The China Lie

by Ryan Cole

The China Lie

by Ryan Cole, Investment U Research

August 20, 2009

Get out of China, now. The entire economy is about to implode.

Let me explain...

The accepted story is that China is going to lead the world out of this recession. It’s successfully decoupled from the U.S., and GDP is going to grow about 8% this year, even as virtually every other country is shrinking or treading water.

The only problem is, the claim is entirely bogus.

This isn’t the first time China has lied about its economic numbers. Most people forget, but last year, everyone thought China’s GDP was approaching $10 trillion.

That was until economists took a closer look at the country… and revised the number down to around $4 trillion.

That’s a pretty big gap.

Made in China - Counting Everything as Part of GDP

And still today, the lies continue. China counts everything made in the country as part of its GDP. That’s right, just made – it doesn’t need to be sold. It’s treated as sold immediately. It can be a loaf of bread growing moldy in a warehouse – that worthless loaf won’t count as a loss, but as a profit, just as if someone bought it.

That worked well enough when everyone was buying everything.

The only problem is, no one’s buying anymore. In fact, exports have fallen 23% compared with a year ago – and China’s economy is over 25% exports. Good thing China doesn’t count that in GDP. Instead, they only see a 10.8% gain in industrial production – who cares if the things being made aren’t bought?

Production in China is Falling...

But it gets worse. Production appears to actually be falling. How can we tell? Electrical consumption is way down in China – falling 3.63% in the April year-on-year numbers. Industrial production was even farther off – down 8.29%. China’s claiming this is due to ‘upgrading’ – but we smell a rat.

During booms – like an economy growing 8% - electrical production goes up. It falls in recessions. Which do you think is more likely in China?

The truth is, factories are shutting down. The Great Migration to the urban centers of production is reversing, as workers go to live cheaply at home, in the countryside. Those left behind are rioting – with worker riots hitting at least one Chinese city nearly every day, though the government tries to keep that out of the public eye.

In short, while China may be claiming strong growth… don’t believe it. This country is hurting as much as any other, even if the government refuses to admit it.

China Lies = Markets Flooded with Investor Cash

The big problem? Thanks to all these big lies, investors have been flooding China with cash. In fact, the Shanghai Index was up almost 90% on the year, as late as July 28.

But the fall has started, with the Index down 5% to start the week. And, once everyone realizes this emperor has no clothes, further falls will be swift, and violent. China’s stock markets have been very volatile the last few years already – and this could be a downside as dramatic as any other.

What should you do? Look into the ProShares Ultrashort FTSE/Xinhua China 25 Fund (NYSE:FXP). It moves at twice the inverse of the FTSE/Xinhua China 25 Index, the rough Chinese equivalent of the Dow. As China’s lies – and rotten economic news – catches up, you’ll be cashing in, ahead of the curve.

Good investing,

Ryan Cole

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