Weekend Reading: Worrying about China…
Three brief excerpts for the weekend on why China is becoming a worry for the global economy and why those numbers are hard to believe…
First, an extract from China has now become the biggest risk to the world economy by Ambrose Evans-Pritchard:
…”The inherent problems of the international economic system have not been fully addressed,” said China’s president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.
While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. “I’m more worried about deflation,” he said.
By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – “stealing American jobs”, says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.
Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.
At some point, American workers will rebel. US unemployment is already 17.5pc under the broad “U6” gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should.
…much of Beijing’s $600bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.
Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.
View from Shangri-La, Hong Kong
If this has not sobered you enough, read these excerpts from China’s record debt has economists worried by Bill Powell:
In a world still awash in economic worry, China has stood apart as the one country that has come through the global slump with only the briefest of hiccups.
Last quarter the nation grew at a brisk 8.9% rate, and many economists expect it to expand even faster over the remainder of the year. Profits at large, state-owned companies that have benefited from Beijing’s aggressive stimulus program are up sharply.
…A lot of global CEOs, of course, are on the thank-God-for-China bandwagon, and it might seem a little churlish to question one of the world’s few good-news economic stories. Yet a growing number of observers believe that China is creating its own bubble economy. And they have a case to make.
The U.S. fueled its housing and consumption bubbles by providing easy credit. China seems headed in the same direction, although the victims would be different this time.
In the first nine months of the year, Beijing has shoveled $1.27 trillion in new loans into the economy, up 136% from the same period last year. That money has gone to three main areas: infrastructure, manufacturing, and real estate.
…Moreover, an increasing number of Chinese loans are being funneled into projects unlikely to generate an attractive economic return. From 2000 to 2008 it took just $1.50 in new credit to generate $1 of GDP growth. Now that ratio is 7 to 1. (In the U.S., just before the financial crisis hit, the ratio was only 4 to 1.)
That’s because the loans are creating huge amounts of manufacturing capacity — which is unneeded in the bears’ view. China’s spare capacity in the cement industry, for example, equals the total annual consumption in the U.S., Japan, and India combined.
So where will the growth come from? China’s export markets are tapped out. Its domestic consumption, stalled at around a third of GDP, hasn’t yet started to rise significantly. Additional manufacturing investment would be crazy, leading arguably to a global deflationary bust of epic proportions.
And finally, from How China Stiffed the World in Copenhagen by John Lee:
Indeed, China’s economic numbers and statistics ought to be viewed as the most unreliable of any major economy in the world. For example, every quarter, China’s National Bureau of Statistics (NBS) goes through the same ritual. Statistics come in from all over the country. The provinces take about two weeks to compile them, three times as fast as many smaller, developed economies with much more efficient processes for data collection. The NBS sorts through them, “consults” with senior government officials, applies a mysterious methodology to trim them into shape, and then spits out an annual GDP figure, always in the neighborhood of 8 percent, that is then diplomatically endorsed by organizations such as the World Bank andthe OECD.
Incredibly, provinces rarely fail to hit economic targets set for them by Beijing each quarter despite few changes in policy. Inaccuracy is also perpetuated by the fact that local officials are praised and promoted according to their capacity to meet centrally issued targets, while central officials themselves have limited means with which to verify local figures. Beijing is completely aware that these numbers are wildly inaccurate despite aggressively defending them after release. For the sake of its image and reputation, Beijing still wants to assure outsiders that it remains in charge even though in important respects it is not. It would not want a team of independent experts seeing for themselves the deception, dysfunction, and lawlessness that takes place throughout China under the watch of unaccountable local officials.
Try and not be too worried…
Have a restful weekend..
Somewhat related posts from my other blog:
What might stall the “Great Chinese Growth Engine�
A brief extract from Stratfor’s Top Predictions for the Next Decade, China: Doomed.
…It explains: “First, China’s current economic model is not sustainable. That model favors employment over all other concerns, and can only be maintained by running on thin margins.”
“Second, the Chinese model is only possible so long as Western populations continue to consume Chinese goods in increasing volumes. European demographics alone will make that impossible in the next decade.”
“Third, the Chinese model requires cheap labor as well as cheap capital to produce cheap goods. The bottom has fallen out of the Chinese birthrate; by 2020 the average Chinese will be nearly as old as the average American, but will have achieved nowhere near the level of education to add as much value. The result will be a labor shortage in both qualitative and quantitative terms.”
“Finally, internal tensions will break the current system. More than 1 billion Chinese live in households whose income is below $2,000 a year (with 600 million below $1,000 a year). The government knows this and is trying to shift resources to the vast interior comprising the bulk of China. But this region is so populous and so poor — and so vulnerable to minor shifts in China’s economic fortunes — that China simply lacks the resources to cope.”
Excerpts from China: Crunch Time by Peter Zeihan:
…China now follows Japan and Germany as one of the three major economies after the United States. Unlike the other two, it controls its currency’s value, allowing it to decrease the price of its exports and giving it an advantage not only over other exporters to the United States but also over domestic American manufacturers. The same is true in other regions that receive Chinese exports, such as Europe.
What Washington considered tolerable in a small developing economy is intolerable in one of the top five economies. The demand that Beijing raise the value of the yuan, however, poses dramatic challenges for the Chinese, as the ability to control their currency helps drive their exports. The issue is why China insists on controlling its currency, something embedded in the nature of the Chinese economy. A collision with the United States now seems inevitable.
It is therefore important to understand the forces driving China, and it is time for STRATFOR to review its analysis of China.
China has had an extraordinary run since 1980. But like Japan and Southeast Asia before it, dramatic growth rates cannot maintain themselves in perpetuity.
…The primary reason why China’s growth has been so impressive is that throughout the period of economic liberalization that has led to rising incomes, the Chinese government has maintained near-total savings capture of its households and businesses. It funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers.
It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share. The U.S. system of attempting to maximize return on investment through efficiency and profit stands in contrast. The American result is sufficient economic stability to be able to suffer through recessions and emerge stronger. The Chinese result is social stability that wobbles precipitously when exposed to economic hardship.
The Chinese people rebel when work is not available and conditions reach extremes. It must be remembered that of China’s 1.3 billion people, more than 600 million urban citizens live on an average of about $7 a day, while 700 million rural people live on an average of $2 a day, and that is according to Beijing’s own well-scrubbed statistics.
…There is, of course, the issue of inefficient capital use: When you have an unlimited number of no-consequence loans, you tend to invest in a lot of no-consequence projects for political reasons or just to speculate.
…There is also the issue of regional disparity.
…There is also the issue of consumption. Chinese statistics have always been dodgy, but according to Beijing’s own figures, China has a tiny consumer base. This base is not much larger than that of France, a country with roughly one twentieth China’s population and just over half its gross domestic product (GDP). China’s economic system is obviously geared toward exports, not expanding consumer credit.
…The Chinese fear their economic strategy has taken them about as far as they can go. STRATFOR used to think that these sorts of internal weaknesses would eventually doom the Chinese system as it did the Japanese system (upon which it is modeled). Now, we’re not so sure.
…STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.
Excerpts from China Skepticism:
…Firstly, China’s much vaunted economic growth is on very flimsy foundations. Yes, they were 173rd in world GDP rankings in 1978, and #2 today. But,the economic model in place is – keep currency low, have an unlimited supply of labor, and export to the US/Europe (‘capitalist’ nations). They earn dollars, and also have near total capture of all household savings, which are then funnelled back into the economy, mainly to just build infrastructure, and infrastructure only (there are highways in China, where one can drive for hours and see very fewr cars).
The success of this is based on trading with the world’s wealthiest capitalist country through the post-WW2 global trading system, and the US can significantly damage the trade by the stroke of a pen which forces them to revalue (or they close down trade doors, although this is hard for the US to do, given how badly off they are, in their own way). It leads to a ridiculously lop-sided economy, with not much going on (local consumption is almost negligible). The amount of ‘economic waste’ is unbelievable – nearly half of the skyscrapers in Shanghai are absolutely empty.
When, and it’s a question of when, and not if, the crash happens – which could be the collapse of exports, the internal property waste bubble bursting, the GDP will see a very severe contraction – which means lots of unemployment, wealth disappearing, and…
…
Politics
The government in control – the communist party, get their legitimacy from the fact that they’re providing growth. Simple as that. So what happens when growth stops?
…A lot of Shanghainese remarked that Shanghai was designed as a ‘showcase’, as ‘national pride’, and that once you step out, all the cities/towns look as ‘bad’ as any Indian tier-2 city.
Communist rule has destroyed every single institution that is present in a real society – media, government, judiciary, citizens organizations. Private industry cannot flourish – while 70% of China’s GDP is locally produced, it’s actually all government controlled, land is allocated by the government, and all resources/permissions are linked to the government.
The government owns everything, and the destruction of all institutions means that the common people have effectively been stripped of all and any means of rising, or of growing personally. A good example of this is in banking – banks exist, but the decisions on who to lend, where to lend, what to lend – nothing is in their hands. Beijing decides all that.
From Chinese TV Host Says Regime Nearly Bankrupt by Matthew Robertson, some excerpts:
…Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. In his memorable formulation: every province in China is Greece.
…Lang’s assessment that the regime is bankrupt was based on five conjectures.
Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.
Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.
Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.
Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).
Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said.
Once the “economic tsunami†starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.
Several commentators have expressed broad agreement with Lang’s analysis.
Professor Frank Xie at the University of South Carolina, Aiken, said that the idea of China going bankrupt isn’t far fetched. Major construction projects have helped inflate the GDP, he says. “On the surface, it is a big number, but inflation is even higher. So in reality, China’s economy is in recession.â€
Further, Xie said that official figures shouldn’t be relied on. The regime’s vice premier, Li Keqiang for example, admitted to a U.S. diplomat that he doesn’t believe the statistics produced by lower-level officials, and when he was the governor of Liaoning Province “had to personally see the hard data.â€
Cheng Xiaonong, an economist and former aide to ousted Party leader Zhao Ziyang, said that high praise of the “China model†is often made on the basis of the high-visibility construction projects, a big GDP, and much money in foreign reserves.
…Behind the fiat control of the economy, which can have the appearance of being efficient, there is enormous waste and corruption, Cheng said. It means that little spending is done on education, welfare, the health system, etc.
Cheng says that for the last decade the Chinese regime has accumulated its wealth primarily by promoting real estate development, buying urban and suburban residential properties at low prices (or simply taking them), and selling them to developers at high prices.