Chinese Bubble About To Burst ?

[Count Bobulescu]

There is a brilliant article here in the FT about Bo Xilai (absolutely essential reading for anyone interested in China). It has a very good last line:

http://www.ft.com/intl/cms/s/2/d67b9...#axzz21FE1Dwq9

Thanks Yo, that is indeed the best account of the Bo affair I’ve read. Seems like China and the world may have dodged a bullet for now. How do you spell megalomaniac in Chinese?

[Yojimbo]

A very detailed post here from Michael Pettis, but hugely informative. A great counter blast to the 'China is different' brigade with their mindless optimism. Its long, but worth reading all the way through and following his links, they are all well worth reading in their way.

http://www.mpettis.com/2012/07/17/th...of-the-market/

What I find interesting is how little is new - the Irish, Spanish, Chinese economies are different, but it all comes down to the same thing - the type of expansion analysed so well by Minsky, with the same voices talking about why 'this time its different', and the same endless attempts to postpone the inevitable correction. China has been putting off a correction for years, and the longer it does this, the worse it will get.

The article also has a good insight into Chinese purchases of commodities and why, contrary to what so much received wisdom will tell you, its a terrible idea.

[Count Bobulescu]

A very detailed post here from Michael Pettis, but hugely informative. A great counter blast to the 'China is different' brigade with their mindless optimism. Its long, but worth reading all the way through and following his links, they are all well worth reading in their way.

http://www.mpettis.com/2012/07/17/th...of-the-market/

What I find interesting is how little is new - the Irish, Spanish, Chinese economies are different, but it all comes down to the same thing - the type of expansion analysed so well by Minsky, with the same voices talking about why 'this time its different', and the same endless attempts to postpone the inevitable correction. China has been putting off a correction for years, and the longer it does this, the worse it will get.

The article also has a good insight into Chinese purchases of commodities and why, contrary to what so much received wisdom will tell you, its a terrible idea.

Thanks again. well worth the read.

[Hapax]

London Independent reporting that prosecutors have charged Bo Xilai's wife and a family aide with the murder of Neil Heywood.

The brief report is the first official news that the case against Gu is proceeding since the announcement three months ago that she and Zhang were being investigated and that Bo was being suspended from the powerful Politburo for unspecified discipline violations. Unmentioned in the Xinhua report was any reference to Bo or a separate party investigation into him.

"To charge a Politburo member if he was involved in any way in the murder would have sullied the reputation of the Communist Party in ways that would have been too much for the leadership to handle"

[Yojimbo]

Michael Pettis again:

http://www.nakedcapitalism.com/2012/...-be-short.html

In this article (quite detailed, but again, worth reading), he emphasises the danger of debt and how small economic changes can magnify hidden debts in unexpected ways. As always, interesting and informative. A point he makes, and is worth making repeatedly to those dimwits (including supposedly top economists) who think that the only debt worth considering is public debt, is that it is the process of private sector deleveraging which is most dangerous, and most likely to go out of control.

[jpc]

An article in this weeks Economist.
More money is leaving http://www.economist.com/node/21559949China that entering it.
First time since 1998.

[C. Flower]

Michael Pettis again:

http://www.nakedcapitalism.com/2012/...-be-short.html

In this article (quite detailed, but again, worth reading), he emphasises the danger of debt and how small economic changes can magnify hidden debts in unexpected ways. As always, interesting and informative. A point he makes, and is worth making repeatedly to those dimwits (including supposedly top economists) who think that the only debt worth considering is public debt, is that it is the process of private sector deleveraging which is most dangerous, and most likely to go out of control.

His observations are very acute - unpredictable dynamic processes - the stunted and divided bureacracies of the EU haven't a hope of mastering them.

In another issue of this newsletter I will try to list more systematically areas where I think we should be concerned about inverted balance sheet structures in China, but my main point here is that very often – in fact in the majority of cases – debt crises catch us by surprise because there is a sudden and unexpected surge in debt caused by factors we hadn’t thought about. It is the sudden and unexpected explosion of contingent liabilities that generally precedes debt crises, and not the actual debt burden a year or two before the crisis, that ends up triggering the crisis. Just remember the finger wagging and the self-satisfied lectures on banking and debt given by senior Spanish government officials and bankers to US and European bankers as late as 2009. No one thought Spain had a problem until debt suddenly emerged from every nook and cranny as a response to the adverse shock Spain was undergoing.
Read more at http://www.nakedcapitalism.com/2012/...tRbIska7Os4.99

[MPB]

Just heard a so called expert on the economy in China predict a soft landing for China. Remember them.

He then said it depended on the EU, US and the UK.

Of course Mervyn King reckons the UK only has a problem becuase of the EU and the EU reckons the only reason there is a crisis is because the UK and the US are printing money.

Both are wrong.

The reason we have a problem is because Banks are corrupt.

[People Korps]

delete phonetic comment

[Yojimbo]

@CFlower - yes, its an excellent quote, and sums up so well why professional analysts so often fail to predict major reversals. China is full of linked chains of debt, once one falls there is a huge risk of systemic failure (not unlike Ireland in 2007). I was one of many who thought five years ago that Irelands low public debt meant we could borrow our way out of any property crash.

Another interesting observation in Pettis' article is that many companies in China have stockpiled metals as a hedge - in other words, they have taken advantage of cheap credit now to buy up lots of copper and iron to see them through harder times (or just to speculate). The problem is that if there is a downturn and the price of commodities collapses, then they'll find themselves with warehouses of unsaleable metals, and no means of paying off the debts incurred to buy it. Hence even otherwise profitable companies could find themselves in trouble - just like some businesses in Ireland (no names mentioned) got into all sorts of difficulties because they dabbled in property rather than focus on their core competency.

[C. Flower]

@CFlower - yes, its an excellent quote, and sums up so well why professional analysts so often fail to predict major reversals. China is full of linked chains of debt, once one falls there is a huge risk of systemic failure (not unlike Ireland in 2007). I was one of many who thought five years ago that Irelands low public debt meant we could borrow our way out of any property crash.

Another interesting observation in Pettis' article is that many companies in China have stockpiled metals as a hedge - in other words, they have taken advantage of cheap credit now to buy up lots of copper and iron to see them through harder times (or just to speculate). The problem is that if there is a downturn and the price of commodities collapses, then they'll find themselves with warehouses of unsaleable metals, and no means of paying off the debts incurred to buy it. Hence even otherwise profitable companies could find themselves in trouble - just like some businesses in Ireland (no names mentioned) got into all sorts of difficulties because they dabbled in property rather than focus on their core competency.

Exactly. In a deflation spiral, spare cash is the only king.

Commodities, bought overpriced with borrowed cash, and for which there is decreasing demand, are an occasion for unrepayable debt.

Another big trap was also the idea that if money was borrowed virtually free, there was no risk. This must have underlain ventures like the Quinn purchases of Anglo Irish shares, and most property transactions in Ireland.

Oversupply of capital, which has nowhere to go where it can fund production of necessary goods, creates open and hidden bubbles everywhere.

[Yojimbo]

An excellent short article here in FT Alphaville about the latest ponzi scheme in China, Wealth Management Products (WMP)

http://ftalphaville.ft.com/blog/2012...of-mass-ponzi/

The figures near the end indicating big capital shortfalls in the major banks are quite scary - this strongly suggests that the ability of the Chinese government to engineer a recovery through the usual method (telling banks to lend money to anyone with a pulse and a CCP membership card) might not work this time round.

It also suggests I think that all those famous ghost estates are far more dangerous than many assume (the conventional wisdom being that since Chinese consumers are not mortgaged up, there is not the same chance of a housing bubble bursting affecting the economy) - they are being used as 'collateral' as the base of many of these savings schemes.

[C. Flower]

An excellent short article here in FT Alphaville about the latest ponzi scheme in China, Wealth Management Products (WMP)

http://ftalphaville.ft.com/blog/2012...of-mass-ponzi/

The figures near the end indicating big capital shortfalls in the major banks are quite scary - this strongly suggests that the ability of the Chinese government to engineer a recovery through the usual method (telling banks to lend money to anyone with a pulse and a CCP membership card) might not work this time round.

It also suggests I think that all those famous ghost estates are far more dangerous than many assume (the conventional wisdom being that since Chinese consumers are not mortgaged up, there is not the same chance of a housing bubble bursting affecting the economy) - they are being used as 'collateral' as the base of many of these savings schemes.

That was exactly what the Irish Regulator said.

[ZeroWedge]

Exactly. In a deflation spiral, spare cash is the only king.

Commodities, bought overpriced with borrowed cash, and for which there is decreasing demand, are an occasion for unrepayable debt.

Another big trap was also the idea that if money was borrowed virtually free, there was no risk. This must have underlain ventures like the Quinn purchases of Anglo Irish shares, and most property transactions in Ireland.

Oversupply of capital, which has nowhere to go where it can fund production of necessary goods, creates open and hidden bubbles everywhere.

All this credit inflation and deflation, boom and bust, goes away if we stop using bank credit as money. There is now for the first time ever, a form of money that cannot be inflated or deflated. That money is bitcoin. Listen to Detlev Schlichter on this subject

Fractional Reserve Banking (FRB) is particularly unlikely to develop in a Bitcoin economy, as there is no need for a depository, for safe-keeping and storage services, and for any services that involve the transfer of the monetary system’s raw material (be it gold or state paper tickets) into other, more convenient forms of media of exchange, such as electronic money that can facilitate transactions over great distances. The owner of Bitcoin has an account that is similar to his email account. He manages it himself and he stores his Bitcoin himself. And Bitcoin is money that is already readily usable for any transaction, anywhere in the world, simply via the internet. The bank as intermediary is being bypassed. The Bitcoin user takes direct control of his money. He can access his Bitcoins everywhere, simply via the SIM card in his smartphone.

The tremendous growth in FRB was made possible by the difficulty of transacting securely over long distances with physical gold or physical paper tickets. This created a powerful incentive to place the physical money with banks, and once the physical money was in the banks it became ‘reserves’ to be used for the creation of additional monetary assets.

http://papermoneycollapse.com/2012/0...ture-of-money/

[morticia]

I think the relevant question isn't the mortgaged up status of Chinese consumers.

The relevant question is how much do their DEVELOPERS owe?

Developers were what demolished our banking system initially, and the Spanish banks seem similar