Chinese Bubble About To Burst ?

[C. Flower]

The IMF "urges more reforms" on China.

Chinese growth in no way was a result of IMF advice, but the IMF now smells impending crash and scent carve up opportunities for vulture capitalism.

http://www.breakingnews.ie/business/...my-560514.html

[Yojimbo]

The IMF "urges more reforms" on China.

Chinese growth in no way was a result of IMF advice, but the IMF now smells impending crash and scent carve up opportunities for vulture capitalism.

http://www.breakingnews.ie/business/...my-560514.html

I wonder if the IMF themselves believe that rubbish. It is staggering that despite all we now know about economic forecasting, that you will still find such statements of certainty coming from economists. Even under 'normal' conditions, its almost impossible to identify trend turning points (which is what a soft landing is).

For a very pessimistic (but in my limited experience, quite accurate) article on what it is actually like to run a business and live in China, this essay is excellent (and very readable, despite its length). While it seems to be motivated by a certain amount of personal bitterness, its a healthy corrective to so much superficial nonsense churned out about China.

http://www.prospectmagazine.co.uk/po...leaving-china/

[ang]

Inflation Inflation Inflation - China to release corn, rice from reserves -

China will release corn and rice from state reserves to help tame inflation and reduce imports as the worst US drought in half a century pushes corn prices to global records, creating fears of a world food crisis.

http://english.sina.com/business/2012/0813/496056.html

[Yojimbo]

A very detailed and closely argued article here by Michael Pettis on the current state of play:

http://www.mpettis.com/2012/08/17/1685/

The article is an odd mix of pessimism and optimism (Pettis has always been a Bear on China, one of the most articulate sceptics when writing about Chinese growth). He says that China is now heading firmly towards deflation, although he does not think this will stay long. This is actually good news in his view as deflation means a rise in 'real' interest rates for savers, which will have the effect of transferring wealth from investors to consumers - the Great Rebalancing as he calls it. In the long run, this is good for everyone (except for the planet of course), as less money spent on dubious infrastructure investments and more in the pocket of the Chinese consumer should allow for more exports by everyone else to China, and less debt overhang within China. However, in the short to medium run, this will mean a major spike in Chinese unemployment, and a major drop in commodity prices (hitting Australia and Brazil in particular quite hard). I would imagine thats good news for us.

An interesting point he makes is that trade figures are probably distorted by businesses using dodgy accounting to transfer cash abroad for safekeeping.

[C. Flower]

A very detailed and closely argued article here by Michael Pettis on the current state of play:

http://www.mpettis.com/2012/08/17/1685/

The article is an odd mix of pessimism and optimism (Pettis has always been a Bear on China, one of the most articulate sceptics when writing about Chinese growth). He says that China is now heading firmly towards deflation, although he does not think this will stay long. This is actually good news in his view as deflation means a rise in 'real' interest rates for savers, which will have the effect of transferring wealth from investors to consumers - the Great Rebalancing as he calls it. In the long run, this is good for everyone (except for the planet of course), as less money spent on dubious infrastructure investments and more in the pocket of the Chinese consumer should allow for more exports by everyone else to China, and less debt overhang within China. However, in the short to medium run, this will mean a major spike in Chinese unemployment, and a major drop in commodity prices (hitting Australia and Brazil in particular quite hard). I would imagine thats good news for us.

An interesting point he makes is that trade figures are probably distorted by businesses using dodgy accounting to transfer cash abroad for safekeeping.

I hear echoes of the ESRI's "soft landing" advisory to Ireland.

If growth is weakening, that must be for objective reasons that have caused demand to weaken. In trying to address that by dropping interest rates, each yuan is chasing less demand. We have seen the results of that in the west - investment in bubbles and toxic assets with little real value, followed by a nasty crash.

Of course there are probably some bargains to be picked up in fire sales in Europe, but where else are the Chinese people going to put their savings?

[Yojimbo]

I hear echoes of the ESRI's "soft landing" advisory to Ireland.

If growth is weakening, that must be for objective reasons that have caused demand to weaken. In trying to address that by dropping interest rates, each yuan is chasing less demand. We have seen the results of that in the west - investment in bubbles and toxic assets with little real value, followed by a nasty crash.

Of course there are probably some bargains to be picked up in fire sales in Europe, but where else are the Chinese people going to put their savings?

The issue about interest rates is that they have always been too low in China. This is how the economy works - people are forced to save (because of no public pensions, lousy health care system, etc), but given no option but to save in banks as the number of savings options is deliberately limited. But the government forces interest rates down, so savers get a lousy rate, while business and investors and the government get lots and lots of available cash. This is the Asian development model in a nutshell - and it is what Pettis describes as a massive hidden tax on savers.

The problem is that it would result in bubbles, so the government has done everything it can to direct that cash towards investment in infrastructure and industry. There is no other way to grow as fast as China has done. The system worked so long as there was a big export market to keep demand high, and of course there was a hell of a lot of building work that needed to be done - the roads and airports etc., got filled pretty quick. But the problem with this sort of economy is that eventually it runs out of easy investment opportunities and the government can no longer direct investment to productive uses, or at least uses that will have some sort of return to the banks. This is the wall Japan ran into in the 1980's, and it seems China is hitting it now - hence the call by Pettis (and many, many others), to stop forcing people to save, or at least give them a decent interest rate if they do save, to try to create domestic demand.

[C. Flower]

The issue about interest rates is that they have always been too low in China. This is how the economy works - people are forced to save (because of no public pensions, lousy health care system, etc), but given no option but to save in banks as the number of savings options is deliberately limited. But the government forces interest rates down, so savers get a lousy rate, while business and investors and the government get lots and lots of available cash. This is the Asian development model in a nutshell - and it is what Pettis describes as a massive hidden tax on savers.

The problem is that it would result in bubbles, so the government has done everything it can to direct that cash towards investment in infrastructure and industry. There is no other way to grow as fast as China has done. The system worked so long as there was a big export market to keep demand high, and of course there was a hell of a lot of building work that needed to be done - the roads and airports etc., got filled pretty quick. But the problem with this sort of economy is that eventually it runs out of easy investment opportunities and the government can no longer direct investment to productive uses, or at least uses that will have some sort of return to the banks. This is the wall Japan ran into in the 1980's, and it seems China is hitting it now - hence the call by Pettis (and many, many others), to stop forcing people to save, or at least give them a decent interest rate if they do save, to try to create domestic demand.

Putting the interest rates up would slow down investment and put borrowers in difficulty. Very likely would pop the bubble in the way that reduction of mortgage interest relief under Thatcher sparked a collapse in property prices.

[Yojimbo]

Putting the interest rates up would slow down investment and put borrowers in difficulty. Very likely would pop the bubble in the way that reduction of mortgage interest relief under Thatcher sparked a collapse in property prices.

I agree that putting up the interest rates would pop the bubble (assuming its not popping), but the crucial measure is the real, not nominal rate - and if China slips into deflation, then the real interest rates will rise whatever the banks do, as they can't go below zero nominal interest rates. This is very bad news for indebted Chinese corporates, but actually very good news for ordinary middle income Chinese citizens, as they will be getting a return on their savings for the first time in a long time (and it might also dissuade them from putting money into fraudulent savings schemes).

[Yojimbo]

The Financial Times is worried...

http://www.ft.com/intl/cms/s/0/cc05e...#axzz23razdFas

“There is persuasive evidence to conclude that the Chinese economy is actually growing at just 4 or 5 per cent right now based on a composite of other indicators,” says Patrick Chovanec, a business professor at Tsinghua University in Beijing.

“Of China’s 9.2 per cent GDP growth in 2011, 5 percentage points came from investment which means that if China builds just as many roads, bridges, condos and villas as it built last year and no more it will knock five points of this year’s GDP growth. Growth is dependent on ever-rising levels of investment in an environment where that investment is not creating adequate returns.”

[C. Flower]

The Financial Times is worried...

http://www.ft.com/intl/cms/s/0/cc05e...#axzz23razdFas

It is extraordinary the way that people are so surprised by the inevitable.

It's worth remembering that millions of people have come out of poverty, but the lives of manufacturing workers seem to be pretty grim in China, and the environmental costs have been terrible - and strongly protested against.
And now they're facing the difficulties of a bursting bubble.
There have to be better ways of doing it.

[gerard25]

It's clear that the China Bubble is about to burst (possibly within months and no more than a couple of years, max.).

China's GDP has grown consistently since 1979, that is 32 long years.... its growth is 174% in the last 10 years alone, GDP growth in the last 10 years. Is this growth Sustainable? no it is not, sooner or later this is growth will slow down (already did)... However, on the other hand, this growth didn't come from the construction sector only, it came from industry and agriculture.

60 % of China's GDP is now construction related.

I believe this is incorrect, how can an economy so diverse as the Chinese economy have 60% of its GDP size from construction?

China's economy GDP - composition by sector
agriculture: 10.1%
industry: 46.8%
services: 43.1% (2011 est.)

GDP composition by sector in China

My point is, yes China's economic growth will slow down as it closes the gap with the Western economies... but I see no reason why its economy will have a severe collapse

[Count Bobulescu]

Burst be damned! Foreign Policy has an almost “glowing” look at China. Haven't read the detail yet.

Slide show of Chinese cities.

http://www.foreignpolicy.com/article...east_is_rising


Cities of the Future.

http://www.foreignpolicy.com/article..._made_in_china

Mistakes being made
http://www.foreignpolicy.com/article...an_destruction

Interview with Ai Weiwei

http://www.foreignpolicy.com/article...ter_is_my_city

Shanghai

http://www.foreignpolicy.com/article...f_new_shanghai

Beijing

http://www.foreignpolicy.com/article...eijing_forever

Mr. Happy

http://www.foreignpolicy.com/article...08/13/mr_happy

I have never felt so utterly like a remnant of history as I did when I opened FP's special report on "The 75 Most Dynamic Cities" of 2025. Of the first six cities on the list, five are Chinese. New York is seventh, and Los Angeles twelfth. London clocks in at 21, and Paris at 26. As decisively as the United States passed Europe after World War II, so China will have passed the United States a decade or so from now.

http://www.foreignpolicy.com/article..._on_this_train

related

Cities by growth index

http://www.foreignpolicy.com/article...cities_of_2025

http://www.foreignpolicy.com/article...cities_of_2025

[Count Bobulescu]

Minxin Pei in Foreign Policy on American perception of China. There is a gap between American perception of Chinese strength and its reality that "has real adverse consequences," Pei writes. China's economy has underlying problems based on its regime. Yet, the U.S. continues to assume China will only rise under it. Instead, Pei argues, the U.S. should reassess and assume that one day democratic transition may come.

For the last 40 years, Americans have lagged in recognizing the declining fortunes of their foreign rivals. In the 1970s they thought the Soviet Union was 10 feet tall -- ascendant even though corruption and inefficiency were destroying the vital organs of a decaying communist regime. In the late 1980s, they feared that Japan was going to economically overtake the United States, yet the crony capitalism, speculative madness, and political corruption evident throughout the 1980s led to the collapse of the Japanese economy in 1991.

Could the same malady have struck Americans when it comes to China? The latest news from Beijing is indicative of Chinese weakness: a persistent slowdown of economic growth, a glut of unsold goods, rising bad bank loans, a bursting real estate bubble, and a vicious power struggle at the top, coupled with unending political scandals. Many factors that have powered China's rise, such as the demographic dividend, disregard for the environment, supercheap labor, and virtually unlimited access to external markets, are either receding or disappearing.

http://www.foreignpolicy.com/article...rong?page=full

[Count Bobulescu]

William Pesek in Bloomberg View on China's growing economic crisis China has run out of ways to stimulate the economy. In 2008, it was easy—pump money in with a stimulus project and growth followed. Now, things are harder. "China’s success gave markets the impression that its leaders could wave some magic wand and growth would be the result," Pesek writes. "Magic is in short supply now."

Policy makers around the world have long envied China’s ability to get big things done. A huge 4 trillion-yuan ($630 billion) stimulus plan as the global economy cratered in 2008? No problem. Marshaling banks to lend trillions more? Check. Enacting sweeping regulatory changes at a moment’s notice? You bet.

Ahhh, the good old days. Now, a once-in-a-decade leadership shift is getting in the way of the stimulus-happy policies to which investors became accustomed. The nimbleness that helped China steer around the worst of the global crisis is confronting political paralysis of the kind more often seen in Japan, Europe and the U.S. The upshot is that China’s 7.6 percent growth rate may fall more in the next 12 months than anyone expects.

http://www.bloomberg.com/news/2012-0...ic-growth.html

[jmcc]

William Pesek in Bloomberg View on China's growing economic crisis China has run out of ways to stimulate the economy.

A breakpoint moment? There is one way to stimulate an economy and it isn't pleasant for those involved.

Regards...jmcc