Global Economic
Trend Analysis

Recent Posts

Tuesday, June 14, 2011 11:15 PM

Wave of Violent Protests, Rioting, Bombings Hits China; Expect More Riots When China's Credit Bubble Pops, Exposing Mountains of Fraud

Mish Moved to MishTalk.Com Click to Visit.

Protests are not uncommon in China. However, most protests have been in rural areas where farmers have had their land stolen by bureaucrats and property developers. The last few weeks have been different. Several large urban areas have seen protests against corruption.

Please consider Wave of Unrest Rocks China

A wave of violent unrest in urban areas of China over the past three weeks is testing the Communist Party's efforts to maintain control over an increasingly complex and fractious society, forcing it to repeatedly deploy its massive security forces to contain public anger over economic and political grievances.

In the latest disturbance, armed police were struggling to restore order in a manufacturing town in southern China Monday after deploying tear gas and armored vehicles against hundreds of migrant workers who overturned police cars, smashed windows and torched government buildings there the night before.

The protests, which began Friday night in Zengcheng, in the southern province of Guangdong, followed serious rioting in another city in central China last week, plus bomb attacks on government facilities in two other cities in the past three weeks, and ethnic unrest in the northern region of Inner Mongolia last month.

Antigovernment protests have become increasingly common in China in recent years, according to the government's own figures, but they have been mainly confined to rural areas, often where farmers have been thrown off their land by property developers and local officials.

The latest unrest, by contrast, involves violent protests from individuals and large crowds in China's cities, where public anger is growing over issues including corruption and police abuses.
Protests in China have been occurring at an increasing rate. This is in spite of the fact the Chinese economy has been growing at 10% a year for a decade.

What happens when China's growth slows to 4%?

Chinese Stock Market Fraud

While pondering implications of slowing growth in China, please consider The big fraud in Chinese stocks by Jim Jubak.
For years, investors in Chinese companies have used the reputations of outside auditors, institutional investors and global investment banks as a proxy for reliable financial reporting. Maybe the disclosed data wasn't always easily understood, transparent or accurate but if a Big Four international accounting firm like Deloitte Touche Tohmatsu signed off on the audit, a big institutional investor like JPMorgan Chase (JPM, news) owned a couple of million shares and an investment bank like Goldman Sachs Group (GS, news) had underwritten the company's initial public offering, the financials had to be OK, right?

Apparently not.

That's what's so depressing, disturbing and disorienting about the fraud recently uncovered at Longtop Financial Technologies (LFT). The company's books were audited by Deloitte, and Longtop still managed to lie about the $332 million in cash it claimed on its balance sheet.

This was no penny stock that duped only unsophisticated individual investors. JPMorgan Chase owned almost 2 million shares that were worth $62 million as of March 31. FMR, which owns the Fidelity mutual fund family, had $261 million invested. Maverick Capital, a hedge fund with $20 billion under management, owned $177 million of Longtop Financial Technologies shares. The lead underwriters on Longtop's 2007 IPO had been Goldman Sachs and Deutsche Bank. In 2009, Morgan Stanley was the lead manager of a sale of more shares.

Since March, more than two dozen companies based in China have disclosed auditor resignations or accounting problems, according to the U.S. Securities and Exchange Commission. The SEC has launched a task force charged with examining accounting at overseas companies listed in the United States.

In other words, Longtop Financial Technologies isn't a bad apple in a barrel of otherwise sound fruit. Instead, it's symptomatic of a big problem that has tainted an entire sector. And because China is too big an economy and too promising a stock market to simply ignore, investors need to figure out how to deal with the problem.
Longtop Financial Daily Chart

Longtop stopped trading May 18. Jubak describes the fraud in great detail in the rest of his post.

Expect Mountains of Fraud

Fraud and credit bubbles go hand-in-hand.

When things are booming, everyone is willing to look away. That's what happened with the US housing bubble as well. Greenspan then Bernanke were both in denial, as was the NAR, real estate flippers, and everyone who stood to profit from the bubble on the long side.

China is currently in the midst of an enormous property bubble and credit bubble, yet some serious cases of fraud have already popped up.

As soon as the Chinese credit bubble implodes, and it will, look for mountains of fraud in the Chinese stock market and the Chinese property market to come to light. Also expect the Chinese Copper Ponzi Financing Trade Gone Wild will implode.

As long as the stock market, the job market, and housing prices hold up, China may be able to contain social unrest. " When China's credit bubble implodes, things will likely be anything but "contained".

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Last 10 Posts

Copyright 2009 Mike Shedlock. All Rights Reserved.
View My Stats