Fears over the true state of China's economy
nzherald.co.nz
nzherald.co.nz
And while a lot of criticism against US financial system is completely valid (of course HN is bashing US first — because HN readers live there and it makes more sense to criticize something that you're more familiar with), it's 10s, 100s times healthier, just because the political competition between a multitude of actors guarantees that power will not be centralized in single hands.
My (completely idiotic and unprofessional) prognosis for the next decade: global financial system will repeat the same mistakes with India boom.
To Quote Thomas Friedman[0]:
"If India and China were both highways, the Chinese highway would be a six-lane, perfectly paved road, but with a huge speed bump off in the distance labeled "Political reform: how in the world do we get from Communism to a more open society?" When 1.3 billion people going 80 miles an hour hit a speed bump, one of two things happens: Either the car flies into the air and slams down, and all the parts hold together and it keeps on moving -- or the car flies into the air, slams down and all the wheels fall off. Which it will be with China, I don't know. India, by contrast, is like a highway full of potholes, with no sidewalks and half the streetlamps broken. But off in the distance, the road seems to smooth out, and if it does, this country will be a dynamo. The question is: Is that smoother road in the distance a mirage or the real thing?"
[0] http://www.nytimes.com/2005/06/08/opinion/bangalore-hot-and-...
But at the same time, investor's optimism has a positive feedback right until the crash, so investors will inevitably get _more_ optimistic about India than they should.
See gas price, crude oil price and rupee/dollar rate over last few years. *sorry about the formatting as this is html doesn't care about white spaces and <pre> tags doesn't work here
year 10 11 12 13 14 15 today
$ Crude 74 109 90 99 108 61 33
Rs.gas 51 63 71 63 71 66 64
$ vs Rs 46.2 44.7 57.1 59.2 60.2 63.4 66.8
The prices are deregulated. But still even though crude prices has fallen so much, govt keeps retail gas prices costlier by increasing taxes. Taxes form the majority of retail gas price.
Taxes vary between states, which is detrimental for business due to the amount of paperwork. Unified tax rate named GST was to be introduced(its not a law yet). The outrageous statement made by someone was that even though GST will charge uniform tax rate somewhere in the range of 14-18% gas prices will be kept out of its purview for the time being. The horror!
But things are bright for India in the long term as youth have high education. All most all have college degree. There are press or internet censorship.
India imports majority of crude and refines all petroleum within the country. Business aren't paying international wages for their refinery workers, they get paid normal wages like for any other Indian. Yet when it comes to selling the petroleum products refined within the country, oil marketing companies used to say they were selling at loss. Not real loss, but hypothetical loss if they weren't selling at international prices -the companies were always making profit. These are listed companies and their annual reports are public.
Now Modi may have not promised he'll keep gas prices low, but is keeping it artificially high what he should do?
Keeping it cheap will not hurt economy as it has a direct impact on prices of food and transportation. People would've been able to save more.
year 10 11 12 13 14 15 today
$ Crude 74 109 90 99 108 61 33
Rs.gas 51 63 71 63 71 66 64
$ vs Rs 46.2 44.7 57.1 59.2 60.2 63.4 66.8I wrote a script to calculate what the prices should be, factoring in the exchange rate and crude price prevailing at the time and these are the results I got.
Month/Year [retail_price vs would_be_price(if taxes were not increased) ]
June 2014 (Rs 71.51 vs Rs 71.51) - taxes when he got into power
June 2015 (Rs 66.93 vs Rs 39.89)
Jan 11, 2016 (Rs 64 vs 36.27)
Indians I know that have been to both are always surprised by how developed China is.
Westerners should travel more. It'll really open your eyes...
China is cleaner, more developed, more organised, things work, better roads / facilities and generally less chaotic with less signs of extreme poverty.
http://www.reuters.com/article/us-usa-politics-dynasties-idU...
In the west we're just better at faking being transparent, having been in the game for longer.
It's just less broken than almost any other.
You mean, except in 2008?!
Of course, you think that 2008 was BAD. But this is not usable data. Compare how BAD was it compared to 1998 in Russia, for example.
As to how well markets functioned wrt the 2008 crisis - one question concerns credit rating agencies. If you believe that they didn't do their jobs well, then it should be troubling that they didn't go out of business, quite the contrary, it's the same small number of firms which still operate in this business. If you believe that they did do their jobs well, because the government bail-out resulted in most junk debt being repaid to creditors, then you essentially don't believe that markets function very well, as they seem to have made a correct calculation that they can extract money out of taxpayers through this junk paper, and that is not what any economist would praise as markets functioning for the benefit of society.
(Two counterarguments to the above that I heard are, the government caused the housing bubble in the first place, or alternatively the government helped smooth/stabilize asset prices, including housing prices, which is a proper use of monetary policy, and the paper was never "really" junk since housing prices rebounded later. Dean Baker argues against the latter based essentially on buying homes getting costlier relatively to renting them in bubble years. The former counterargument is voiced more rarely which is perhaps why I haven't heard a counter-counterargument. Anyway, I think this whole thing is a bit muddy...)
Well, it's not like the credit agencies bailed out the banks themselves. The version of the criticism I have heard was that the banks (and credit agencies) knew that the taxpayers will bail them out if they fail, and therefore they took unnecessary risk - making investments just as useless as the nails made by Soviet nail factories.
> a lot of criticism against US financial system is completely valid
http://www.theatlantic.com/past/issues/99mar/marketgod.htm
"The East Asians' troubles, votaries argue, derive from their heretical deviation from free-market orthodoxy -- they were practitioners of "crony capitalism," of "ethnocapitalism," of "statist capitalism," not of the one true faith."
Interesting reading.
"The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic."
http://nymag.com/daily/intelligencer/2015/12/big-short-geniu...
And having seen that things like interest only loans are still a thing, and very much still offered and applied for, I would tend to agree.
Or even better compare to china that might have to down grade its growth to "normal"...
I forgot what your point was...
Its an extreme oversimplification to say that 2008 was a US problem. It was a problem of international finance, the bulk of which (maybe unwisely) is done via US financial institutions and with US financial products. That a problem with international finance was linked to recessions globally is not surprising.
Similarly, if some systematic problem in international manufacturing appeared, the bulk of which (perhaps unwisely) is done in China, we would expect it to also have global ramifications.
It turns out that a financial problem in China is currently contained because it is not a major player in international finance (yet).
It wasn't a single country's recession, it was connected to the Asia's earlier crisis and oil price plummeting.
> I forgot what your point was...
You can read it above.
Last I checked it had nothing to do with oil, so please explain.
A better structured economy would have more competition and more bankruptcies. And fewer bailouts and government-arranged mergers.
The capitalist system must be able to purge bad decisions and investments naturally or it will eventually calcify like a centrally planned economy.
But several times the "bailout" kept the institution alive, but wiped out the shareholders. I thought that was at least somewhat reasonable. Wipe out the senior management too (which I don't recall whether that was done), and that might be about as good as can be achieved.
China likely has earned itself a buffer because of its growth and development of many good businesses but the danger is all the propped up businesses that are state owned or owned by cronies
There hasn't been a single period anywhere in the world in the last few centuries where markets haven't imploded cyclically.
In this, China is just aping business-as-usual on Wall St.
[0]: https://en.wikipedia.org/wiki/Great_Chinese_Famine
[1]: http://www.missedinhistory.com/blog/missed-in-history-the-gr...
Like reporting numbers.
In communism, people are incentivized to inflate the positive numbers and deflate the negative numbers, because the primary goal is to maintain a good and submissive relationship with the higher-up party chief. The higher-up has the same incentive before his higher-up.
If you fall from grace with your higher-up (by not being able to achieve the numbers planned by the party), then your career is over (and possibly that of your family and business partners too). So you have to give him those numbers. If you do, he will take care of you and with time, you will grow.
Then there's another property of communism: people steal.
Not only you have to report higher productivity than the set goal, you also have to cover up for all the stealing that took place below you and the "favors" you make to the higher-ups.
Of course this is illegal, but when people start doing this, they become partners in crime and now it's about life an death. Falling from grace can actually mean doing hard time in jail or even getting the capital punishment.
This system works well when the economy grows - the pressure to perform beyond expectations is increased with each layer of bureaucracy and is more than just about "job security" - it's about survival - so people have to produce those numbers.. even if it means lying.
Of course the hard work is done by the same oppressed "working class" that the system was supposed to help in the first place.
Now, I have no idea what's going on in China and if these properties apply to their particular flavor of communism, but I suspect they do, because this is how human beings have to behave in that game to win.
And that means that the numbers reported by the government are probably off by quite a bit and it's possible that even they have no idea what the real situation is.
The main difference is that in an autocratic system, it is easier to not get caught by using force to silence oppositions or whistle blowers. In a working democracy with some kind of transparency and regulation, you can't lie for ever. (But then you can still say you are flabbergasted by what the auditors have found and you will do everything in your power to find out why such shocking activity took place and restore the public confidence in your company)
In a capitalist system, it's possible for private citizens to achieve financial success without going through the government, collect and publish their own information, and in doing so, challenge and influence the government.
Look at deflation pre-WW1 and not that not only was this a period of growth, but also one where downturns were sometimes severe but over very quickly. You have the Panics of 18xx, but not any panics that last years.
Every single economy that transitions from agriculture to industry experiences the same fall in birth rates. Having a lot of kids goes from being an insurance against elderly poverty to an insurmountable burden on your focus and finance. Most of the Chinese couples who have one child are happy to leave it from that.
How will China experience a baby boom any time soon? Why 3 years? Where's your evidence?
The reality is that growth, in the long-run, is now in Asia (think of the hundreds of millions of Chinese still living in the countryside...).
This round of modernization (the third wave, after England, America+Western Europe) involves 4BN people led by India and China and they're just getting started. Take a pause and think of what that means. Four billion. BILLION.
We're entering the age of Asia. Just wait and see.
I think the bigger fear in China (at least amongst the leadership) is some crazy environmental disaster. Think of the hundreds of millions that live on the Yangtze... a massive flooding event that wipes up power/clean water is much more likely cause of revolution than an economic meltdown.
The US can barely handle Katrina... China is 10x more dense. Something like that would be death knell for CCP control.
Nevertheless, most institutions that have existed through human history no longer exist.
Naysayers being wrong isn't a data point. It's barely even noise.
There's no realistic world where China rises smoothly with no setbacks along the way. It's all but mathematically impossible by the nature of complex systems. It is reasonable to be concerned that their rise up to this point has also been unrealistically smooth. Communism has a track record of producing this apparent growth curve, after all.
Interesting that you say that. I believe the China is the longest surviving political entity. It's been around for two thousand years...
>There's no realistic world where China rises smoothly with no setbacks along the way. It's all but mathematically impossible by the nature of complex systems. It is reasonable to be concerned that their rise up to this point has also been unrealistically smooth. Communism has a track record of producing this apparent growth curve, after all.
Very true. My point is simply that growth is now in Asia. This is merely a bump in the road. The economic tide has changed in favor of the east. As an American its sad to state this, but its the truth.
Just look at tech. China has caught up in many many ways and starting to out innovate even the US. And they're just getting started.
By my standards, what we today call China dates to the 1949 Communist revolution. For China to be able to claim continuity, the other side would have had to have won. "Polities located vaguely in the Chinese landmass area" is not an institution.
"China has caught up in many many ways and starting to out innovate even the US. And they're just getting started."
I'm not seeing a lot of evidence of innovation. What I see is a Communist country doing what Communist countries do, living off of the innovation of others while pouring a lot of effort into PR that confuses credulous Westerners who really want to believe. I believe the Chinese people are capable of innovating, but until they structure their society differently, it isn't going to happen. It is an interesting question as to whether the Chinese people could tolerate and/or adjust to a truly high-innovation culture, but that's a PhD-thesis-sized topic.
To be fair, whenever I try to learn something new, I generally have to do a decent amount of "copying" in a sense to get started before I can improve and make my own contributions to whatever it is that I'm doing and learning so I suppose that's to be expected and is even a sensical approach at a societal level. Why invent a touch screen when several implementations exist? Reverse engineer or find research papers and build the same one. From there you can have the experience to tweak and make your own contributions to the touch screen world, etc, etc, etc ad nauseum until you're making contributions all over the place.
Most economists have never placed a foot inside a datacenter. It's easy to understand how they imagine music (or books, software, etc) does not involve a physical process.
However, its path toward growth can be interrupted and slowed. It has happened at least twice in the few hundred years: first by the late Qing dynasty, and then again in the Great Leap Forward.
That's what people are worried about with China: that the tension between its "communist" government and its growth-pacified population will not be resolved without serious interruption to its progress.
In the U.S. there are mechanisms to relieve such tension. George W Bush mismanaged Katrina and Iraq, and the Republicans got booted from office shortly thereafter. If the Chinese leadership starts to lose the populations' confidence, how do the people pick new leadership?
As for booting the Republicans, the American people have now happily elected the GOP into power in both houses of Congress, and they've sent a bill to the White House repealing ObamaCara/ACA. Of course, it was vetoed by Obama, but given that the GOP controls most state legislatures and governorships and Congress, I fully expect a Republican to win in the 2016 election, so we can look forward to more Bush-style mismanagement.
Source: http://blog.mpettis.com/2015/11/chinas-rebalancing-timetable...
If it is then it doesn't matter much. Especially given their authoritarian political and economic model.
Yes. They even use the same sentence and arguments every six months since 30 years. I live in China and keep my eyes open, and what I see here is that people go to work, big trucks deliver bunches of new cars from the factories to the cities, universities produce an increasing number of highly skilled engineers, et cetera.
http://www.amazon.com/Dow-36-000-Strategy-Profiting/dp/08129...
What is especially interesting is the publication date.
Additionally, remember when everybody in Europe and the U.S. seemed to be buying property? When was that? Oh, 2006.
But, the point without the snark is that none of the BRICs have a "golden ticket". What they do have, is a large trade surplus and murky leveraging.
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[1] - Or even better: http://www.amazon.com/Dow-2008-Different-This-Time/dp/189395...
Especially in the hinterland... it's really night and day. Literally in a year you go from farms to skyscrapers. Crazy fast development.
The world is starting to notice though... now you see more Chinese middle-class tourists, more Chinese students (not the smart ones who just goto the ivies, but the rich mediocre students in community / for-profit / tertiary colleges), and real estate investors (which is starting to be a huge problem in Cali, PNW, etc.).
This is nothing but a road bump for China. The Chinese are hungry as hell. I don't really think the west fully appreciates their cultural drive.
The bigger story I don't see much mention of in the press is the growing dilemma facing Europe. Do they ally themselves with America or the growing East. This will grow to become a key political concern for the EU in the next 10-20-30 years.
From what I see, it looks like they're going to ally themselves with the middle east/north Africa and adopt the culture from there.