China Frauds May Fit Panics, Crashes Model, Societe Generale’s Grice Says
Growing evidence of corporate fraud and corruption on infrastructure projects signals that a crisis is looming in China, if history is any guide, according to Dylan Grice, a global strategist at Societe Generale SA.
China is displaying all the signs of the typical financial crisis laid out in economist Charles Kindleberger’s history of manias, panics and crashes, London-based Grice said in a research note dated Nov. 4.
Recent developments in China have been in line with Kindleberger’s five-stage model of a financial crisis, based on the work of Hyman Minsky, Grice said. Those include revelations of fraud, “aggressive and sudden credit expansion,” and “the pervasive feeling that ‘China is different,’" he said.
Grice has long been bearish on China, saying in November last year that the economy would have a ‘‘hard landing’’ in 12 months to 18 months followed by deflation. Estimates for a ‘‘soft landing’’ in China are another ‘‘pyramid of piffle,’’ his colleague Albert Edwards wrote in an Oct. 20 note.
China’s gross domestic product has grown 11.2 percent on average over the past five years. Societe Generale expects expansion of 9.2 percent this year and 8.1 percent in 2012.
China has just moved from stage three, known as ‘‘euphoria,’’ to stage four, the ‘‘crisis’’ phase, characterized by an uneasy period of financial distress often accompanied by a move to increase liquidity, Grice said in his Nov. 4 note. ‘‘I’m worried about what stage five (revulsion) will look like.’’
China this year has made an anti-corruption campaign its top priority in an effort to address mounting discontent over the abuse of power and a widening income gap. Premier Wen Jiabao in February pledged to root out misrule and said the government will monitor its officials.
Minister of Railways Liu Zhijun was dismissed in February and placed under investigation for ‘‘severe violations of discipline’’ and receiving bribes. The ministry’s deputy chief engineer, Zhang Shuguang, was removed the following month and faced a similar investigation.
The U.S. Securities and Exchange Commission last year formed a task force to examine China-based reverse merger companies and their auditors after businesses including Sino- Forest Corp. and China MediaExpress Holdings Inc. faced allegations of accounting abuses and fraud by Muddy Waters LLC. Reverse mergers involve buying public shell companies to gain stock market listings in North America, avoiding the scrutiny of an initial public offering.
Factors including corruption in infrastructure industries and allegations of fraud among reverse takeover companies feel ‘‘very stage four’’ of a crisis, Grice said.
‘‘It’s possible that the Chinese can keep the plates spinning for a few more years yet,’’ Grice said. ‘‘But economic expectations are always too sanguine before bubbles burst.’’
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