Chinese History Proves Adelson Wrong, Macau Still Headed Down

TAGs: Editorial, Las Vegas Sands, Macau, Rafi Farber, sheldon adelson

In his landmark book “Mao’s Great Famine,” University of Hong Kong Professor Frank Dikötter exposes the world for the first time to official Chinese government archives documenting Chairman Mao Zedong’s Great Leap Forward. Until 2010 these archives were kept entirely secret. What happened between the years of 1958 and 1962 is almost indescribable in its horror. 600 million Chinese were turned into a giant army, collectivized into the largest and most complete experiment in pure communism the world has ever seen.

With the State controlling every part of production from the field to transport to storage, the economy became so inefficient and disorganized that between 45 and 55 million people were killed and/or died of starvation, and this is just within that four year period. The details are in the book for those who can handle it, but there is one line from Dikötter that needs to be understood for those still looking for a Macau bottom. The professor asks the crucial question, Why didn’t a credible threat to the ruling communist party ever materialize, especially in the midst of such carnage? He answers:

A common conviction in imperial times [in China] was that the emperor was benevolent, but his servants could be corrupt. Even more so in the People’s Republic, the population had to reconcile a vision of utopia trumpeted by the media with the everyday reality of catastrophe on the ground. The belief that cadres who were abusive failed to carry out the orders of a beneficent Chairman was widespread. A distant entity called ’the government’ and a semi-god called ‘Mao’ were on the side of good.  If only he knew, everything would be different.

At a news conference back in December, Las Vegas Sands CEO Sheldon Adelson was quoted as saying a 2016 turnaround for Macau was imminent. “We are at the beginning of the shift in the cycle from a recession-type economy to a bottoming out,” he said, and I think the economy and Macau’s fortunes will turn around.”

Chinese History Proves Adelson Wrong, Macau Still Headed DownNot so much. Why not? Chinese history from almost one thousand years of foot-binding to the Great Wall of China to Mao’s Great Leap Forward to the great Keynesian money printing bonanza that began in the 1990’s, the Chinese are absolutely tenacious in taking social engineering projects to their extremes, no matter how painful. Trust in the government is ingrained even in the midst of the worst of all human catastrophes. What we have now is nothing compared to what China has been through even in the recent past, and historically it has taken a lot more pain to induce the country to change course even slightly.

With the Great Leap Forward it was an experiment in full-blown communist economics. Since the 1990’s, China has been the #1 experiment in full-blown Keynesian economics, by which I mean money printing. Granted, Keynesianism is not as obviously damaging as communism, which is why there has been much improvement there since the 1970’s, but we saw during the Great Depression how bad Keynesianism can get.

The crash of 1929 was caused by the 1920’s boom, which was caused by the expansion of the money supply. The Federal Reserve had just come into existence 15 years before, and was just getting used to its power. From 1921 to 1929, the US money supply expanded from $45.3B to $73.6B. See page 92 at the link. That’s an increase of 62% in 8 years. By 1929 the printing stopped, mostly because gold was being drained from the country and the dollar was still tethered to gold. The Great Depression set in.

If the Great Depression was caused by a 62% monetary expansion in 8 years, imagine what a 2,384% increase over 20 years can do to an economy. It can boom it, which is what has been happening in China for the last two decades, but the resulting bust will be enormous. The bigger the boom the bigger the bust. That’ how it works. But much like the Chinese government did not understand the consequences of full-blown communism in 1958, they do not understand the consequences of full-blown Keynesianism now.

One could claim that since the yuan is not tethered to gold, the People’s Bank of China can keep printing forever and keep the boom going indefinitely. Theoretically yes, they could, but eventually there would be a revolt against the money itself via hyperinflation. At this point, China can still publish fantastic GDP numbers, which do increase when the money supply is increased. This is not exactly rocket science since GDP is a calculation of the full monetary total of transactions in a given territory. If there’s more money in that territory, GDP goes up. But once it becomes obvious that living standards are rapidly falling in the face of rising GDP, the printing stops.

An extreme example just to illustrate the point, let’s say the GDP of country X is 1 billion units, which can buy 1 million houses. Then hyperinflation sets in and GDP is now 100 billion units, which can now only by 100,000 houses. So GDP has multiplied by a factor of 100x, but living standards are down by a factor of 10. Putting this in Great Leap Forward terms, even if China under Mao’s direction had exported more steel than Great Britain – Mao’s stated goal at the time – it doesn’t change the fact that 45 million people perished and life was miserable for those who survived. The economy is not numbers. It is individual human lives, each one of which matters more than any number.

The Smoking Gun

Austrian School economists particularly have speculated that the printing will not continue much longer. Well, we now finally have our smoking gun. According to a leaked memo from PBOC minutes last week, the bank rejected lowering reserve requirements for Chinese banks for fear of weakening the yuan. Lowering reserve requirements is a prime way of expanding the money supply, and the PBOC decided against it. This means that their fear of inflation is outstripping their fear of economic contraction. And, by the way, the Shanghai SSE Composite Index is down another 6.5% today.

So no, Sheldon Adelson, we are not at the beginning of the shift in the cycle from a recession-type economy to a bottoming out. These turns aren’t divined out of nothing. They follow hard numbers. We are not at the beginning of a recovery, but at the beginning of the real Chinese crash, the unwinding of a 2,384% monetary expansion that would have shocked John Maynard Keynes himself.

Macau stocks are already headed back down towards their October lows. Remember that the only thing that brought them up from there was some empty rhetoric from Chinese officials about helping Macau somehow. This time the lows may be broken. LVS still has a bit of a buffer, but Melco Crown for example is dangerously close to its last support at $12.80 already. The bid as of this morning is already as low as $10 and the break may happen today, considering yet another crash day in mainland China. Wynn already broke through its lows, and Galaxy Entertainment is also very close to that point.

The facts on the ground are also pointing to serious problems ahead. Empty real estate and buildings being destroyed for lack of use all point to resources misallocated due to monetary manipulations. It’s about to get bad over there, and the more the Chinese government tries to freeze its economy in place, the worse it will get. This is, by the way, the very same regime that brought us the Great Leap Forward. Just keep that in mind.


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