credit bubble the past two years, not genuine growth. The GDP growth numbers are totally false as China does not correct for the very large price increases. What they count as growth, is nothing more than inflation. Reading this book, may save you, or make you a fortune. Its the most important read of the year.
TABLE OF CONTENTS
ABOUT THE AUTHOR TABLE OF CONTENTS INTRODUCTION COMMODITY PRICES WILL TUMBLE THE REAL ESTATE BUBBLE EMERGING COUNTRIES:SHARP SLOWDOWN! THE BATTLE AGAINST INFLATION BEWARE OF CHINESE IPOs A BRIEF HISTORY OF RECENT U.S. BUBBLES HOUSING DEBT THE FINANCIAL TSUNAMI CHINAS TRADE DEFICIT SOARS UNAFFORDABLE REAL ESTATE NEW ITEM FROM CHINA DOUBLE-DIGIT INTEREST RATES AHEAD A TURN OF THE TIDE TIGHT CREDIT AND A SHARP SLOWDOWN POWER SHORTAGES OVERSUPPLY THE CHINA BUBBLE IS BURSTING THE MEDIA TAKES NOTICE CHINA IPO DISASTERS THE COMING REAL ESTATE COLLAPSE THE SQUEEZE WATER SHORTAGES CORRUPTION AT ALL LEVELS THE WEAKENING CHINA ECONOMY DEBT DEFAULTS ARE STARTING A MT. EVEREST OF DEBT SOCIAL UNREST 1 5 7 11 14 17 18 22 23 25 26 28 30 33 34 36 39 40 41 42 45 46 48 50 51 52 54 56 58 59
The Coming China Crisis | By Bert Dohmen BIG BROTHER FUTILE INFLATION FIGHTING THE GROWING MANUFACTURING CRISIS IS A SOFT LANDING POSSIBLE? CHINA CAR SALES PLUNGE STEEL PRODUCTION: NOT RELEVANT THE EMERGING MARKETS: CRISIS AHEAD! THE REAL ESTATE BUBBLE BURSTS SIMILARITIES TO JAPAN EPILOGUE A NOTE FOR INVESTORS CALLING THE PLUNGE: MID-2011 HIGHLIGHTS OF BERT DOHMENS 33-YEAR TRACK RECORD TESTIMONIALS DOHMEN RESEARCH ADVISORY SERVICES AND SUBSCRIPTIONS 59 60 63 65 67 69 72 74 76 81 83 86 90 95 100 100
INTRODUCTION
Some of the older stories in this book are from issues of the award-winning WELLINGTON LETTER where we warned our clients to prepare for the next phase of the global financial crisis. However, most of the content of this report is about what is happening now in China, and what is likely to happen over the next year or two. I am a big China bear now just as I warned of the U.S. meltdown in my book, written in 2007, PRELUDE TO MELTDOWN. China has had remarkable economic growth. But it had a lot of catching up to do. China was about 100 years behind the industrialized nations of the world. And much of the catching-up was due to the technology of the west. Look at this parabolic growth.
The Coming China Crisis | By Bert Dohmen Many people think that Chinese ingenuity has produced the strong economic growth in China. The facts are different. It was cheap labor that allowed China to be the export king, with huge foreign cash reserves building up for the government. Furthermore, the manufactured Chinese goods are really a product of free, western technology. Imagine, China didnt have to develop any of the technologies, the patents, the manufacturing methods, machinery. This was the product of 100 years of effort in the US and Europe. And it was given to China free of any cost. In fact, its a requirement to give it when a foreign firm wants to do business in China. That, combined with ultra-cheap labor, is how China was able to make the big leap. However, the catch-up phase and the free use of this technology is now coming to an end. In the future, China will have to do its own development. Thats costly. It means paying labor and especially engineers and other professionals much more. General wage increases the past two years are about 40%. Those for professionals are much greater. The cost increases create price pressures, i.e. inflation, a squeeze of profit margins, and the counterforce from the government to stop inflation via a credit crunch. A credit crunch and economic downturn now will be very painful. Many companies will close. Unemployment will rise, social unrest will soar, and the government will become more oppressive. My work strongly indicates that China is now going through what
The Coming China Crisis | By Bert Dohmen the U.S. did in 2007-2008. The difference is that the over-investment is in non-productive projects, such as huge construction projects, shopping malls and entire cities which are empty, over 40 billion square feet of commercial space under construction now, most of which will never find an occupant. The crisis will present great opportunities for investors and traders who are informed and have the best guidance. During the 2007-2008 crisis in the US, subscribers to our various advisory services, from the award-winning WELLINGTON LETTER, to our almost daily trading services like SMARTE TRADER, were able to make huge profits as the various markets tumbled from 50%-60%, or more. Another such opportunity is around the corner. Chinas capital investment is over 60% of GDP. Much of that is in such projects as mentioned above. This compares to 6-8% for most other industrialized countries. Of course, China had a lot of catching up to do. The problem is that governmentally funded programs create huge debt and very little return for many years. The crunch in China has started. We believe it will unleash a tsunami throughout the financial world, potentially much stronger than the 2007-2008 crisis. That one was mostly company-specific, where many financial firms went bankrupt or had to be rescued. The next crisis will involve entire countries defaulting. No one is big enough to bail them out. An implosion of a credit bubble is always deflationary as the
The Coming China Crisis | By Bert Dohmen creditors lose what they thought were their assets. Only when the central banks engage in a desperate money creation binge to prevent a depression will we see currencies plunge in value compared to assets, things, which have the ability to maintain their intrinsic value. Currencies will be avoided in favor of hard assets, like gold, silver, and other commodities.
COMMODITY PRICES WILL TUMBLE

In November 2010, I wrote that Chinas tightening of credit was starting to be noticed by the markets. I had been warning about this for months. The fear of further interest rate hikes in China roiled the global markets. Anything related to commodities tumbled in the week of Nov. 15, 2010. That was a preview of what is ahead when things really get serious. China may like the lower prices. Commodity prices had soared over the past several months, increasing the purchasing prices of raw materials to China. What better way to get lower prices and fighting inflation pressures at home than to promote the idea that interest rates will rise, the economy will slow, and commodity prices will drop? Chinese officials said that copper prices were about 20% higher than justified. That caused a plunge in copper prices. Obviously, inflation numbers in China were confirming my view that inflation would become a huge problem. Chinas consumer price index surged 4.4% in October from the year earlier period, much more than generally expected. But we predicted this in Bert Dohmens WELLINGTON LETTER. The prior month inflation was up 3% (annualized). You see, my prediction was that the governments fight against inflation, through higher interest rates, would actually boost inflation. We wrote: China is now on the road to very high rates and then an eventual plunge into recession. The government will hike rates on every inflation report. That will boost inflation pressures,
The Coming China Crisis | By Bert Dohmen producing further interest hikes, which increase the cost of doing business. It never has a happy ending. According to Miss Sharmin Mossavar-Rahmani, CIO of Goldman Sachs Private Wealth Management, since 1993, when the MSCI-CHINA index came into existence, the U.S. stock market has outperformed this index by 8% per year, in spite of the tech bubble burst in 2000, the 9/11 attack, and the credit market implosion in 2007-2008. Thats amazing. The popular perception that China is the great investment story is overhyped. The reason is that many of the largest companies are owned by the government. If the real estate bubble bursts, it may produce a rerun of 2008, when the stock markets crashed around the world. Is China the next great super power? It could happen. In fact, many analysts predict that this may happen over the next 20 years. But we remember the late 1980s when the same was said about Japan. At that time, Japan was 18% of world GDP. Today, Japan and China combined are about 8% of world GDP. As Mr. Michael Pettis, a professor at Beijing University School of Management, points out: An article in Sundays [Oct. 17, 2010] New York Times says: In 1991, economists were predicting that Japan would overtake the United States as the worlds largest economy by 2010. In fact, Japans economy remains the same size it was then: a gross domestic product of $5.7 trillion
The Coming China Crisis | By Bert Dohmen at current exchange rates. During the same period, the United States economy doubled in size to $14.7 trillion, and this year China overtook Japan to become the worlds No. 2 economy. A lot of things can happen on the path to greatness. China still has to make the transition to a more democratic system where people can vote. Will that happen without turmoil?
THE REAL ESTATE BUBBLE

In our December 2010, issue of the Wellington Letter, we noted that the latest numbers released by China (Dec. 11, 2010) revealed that the economy was continuing to grow strongly in spite of efforts to tighten money. Industrial production rose a hefty 13.3% last month (year-overyear). Consumer prices rose a big 5.1%, the most since July 2008. Thats the official number. Actual inflation is probably two to three times higher, according to business people in China. The GDP deflator, a better measure of inflation, is close to 11%. Vegetable prices in the major cities rose 62% in the first 10 days of November. Food prices, which account for one-third of weight in calculating the CPI in China, climbed 10.1% in October. Cotton prices are skyrocketing. According to the website Cottonchina.org, the cotton price has climbed from about 18,000 yuan (US$2,713) to 28,500 yuan (US$4,296) per ton since September 1. Thats over 50% in just 2.5 months. An even bigger problem is that people cant afford these higher prices. Sales for cotton products have plunged. That means the small vendors are starving. The high food prices lead to hungry people. All this creates more unemployment. And historically, hungry and unemployed people riot in the streets. Thats always the 24/7 fear of any totalitarian government. The governments tightening efforts have been much too timid. In Dec. 2010 I wrote: Next year, they will get more serious about
The Coming China Crisis | By Bert Dohmen battling inflation, and that wont stop until the economy stumbles. There is no soft landing from a bursting credit bubble. The more they procrastinate now, the greater the credit crunch later. Remember 1980-1981 in the U.S.? Well, take that and multiply by 100 for China. We made the case that China was heading for one of the largest real estate disasters since Dubai. The main problem in China is the huge, speculative real estate bubble that we have been discussing. That can go on for several years, and usually does, before governments get concerned. Remember, in the U.S. some very smart hedge fund managers started investing for a bursting of the U.S. bubble in 2005. They were about two years early, but eventually they made billions of dollars. Inflation is always the limiting factor to any expansion fueled by excessive credit. Once government becomes worried about rising inflation, you get into the end game. And that always ends with a great amount of pain. Its like a giant hangover: the pain is proportional to the amount of fun you had at the party. Instead of looking into the mirror, Chinese officials now blame the Feds quantitative easing for Chinas inflation. Thats ridiculous, as the stimulus of the Chinese government has been three times greater than the one in the U.S. on the basis of the size of GDP. In 2009 the money supply in China increased the equivalent of 40% of GDP, according to Lombard Street Research. In 2010 it has increased by $115 billion a month, says Citigroup.
The Coming China Crisis | By Bert Dohmen Compare that to the Feds QE2 which is $75 billion per month. Chinas GDP is only about 30% of the U.S.s. Chinas money supply M2 is now double the size of Chinas GDP. In the U.S. its a little more than 60% of GDP. Chinas government is fighting inflation as all central banks do, i.e. with totally ineffective measures. They raise interest rates, they raise bank reserve requirements, and they set limits on total loans outstanding. Historically, such measures dont work until interest rates get so high that the entire speculative pyramid crumbles. Only then does inflation decline. In my view, Chinas credit bubble of the past 18 months is much larger than the one that burst in 2007 in the U.S., Europe, and Asia. The consequences could be worse as well. But it will take time to materialize.
EMERGING COUNTRIES: SHARP SLOWDOWN!

In late 2010, we wrote: The popular perception is that the emerging markets are still booming. Well, real (inflation-adjusted) GDP contracted sequentially in the third quarter (2010) in Singapore, Malaysia, the Philippines and Thailand. In Hong Kong, Taiwan, Korea and Malaysia there was basically no growth. The OECD Composite Leading Indicators (CLI) indicates that the five major economies of Asia, including China, are, in fact, slowing faster than those in the OECD. China is slowing the fastest with the CLI declining 3.9% year-over-year in September. This explains the poor performance of China stocks in spite of every analyst in the media recommending China. Then look at the countries outside of the OECD: The LEI in Brazil has gone from nearly 22% year-over-year in early 2010 to just below 3%, India from 15% to 6% and China from 27% to 10% in late 2010. We could call that a screeching slowdown. If you extrapolate those trends, you see recessions next year.
THE BATTLE AGAINST INFLATION

In Dec. 2010 we wrote: On December 24, the Peoples Bank of China raised the benchmark one-year lending rate by 25 basis points to 5.81%. The one-year deposit rate will go to 2.75%, effective immediately. The bank is raising rates now because usually rates on loans are adjusted at the beginning of the year. This means that credit for everyone will be adjusted upward in January. As we have been pointing out all year, China is now on that part of the credit cycle that eventually always ends in a credit implosion. There is no painless way to get off it, although they certainly will try. China has had the greatest credit bubble in modern history. The broadest measure of money supply, M2, has surged by 55% over the past two years, and loans have climbed 60% to 47.4 trillion yuan (about $6.8 trillion). Considering that Chinas economy is less than one-third the size of the U.S. that would be like $20 trillion in loan creation in the U.S. where the size of the GDP is about $14 trillion per year. In Jan. 2011 we wrote that analysts had the opinion that interest rates in China would rise another 100 basis points (one percentage point). We strongly disagree! That was much too low. In the late 1970s in the U.S. economists were equally wrong. They said the prime rate would peak out at 12.5%. We predicted in the Wellington Letter that the U.S. prime rate would hit 20%. Economists called that ludicrous. But it happened in 1980.
The Coming China Crisis | By Bert Dohmen We will now go out on a limb: we predict that the one-year lending rate in China will eventually rise to at least 12%. And it wont stop there. When the government recognizes that all its efforts to control inflation are too tepid and thus futile, it will eventually institute price and wage controls. Imagine what that will do to the international commodity and financial markets. Chinas central bank will have to reduce speculation. But current measures are too mild. When interest rates rise strongly and inflation along with it, and further increases are expected in both, speculation is the only way to keep up. People are only getting 2.7% on their bank deposits. Prices in the big cities are rising at 10%-30%. That forces people to speculate. Governments always make the same mistake; it tries to control inflation by raising interest rates instead of strong measures to curb lending. It considers the latter method too painful. But it is the only thing that works. Ask Paul Volcker. Thats what he did in 1980. In China, the situation is similar. Governmental officials at the national and the local levels profited beautifully from the property bubble. Therefore, it was allowed. But now that property has become totally unaffordable for the average person, the government has to act if it doesnt want 200 million people rioting in the streets. The end of the bubble is near. In late 2010 early 2011 China started to accelerate its tightening
The Coming China Crisis | By Bert Dohmen moves. It raised bank reserve requirements three times, but in ridiculously small amounts. The last move came on Dec. 11 when it added 0.5% to the reserve requirements. Such moves did nothing to curb rampant bank lending for more construction of buildings that will be empty. China then limited the purchase of property by foreign firms to property used for their own businesses. Just about every week there was another rule change aimed at reducing speculation. China has embarked on the traditional central bank cycle. First, they fuel excessive growth through massive money injections; this creates speculative bubbles that produce rising inflation, which is then fought by the government through tightening measures and sometimes price and wage controls. The cycle continues until the back of the economy finally breaks. Only an implosion of the speculative bubble stops the cycle. There is no happy ending. The economy is already slowing rapidly, but the numbers are being disguised as the government always quotes year-overyear numbers. That doesnt tell you anything about the last four months. Governmental statistics in China are considered unreliable. So, to see what the economy is doing, a good proxy is electrical output consumption. After all, it takes electricity to run factory, light offices and homes, and keep the economy going. Here is a chart up to Oct. 2010 of electrical output in China.
The graph has plunged to the lowest percentage change, i.e., shrinkage, on the chart that goes back to 1988. This is a huge canary in the mine. My forecast is that when the China bubble bursts it will be like a tsunami through the global financial world. Will you be ready?
BEWARE OF CHINESE IPOs

There is a big boom in the U.S. of Chinese companies going public (IPOs). So far, 24 IPOs have been done in the U.S. of Chinese firms, which, according to Herb Greenberg of CNBC, is twice last years rate and 21% of all IPOs done in the U.S. this year. Some large mutual funds in the U.S. are buying them. Should you? The problem is that these are very small firms, less than $100 million in sales. Another problem: can you really believe their financial statements? To us this smacks of a late-stage phenomenon. In the U.S., when the cat and dog stocks run, you know its time to look for the exit. Remember the China stock boom in 2007? We had about 200 Chinese stocks trading in the U.S. on our computer screen. Most traded actively. Now, there are only about 30 of them that trade more than 10,000 shares per day. The majority of the stocks have no quotes at all, apparently having gone out of business. Obviously, a great deal of money was lost by investors. There is a long-standing rule: when you see many IPOs, it means that the smart insiders are selling their shares to the uninformed public. Guess who wins? We ask who will the mutual funds that are buying these stocks sell to when they want to get out? One IPO is LE GAGA, symbol GAGA. Can it get more blatant? The company is a produce wholesaler. Another high flying Chinese IPO, RINO, was delisted for accounting irregularities. Other Chinese IPO stocks have also been delisted or have stopped trading because of accounting problems.
A BRIEF HISTORY OF RECENT U.S. BUBBLES

All credit bubbles are produced by a government and its central bank. A good example is the late 1970s in the U.S. The Fed made it clear it would not tighten money availability, just make it more expensive. For us, that was the signal that a speculative inflation bubble would be created. We forecasted that the prime rate would rise to 20%, and we became big bulls on gold. That episode ended with the prime rate at 21.5% in 1980, 30 T-bonds collapsing to yield 15.75%, and inflation in the double digits. Paul Volcker finally came in and crunched credit. As a result, commodities and the stock market plunged. We started selling gold related assets short when gold broke down through $694. The back of inflation was broken, but with severe pain. The bubble in the U.S. stock market in 1999-2000 occurred because the Fed did not raise margin requirements for stocks and supplied all the credit possible. Excessive money growth always goes into speculation. And that created the internet stock bubble that then collapsed. From 2003 to 2007 the Fed once again blew up a huge bubble, this one in housing, and the derivatives linked to that. The Fed and other regulators not only allowed that speculative bubble to grow, they encouraged it. The SEC agreed to the requests of major Wall Street firms to allow the leverage ratio of debt to capital to go to 34 from 12. At
The Coming China Crisis | By Bert Dohmen the higher number, it only took a 3% decline in the value of the investments for the firms equity to be wiped out. And thats why Bear Stearns and Lehman Brothers failed. Each period of excessive stimulation by the Fed ended in a market crash and a deep recession. This is the reason that no small group of non-elected people should try to control the behavior of 300 million people via monetary policy. They only make things worse.
HOUSING DEBT
The US home mortgage market is valued at some $10.6 trillion. Foreclosures and past-due loans amount to some 14% of the market, or about $1.5 trillion. Of this staggering figure, the loans delinquent or in foreclosure to which the top three banks (Bank of America, Wells Fargo and JP Morgan) are exposed amount to more than $600 billion. Those bad loans must be handled by the banks. The banks hope that they will be bailed out by a housing recovery. But there is no recovery. When the U.S. economy goes into a recession again, and then gets hit by the European crisis, and then by the China crisis, all these bad loans on the books of U.S. banks will have no chance of recovering their value. And that is why the stocks of the big banks are behaving so poorly.
THE FINANCIAL TSUNAMI

In our WELLINGTON LETTER of February 2011, we wrote: China will be the source of a tsunami heard around the world. It may occur as soon as later this year or perhaps not until one to two years from now. But it will happen. Once you get on this roller coaster, you cant get off without severe pain. However, for investors the early phase of such inflation can be profitable, especially if you concentrate on strong countries that have lower inflation. And that means the U.S. Once the global investment capital flows recognize that the U.S. has become the safe haven, money will flow out of the emerging markets into the US. And that will produce an awakening of all the emerging markets investors. We would shun those markets now. The risk is high and the potential reward is too low. Realize of course that this is definitely a minority view. If your broker talks you out of selling that area, ask him if he is aware of the big declines in the emerging markets during 2008. Brazil is seeing rising inflation, which is now 6.7% (June 2011), versus the 4.5% target for last year. Food prices are rising at 10.4%. As we all know, governmental statistics usually err on the side of painting the news better than it is. The government is getting concerned. Prices in Brazils department stores for normal goods like jeans, shirts, sweaters, etc. are three to four times
The Coming China Crisis | By Bert Dohmen higher than in the U.S. Brazil is now preparing for World Cup Soccer and the Olympics. Imagine how the huge construction for these events will boost inflation. CONCLUSION: The emerging countries are now caught in a trap. They have sharply rising inflation and people are getting restless. If they fight inflation harshly with tight money, it means recession, even more economic pain, and riots in many countries. If they dont, it means much higher inflation later and an even stronger recession. There is never an easy way out of a speculative bubble.
CHINAS TRADE DEFICIT SOARS

In March 2011 Chinas latest trade numbers showed a surprising trade deficit of $7.3 billion, with imports exceeding exports. It was the largest deficit in seven years. That means China is now importing more than they are exporting. Much of Chinas growth has been based on exports. Its easy to figure out what a decline in business for this industry will do to Chinas economy. Building large buildings that remain empty has also been a significant contributor to Chinas GDP growth. Chinas period of accelerating troubles is starting. In spite of the eight increases in reserve requirement for banks, loan growth had not slowed in March 2011. And thats the key. When the government finally gets serious, it will be very painful. Furthermore, there is disagreement among policy makers about further tightening. Li Lihui, governor of the Bank of China, said reserve requirements cannot be raised further. However, Su Ning, a former deputy governor of the Peoples Bank of China and now a member of the Chinese Peoples Political Consultative Conference, said that the ratio could be raised further without compromising economic growth. The loan growth for February suggests that a sharp slowdown is occurring, as loan growth was down 40% from the prior month (600 billion from 1 trillion yuan), according to China Daily. Thats a screeching halt. Credit growth has always been our best indicator for what is happening in the economy. Note that this is a growth
The Coming China Crisis | By Bert Dohmen slowdown, not a nominal change. But it is a solid sign that the Chinese economy is decelerating sharply, no matter what the governmentally produced statistics say. Chinese Premier Wen Jiabao said in an online discussion Sunday (Feb. 27) that the government will reduce its annual GDP growth target between 2011 and 2015 to 7% to raise the quality of growth and improve living standards. Wen also pledged to reduce energy consumption per unit of GDP during the period of the twelfth five-year plan. CONCLUSION: Our work shows that Chinas economy will slow noticeably this year. Judging by the market reaction to the trade deficit, such a slow-down will shock the global markets.
UNAFFORDABLE REAL ESTATE

In the April 2011, issue of the Wellington Letter we wrote: The bursting of the China property bubble is inevitable in our view. Only 10% of the people can afford the median priced home. In California at the top of the housing bubble we think it was around 15%. When most people cant afford the real estate, where will the buyers come from when the speculators try to sell? There wont be any buyers. In February 2011, real estate prices in China dropped 4%, officially. To us that means they dropped much more. Furthermore, price declines after a multi-year speculative real estate bubble is usually very negative. It brings more supply to the market as the smarter speculators sell. But then they cant find buyers, and prices drop further. Its usually the end of the bubble. The government is trying property sales tax in two cities, Shanghai and Chongqing, to slow real estate speculation. In Shanghai, the property tax applies to only new housing, including villas, purchased after March 27. The overall tax burden will be heavier in Chongqing than in Shanghai. There are three tax rates in Chongqing: 0.5%, 1% and 1.2%, while they range from 0.4% to 0.6% in Shanghai. These are ridiculously low. These very low penalty tax rates are certainly insufficient to reduce property speculation. Put that together with the mild efforts to raise interest rates, and you can easily see that the government
The Coming China Crisis | By Bert Dohmen is behind the curve. That means inflation will continue to climb, and the day of reckoning is pushed out into the future. But when it comes, it will be that much more painful. A colleague, Simon Hunt, just visited China again. He points out what we have said in the past, that the official inflation rate doesnt come close to the actual rate. Instead of 5%, business people tell him its at least 20%. Credit has become tight, if you can even get it. And that is the ultimate stopper for the economy. Using the GDP deflator, a better measure of actual inflation, gives you much lower real GDP growth numbers. He says this: Using the GDP deflator to get a good handle on actual changes in the economy provides a much better fit to what one heard on the ground in recent years, namely that in the second half of 2008 business tanked and remained very soft through the first half of 2009. On this count, real GDP rose by 7.8% in 2008, not 12.6%, and actually fell by 0.6% in 2009, not increasing by 7.7% in 2009 as the CPI deflator would show. And last year, real GDP rose by 6%, not the 13.6% deflated by the CPI data. We can see that half of economic growth comes from inflation! Simon Hunt found the huge built up inventories in the supply channels:
The Coming China Crisis | By Bert Dohmen For instance, during 2010 car makers increased their inventories by an average of 21%, but by 118% for cars of 1 liter or below and by 125% for those between 2.5-3.0 liters. Other examples are: Refrigerators 33%, air conditioners 44%, washing machines 30%, mobile phones 30%, computers 34% and color TVs 13%.
NEW ITEM FROM CHINA

We read many publications and articles out of China. We find important facts you cannot find in the US media. Here is one item from April 2011: The Chinese government accused Google along with three of its affiliate companies of tax evasion. Currently Google is under investigation. Three companies affiliated with the search engine Google are being investigated for tax fraud in China... The companies have been found using fake invoices. Accounting and business tax irregularities involving more than 40 million yuan (US$6.06 million) were also discovered, the newspaper said. Remember in early 2010 Google moved from China to Hong Kong over a dispute about censorship. Is this retribution?
DOUBLE-DIGIT INTEREST RATES AHEAD

In the Wellington Letter of April 2011, we wrote: Over the weekend of April 16, Chinas central bank hiked bank reserve requirements again, this time 0.5 points, to 20.5. The banks governor said that monetary tightening will continue for some time. We believe another interest hike will probably come in May from the current 6.3% for one-year money, to 6.8%. But by year-end, we predict that interest rates in China will be near or over 10%. We hear that private companies cannot get credit. The squeeze is on. Yet the China bulls think that China can engineer a soft landing. Only if you believe the moon is made out of cheese. So many analysts talk about the strong economic growth of China. However, my view is that most of the growth which shows up in economic statistics like production, sales, etc. is actually an increase in prices, i.e. inflation. Here is the example above as applied to China. In 2010, GDP in China grew at 9.8%. Thats after adjusting for inflation. But official inflation was said to have been 3.3%. Business people in China say its at least 10%-20%. Lets just say inflation is understated by 10%. That means that GDP growth, after inflation, would actually be near zero. In other words, all the GDP growth is actually inflation.
The Coming China Crisis | By Bert Dohmen Or if you assume that perhaps the understatement is 5%, then actual GDP growth is 4.8%, certainly a lot less than advertised. Inflation is causing many firms to close up as they can no longer pay the rising costs. Do we hear that in the U.S. media? Export growth and real estate construction is the largest contributor to economic growth in China. They are growing. They continue to build buildings, cities, and shopping centers which stay empty. Its counted in GDP. But is that productive economic growth? Obviously, there must be a lot of shrinkage in other sectors to produce the anemic GDP growth when we adjust it for actual inflation. When it comes to governmental statistics anywhere, things are not always what they seem. Now think of what will happen when the global economies have a sudden slowdown, as they will. The Middle East is on fire. Japans catastrophe has not only sharply reduced that countrys growth, but because of supply-chain disruptions, it is affecting growth in other countries. Just imagine if Chinas exports are now reduced because of slower global growth! It will be painful as it comes just at a time of tightening credit and sharply rising interest rates in China. China will be the source for the next global crisis.
A TURN OF THE TIDE

In the May 9th issue of Bert Dohmens Wellington Letter, we wrote: The Chinese economy is now starting its long-term correction of the credit and speculative excesses. It will soon become clear that the alleged great economic growth of at least the past two years was merely a credit bubble, not genuine growth. Entire cities are empty of people. But the construction counts as part of Chinas GDP. The worlds largest shopping mall, the South China Mall, has virtually no occupied shops and no shoppers. At the same time, the average Chinese person lives in a one-room shack, many of which are destined for destruction in order to build more huge high rise apartment buildings, which will also remain empty. The housing glut of unaffordable homes and apartment in China continues to grow. One analyst stated that there is about 30 billion sq.ft. of new construction in progress right now. With the new efforts to curb speculation, its a cinch that most of this will never be sold or occupied. This is the type of stuff revolutions are made of. And the government knows it. Therefore, the real estate developers, in spite of the excellent political connections, will eventually be sacrificed. We remember when in 1990, Japan announced their intention to kill real estate speculation with tight money. Their stated goal
The Coming China Crisis | By Bert Dohmen was to get real estate prices down by 30%. A Finance Ministry official was asked by a journalist if that wouldnt bankrupt many developers. The reply: Easy come, easy go. Thats when we predicted a ten-year period of recession and disinflation for Japan. No one believed it. But it happened and even lasted much longer. Capital investment in China makes up more than 60% of GDP. Thats a number never seen before anywhere. For other industrialized countries, its less than 10%. The consumer is only about 34% of GDP vs. about 70% in the U.S. Interestingly, about six years ago when the Chinese government made its goal to increase the consumer portion of GDP, it was over 45%. You see, the command economy is not that controllable. In fact, lots of it is just a group of party officials making up numbers. Its similar to some of the financial statement of Chinese firms. In its fight against inflation, Chinas central bank said it will continue using price control measures including interest rates to curb inflation. Well, that doesnt work. Price controls just distort the markets. President Nixon tried that in the early 1970s and it led to a horror show. What started as a program printed on fewer than 100 pages ended being thousands of pages. And using interest rates to fight inflation only enhances inflation as companies raise prices to offset the higher cost of money. Only tight credit restrictions can stop inflation, but that hurts. Therefore, politicians usually avoid that. Now we are seeing an avalanche of new IPOs of Chinese
The Coming China Crisis | By Bert Dohmen companies on the NYSE. In years past, such stock could never have been listed on the NYSE. But the exchange needs the business. History shows that when any group of insiders sells their stock to the public, its an effort to exit, i.e. get out while the getting is possible. This is a sure sign that there is a big trouble brewing in China. CONCLUSION: If you want to speculate in China, do it by selling short in a conservative manner. China is once again where it was in 2007, before the big implosion, except that the current bubble is probably 10 times larger.
TIGHT CREDIT AND A SHARP SLOWDOWN

The MNI China Business Sentiment Survey of May 27 fell to 61.22 in May 2011 from 69.28 in April. The index was at 78.46 in May last year. Thats significant deterioration, but China is still one of the favorite markets of the bulls in the media. Credit conditions remain very tight. In April, the index for credit availability hit the lowest level in the surveys six-year history. As long-time subscribers know, according to our Theory of Liquidity and Credit, credit availability is the most significant determinant for economic growth. Tight credit is the boom killer. We dont understand why hardly anyone talks about this. When credit becomes so tight that no business can get a loan, which is the case now, the highly inflated credit bubble implodes. Thats extremely painful and produces more than just a slow-down or recession. We have been saying for over one year that when the speculative real estate bubble in China is finally popped by the government, a soft landing becomes impossible. This is very serious and will produce the next global financial crisis. And thats where we were in early summer of 2011, although virtually no one in the west seemed to be aware of it.
POWER SHORTAGES
Eastern China, where all the manufacturing is located, is facing the greatest power shortages since 2004. Part of the problem is that the government had been encouraging people to buy electrical appliances to improve their way of life. Now they have all the gadgets, but dont have the power. Many companies report that they dont have power one out of three days. So they install diesel generators to make their own power. But that takes diesel fuel, and now there are shortages of diesel fuel. In eastern China where all the production is, there is a projected shortfall of around 19 million kilowatts of power during the peak summer season, according to the East China Power Grid. Households will get priority over industry. Yes, people can riot in the street, companies dont. On another note, entrepreneurism is blossoming in China. The Beijing Business Today journal reported that more than 1,100 firms in Beijing alone are getting ready to list their stock on Chinas stock exchanges. That includes more than 800 new high-tech firms. Developed capital markets are necessary for long-term growth. Thats an advantage Britain and the U.S. had for more than 100 years. We wonder how many firms will have accurate financial statements.
OVERSUPPLY
There are some things which are not in short supply in China. The head of Chinas Baosteel Group recently predicted the imminent collapse of iron ore prices. He said that the production of iron ore has far exceeded demand due to the uncontrolled expansion of production capacity by the worlds mining companies. The bubble is about to burst, he said. Another thing in oversupply is commercial real estate. Reportedly, there is now 30 billion sq. ft. of commercial real estate under construction. The optimists might say that even if there is an oversupply, high economic growth will eventually absorb it. The problem is that the shoddy construction starts to show after two to three years. Who will want these after five to ten years? The real estate bubble in China is imploding as we speak, yet it seems to be widely ignored. The head of one major developer in Beijing, Miss Zhang Xin, said that sales in Beijing dropped 50%. In all of China, sales are down 27% in April, and prices have plunged 21%. This is the tsunami that will go around the world. You cant be nave and think that just because its a dictatorship they can produce a soft landing. But it will present some great opportunities for short sellers. All of Asia will be a short-sale.
THE CHINA BUBBLE IS BURSTING

In the June 2011, we said: Asias huge, speculative real estate bubble is bursting like a hot bottle of champagne. Hong Kong real estate has had a huge bubble which is now cooling according to local real estate people. Well, what they call cooling is the start of what will be an immense implosion. The central bank of China in April warned of the risk of a credit-fueled property bubble. Really! They just noticed that? Barclays Capital warns that Hong Kong home prices could fall as much as 20% in 2012. In my view, that will be just the start. The Hong Kong Monetary Authority has tightened rules on mortgage lending four times since Oct. 2009. Down payments have been increased on locals, and more on foreigners. Singapore is also a very hot real estate market. Notice that Hong Kong and Singapore are considered safe havens for international capital flows. Money goes to where it is welcome. Its primarily the foreigners who are still the big buyers. But the bubble has been blown up even more in these safe havens, which means that they will also experience an implosion. The Singapore government in January (2011) raised the down payment on second mortgages and extended the sales tax for home sales to four years from three as it added more rules to curb
The Coming China Crisis | By Bert Dohmen speculation. The reality is that the efforts to cool speculation are still a matter of too little, too late. In other words, the central banks are behind the curve. It still pays speculators to speculate in spite of the higher taxes and higher down payments. However, eventually the central banks will catch up. And that is when the real pain for the markets starts. India is another place where a sizable correction is ahead. The central bank has raised rates ten times since March last year. That has resulted in home prices in Mumbai declining 20%. Developers are reducing prices to move the inventory. History shows that once developers start lowering prices, the game is over. The speculators want to sell but cant find buyers. That makes other potential buyers stand on the sidelines. And thus, prices implode. Australia has had a huge property price bubble, fueled by the commodity boom and demand from China. Its obvious that with all the Asian central banks tightening credit in order to choke off real estate speculation, that the Australian economy will have its problems. Additionally, Australias central bank has been very aggressive in tightening. It has hiked rates seven times since Oct. 2009. As a result, Australia now has the highest benchmark interest rate in the developed world. Home prices are falling at the fastest pace since the crisis. Amazingly, we dont hear analysts even mentioning this very important canary in the mine.
The Coming China Crisis | By Bert Dohmen South Korea actually started the new real estate recession in 2010. At the end of the year, prices were already down 20% from the recovery peak. Very large projects have been cancelled or lost financial partners. Household debt is an enormous 140% of disposable income. They cant get credit to buy property.
THE MEDIA TAKES NOTICE

On June 9, 2011, the Wall Street Journal carried a story headlined The Great Property Bubble of China May Be Popping. Well, you read it here first, about eight months ago. The yield curve just inverted in India and in Brazil. An inverted yield curve is always the beginning of the big squeeze which eventually ends in a very tight credit and a recession...or worse. Chinas yield curve is very close to inverting. Investors have very little time to find the exits, or find ways to profit from the coming disaster, which is something we specialize in with our investor services.
CHINA IPO DISASTERS

On the New York Stock Exchange, there has been an avalanche of offerings of Chinese stocks. These stocks IPOd with great fanfare. Renren Inc, one of the largest social networking websites in China, had its IPO on May 4 with the price soaring 29%. It raised $855 million. The stock is now down about 75% from the high of the day of the IPO. There are accounting questions. Netqin Mobile Inc, a Chinese mobile security company, declined about 50% from the high of the IPO day. On May 19, trading was halted for Longtop Financial, a recent IPO, because of accounting questions. It has not been able to publish financial results. This IPO was launched with the help of some of Wall Streets largest firms, like Morgan Stanley and Deutsche Bank. Several big hedge funds were buyers. Where is the due diligence? Of the 11 Chinese IPOs in recent weeks, ten are down from the offering price. Six have declines of over 50%. We warned against these IPOs from the beginning. More than 150 Chinese companies, worth US$12.8bn at market value, have entered US markets through reverse mergers since 2007, with only about 50 filing IPOs. The Bloomberg Chinese Reverse Mergers Index, which tracks
The Coming China Crisis | By Bert Dohmen 78 shares listed in the United States, has dropped 44% this year. In China, we now see the first attempted IPOs of firms failing. We see headlines: Chinese IPO fails as investors bust myth. Auto parts producer Nanning Baling failed to attract sufficient demand for its offering This is like 2007 when suddenly IPOs had to be withdrawn in the U.S. That was a great warning signal.
THE COMING REAL ESTATE COLLAPSE

In Beijing, May real estate sales hit the lowest rate in 28 months, when the world was at the depth of the financial crisis. Now prices are declining again, just as we forecast. The official estimate is that real estate prices will decline about 10% this year. Thats wishful thinking. To us that forecast signals an eventual decline of 50% or more over the next several years. In 1990 in Japan, the government said it wanted to get prices down by 30%. They fell by 50%-70%. This has produced a 20year period of economic stagnation. Its a roadmap for China and the U.S. The Oriental Morning Post reports that over the next three years, a new high rise (skyscraper) building will begin construction every five days. Over five years, the number of skyscrapers will top 800. Thats four times what we have in the U.S. Granted, it is a populous nation, but most of the people will not be working in those buildings once completed. Furthermore, in the U.S. most skyscrapers were built by companies who occupied them as headquarters. They didnt have to depend on leasing the space out to others. In China, most of the buildings have to depend on lessees to occupy the space. Where will the lessees come from when the economy is in recession? According to the Economic Observer, the worlds second, third,
The Coming China Crisis | By Bert Dohmen fourth, seventh and ninth highest buildings are located in Taipei, Shanghai, Hong Kong, Nanjing and Guangzhou, respectively. The worlds tallest building is located in Dubai and stands 828 meters tall. Put that together with all the other evidence that Chinas property bubble is now bursting, and you have a prescription for some very difficult times. There is an old truism that at the peak of every bubble, the tallest buildings are built. In 2007, it was in Dubai, the worlds tallest building. We know how precise that was. In China, it will not be just one skyscraper marking the top, but 500. On August 2, 2011, Saudi billionaire Prince Alwaleed bin Talal signed a $1.23 billion contract with Bin Laden Group for what will be the tallest building in the world. It will be completed in five years. The 1,000 meter plus (3,280 foot plus) tower would replace Gulf neighbor Dubais 828 meter (2,716 foot) Burj Khalifa as the tallest tower in the world. My view is that it will not be completed in a decade, or ever. CONCLUSION: the frenzy over everything Chinese has reached the pinnacle. Its like 2007, when leaders in the financial world told investors that it was a new paradigm. In 1929, the leading economist said the economy is on a permanently high plateau. He said there could not be another recession. My work suggests that the Chinese markets will lead the global bear markets to the downside.
THE SQUEEZE
Credit for businesses is now almost unavailable in China. And credit from a supplier of raw materials to a producer has also disappeared. Instead of giving the buyer a 90-day term for payment, cash on delivery is required for most transactions. However, the manufacturers must fulfill the contracts to the foreign buyers. They have no choice but to borrow at very high interest rates. Manufacturers are encountering big price increases in the materials they buy, but their foreign buyers are resisting price increases. That results in a significant profit squeeze, or no profit at all. Huang, owner of Wai Pang Knitting Factory in Dongguan, said his orders have dropped 30% this year, while the higher-thanexpected increase in labor costs has made 30% of its remaining orders unprofitable.
WATER SHORTAGES
If the above is sufficient to cause severe problems, there is an even bigger and more unsolvable problem on the horizon, for China and the globe: water shortages. I know, I know. Most people are probably yawning now. But this problem is severe. In China, the largest fresh water lake, Poyang Lake, is dry. The boats are sitting on grass. This is in the Yangtze valley. On many days, dust storms make the skyscrapers in the big cities invisible. A common part of clothing is a face mask. Furthermore, China has used huge amounts of artificial fertilizers. Over time, these make the soil very acidic and unsuitable for production. The growing season in North America last year was shortened because of all the ash from large volcanic outbreaks, including those on the Kamchatka peninsula in Russia, just above Japan. Our view is that in less than 50 years, water, not oil or global warming, will be the biggest problem in the world. If you read history, you will see that major depressions have been accompanied by droughts, dust storms, food shortages, famines, resulting in wars. Dr. Iben Browning spoke about this chain of events years ago. They are all related to planetary cycles and sunspot cycles. No, your SUV isnt guilty. Thats what our children will face. Are they ready for that?
CORRUPTION AT ALL LEVELS

From a story on BBC News (June 17, 2011): Chinese officials stole $120 billion, fled mainly to US Thousands of corrupt Chinese government officials have stolen more than $120bn (74bn) and fled overseas, mainly to the U.S., according to a report released by Chinas central bank. Between 16,000 and 18,000 officials and employees of state-owned companies left China with the funds from the mid-1990s up until 2008. The officials used offshore bank accounts to smuggle the funds, according to the study posted on the Peoples Bank of China website this week but which has since been removed. It said the officials smuggled about 800 billion yuan into the US, Australia, Canada and the Netherlands through offshore bank accounts or investments, like property or collectibles. The stolen funds were covered up by disguising them as business transactions by establishing private companies to receive the money transfers. The study said corruption inside China was severe enough to threaten the nations economic and political stability. The Chinese government also revealed that the high speed train being built between Beijing and Shanghai suffered significant corruption. The railways minister has been fired on corruption charges.
The Coming China Crisis | By Bert Dohmen Allegedly, $28.5million had been stolen by individuals and construction companies. The Chinese media reports that the railways minister is thought to have embezzled $121 million. The construction was hurried and is shoddy. Already, major parts of some of the railroad stations have to be rebuilt. One of the high speed trains recently derailed, killing a number of passengers and injuring hundreds of others. Our view is that when such significant corruption occurs at high levels in the government, where public officials are often executed for corruption, what can you expect on the financial statements of private companies? China Mobile is the largest telecommunication company in China. It has been involved in corruption scandals for several years. The news service, Caixin, writes: Chairman Tian Tao and CEO Li Yinan of Beijing Wuxian Xunqi Information Technology Co., an operator of China Mobiles 12580 service, will resign following the further investigations into allegations of corruption at the countrys largest telecom carrier. Wuxian Xunqi is the exclusive partner and operator of the 12580 operation, an online traveling service. Launched by China Mobile, it includes hotel and air ticket booking services. Since late 2009, many senior executives at China Mobile have been found to be involved in major corruption scandals, with many related to behind-the-scenes deals with the companys service providers.
THE WEAKENING CHINA ECONOMY

My work shows that Chinas official GDP growth of 9.4% is pure fiction. It consists primarily of price increases, not real growth, because the inflation adjustment is much too low. In fact, I would go as far as saying that the economy is now growing at low singledigit rates, and will soon go into contraction although the GDP numbers wont show that. The manufacturing data out of China on July 1 showed the weakest numbers in 28 months. In a separate report from HSBC, manufacturing stalled out last month. Does this sound like the advertised 9% GDP growth? The real fact is that most of the economic growth has come from construction of buildings which remain empty. Imagine 30 billion sq.ft. of buildings under construction, much of which will remain empty when finished. We are starting to see the effects of the first phase of the real estate bubble bursting. Suddenly, there are signs of a surplus of copper. Copper is considered one of the best indicators for economic activity. The fact is that there has been a lot of hoarding of construction materials in China as the prices just continued to rise. Much of this stockpiling was financed with borrowed money. As prices decline, the borrowers have to sell copper or put up more money. Earlier this year, the bonded warehouse in China were full. We have heard that copper exports were eight times the year-earlier
The Coming China Crisis | By Bert Dohmen total. London Metal Exchange bonded warehouses saw copper inventories leap 17% in the first quarter. Furthermore, to circumvent tight bank lending in China, borrowers are relying more on available letters of credit to finance copper arbitrage trading and otherwise have the use of the borrowed money with copper purchases as their collateral. If copper prices continue to fall, those borrowers will have to sell their copper on the market to prevent further losses, resulting in still lower prices.
DEBT DEFAULTS ARE STARTING

Shanghai Rainbow, a development company set up by the city of Shanghai, has failed to repay part of its 1 billion yuan (US$154 million) debt that had fallen due. According to reports, the Shanghai Banking Regulatory Bureau called the chiefs of local banks for a meeting on June 28 to discuss the problem and asked them to form two consortiums to offer syndicated loans to Shanghai Rainbow. One of the consortiums had been asked to arrange a loan of 8.5 billion yuan (US$1.31 billion). However, even as a new loan is being arranged, some of its debts have already become overdue. In our opinion, we will see an accelerating number of such problems. This is similar to the first problem in 2007, when two funds of Bear Stearns were insolvent because of huge losses. That was the canary in the mine. Initially, the authorities will jump in for the rescue. Eventually, the defaults will overwhelm the system. That may wait until late 2012 or 2013, although in todays electronic world, it may come sooner. Chinese stocks traded in Hong Kong are now a great target of the short sellers. The facts are clear. In China and Hong Kong there are now worries about a hard economic landing. Continued revelations of false financial reports by Chinese companies is increasing the appetite that sells Chinese stocks short on the Hong Kong stock market. Hong Kong Exchange and Clearing statistics show that investors shorted about HK$91.1 billion worth of H shares of four major Chinese banksABC, BoC, CCB
The Coming China Crisis | By Bert Dohmen and ICBCbetween January and May. Why dont we hear more about this in the U.S.? Wall Street doesnt want these facts to get out because they have made great underwriting profits with the Chinese IPOs on the NYSE over the past few months. Therefore, any analyst who divulges this adverse information is treated just like the few bears were in 2007 and 2008, i.e. not very kindly. The truth is not very popular today.
A MT. EVEREST OF DEBT

Premier Wen Jiaboa of China had ordered the first audit of local government borrowing in March. The results are in. Local government debt was 10.7 trillion yuan ($1.7 trillion) at the end of last year. The report warned of repayment risk. Local governments rely on land sales for more than 80% of their income. What will happen when the real estate bubble implodes and there are no buyers for the land? However, a few days later, Moodys came out with a report which said Chinas local government debt burden may be 3.5 trillion yuan ($540 billion) larger than the official numbers above. Moodys said it found more potential loans after accounting for discrepancies in figures given by various Chinese authorities. Moodys said that as many as three-quarters of the loans could turn sour. That would push the bad debt ratio for banks to between 8% and 12% of all loans, up from just over 1% now and worse than Moodys had previously anticipated.
SOCIAL UNREST
The many riots in different parts of China are becoming more violent. This is what Futures Magazine writes: Reports indicate that scary riots in Chinas Guangzhou area have put leaders of that country on edge as they came on the heels of several weeks worth of intensification of such unrest. Chinese society currently witnesses untold numbers of protests and riots each year as the ire over government corruption and social inequality appears to be boiling at a disturbingly high level. The global riots and revolts are not a coincidence. And they will eventually come to the U.S. Are you ready for that?
BIG BROTHER
Here is a news item from WSJ.com: Western companies including Cisco Systems are poised to help build an ambitious new surveillance project in Chinaa citywide network of as many as 500,000 cameras that officials say will prevent crime but that human rights advocates warn could target political dissent. These cameras will allow a quick response by police when people are starting to gather for protest. Isnt technology great!
FUTILE INFLATION FIGHTING

China is having a huge inflation problem, which will get worse as the government tries to fight inflation with a method that never works, namely hiking interest rates. The rising rates actually create higher inflation. On July 6, the Peoples Bank of China (PBOC) raised the benchmark 12-month lending rate to 6.56%. Dont you just love the words Peoples Bank? You see, everyone loves fairy tales. Its like calling members of the U.S. Congress public servants. Anyway, the only way rising rates stop inflation is by crunching the economy. The implosion of the credit bubble stops the inflation, not the higher interest rates. And that is very painful. Currently, credit in China is almost impossible to get by private companies. Some companies are paying interest rates of 50% to 130% to small finance companies just to finance purchases of raw materials from their suppliers. How can any analyst think that this can end in a soft landing? Corruption is a major problem in China. And that will be exposed in the coming meltdown. As Warren Buffett said years ago, You see who has been swimming naked when the tide goes out. Premier Wen Jiabao said that the countrys efforts to contain inflation have worked and that the pace of consumer price increases
The Coming China Crisis | By Bert Dohmen will slow, Bloomberg reported. There is concern as to whether China can rein in inflation and sustain its rapid development -- my answer is an emphatic yes, Wen said. China has made capping price rises the priority of macroeconomic regulations and introduced a host of targeted policies. These have worked. The overall price level is within a controllable range and is expected to drop steadily. Is he right, or is this wishful thinking? Studying many decades of inflation cycles in the world, we cannot find one instance where rising inflation has been reduced by hiking interest rates while maintaining rapid economic growth. Perhaps China will show the world how it can be done. However, we are doubtful. However, the government is concerned about the enormous and growing mountain of bad debt. Beijing may assume up to RMB3,000 billion (US$463 billion) of debt that banks could never hope to retrieve, according to WantChinatimes.com. Dong Tao, Credit Suisses chief Asia economist, said that local government debt is the biggest problem the country has faced in his many years as a China watcher. Although Chinas national debt is about 20% of GDP, if considering all the debt including the 70% of stimulus loans to state enterprises, the governments debt is probably around 80% of GDP. Well, now we see that China is potentially just another financial basket case, not much better than the U.S. or Greece. They just have the advantage of a closed financial system, not subject to market forces. But eventually, that wont save their economy.
The Coming China Crisis | By Bert Dohmen All of our information shows that Chinas manufacturing firms are now basically operating without making a profit. Wage increases are over 20% over the past one to two years, while the cost of raw materials is up similar amounts. Yet their Western customers are not willing to pay higher prices. So they are in a real cost squeeze. Local manufacturers cant get financing from their suppliers any more. Now its cash on delivery. They cant get bank loans either. So they go to private financing firms, paying interest that would make the Mafia blush. How long can you keep a business afloat under those conditions? Standard & Poors says that perhaps as much as 30% of bank loans are expected to turn bad. Imagine the kind of bailout that will require from the central government! Local governments are not allowed to borrow from banks. So they set up financing vehicles which do make loans. Its estimated that these loans amount to a hefty $2 trillion. The overdue loans, according to the official audit, are estimated to be more than 8 billion yuan ($1.27 trillion) and growing rapidly. You see, global governments get most of their revenues to finance expenses from land sales. Many are now running out of land to sell, while others that have the land cant find the buyers as property sales to speculators are drying up.
THE GROWING MANUFACTURING CRISIS

The next global financial crisis has started in Europe and will eventually be followed by China. These will envelop the markets of the world. Stress will start building this September. The July 20, 2011, story from a China news service was headlined: Southern China sees wave of manufacturing bankruptcies. The story blamed the rising value of the currency and unavailability of credit for the bankruptcies of manufacturing firms, especially in the heavily industrialized areas of Guangdong and Zhejiang. The story states that a wave of bankruptcies with a severity not seen since the 2008 financial crisis is sweeping through the manufacturing industry. The story didnt mention two other big problems: the 40% rise in wages over the past two years, and decreasing orders from overseas. Industry sources say that they expect a shutdown of 10% of textile companies in Dongguan, the manufacturing stronghold of Guangdong Province, and 20% in Zhejiang Province. The second largest toy manufacturer, Dong-guan Soyea Toys Co Ltd, closed down unannounced on April 1 after its South Korean owner went into hiding. Why would the owner go into hiding? You need permission to close down a company or be arrested. Any hint of problems, and the foreign owner has to forfeit his passport. In mid June, well-known textile manufacturer Dinkind Knitting
The Coming China Crisis | By Bert Dohmen Fashion Co Ltd abruptly went bankrupt. The company employed more than 2,000 workers in Dongguan. The president of the Dongguan Textile and Garments Trade Association said the second half of the year is usually a boom season for the textile and toy industries, but that business will not recover unless credit is eased and labor and commodity prices are reined in. The China Economic Weekly quoted business leaders in Zhejiang as predicting that nearly 20% of small and mediumsized enterprises in the eastern province would close down within the next three years, for the same reasons that Mr Chen listed. The three years is probably a political statement. You can change that to one year. The president of the Dongguan Taiwan Business Association predicts that over 10% of the members of his association would close their businesses before October. The owners are probably already packing and planning their escape. Remember when the airport parking lot in Dubai was full of abandoned cars? These people were also escaping, fearing arrest for abandoning their business enterprises. The above confirms our forecast of a China Crisis-Phase I having started.
IS A SOFT LANDING POSSIBLE?

In spite of the facts, governmental officials in China are no different from those in the U.S. They are experts at putting lipstick on a pig just to make it look better. But its still a pig. A governmental official, Ba Shusong, deputy director of the Institute of Finance at the Development and Research Center under the State Council (Cabinet) says that although there is a slim chance of a hard landing, overall economic growth is still expected to reach around 9% this year. He must be Ben Bernankes long lost twin brother. You see, he also makes the mistake of looking at GDP, a number which is adjusted for inflation. However, actual inflation is much higher, and therefore real GDP is much lower than the official number. The GDP growth actually consists mostly of price increases. Mr. Ba Shusong says that the Chinese government should be more cautious against possible excess control measures in certain sectors. Ba said the real credit-tightening pressure to be faced by enterprises will come mainly from the banking system rather than from official interest rates. He said capital costs for private enterprises in the Yangtze and Pearl River deltas, the two regions with the most vibrant economy, are now essentially similar to those during the 2007-2008 period.
The Coming China Crisis | By Bert Dohmen Thats quite a revelation considering its an official source. He continues that companies may feel the pinch at this time more because the overall economic strength of the country is not robust as 2007, when China registered an unusually rapid GDP growth rate of 14.2%. He is right on that point. The economic bounce in China of the last two years was merely a credit bubble created by the government, not the private sector. And such bubbles actually create more severe problems down the road. On July 21, HSBC bank released its flash PMI (purchasing managers index) which was below the critical 50 level, thus inferring economic contraction. It came in at 48.9, the lowest level in 28 months, or since the depth of the last financial crisis. That confirms our statements of the past several months, i.e. that China was already in a sharp slowdown but price increases disguise that. The Purchasing Managers Index is a free market number, not one made up by the government. Note that Mr. Ba refers to the strong economic growth in 2007. At that time, inflation was lower which means that the GDP number was more accurate than now. In spite of the 50% stronger GDP growth in 2007, the Shanghai stock market index plunged about 60% during the crisis. The environment is much more fragile now.
CHINA CAR SALES PLUNGE

In late July 2011, we got a report that new car sales in China are plunging. Dealers are getting stuck with excessive inventories as the car builders continue to produce at a high pace but the dealers encounter a dearth of buyers. Currently, unsold inventories are expected to reach 4 million cars, although our own estimate is up to 50% greater. Margins on car sales are slim. With private firms basically unable to get bank loans because of the credit squeeze, firms have to go to small credit firms, paying very high interest rates. That eats up a 10%-20% profit margin very quickly. The inventory cycle is now approaching 60 days, up from a normal 45 days. As things stand, the countrys top 12 carmakers are seeking to make and sell nearly 19 million cars this year. The figure must exceed 22 million if the estimated output from more than 100 smaller carmakers that focus mainly on commercial vehicles is taken into account as well. Carmaker Geely Holding Group recently announced a bond sale to raise one billion yuan. They are preparing for a crunch. The firm already has debt of 71 billion yuan, or more than $10 billion. Their car sales in 2010 were up 27%, less than the average 34% increase in the industry. But this is 2011. What if sales decline? BYD Co, the Chinese battery and automaker in which Warren Buffetts Berkshire Hathaway Inc owns 9.8%, said that its firstquarter profit declined 84%, mainly due to a slowdown in car
The Coming China Crisis | By Bert Dohmen sales and rising costs. The company informed the Hong Kong Stock Exchange where it is listed that the performance in the first quarter dropped significantly, which was mainly due to a decline in the performance of the automobile business. It also noted weakening sales of rechargeable batteries and cell phone parts. Bottom line: a credit crunch produces waves through the entire economy. As car sales and property sales decline sharply, there will be equally sharp declines in demand for raw materials. No one will be immune. Its amazing that we hear so little about the implosion of the China credit bubble.
STEEL PRODUCTION: NOT RELEVANT

In spite of the slowdown, steel production in China rose to almost 60 million tons in June, up 11.9% from the same month last year. China is the worlds largest steel producer. In comparison, U.S. steel production was slightly above 7 million tons in June. The casual observer takes this as a sign that the Chinese economy continues strong. The truth is that steel production is the major source of income and employment in many cities around China. They dont dare stop production. A better indicator of demand is prices, and steel prices are declining in China because of soft demand. On August 1, 2011, a report in a financial journal dared to reveal some potential banking problems in case of a housing price plunge. The Chinese government did a stress test of its banking system. It was similar to, or worse than, those conducted in Europe, i.e. they did not really stress. One banking analyst who works at a leading state-run bank said that it did not represent the true situation as the test was done on paper with static data. This analyst wrote in a report quoted by the First Financial Daily in Shanghai that local banks could not survive a 20% decline in housing prices. He noted that mortgages make up 40%-50% of the loans extended by local banks.
The Coming China Crisis | By Bert Dohmen Of course, the government had to counter that statement. The chairman of the China Banking Regulatory Commission said that Chinese banks are strong enough to withstand a decline in housing prices of up to 50%. Isnt this all reminiscent of 2007 in the US when the housing market started to crumble but Fed officials and others said there was nothing to worry about. This chairmans assurance will turn out to be just as wrong. In our opinion, housing prices in China will plunge at least 50% over the next several years, and probably 70%-80% over a longer period in some areas. Todays prices are unaffordable for 95% of the Chinese. Most of the condos are empty as they are owned by speculators. In 2007, we predicted that the entire price rise of the prior six years would be wiped out in the coming financial crisis. No one, including some of the bears, believed us. But it happened. In China, we believe the entire price rise of the past nine years will be wiped out. Regulators always forget the ripple effect. Land sales are the major revenue source for most cities. In a housing crunch, they wont be able to sell land and therefore wont have money to run the cities or to pay debt service on existing debt. They will have their own municipal crisis. That means entire cities will default on their debt. Sound familiar?
Banks will have to be rescued by the central government, just to prevent a banking crisis. They cant afford to have citizens lose their savings and risk riots in the streets. But that wont resolve the excessive debt, defaults, and a big recession. For a country that has been the locomotive of the world, this will have huge repercussions around the globe. Just as price increases and inflation causes a period of apparent prosperity, a price decline caused by a credit crunch produces a cascading unwinding of the excesses. And that will create severe pain. Car sales, steel prices, a plunge in housing sales are all occurring at this very moment. Yet, US money managers still love the China story. Well, its their clients money they will lose, not their own.
THE EMERGING MARKETS: CRISIS AHEAD!

The emerging markets have been beneficiaries of the great central bank money creation which occurred after the 2008 meltdown. Trillions of artificially created dollars, yen, yuan, etc. sloshed around the world. Result: INFLATION! Ludwig von Mises, the founder of the Austrian School of Free Market Economics, wrote this about 70 years ago: The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy. Compare that to what the heads of central banks are saying to excuse their incompetence. The head of the Brazilian central bank, who presides over 6.7% inflation in mid-2011, said that Brazil is experiencing a new form of inflation that has never been studied in economic literature: high and controlled. He said that inflation could stay at current levels for a long time without damaging the economy. He said there is nothing to worry about because inflation of other economies was much higher: Russia 9.4% and India 8.8%. He also blames speculators, the weather, excessive demand for goods from other countries, for the Brazilian inflation. Brazil has huge financing needs for the next several years: the
The Coming China Crisis | By Bert Dohmen 2014 World Cup Soccer, the 2016 Olympics, energy build-out (Petrobas) and infrastructure. Estimates are that foreign capital in the amount of US $2.1TRILLION will be required. The size of Brazils GDP is only US $2.02 TRILLION, compared to over $14 TRILLION of the US. Who will lend Brazil the money? How will they control the resulting inflation. Dont buy your tickets yet for the Soccer or the Olympics. They may not take place. When the credit bubbles around the world pop, the big hot money flows will quickly exit the emerging markets. They will then have severe financial crises which will only accelerate the global meltdown. In the past the U.S. was the primary bailout agent for entire countries. Now that U.S. debt has experienced a debt downgrade, who will bailout a number of emerging countries, and then the U.S.A.?
THE REAL ESTATE BUBBLE BURSTS

By early August, the reality of the crumbling real estate bubble in China was starting to become more visible. A joint report by 16 large Chinese real estate firms said that seven were experiencing a 30% drop in net profits. They expect housing prices to drop by more than 20% in the second half of the year. Thats an incredible drop considering the report is from the industry which has every incentive to be positive. So we conclude that this is slanted to the positive side and that they actually expect a much more serious decline. Developers have already cut prices, but this hasnt boosted sales. Thats typical of a liquidation market which is a term for a lot of sellers wanting out and no buyers willing to step in. Housing sales in the big cities dropped a big 29.3% in the first half of the year. We expect the decline to be even worse in the second half. Property developers in China have been the target of numerous governmental measures to stop the property bubble from growing further. When banks were told to stop financing of new development projects, the large developers borrowed in Hong Kong and other foreign markets. Just as in the US, developers will build, even when there is no demand, as long as someone will lend them money. It seems to be part of the DNA of developers. In early August 2011 Chinas foreign exchange regulator
The Coming China Crisis | By Bert Dohmen suspended all applications by property developers to issue offshore bonds through overseas units. This will shut off a considerable supply of funds. Hong Kong-listed mainland developers raised US$8 billion from offshore bond issuances in the first half of 2011, compared to US$8.8 billion for the full year of 2010. In mid-August official statistics showed that property sales nationwide dropped a hefty 33.7% in July from one month earlier. Just imagine, such a big plunge in one month! This is reminiscent of the US in 2008. The unsold inventories of 20 major developers rose 46.4% year-on-year in the first half of this year, to 317.8 billion yuan (US $49.7 billion) according to Caixin. All property bubbles throughout history are the same. Excessive availability of financing to developers, and then buyers, creates a price bubble to unaffordable levels. Then the cause of the bubble, i.e. credit, is shut off by the government in order to stop the growing bubble. Then demand vanishes, the speculators go bankrupt, and the lenders start toppling. This causes a serious financial crisis, recession/depression, and social unrest in many cases. There is absolutely no way out of this in a painless way. There can be no soft landing.
SIMILARITIES TO JAPAN
In our view, the China property bubble is Dubai times 100. The implosion will be 100 times greater as well. At the same time, the severe credit crunch in China will now be exacerbated by a plunge in exports as the global economies go back into recession. A multitude of Chinese manufacturers will close, unemployment will soar, there will be great social unrest, and the government will become more ruthless in stopping demonstrations. Foreign owners of factories in China will flee overnight in order to avoid arrest for closing a factory without governmental permission. The fraudulent financial statements of Chinese firms, which so many investors relied on, will be exposed. There will be many scandals. Garbage eventually floats to the top, especially in bad times. The reduced demand by China of raw materials will adversely affect all the firms which have depended on China demand for their sales growth. This means the commodity producers, such as Australia, Brazil, Canada. That will produce a tidal wave throughout the financial world. BOTTOM LINE: the real estate bubble in China has already burst. It is now deflating. But investors around the globe remain oblivious to this reality. The bullish story on China, which is used to promote the stocks of US firms doing business there, is still being promoted. However, soon Wall Street will find that no one is buying that story any more.
The Coming China Crisis | By Bert Dohmen China is going into a serious credit and economic crisis, and only a few investment professionals are paying attention. In 1990, when the Japanese Ministry of Finance announced it would tighten credit in order to reduce property price levels by 30%, we predicted Japan would have at least a ten year, deep recession as a consequence. At the time, that sounded crazy. After all, even in the US Congress there were voices to replicate the wonderful central planning of the Japanese economy. But now, after 20 years, the Japanese Nikkei stock index is still down about 78% from the 1990 peak. Thats a super long bear market. Could this happen in China? Our view is that the conditions are somewhat similar to what Japan was in 1990. Japan basically had a centrally controlled economy, a huge credit bubble produced by 1% interest on long term corporate bonds, and a real estate bubble that staggered the imagination. It was said that the ground of the Imperial Palace in Tokyo was worth more than all the real estate in California. When the bubble burst, Japan tried to boost the economy with huge infrastructure projects, highways and bridges to nowhere, etc. Gigantic losses on balance sheets of financial institutions were buried using financial engineering involving derivatives. But the losses will reappear again, in 30 years after the bubble burst, i.e. 2020. At the time, Japan was the locomotive of global trade. China now
The Coming China Crisis | By Bert Dohmen is the engine for global growth. In China, capital investment, almost all from the government, is over 60% of GDP. In other developed nations its around 6-8%. Enlarging those bad investments once China starts to fight recession will be just as ill-fated as it was in Japan. Whereas the common perception is that China will surpass the GDP of the U.S. in the next five years, we believe that suddenly Chinas problems will be just as great as, though different from, those of western countries. It seems to be the nature of cycles that when they say things have never been better that in fact they wont get any better and can only get worse. The U.S. may be dependent on China financing the U.S. deficits, but China is very much dependent on U.S. demand keeping its export industry flourishing. As the U.S. economy goes back into recession, the demand will contract and China will see economic contraction in the private sector. That will cause another global crisis. Whereas the financial crisis of 2008 was one of specific financial institutions going bankrupt, the next crisis will be one of entire nations becoming insolvent. This chart of the Shanghai index shows the 65% crash during the 2008 crisis. Massive monetary injections by the government, about 6 times the size of our Federal Reserve in relation to GDP, created another huge speculative bubble in real estate. Now that is causing high and rising inflation.
On September 1, 2011 Premier Wen said that the government would not relent in its fight against inflation until prices come down. And then he said something very disturbing: he said the government will prepare for imposing price controls next year. That is an incredibly strong statement, but no one in the media seemed to be aware of it. When that happens, batten down the hatches around the world for a severe financial hurricane. In our opinion, the theory that Chinas GDP will surpass that of the U.S. by 2016 is wrong. It reminds us of similar forecasts about Japan in 1989, when even members of the U.S. Congress wanted to emulate the Japanese model of central planning. And then Japans stock market crashed as the government started fighting inflation, just as in China now.
The Coming China Crisis | By Bert Dohmen A 20 year period of economic stagnation followed. The Nikkei index is still down over 77% from the 1990 high. And soon will make a new multi-decade low. Its a great short sale. Governmental central planning only works in the catchup phase from being underdeveloped to being a developed economy. After that, the entrepreneurial spirit of the individual has to take over. But thats not possible in governmentally controlled economies where all power, rights, and freedoms come from the royalty of the politicians. This is why Japan has not recovered. And that is why China will have great problems in the future. And thats why the US cant recover.
- Bert Dohmen
EPILOGUE
FINANCIAL CRISIS PART II In our view, the second phase of the financial apocalypse is still ahead, sometime between now and 2013. We will watch it closely. Our technical indicators will give us ample warning. In my book, PRELUDE TO MELTDOWN, written in 2007, I discussed my analysis and forecasts with charts showing that in 2008 the globe would encounter a crisis similar to 1929. Very few people believed it, but it happened. My recent book, FINANCIAL APOCALYPSE, published in 2011, is a collectors item. Its a chronological account of how I saw the developing crisis in 2008 and how Wall Street analysts continued to advise there is no recession, or its a buying opportunity, or its just a soft patch that will soon lead to a new phase of prosperity. At the same time, I was advising our clients to sell short, enabling them to make fortunes during the crisis. The current situation is reminiscent of 2007. There is complacency, total denial, and every effort by Wall Street to paint a happy face on the bad credit situation. The U.S. situation is bad enough. There is still over two trillion dollars ($2.7 trillion to one analyst) of bad unrecognized debt on the books of the banks. They dont have the capital to write that down.
The Coming China Crisis | By Bert Dohmen But the situation in Europe is even more dismal. Entire countries in EU are threatening to have imploding economies. The estimate of bad sovereign debt on the books of the largest European banks is estimated at well over $1 trillion, but the banks dont divulge the actual numbers. That makes it even worse. The IMF recently said that $3.6 trillion of loans on the books of European banks will come due the next two years. In Asia, the biggest real estate bubbles are starting to implode at this time. China is by far the largest bubble ever seen, much greater than the one in Dubai which caused prices in that country to decline by 70% or more. In my book of 2007, I predicted that Dubai would become the greatest real estate disaster in the history of mankind up to that time. Well, Chinas will be much bigger. While the world is concerned about high inflation, we are actually about to see another great deflationary wave gathering strength caused by the crumbling of fantastic mountains of debt. The prices of consumer essentials may continue to rise, because we all have to eat, and we all need energy for our very existence. But everything else will see price declines. Of course, the central banks wont stand idly by and let the financial system crumble. The only weapon they have is the creation of artificial money. So we have to anticipate a sharp reduction in purchasing power of our currency. Gold is the perfect hedge against that. I expect much, much higher gold prices over the next ten years.
A NOTE FOR INVESTORS

The above is the interim story of the Coming China Crisis. Except for a handful of analysts and hedge fund managers, the facts are unknown or ignored. This is so reminiscent of the 20072008 developing crisis in the U.S. when our warning fell on deaf ears. Of course, human beings were not given the ability to have a perfect view of the future. My view may turn out to be wrong if governments around the globe suddenly find the magic solutions to the immense problems. The major U.S. stock indices are now in bear markets, although Wall Street analysts and money managers dont seem to notice. This is what we wrote in the May 30, 2011, WELLINGTON LETTER, which was headlined: IMPORTANT TOPS! The warning signs of an important top forming at this time continue to mount. Important tops dont occur on one day, one week, or even one month. Its a process. Wall Street firms first disguise the selling of their own portfolios. They also want to get all the IPOs still in the pipelines launched before the window closes, and then they want to be positioned on the short side before the deterioration becomes evident to all. Its interesting that most investors and even professionals I met
The Coming China Crisis | By Bert Dohmen at a recent conference are so complacent and think the market is making new highs. Well, the top in the market so far was made on April 29 (closing basis on the DJI and S&P 500). The market has been declining for one month, but no one is worried. Furthermore, on April 28 the highest volume stock on the NYSE, Citigroup (C), had a reverse split of 1 share for 10 shares. That is perfect for marking an important top. Now the stock is around $40 instead of $4. Our work suggests it will go back to the 2009 low, which is around $10. Of course, in the words of Wall Street, thats ludicrous. Read my book, FINANCIAL APOCALYPSE, and see how many others of our forecasts over the past 33 years they called ludicrous, but nevertheless came true. Furthermore, as we have been pointing out, the distribution phase, i.e. when the Wall Street firms start unloading onto the public, started in mid February. Yes, that means that the big, smart money has disguised its selling for five months. Such a long period of selling is very meaningful. By late July, the big, smart money was done disguising its actions. Now it was time to let the markets sink by their own weight. On the Aug. 9, 2011, low, the Dow Jones Industrials Index was down 2172 points from the May 2 high. In early August, which appeared just before the selling avalanche, we said:
The Coming China Crisis | By Bert Dohmen We have changed our danger status in the markets from yellow to red. Over the next four trading days, the Dow plunged 1292 points. Our trading advisory services were short.
CALLING THE PLUNGE: MID-2011

Here is the progression of the headlines in the Wellington Letter from May to September, 2011: May 9: RETURN OF THE DOUBLE-DIP May 30: IMPORTANT TOPS! July 19: FINANCIAL CRISISPHASE II is BREWING July 31: THE NEXT PERFECT FINANCIAL STORM August 8: $4 TRILLION IN STOCK LOSSES (globally) August 28: BEWARE OF AUTUMN! September 8: PHASE II of the GLOBAL CRISIS will now ACCELERATE September 11: EUROPEAN CRISIS ACCELERATES Yes, we gave plenty of warnings for three months that the
The Coming China Crisis | By Bert Dohmen recession had actually started, and that in fact the bear market had started. However, you wouldnt know that by listening to all the analysts appearing in the media. They were still talking about a soft patch in the economy, and a buying opportunity in the stock market. Investors should not make the mistake of thinking that high inflation will boost the real prices of assets. Purchasing power will decline much faster than price inflation can boost prices. This will cause investors to seek ways to protect purchasing power. The natural for that is gold and silver. So we have to be prepared for extreme volatility. During such times, you must have the most experienced analyst to guide you. Just ask investment professionals you interview, How did you do during 2008? If they lost considerable amounts, you should look elsewhere. That, of course, eliminates a lot of people in the business. But thats OK. When you need brain surgery, wouldnt you try to find the best? However, clients of Bert Dohmen were more fortunate in 2008. The written record reveals that in his PRIVATE PORTFOLIO service, which enables the average person to manage his own portfolio with Dohmens guidance, investors were advised to have positions in the ETFs that are designed to rise in price as the stock index or sector decline. Here is a graph of how these positions did during the critical five week crash:
The Coming China Crisis | By Bert Dohmen PRIVATE PORTFOLIO CRASH PERFORMANCE
The gains are real, not typographical errors. The average gain for the six weeks during the crisis was 72%. The ETFs are the leveraged kind. They soared as the markets plunged. The fiveweek profits are similar to what money managers hope to achieve over a ten-year period. This is why ignoring popular opinion is so important if you want to make money in the markets. Bert Dohmens newest book, FINANCIAL APOCALYPSE, is a collectors item about the 2008 crash. Its a step-by-step account, with charts and astute analysis, of how Bert Dohmen identified
The Coming China Crisis | By Bert Dohmen the coming meltdown and guided his clients to great profits during this historic crash. (www.BertDohmen.com) Here is a chart of the major market calls by Bert Dohmen during the 2007-2009 period. These are actual recommendations made in Bert Dohmens various advisory services to his clients. Note how his analysis caught tops and bottoms, often within one to two days.
HIGHLIGHTS OF BERT DOHMENS 33-YEAR TRACK RECORD

Wall Street called it ludicrous! Bert Dohmen has established an unsurpassed record of contrarian forecasts. He knows that being right means to be in a small minority. Going with the crowd usually means substantial investment losses. He is founder of the well known investment and economic research firm, Dohmen Capital Holdings. He uses advanced technical analysis for precise market sector timing. And his skill of predicting Federal Reserve policy has earned him the title of Leading Fed Watcher (WSJ). Astonishing forecasts of Bert Dohmen: In 1978, Bert Dohmen predicted that long-term U.S. Treasury bonds would lose 40%-50% of their value over the next several years. Wall Street called the prediction ludicrous. A leading Wall Street economist said at a seminar that this was impossible, as the U.S. financial markets would stop functioning. Over the next three years, U.S. T-bonds lost 44% of their value. In early 1979, with the prime rate around 12%, Bert Dohmen predicted that the lending rate would go to 20%. Wall Street economists called it ludicrous. Yet, one year later, the prime rate hit 20%.
The Coming China Crisis | By Bert Dohmen In 1980, after gold had hit an all-time high above $800, a bull market Dohmens clients participated in with great profits, he predicted that gold would go into a 20-year bear market. Even some of his strongest supporters had doubts about that forecast. His colleagues and Wall Street analysts called the prediction ludicrous. Yet gold plunged and the bear market lasted until early in the year 2001 when it made a low of $252. In mid-year 1981, the year-end interest rate forecasts of a select group of noted economists were featured in the Wall Street Journal. The next month, in the July 1981 issue of The Wellington Letter, Bert Dohmen added his own prediction. That table is reproduced here. The list included the future Federal Reserve Chairman, Dr. Alan Greenspan. Note how wrong these economists were. And then note Bert Dohmens forecasts.
The Coming China Crisis | By Bert Dohmen Bert Dohmens forecasts were right on target and way ahead of the crowd.
The Coming China Crisis | By Bert Dohmen Bert Dohmen predicted the 90-day T-Bill rate would plunge from 12.43% to 8% by year end. Wall Street called it ludicrous because inflation was still very high. At the end of the year, the T-bill yield was exactly 8%. In the late 1980s, major hedge funds started short selling the Japanese stock market, when the Nikkei went above 23,000. Dohmen said it was too early. In early 1990, after the Tokyo Nikkei Index had soared above 39,000, Bert Dohmen predicted the Nikkei would finally crash and go into a bear market lasting at least ten years. Wall Street analysts called it ludicrous. Economists and Washington politicians felt that the Japanese model was one that should be replicated in the U.S. Japan was a major lender and capital provider to the world. Seven of the worlds largest banks were Japanese. Yet twelve years later, the Nikkei Index made a new low, down more than 75%. In March 2000, when the NASDAQ COMPOSITE made its alltime high above 5100, Bert Dohmen wrote: When the Fed pursues this type of policy it always ends in a crash. That was right on target. The crash started the next month. In September 2000 Bert Dohmen predicted that the NASDAQ COMP would plunge to 1400 from the 3000 area at the time. The bulls called the forecast ludicrous. Bullish sentiment about the internet and technology sectors was near its high.
The Coming China Crisis | By Bert Dohmen In February 2002, on FoxNewss Neil Cavuto program, Bert Dohmen predicted that the NASDAQ Composite would not see its March 2000 high of 5,132 again for at least the next ten years. The Wall Street analyst on the same program said: Thats ludicrous! Eight months later the NASDAQ had plunged to the 1108, down 78% from its peak. The bear market of 2000-2002 produced the worst wealthdevastation in world history up to that time. More than $9 trillion dollars of wealth was wiped out. Of course, that was far exceeded by the 2007-2008 global meltdown, which was another prescient forecast of Bert Dohmen. Lesson: a prediction which Wall Street calls ludicrous may turn out to be correct.
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[Bert Dohmen has] gained an international reputation for his accurate forecasts of the economy and major investment markets. - Wall Street Transcript ...The WELLINGTON LETTER...is the most thoroughly researched and best written investment newsletter that I receive. - Neil Cavuto, Fox News Network Im sending one new subscriber your way, but I will not accept any credit for it. That he will finally have access to your sagacity and opinion is recompense enough. I have no doubt he will profit greatly, and become more a shepherd and less a sheep in the exercise. Thanks not only for your wisdom but for your candor as well. We may end up serving our own country, the country we love, better in the long run for this awareness. - T.C. Redmond, WA
The Coming China Crisis | By Bert Dohmen Dear Bert: I just wanted to send you a big THANK YOU for all of your guidance. With your help Im now buying a house. Your help through these times will not be forgotten. - M.B. Honolulu, HI Hi Bert! I would like to tell you why I subscribe to your service: I respect you! YOU are knowledgeable and experienced! And you give sound advice! PLUS !!!! Trading your systems allows me to work (own) a business and to build my finances! Thanks, Bert! - RH. A happy subscriber! Virginia Beach, VA Dear Mr. Dohmen: I just want to thank you for your last recommendations to buy BBH & SWH. Im up a little over $50,000 in three weeks. Im increasing my allocation to your service. Keep the good work. - B.D. Hilton Head, SC As an investor for over 20 years, I must say that your SMARTE TRADER service has been incredible!! Your analysis is truly uncanny. In the four months that I have subscribed to the SMARTE TRADER my successes has far and away outdone any previous trading strategy. I have
The Coming China Crisis | By Bert Dohmen done better in four months with your recommendations than in the last 3 years. Incredible!! - M.R. Thank you, thank you, thank you. Mr Dohmen is simply the best at calling turning points in the markets. I just wish I could learn to tune out everyone else. - M. Bo Bert, I have never seen anyone with such accurate calls on markets as you have been. Right from the start of my subscription I have made money every day. My account size I am using for this type of trading was $30,000.00 when I started. I saw you on CNBC the day after you called the bottom a couple of weeks ago. Again, thank you very much for your service, I will bet I become a life long member. - MARK@CC I often ponder how much Ill miss your advice when you retire! Wishing you the best. Comfortably retired in Thailand, yours truly, - R. Co. , Ph.D.
The Coming China Crisis | By Bert Dohmen Bert Dohmen is a pro. - Gene Marcial, x-columnist for Business Week Bert Dohmen is one who has a track record- a great one. - Don Bauder, Syndicated Financial Columnist Not only do you give clear, understandable descriptions of the economy and the markets, but youve given me the opportunity to get in before the markets moved, and out with good profits. - Clyde Harrison, Ex-Vice Chairman, Chicago Board of Options He gave me the warning about the big crash in 2008 that saved me millions of dollars. - A.G. Chicago I wish I had found you sooner Again thank you for all you have taught me; it has been priceless. I just spoke at my broker dealer meeting in front of a hundred reps and went off for ten minutes about how amazing you are and how foolish they would be to not at least
The Coming China Crisis | By Bert Dohmen sign up for the Wellington letter. - BLB Let me say about Wellington letter -- It is the best commentary/forecaster of the stock market of which I am aware. - M.B. I am subscribed from here in Mexico City to 14 monthly global financial reports and I can truly affirm that the Wellington Letter is at the very top in your brilliance of reporting current status and also in projecting major future scenarios. - H.M. Bert Dohmen has proven to me that the financial health of his subscribers is his mission. I recommend any and all of Bert Dohmens advisory services without reservation. The cost of these services will be recovered almost immediately if the subscriber takes appropriate action. Those who ignore your wisdom and market advice do so at their own financial peril. Thank You Again. Your long time loyal subscriber, - Dr. A.M.
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Bert Dohmens WELLINGTON LETTER An award-winning investment and economic newsletter with an impressive 35 years in circulation. Targeted toward the serious investor and business executives, it has provided readers with the most accurate analysis and forecasts of the global economies and investment markets found anywhere. His readers have prospered in bull and bear markets alike. www.dohmencapital.com/ordernow.htm
The Coming China Crisis | By Bert Dohmen HOW TO SUBSCRIBE Go to www.dohmencapital.com/ordernow.htm and click on the service that is best for you. Or you can send us an e-mail: office@dohmencapital.com OTHER BOOKS:
Prelude to Meltdown (2008)

By Bert Dohmen, Founder of the Dohmen Capital Research Group Bert Dohmen, warned at the beginning of 2008, that starting in September, 08 the global financial markets would teeter on the brink.
Financial Apocalypse (2011)

By Bert Dohmen, Founder of the Dohmen Capital Research Group The global financial crisis of 2008 was the worst crisis since the 1930s. Wall Street honchos and Washington leaders tell the public that no one could have predicted it.

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The Coming China Crisis | By Bert Dohmen

ABOUT THE AUTHOR

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The Coming China Crisis | By Bert Dohmen

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The Coming China Crisis | By Bert Dohmen

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COMMODITY PRICES WILL TUMBLE

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The Coming China Crisis | By Bert Dohmen

THE REAL ESTATE BUBBLE

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The Coming China Crisis | By Bert Dohmen

EMERGING COUNTRIES: SHARP SLOWDOWN!

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The Coming China Crisis | By Bert Dohmen

THE BATTLE AGAINST INFLATION

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The Coming China Crisis | By Bert Dohmen

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The Coming China Crisis | By Bert Dohmen

BEWARE OF CHINESE IPOs

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The Coming China Crisis | By Bert Dohmen

A BRIEF HISTORY OF RECENT U.S. BUBBLES

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The Coming China Crisis | By Bert Dohmen

THE FINANCIAL TSUNAMI

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The Coming China Crisis | By Bert Dohmen

CHINAS TRADE DEFICIT SOARS

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The Coming China Crisis | By Bert Dohmen

UNAFFORDABLE REAL ESTATE

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The Coming China Crisis | By Bert Dohmen

NEW ITEM FROM CHINA

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The Coming China Crisis | By Bert Dohmen

DOUBLE-DIGIT INTEREST RATES AHEAD

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