A rebuttal to China crashing soon

Minxei Pei writes an interesting article in The Diplomat titled "China's Economy: Seizure or Cancer".

In it he outlines a number of the obvious features that have been discussed on this blog about China's overall economy.  He dissects the current situation and asks whether there will be an immediate heart attack that hobbles the beast or a systemic cancer that eventually kills it.

He refers to a "heart attack" scenario where a cascade of events, precipitated by a slowdown and excess debt, cripples China.  In his perspective China's communists will force the banks to defer losses and provide a backstop to prevent further contagion.  He states:

But China is different. Because the banking system is effectively owned and controlled by the state, a banking crisis won’t materialize unless the state itself is insolvent and Chinese depositors have completely lost confidence in the state’s sovereign guarantee of its banks. This unique character of the China’s state-owned financial system is the cause of the country’s inability to allocate capital efficiently. However, in the short term, this structural flaw may turn out to be an asset in averting a seizure of the financial system.

As in the global meltdown of 2008 and earlier banking system upsets in China, this approach has worked.

On a second level, if the economy doesn't crash immediately over the course of the next several months, the author perceives a potential "cancer" in the nature of the communist-capitalist hybrid.

Despite the threat of a seizure in the near term, the greater danger to the Chinese economy is its structural inefficiency, which is deeply imbedded in a state-led development model...

The investments made by the Chinese state may have given the Communist Party a lot of prestige (think of the country’s modern infrastructure and ambitious high-tech plans), but delivers preciously few real benefits to its people. Chinese state-owned enterprises have thrived because of their access to practically free capital, but their efficiency remains abysmal compared with domestic private firms or their Western rivals.

No country can keep pouring unlimited amounts of capital into unproductive infrastructure projects. China doesn't have the ability to keep blowing this current bubble and then dismissing colossal financial losses when the bills come due.  With Europe sinking into recession, America limping along, and much of the emerging market turning negative, there is little reason to believe they can pull the same rabbit out of the hat again.

That hard landing in China is looking a lot more likely!

Data that has been coming out in the past several weeks has shown a distinct contraction in the economy of China.  Unlike previous monthly claims that showed that the country was achieving its predetermined growth numbers, both April and May's numbers look at best underwhelming.  Questions are now being asked if China is in a recession?

Publicly,  April's growth in imports rose a moribund 0.3%, compared to an 11% from the previous period in 2011.  The NY Times is reporting that businesses across the country have reduced consumption of  many products, including commodities such as iron ore and high-end electronics, such as computer chips.  Exports grew only 4.9% in April; half as much as economists had expected.

Preliminary data published by HSBC and the financial information provider Markit for the month of May indicates that the Purchasers Managers Index (PMI) fell to 48.7 in May from 49.3 in April.  Indexes below 50 are considered representative of a contraction.  Whereas the HSBC manufacturing index has been below 50 for seven months.  May exports similarly fell to 47.8 in May, from 50.2 in April. 

China's National Bureau of Statistics has stated that

inflation in consumer prices slowed to 3.4 percent in April from 3.6 percent in March, while producer prices, measured at the factory gate, actually fell 0.7 percent in April from a year earlier.

Chinese government indexes show real estate prices have fallen in a majority the country’s urban markets.  Housing developers have dropped prices and some have reduced activity at constructions sites to a single daytime shift, down from a continuous 24-hour work cycle.  Demand for construction workers has sharply declined.

In a different NY Times article, the plight of local business people in Xi'an, a city of eight million in northwestern China, is highlighted.  Sun Yufang, a wholesale dealer of ovens, ranges, and water heaters,  states that local  residents have nearly stopped redecorating or outfitting apartments.  She elaborates that, “We didn’t really feel the global financial crisis, but this year, we’ve really felt it — I don’t see a solution unless people start buying,”  Likewise, Yian Leilei, a wholesaler of tablecloths and car seat covers, said that "sales nose-dived after Chinese New Year on Jan. 23 and had not recovered."

Jim Walker, founder and managing director of the Hong Kong-based economic research company Asianomics, has said that the, “Property-led growth and infrastructure-led growth is just about finished".  He concludes that more stimulus funding will have limited value, since there is already an excess of infrastructure projects, including transportation projects such as airports. 

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Historically, China's economic data has been of questionable value. Senior politicians and economists within the Chinese government have said that the data, especially that arising from local offices, are frequently massaged to confirm with politburo demands.  For example, Le Keqiang, a senior communist party official, was quoted in 2007 cable released by Wikileaks that China's GDP figures were "man-made."  He explained that he reviewed only three statistics to assess the strength of the Chinese economy:

1. Bank lending
2. Electricity consumption
3. Rail cargo volume 

If one is to evaluate the economy based on these metrics only, the Chinese economy is in very poor shape.  For instance, bank lending has contracted as demand for new loans and projects has declined.  Electricity production is down m/o/m  for April, while freight cargo by rail has flat-lined.  An article on The Atlantic magazine's online site discusses these issues.

The collective declines in imports and exports, a worsening housing market, depressed labor conditions, reduced consumer confidence, and sinking inflation are representative of a serious situation that points towards a fundamental hard landing occurring in the months ahead.

Further stories on Chinese Students Cheating

Over the past several years there has been a recognition that academic fraud amongst Chinese students has reached critical levels.  In the past five years, Chinese students have increased their undergraduate representation in American colleges from a mere 10,000 students to over 57,000.  While there is no reason to believe that the most successful Oriental students currently enrolled in North American schools engage in any of the documented modalities of fraud, sufficient data continues to accumulate that the average applicant is less than accomplished than what he or she is portraying.  For example, an article in the IHT titled "Sneeking into Class from China" points out the following:

Zinch China, a consulting company that advises American colleges and universities about China, published a report last year that found cheating on college applications to be “pervasive in China, driven by hyper-competitive parents and aggressive agents.

The consulting company told American colleges,

Our research indicates that 90 percent of recommendation letters are fake, 70 percent of essays are not written by the applicant, and 50 percent of high school transcripts are falsified.

Colleges in response are finding the following:

American college recruiters in China feel overwhelmed by the proliferation of cheating, lying, and fraud: Study abroad big business in China, and young Ivy League graduates write essays for Chinese applicants while many a Chinese public school fakes transcripts and recommendation letters.

In 2010 a Centenrary College, located in NJ, decided to shutter each of its satellite campuses in China and Taiwan, subsequent to discovering "rampant cheating among local student".  The extent of the fraud was so ubiquitous that the college was forced to

[withhold] degrees from all 400 Chinese-speaking students in its master’s of business administration programs in Beijing, Shanghai and Taiwan, said Debra Albanese, Centenary’s vice president for strategic advancement.

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In 2009 the GMAT testing agency discovered a wide-spread scandal in which Chinese companies were collecting and selling GMAT questions online.  In response to that and a growing demand from Chinese students for the test, the testing agency has introduced a fourth part containing integrated reasoning questions, in addition to the current verbal and mathematical skills and analytic writing ability sections.  A NY Times article stated that the, "rise in applications to U.S. schools from overseas students has been accompanied by a reported rise in fraudulent credentials"  The new analytic section is meant to handicap memorization and assess the ability of the student to

synthesize information from multiple sources in order to solve complex problems... They also wanted candidates to be able to indicate what information was relevant, and not relevant, and to be able to evaluate which among a set of possible outcomes were the most likely.

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Despite all these harsh criticisms and unfavorable reviews, China's institutions appears to be still very much centered around polices and practices that maintain acceptable levels of fraud and corruption.  The Economist magazine stated,

Scholars, both Chinese and Western, say that fraud remains rampant and misconduct ranges from falsified data to fibs about degrees, cheating on tests and extensive plagiarism.

This pervasive and continuous levels of fraud not only diminish the value of honest Chinese students who participate in Western universities -many of whom I personally knew to be excellent students- but leads one to question the entire system of data collection, research, and scientific publication that is present within China.

The implications of widespread academic misconduct could be great. Denis Fred Simon of Penn State University argues that growing evidence of fraud “calls into question the overall credibility of the entire scientific enterprise in China-and unfortunately feeds negatively into the related concerns about the safety of Chinese products and the integrity of information coming out of China.”

Whereas this slavish affection for deception will allow a few to prosper, eventually the system will collapse from the weight of fraud, incompetence, and indifference to empirical fact.

Recession Watch: one dip, two dips,... we all fall down

The trend lines are undeniable; the US economy is heading into another recession.  Debate between economic analysts entail whether what is occurring is an entirely new recession, a double-dip recession, or the continuation of even larger economic contraction that began initially with the 2008 financial crisis (which some would argue is an extension of the 2001 recession) and has properties that are unlike previous recessions.  Each of these arguments have some validity in explaining the current situation, but all conclude that this new decline, while not likely to be as severe as the 2008 crisis, will last longer in duration and given the current political weaknesses of the major industrial nations, be more difficult to mitigate.

Leaving aside the debt crisis and economic malaise that is occurring in Europe for the moment or the possible hard landing that has been predicted about China and the entailing risks these situations pose to the global economy, America's economic position is clearly weak.

First, the jobs position is dismal.  Last month, zero jobs were added and only a fraction of the jobs necessary to compensate for population growth alone have been achieved in the previous four months.  The NY Times summarizes:

Over the last 50 years, every time that job growth has been as meager as it has been over the last four months, the economy has been headed toward recession, in a recession or in the immediate aftermath of one.

The collapse of job creation is not about businesses fearing regulatory uncertainty, creeping hyper-inflation, or the need for further tax-cuts to stimulate big businesses already bloated corporate coffers, but rather it is due to insufficient aggregate demand.  People without jobs, people forced to take inferior paying jobs, people concerned that they may lose their jobs, people forced to subsidize their spouse, adult children, parents, and/or relatives, and people loaded with debt, aren't engaged in making major purchases, because they can't afford to.  Consider the following:

But the latest indicators suggest that even if the economy does not continue to worsen, it appears to be too weak to add enough jobs each month — roughly 125,000 — even to keep pace with population growth. Anything less, and the share of the population that is employed will continue to fall.

The stimulus program offered by Mr. Obama was insufficient to meet the full demands of the  financial crash of 2008.  This blog has been saying for the past three years (here, here, and here) that the weak recovery was an illusion.  Joseph Stiglitz said back in 2009 that, "We need a larger and better designed stimulus."  Paul Krugman has been waging a public policy crusade to convince the public that a second more robust stimulus is needed.  President Obama, instead of listening to these and similar minded economists, decided to split the difference and offer everyone a little of what they wanted: a little bit of tax cuts and some stimulus over a couple years.  The problem was that while averting a more severe recession, it failed to create enough power to re-inflate the economy to pre-recessionary levels.  Now that the stimulus dollars have been used, the economy is drifting back into negative territory and with a recalcitrant Republican dominated House of Representatives, there is virtually no chance that anything of substance being passed.

Other indicators such as GDP, consumer confidence, consumer consumption, factory employment diffusion index, and housing are all trending downwards.  Volatility in the market place, with abundant talk of debt crises across the western hemisphere, has investors and business worried.  Last month Asian banks cut credit lines to French banks.  Central banks across Europe, Japan, and America have made the unexpected move to offer dollars to European banks to ensure liquidity.

What had been in 2008 a financial crisis has migrated into a sovereign debt crisis.  Nouriel Roubini expands:

We are running out of policy bullets. The policymakers don't have monetary bullets; they don't have fiscal bullets; they cannot even backstop their own financial system. That's why it's more scary than a year ago, two years ago, or three years ago -- when we had all these policy bullets. Now we are running out of them.

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Ken Rogoff, Harvard professor and former chief economist at the IMF, has said, "the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation."  As a result, Rogoff points out that many policy makers have badly misunderstood the overall problems associated with this second great contraction, as he puts it.  He offers the suggestion that, "If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions."

Solutions to both individual and national debt problems should be addressed as follows:

For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries.  For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.

Another approach offered by Rogoff to reduce the painful deleveraging process and years of unnecessary slow growth, would be for central banks to pursue a policy of moderate inflation of 4-6% for several years.

At this stage, none of the policies suggested by Stiglitz, Krugman, Roubini, or Rogoff appear on the table in either Washington DC or the capitals of Europe.  Instead of sustained and ambitious solutions, we are left with blathering idiots telling us of austerity programs that will magically generate confidence, while keeping away the terrible bond vigilantes.  The incompetence and stupidity of our leaders is nearly blinding.

A decade of hell and the fall of America

The above chart (h/t Economist's View, "How long will it take for the economy to recover?") issued by the CBO describes what should be the central discussion amongst Americans.

While the developed world was on summer vacation, the economies of Europe and America have begun to decline in an alarming fashion.  Europe is scrambling to stabilize its weak perpherial economies. The march of the PIIGS has expanded to the point where Spain and Italy are no longer just question marks.  European banks are seeing formidable potential losses arise from sovereign debt issues.  Credit is tightening up and these same European banks are looking to national governments and the EU for assistance. Indecision amongst Europe's prominent leaders and a growing populist revolt across the continent have contributed to growing unease in the markets. The breakup of the entire European economic union and the failure of the Euro currency is now seriously being considered.

In America, zero jobs were added to the economy last month. Growth for the second quarter (Q2-2011) was revised to 1% (annualized).  Financial institutions like Bank of America are in trouble and Warren Buffett has again been brought, as the non-governmental creditor of last resort, to prop up the ailing bank. The Republicans have inflicted serious damage to the American economy, in their traitorous advancement of no-taxes and no-growth governance.   Obama is floundering in his dismal attempt to appease his corporate backers, while carving out a middle path for his own election.

The above chart should make you terrified.  Although the rose-colored glasses of 3.5% annual growth is being portrayed, it is the green line with 2.5% growth that is most alarming.  The difference of 1% means that America effectively will lumber along for the next decade with little to no growth, unemployment will remain obscenely high, structural unemployment and a permanent underclass will arise, the deleveraging process will take longer, and governments will be unable to adequetely deal with further social or economic problems effectively.  This is the best case scenario we are working with at the moment, taking into account the data and Rogoff and Reinhart's post-crisis modelling.

Now consider that the world heads into a protracted recession, with China crashing shortly afterwards -taking those countries like Canada and Australia that have been dependent on commodity exports with it- and you've got a recipe for global armageddon.  The world stops growing and economies across the planet try to dig themselves out of this hole.  Here too the data suggests as in the case of the Asian and Latin American crises, that a ten year window will be required to get back any reasonable trendline.  The implication is an entire generation of workers see reduced income, mounting debt, and insufficient job opportunities.  How are these countries going to pay for the benefits sold to the baby-boomer generation, when the children of the boomers are unable to find long-term jobs and thus fund those liabilities?

We have come to the end of the line.  All the major economies of the world are now posed to fall and in that cataclysmic descent, we shall venture hopelessly through a decade of stagnation, decline, and possible collapse.

Sino-Forest faces more scrutiny

The beleaguered Chinese forestry company Sino-Forest has had its ratings withdrawn by Standard and Poor's (S&P) today subsequent to news that its Chairman and Chief executive Alan Chan has resigned.  S&P states that the charges laid against Sino-Forest are most likely true and as such, it is forced to de-list.  Moody's Investors Service on the other hand has cut Sino-Forest's rating "to Caa1 from B1 and warned it was continuing its review of the company for further downgrade."

This blog earlier wrote an article describing the underlying fraud and failures of corporate governance associated with Sino-Forest.  In the days ahead there will be plenty of finger-waving at the company and its managers. The fact that corporate fraud  is involved is hardly new.  The tool most used by white-collar criminals is accounting gimmickry to conceal nefarious activities that enrich the owners and/or management.  I have written previously on the wide-spread corruption within China and prevalent ethos of fraud within America's most vaunted institutions, such as AIG, Goldman Sachs, Lehman Brothers, Big Pharma, and Moody's.  The fact remains that China is learning from the Master, the United States of America, when it comes to engaging in corporate malfeasance.

The questions that need to be addressed are:

1. Are any rating agencies actually capable of rating any company's true credit worthiness?
2. Why are accounting agencies constantly failing to detect this level of deception?
3. Why aren't agencies such as the the Ontario Securities Commission (OSC) given more resources and talent to investigate and prevent systematic corruption within its jurisdiction?
4. Why aren't Canadian governments more vigilant in prosecuting corporate criminals?
5. Why aren't US governments more vigilant in prosecuting corporate criminals?
6. Why are so few white-collared criminals prosecuted and furthermore found guilty in both Canada and the USA?

Only once the public begins to ask and demand answers to these questions, will substantial change occur.

Sino-Forest just another example of Chinese fraud

According to news reports (NY Times and Toronto Star), the once highly traded Chinese forestry company Sino-Forest has come under the examination by the Ontario Securities Commission for "fraudulently inflating its revenue and exaggerating the extent of its timber holdings."

The story follows a general trend that has become all too normal. Corporations attempt to inflate their earnings and value through shady accounting and off-sheet intermediaries.  The purpose, just as in other notable cases, is to exploit ignorant investors into the next so-called big thing. 

In Canada, the obvious comparison is Bre-X, a Canadian mining company that claimed that it discovered copious reserves of gold within Indonesia, during the mid-90's.  Independent investigations into the company's claims found that their initial findings were falsified.  The collapse of Bre-X lead to billions of dollars in losses for institutional investors, including $45 million for the Ontario Municipal Employees Retirement board, $70 million of the Quebec Public Sector Pension fund, and $100 million for the Ontario Teachers Pension Plan.  No criminal charges have ever been laid in this debacle.

The American corollary is of course Enron, the company that defined the roaring 90's and the incipient corporate crime wave that has made a complete mockery of Anglo-American capitalism.   It was discovered that the company had created numerous offshore entities that were used "for planning and avoidance of taxes, raising the profitability of a business."  The totality of the expansive fraud committed by management and energy-traders resulted at the time the largest Chapter-11 bankruptcy in the history of the USA, the collapse of the accounting firm Arthur Anderson, and the introduction of the Sarbanes-Oxley Act of 2002.

In the case of Sino-Forest, in June 2011 it was described by Muddy Waters Research, an investment research firm, that the company was a “multibillion-dollar Ponzi scheme” that was “accompanied by substantial theft.”  In addition,

A reporter for The Globe and Mail of Toronto subsequently spent two weeks visiting various properties ostensibly owned or controlled by Sino-Forest and its subsidiaries. It proved to be a trek that frequently led him to nonexistent addresses and empty offices. Like Muddy Waters, the newspaper also found evidence that Sino-Forest had greatly inflated the size of its forestry assets.

The accountants of Sino-Forest, Ernst Young Canada, at this moment are conveniently being given distance from the fiasco, by being allowed to claim "geographical and cultural differences" in understanding the Chinese market.  Given that Sino-Forest's management and operations are all in China, it raises the question whether Canadian accountants and regulators have the competence and ability to protect investors from unscrupulous foreign operations.

According to Forbes magazine, the SEC and PCAOB have been reviewing companies that operate in China but are traded in American markets and have found similar situations.

In the past six months alone, more than 25 New York-listed Chinese companies have disclosed accounting discrepancies or seen their auditors resign. In the process, questions have been raised about the strength of governance and financial oversight at many small-cap Chinese companies. In the past year, Nasdaq and NYSE Euronext have halted trading in the shares of more than 20 small and micro-cap Chinese companies. Five Chinese companies have been de-listed.

As bad as corporate governance is in North America, the Chinese are considerably worst in providing independent and qualified directors.  In the case of Sino-Forest, none of the directors had any experience in the forestry industry or competentence in risk management.

As for Canada, it is obvious that the Ontario Securities Commission is clearly incapable to adequately investigating all the corporate crime that potentially exists under its mandate.  Richard Powers, a business law professor at the University of Toronto, has stated that situations like Sino-Forest will force regulators to evaluate the, "practice of letting companies acquire dormant shell companies to list on the stock exchange."  Until governments get serious about giving teeth and muscle to financial regulators, fraud -whether it emanated domestically or via foreign nationals- will only continue to persist to the detriment of the market as a whole.

The Dismal Science Redefined

Current economic theory is less a science than an ideology peculiar to a certain period of history, which may well be nearing an end...

[Economists are] the jilted lovers of the science world – the more rigidly they approach their subject, the more it mocks them with spurious and headstrong behaviour.

Since this blog started, I've been constantly commenting on the dearth of empirical evidence that lies behind many of the attributed economic theories of our time and the persistent irrationality, if not complete fraud, of proponents of modern economics.  Many noted persons who are economists, like Paul Krugman and J. Brad DeLong, have likewise stated how the field has become a self-serving entity, that is in many cases polluted beyond the point of usefulness.  The above quotes, culled from a Globe and Mail newspaper opinion piece by Brian Milner titled "Economists and their fairy tale world of prognostication," is another indictment of the dismal science's ability to actually be a science.  The central basis of any science is its ability to factually explain natural phenomenon, testability of theories, reproducibility of experiments, and its ability to predict future events.  Economics, or at least that set of dogma pedalled in the MSM, doesn't pass any of the above criteria. 

If economists want their profession be taken seriously, then they should start actually calling out those on their side who have perennially gotten it wrong and banish them.

The entire fable of sustainable capitalism is disintegrating all around us like the dreamscape in the movie Inception.  The communists of China, through their mercantile and corrupt practices, are acquiring natural resources across the globe and buying friends everywhere.  The new globalization that peaked in the last decade is slowly devolving.  The financial system that imploded in 2008, has only been patched together with band-aid remedies and awaits further paralysis in the near future.  China, Europe, and America are all betting against the odds, that growth will magically return and the masses will defer sharpening their pitchforks until another day.

Thomas Friedman on Why America is Floundering!

Thomas Friedman comments in his op-ed piece -called "We're No. 1(1)!"- on why he thinks America no longer is the world leader that it once was.  While I think he skirts some of the obvious contributing factors, he does hit the nail on the head in referring to American society as one that has become intellectually incurious, slothful, and where individuals are driven towards instantaneous gratification in both their careers and personal lifestyles.

With regard to why American children consistently score so low internationally, despite the enormous sums of money to reform and improve the education system, he refers to another piece written by the Washington Post's Robert Samuelson in Newsweek.  Samuelson contends that the dearth of progress on the educational frontier emanates not from lousy teachers and administrators, but from lazy, coddled, and unmotivated students, who no longer attempt or even care to achieve academic excellence.

The larger cause of failure is almost unmentionable: shrunken student motivation. Students, after all, have to do the work. If the students aren’t motivated, even capable teachers may fail. Motivation comes from many sources: curiosity and ambition; parental expectations; the desire to get into a “good” college; inspiring or intimidating teachers; peer pressure. The unstated assumption of much school “reform” is that if students aren’t motivated, it’s mainly the fault of schools and teachers...

Motivation has weakened because more students (of all races and economic classes, let it be added) don’t like school, don’t work hard, and don’t do well. The conflict between expanding “access” and raising standards goes against standards. Michael Kirst, an emeritus education professor at Stanford, estimates that 60 percent of incoming community—college students and 30 percent of freshmen at four-year colleges need remedial reading and math courses.

The best part of Friedman's analysis relates to the wretched Baby Boomers, who I call "The Greediest Generation!"  In contrast, as he points out to the World War II generation who sacrificed, struggled, and saved to overcome the Great Depression, defeat both Nazi German and the Japanese Empire, and rebuilt Europe and expanded America's industrial prowess, the baby-boomers:

leaders never dare utter the word “sacrifice.” All solutions must be painless. Which drug would you like? A stimulus from Democrats or a tax cut from Republicans? A national energy policy? Too hard. For a decade we sent our best minds not to make computer chips in Silicon Valley but to make poker chips on Wall Street, while telling ourselves we could have the American dream — a home — without saving and investing, for nothing down and nothing to pay for two years. Our leadership message to the world (except for our brave soldiers): “After you.”

When India, China, and many developing countries are turning out more ambitious, fit, and intellectually competent students, employees, and businessmen, how far does anyone think the fatties and professional victims of America's culture wars are going to get in the great competition of life?  As conservatives like to bemoan, "Culture matters!"

Quote of the Day: Tom Ricks on 9-11

Tom Ricks is an author and a Pulitzer award winning journalist who has covered the Pentagon and military affairs for the WSJ and the Washington Post.  In his Foreign Policy blog he succinctly summarizes the whole post-9/11 and Iraq debacle in one paragraph:

I've long thought that this country was knocked off balance by 9/11, and that instead of steadying us, as leaders should, President Bush and Vice President Cheney led the panic, and so intensified and lengthened the period of disequilibrium. The Iraq war was one result -- and also a cause -- of the length of this period, because the hundreds of billions of unnecessary spending led to a huge borrowing splurge by the federal government. Essentially China paid for the war, and our children and grandchildren are on the hook to pay it back.

Maybe the sheeple will remember that it was was their own intellectual laziness and dismal understanding of world affairs and economics that led to the election of a president who previously had never left the country, and permitted that same president to pursue two Middle eastern wars while cutting taxes; the latter a first in the history of the republic.  This morasses is as much the fault of the belligerents and corporate toadies in the White House and US congress, as it is the idiotic and feeble minded dolts who consistently failed to ask the right questions and hold those in power in check.  These red-baiting dunces, who decades ago were shrieking of the terror of global communism, have handed the butchers of Tiananmen Square and the communist hierarchy in Beijing the financial and political leverage that forty years of cold-war posturing could not accomplish.

A Sign of Things to Come: Rare Minerals & Made in China

China's prominence as the world's second largest economy now poses a substantial threat to the continued growth and development of Western economies.  Over the past two years, the Chinese government has been developing policies that "prohibit or restrict exports of rare earth metals that are produced only in China and play a vital role in cutting edge technology, from hybrid cars and catalytic converters, to superconductors, and precision-guided weapons," according to news reports.

Nearly 95% of the world's rare earth minerals are extracted and processed in China.  A year ago, China’s Ministry of Industry and Information Technology called for a complete ban on trade to foreign nations of terbium, dysprosium, yttrium, thulium, and lutetium.  A subset of other metals, such as neodymium, europium, cerium, and lanthanum, would be limited to a combined export quota of 35,000 tonnes a year; a value substantially below current global needs.  An article published last week in Chemical and Engineering News elaborates:

China has maneuvered effectively since the mid-1980s to establish a worldwide monopoly on rare-earth resources. Aiding its effort to corner the market is China’s tremendous rare-earth mineral wealth. U.S. Geological Survey reports indicate that China possesses roughly 52% of the world’s known rare-earth reserves. By comparison, the U.S. is believed to have the second-largest share, at about 13%. Russia and Australia each have 5–6% of the known reserves. India, Canada, Greenland, and a few other countries also have appreciable quantities of rare-earth minerals.

A summary of current uses of rare earth metals is listed below:

Each Toyota Prius uses 25 pounds of rare earth elements. Cerium and lanthanum are used in catalytic converters for diesel engines. Europium is used in lasers... Blackberries, iPods, mobile phones, palms TVs, navigation systems, and air defence missiles all use a sprinkling of rare earth metals. They are used to filter viruses and bacteria from water, and cleaning up Sarin gas and VX nerve agents.

A couple of months ago, the Chinese People's Daily reported that the Chinese government had created an internal cartel to prevent the undervaluing of minerals.  Peng Bo, an analyst at Guosen Securities, states, "The pricing mechanism, if put into practice, will effectively buoy rare earths' undervalued prices and give Chinese producers more say on the global market."  The Chinese newspaper bluntly states that prices in rare earth minerals, such as neodymium, have skyrocketed and that Japanese and American markets are completely dependant on China for their needs.

Recently, America's Government Accountability Office (GAO) prepared a report on rare-earth materials as it pertains to America's military preparedness.  The report found:

that rare-earth materials play important roles in numerous defense technologies, including radar, missile-guidance systems, lasers, and night vision equipment. The Department of Defense is now conducting an internal assessment and is expected to devise strategies to protect against rare-earth supply interruptions.

It's not just the minerals per se that China will now limit, but also the development, production, and distribution of the attendant technologies that are dependant on these minerals. The indolent and short-term thinking of America's leaders in government and business, have created a untenable situation, in which a foreign government now has the ability to limit and control the development of not only the West's existing technologies, but future technologies, such as "green-tech," that were supposed to transform America's depressed manufacturing landscape.  If innovation is the source of future prosperity, then that wealth will be exclusively controlled by the communists in Beijing.  Coupled with America's need for the Chinese to continuously purchase Treasury bills and flood their markets with cheap disposable consumables, the future has become substantially more complicated for those in Washington D.C.

Garbage Posed to Clog China's Three Gorges Dam

Another article underlying that all is not alright with China or its environment. 

The Wall Street Journal outlines that as a result of recent rainfall across mainland China, massive levels of garbage and detritus have accumulated in river systems upstream of the the Three Gorges Dam and are posed to congest the dam's miter gate.  It is estmated that more than 150 million people live near the dam and its upper stream. Residents, due to inadequate waste removal facilities, routinely dump their household garbage directly into the river. As more people transition from low-productivity agrarian subsistence, to higher level urbanization and industrial production the overall problems are likely to increase, rather than diminish.

China’s state-controlled media continues to punch holes in the image of the mighty Three Gorges Dam.

The latest poke came via China Daily, the English-language government-run newspaper. In an article Monday, the paper warns a thick layer of garbage washed into the reservoir by torrential rains could jam a key floodgate on the world’s biggest dam.

“The large amount of waste in the dam area could jam the miter gate of the Three Gorges Dam,” Chen Lei, Three Gorges engineer, told the China Daily.

China has been coping with the deadliest floods in decades, with some 1,000 killed, stressing China’s poorly built infrastructure. Bridges have collapsed and authorities are rushing to reinforce dams and reservoirs cracking under the pressure.

Authorities have spoken publicly about problems at other dams, but this year’s unprecedented frankness about the Three Gorges in state media raises other questions. One of the Three Gorges biggest selling points was its ability to tame flooding on the Yangtze River. Critics say the dam could never live up to overhyped expectations on flood control.

In the past, domestic criticism was squashed as long as the dam’s chief proponent, former Premier Li Peng, had influence.

In the arcane shadow puppetry of China politics, perhaps all this trash talking against a project so closely linked to the former premier reflects some hidden political message?

Combined with increasing agricultural demands, encroaching deserts, water toxification, airborne pollution levels (which is estimated to cause 1.3 million premature deaths a year from respiratory disease) and industrial waste problems, China's ecological future appears grim.

25% of China's Surface Water too Toxic to use for Anything

More revelations of the great Chinese miracle! According to ENN:

Almost a quarter of China's surface water remains so polluted that it is unfit even for industrial use, while less than half of total supplies are drinkable, data from the environment watchdog showed on Monday.

Inspectors from China's Ministry of Environmental Protection tested water samples from the country's major rivers and lakes in the first half of the year and declared just 49.3 percent to be safe for drinking, up from 48 percent last year, the ministry said in a notice posted on its website (www.mep.gov.cn).

China classifies its water supplies using six grades, with the first three grades considered safe for drinking and bathing.

China's industrial policies have always favored large scale growth at the expense of the environment and to the health of its populace.  Is there another country in the world, where more than 50% of surface water is so polluted that it unusable for human consumption?  These statistics, if even partially correct, indicate that the long term viability of the Chinese state is an illusion.   With fresh water supplies dwindling across the globe, it is undeniable that shortages of potable water will pose severe constraints on both the health of the average Chinese person and long term growth possibilities.

Evaluating the Likelihood of China Crashing

The overall question of China’s economic situation remains enigmatic. Earlier this year several leading experts expressed grave concerns related to the distinct possibility that China would crash. Renowned short-seller James Chanos was the first to publicly state that his company was actively analyzing methodologies to prosper from an anticipated Chinese economic crash. He considers China to be “on a treadmill to hell” because of its addiction to pushing growth through property development. A point belied by the fact that as much as 60% of the country’s GDP is now contingent upon construction related activities.

In February, Ken Rogoff -Harvard Professor, former chief economist at the IMF, and author of the critically received historical economic analysis ‘This Time it is Different’- warned of a collapse of China’s debt-fuelled bubble. Rogoff refutes the conventional arguments offered over the past decade that China cannot have a crash. History he insists provides no example where an emerging market nation did not succumb to a crisis that sent growth plummeting and markets crash. “You’re starting to see that collapse in property and it’s going to hit the banking system,” states Rogoff in Bloomberg BusinessWeek.

In the past couple of months, a tidal-wave of fund managers have turned on China. Marc Faber, publisher of the Doom, Boom, and Gloom report, anticipates that China will have a hard landing by the first half of 2011. Whereas Hugh Hendry, a UK based hedge fund manager, is developing a stand-alone fund that will exploit the upcoming failures of the Chinese economy.

As of this month, the Shanghai stock market remains at its lowest point in sixteen months. Much of China’s GDP growth can be directly correlated to the value of property, which has soared 40% in the past 18 months alone. Despite attempts by the communist government to quietly reign in excessive speculation and overleveraging in the housing and commercial real estate market, unsustainable growth patterns persist. According to Bloomberg, property prices in 70 Chinese cities rose 12.4% in May; the second-fastest pace on record.

A number of analysts are predicting that any correction will not harm the overall Chinese economy. Optimists point to the fact that “Shanghai’s sales of new homes fell 57 percent in the first six months of the year,” implying that an orderly correction shall occur. Bloomberg news posts the assertion of one analyst that China’s property boom is “cash-driven” rather than “leverage-fuelled,” and as a result, the same dynamics that occurred in the US housing market would not be replicated in China.

On the other hand, a report by Fitch rating agency issued earlier this month and discussed in the NY Times,

Said Chinese banks were increasingly engaging in complex deals that hid the size and nature of their lending, obscuring hundreds of billions of dollars in loans and possibly even masking a coming wave of bad real estate and infrastructure loans.

The report also highlights that Chinese regulators have understated loan growth “in the first half of the year, by 28 percent, or about $190 billion.” The level of deception and fraud occurring in the Chinese banking industry, coupled with the financial innovations created to explicitly conceal risk, are the hallmark attributes of an economic system that is in the early spasms of crashing.

Overall, given the inherent conflict of interests of local governments, who have a vested interest in property speculation, infrastructure expansion, and show projects necessary to enhance their reputations and meet growth quotas, it is unreasonable to assume that these same persons and/or entities would voluntarily halt their long established and until now profitable practices. Established corruption, currency manipulation, a lack of transparent legal rights, collusion of state banks with local businessmen, revolting masses, and an ever growing list of skeptics of the “Chinese miracle” portend that even if the property bubble does not crash the economy, there resides many unstable and troubling fault lines that can.

Will China Crash?

Investment analyst Gordon Chang has written an opinion piece in the Christian Science Monitor, which expands on an article written earlier in the New York Times that describes the underlying themes which have driven acclaimed investor James Chanos into betting against the Chinese economy.

Until now, China's extensive annualized growth and its emerging role as a global economic and political power have muted much of the criticisms and naysayers.  However, with more investors questioning the soundness of the "Chinese miracle", Mr. Chang, who has been making dire economic predictions for the People's Republic of China for more than a decade, is finding his assessments more closely followed.  In his CSM commentary, he uses the analogy of Dubai, where their bubble was fully evident to all and yet when it imploded, there were many investors who were dismayed that it could have occurred.

Key points outlined are:

• Beijing’s stimulus spending last year represented approximately a quarter of the total economy, resulting in as much as 95% of China’s growth being attributable to state investment
• China's exports declined 16% in 2009 and there is little evidence that global demand will increase in 2010.
• Power consumption statistics contradict government economic growth statistics and infer that the 'real' economy was expanding at only two-thirds of the announced rate.
• The nation's stimulus plan favored "large state enterprises over small and medium-sized private firms, and state financial institutions are diverting credit to state-sponsored infrastructure."
• Whereas annual growth was driven by private growth in previous years, in the current situation China is "re-nationalizing the economy with state cash."
• 20% of state bank loans have been diverted into the country’s rising stock markets, and "another large portion is fueling property market bubbles."

If the criticisms made by Mr. Chang prove correct, then China's state-sponsored stimulus package will, like America's dalliance with low and non-existent interest rates after the dot-com implosion, prove to have made the country more susceptible to economic decline.

***

I too have written about the Chinese economy crashing (here) and the inconsistencies of economic data emerging from China in the past decade (here and here).

More Investors Convinced China will Crash

There has been a number of articles in the past few weeks outlining the distinct possibility that the Chinese economy, due to inherent corruption, an unstable credit bubble driven by housing speculation, and a poorly regulated financial system, is posed, at the very least, to have a hard crash that will spill over into the rest of the global economy.

According to the NY Times, "Mr. James Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc."  Chanos' hedge fund, Kynikos Associates based in New York, foresaw the demise of Enron and a number of other high-flying companies whose profits were too good to believe.  As is frequently stated by the financial industry, "Past performance is not indicative of future earnings."  So how valid is Mr. Chanos' opinion on this subject?

The nation’s huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth.  But many analysts now say that money, along with huge foreign inflows of speculative capital, has been funneled into the stock and real estate markets.  A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 one that Mr. Chanos and others have called wasteful and overdone.

The implication is that the great illusion of growth and prosperity that continues to be exalted by investors and politicians alike, will not last.   As they also say in business, it's a matter of simple "mean reversion."

Thomas Friedman in yesterday's NY Times OP-ED pages, will not accept any such arguments about declining Chinese supremacy.  He retorts that China is sitting on two trillion dollars worth of foreign currency reserves, the country is finally finding its stride by finding efficiencies in its vast transportation infrastructure, capable managers and entrepreneurs are returning to the country in droves, and vast numbers of students are enrolled in college and university programs.  Collectively, China's best days, in his opinion, are still in front of it and we in the West best get used to it.

That argument is fine and in the long-term, China may well do better than woeful and stagnating Japan or the once heralded Asian-tigers of the Pacific south-east.  However, Friedman fails to address the central premise of his opponents, in that there is obviously a credit bubble brought on by massive state stimuli to mostly state owned and inefficient businesses.  How long is this affair supposed to continue, in which the central government keeps pouring capital into questionable economic endeavors with equally limited return?  Three of the top five banks in the world (by capitalization) are now Chinese.  Does anyone really know what is on their books and how confident we should be about their debts?

The Washington Post, elaborates on lending practices by Chinese banks:

The government has helped pump up the property market by keeping interest rates low, the currency undervalued and the fiscal spigots open. Standards for bank lending have been lax, with lending rising at a 30 percent annual pace in 2009, according to a report by the Los Angeles-based bond investment firm Pimco.

Recent housing bubbles, that were created elsewhere, also have had similar attributes: rampant speculation, apartment and home prices doubling over the period of months, loan applicants lying about income, regular people with average incomes being priced out of the market due to geometric growth patterns, and officials and real estate agents boasting that price corrections were not probable given regional dynamics.

Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.

Enough data has been seen by this blogger, that I can confidently state that those banking on gossamer winged dreams of future growth derived from corrupt plutocrats, are probably the same persons who learned nothing from the past economic catastrophe and are thus bound to repeat the follies of their predecessors.

Niall Ferguson: I've seen the future and it stinks!

Niall Ferguson gives an interview with business journalist Consuelo Mack of the PBS program 'WealthTrack'.  In it Ferguson does his standard song and dance about the origins of the strife between the USA and China or what he ofter refers to as Chi-merica.   He sternly admonishes those who feel that the current recession/depression is over and the classic 'V' shape recovery is occurring.   Paul Krugman, who has been having a public feud with Ferguson, addresses both topics in his NY Times column (respectively here and here).  In both cases, Ferguson and Krugman are basically on the same page in offering both concerns and veiled predictions of weak American economic performance in 2010.

The take home message in my opinion, which comes near the end of the interview, is Ferguson's comparison of the current 'depression' with of the depression of 1873.  This particular event, which is almost never referenced in the press, involved depressions emerging in both America and Europe.  In America, construction work lagged, wages were cut, real estate values fell and corporate profits vanished.  A total of 89 railroad companies went bankrupt, 18,000 businesses failed between 1873 and 1875, and unemployment reached 14% by 1876.  Whereas in Europe, the Vienna stock exchange crashed, Viennese banks failed, speculative bubbles collapsed, and industries crashed.  Deflation ensued for the next twenty years and an economic shift from Europe to America occurred.

In Ferguson's analysis, China plays the part which America played in the 1873 crash, in terms of the shift of industrial strength.  He also believes that like the populist backlash that emerged in the first Gilded age, current day populist rage across the Western world arising from severe unemployment, decreasing social amenities, and the realization of the corrupt financial/governmental systems, could pose substantial risk for standing governments.

The second message, despite his early preening in the interview about the rise of the emerging markets and especially China, is in his own words,  "I've been to Chongqing. I've seen the future and it stinks!"  He concludes that China's communist party is incapable of fundamental reform or eliminating the rampant corruption that underlies the fabric of its merchantalist society.  I have written a fair degree on China's corrupt business practices (here, here, and here for example) and believe likewise, that this facet of their culture will be one of the principle agents why the so-called Chinese miracle will not overtake the West.

Corruption in China

One of the enduring attributes of a functioning state, is its ability to operate in an efficient and productive manner for all its citizens.  This isn't a trivial task.  Regardless of the country, great lengths are made by those in authority, both in government and commerce, to conceal their actions, distort public policy, and disseminate propaganda, so that they utilize the resources of the state to their own advantage.  Tolerance for corruption is varied, but is solidly rooted in those nations that are governed by dictatorships, unstable military regimes, and crony-capitalism.  Democracies for all their faults, through transparent legal frameworks, the nature of adversarial and partisan politics, and an open and free press, permit some of the most egregious behavior associated with institutional corruption to be minimized.

According to the Carnegie Endowment for International Peace, China's failure to contain, "Endemic corruption among Chinese officials poses one of the most serious threats to the nation’s future economic and political stability."  This particular study finds that due to the low prosecution rate of corruption, the context is created for even low-level officials to amass an illicit fortune.  As China has moved to a market-driven economy, corruption has exponentially increased.  The report estimates that the direct costs could be as much as $86 billion each year.

The indirect costs of corruption (efficiency losses; waste; and damage to the environment, public health, education, credibility and morale) are incalculable. Corruption both undermines social stability (sparking tens of thousands of protests each year), and contributes to China’s environmental degradation, deterioration of social services, and the rising cost of health care, housing, and education.

The Chinese government has publicly stated its displeasure with this societal manifestation and has made efforts (how successful they are is another question) to rectify the situation.  For example, a mass public trial in Chongqing earlier this year was conducted upon, "9,000 suspects, 50 public officials, a petulant billionaire and criminal organizations that dabbled in drug trafficking, illegal mining, and random acts of savagery, most notably the killing of a man for his unbearably loud karaoke voice."  The trial has exposed to the Chinese public and the world the vast intermingling between organized crime and government.

The New York Times has another interesting article in which the Chinese government itself reports that corruption amongst it's officials is having a serious and negative impact on the country.  How long the country can absorb this activity and what it entails towards China's global aspirations, will dictate the nature of global economics for the next decade. 

NY Times article follows: 

***

China Finds Huge Fraud by Officials
By DAVID BARBOZA

SHANGHAI — Chinese officials misused or embezzled about $35 billion in government money in the first 11 months of the year, according to a national audit released this week.

The announcement is the latest indication of how widespread corruption has become among government agencies and how difficult it will be for Beijing to root it out.

The National Audit Office, which carried out the examination, did not disclose the size of the budgets reviewed this year. But the agency, which is based in Beijing, said that it surveyed nearly 100,000 government departments and state-owned companies, and that more than 1,000 officials were facing prosecution or disciplinary action because of the audits.

Auditors said government officials engaged in everything from money laundering and issuing fraudulent loans to cheating the government through the sale or purchase of state land or mining rights.

“Criminals are now more intelligent, and covert,” Liu Jiayi, the director of the National Audit Office, was quoted as saying in the state-run news media.

Prime Minister Wen Jiabao hailed the work of the auditors on Tuesday and called on them to monitor government projects and prevent waste.

But analysts say the Communist Party faces significant hurdles in trying to curtail corruption. Every year Beijing announces new anticorruption drives, new laws and new policies aimed at dealing with the problem.

But every year the scale of fraud seems enormous, particularly in a country where the average person earns less than $50 a week.

In 2005, for instance, the National Audit Office reported finding about $35 billion worth of government funds misused or embezzled. That was the last year the office gave a national figure covering its audits, according to its Web site.

Experts say the audits revealed one thing: many in government are finding ways to steal public money.

“The huge crackdown reflects the seriousness of corruption in China’s government,” said Zhu Lijia, a professor of public policy at the Chinese Academy of Governance in Beijing. “Even the National Audit Office should be supervised. In the past few years it was the N.A.O. that decided whether to publish or hide some statistics.”

Why do you make them so stupid, God?

Every time I review a poll done assessing the average American's grasp of economics, public policy, or science I cringe. The latest is a doozy!

According to the a Public Policy Polling (PPP) survey no less than 44% of Americans polled wish that Dubya was still in the White House managing affairs. As a quick recap, lets look at Mr. Bush's greatest accomplishments and legacy:

• Failed to prevent terrorists from attacking America on 11-Sept. 2001
• Invaded Afghanistan, but failed to capture and prosecute Bin Laden
• Assisted members of the Bin Laden family and assorted Saudi nationals to leave America eight days after 9-11
• Illegally invaded Iraq to the opposition of nearly the entire planet
• Mismanaged the entire Iraq War and let terrorism exponentially grow across the world
• Allowed nuclear weapons proliferation to rogue nations like North Korea and Iran
• Ignored New Orleans after Hurricane Katrina struck and let the city nearly be destroyed by his administration's incompetence and neglect
• Tried to scuttle and then block corporate crime prevention legislation, after the first wave of corporate criminality (i.e. Enron, WorldCom,...etc.)
• Produced virtually no jobs during his eight years in office, that is capped by two recessions
• Caused the greatest economic meltdown in the history of the world (in terms of absolute size) through his deregulatory and laissez-faire policies
• Increased the US National Debt by 86% (i.e. $4.9 Trillion)
• Eliminated the 800 year rule of habeas corpus in common law
• Instituted torture, extraordinary rendition, and indefinite imprisonment as common tools against enemies of the state and created concentration camps and CIA controlled "black-sites" for torturing/executing prisioners overseas
• Conducted a series of wide reaching and illegal searches of Americans personal email, phone calls, physical mail, purchasing habits, library and book borrowing habits, and monitored public speech
• Criminalized public protest of Republicans during his election convention in 2004
• Stole or rigged three elections (2000, 2002, and 2004) through well documented forms of fraud, voter intimidation, destruction of ballots, and suppression of Democratic voters
• Attempted to create a unitary Presidency in violation of the US Constitution
• Politicized every office and branch of the US government to serve his dogmatic Christianist and pro-business agendas.
• Denied man-made Climate Change was occurring for years, then when he said that it did exist, stated that there was nothing anyone could do about it.... etc.

What type of world are these people living in that they think George W. Bush, Dick Cheney, Tom Delay, Donald Rumsfeld, Condollezza Rice, and rest of the criminal junta that ran America off the cliff and made it the most loathed nation in the world, should be allowed back into the White House?

Well, it is most likely the same world inhabited by Americans, who in another Pew survey, think that the world's leading economic power is China. An incomprehensible 44% of Americans polled thought that China, a country with an economy one-sixth as large as the US and where the majority of people have no indoor plumbing and are agrarian farmers, has the world's largest economy. They are also equally likely to be amongst the, "19% of the public [that] says the use of torture is often justified to gain important information from terrorist suspects... [or the] 35% [that] say the use of torture in these circumstances is at least sometimes justified."

There you have it! A large percentage of Americans believe that Bush should have remained as president, that torture is an excellent and ethically sound policy, and that China is economically more significant than America. FUCKING RETARDS!

Chinese Students Caught Cheating...

Yes I know, it's a truism and anyone who has attended any university in North America consisting of a large population of Chinese students, knows that some unsavory academic behavior is not untypical.

BusinessWeek has an article titled "Crackdown on China GMAT Cheating."

The US company, which manages the Graduate Management Aptitude Test (GMAT) recently won a copyright infringement court case in China against a local company that was distributing testing materials, questions, and answers to potential students. It also won a ruling against an American company, run by a Chinese national, "which allowed students to get a look at live questions from the GMAT exam." The scale of the operations and distribution of fraud were not elaborated in the article, but studies have shown due to the standardized nature of the Business School entrance test, more students partake in cheating than in other graduate study fields.

In addition to pursuing companies that facilitate cheating, the GMAT testing agency has

heightened security measures at testing centers [including] palm vein readers, which use infrared light to capture each test-taker's unique palm vein pattern, as well as digital photographs and passport scanners... The organization also has Web crawling software that scans 15 million Web sites every evening, looking for sites that illegally compile "live" GMAT questions.

The penalty imposed by GMAT for Chinese students committing user fraud have included revocation of test scores, notification to the universities to which the student has applied to of fraud, blocking individuals from re-taking the test for five years, and in one case, unspecified disciplinary action against one woman who, "took the GMAT on seven different occasions for seven different people."