China's Subprime Crisis Is Here
bloomberg.com
bloomberg.com
Edit: more interesting facts.
- China's percent GDP growth is more than twice that of the US. (7.4% vs 2.4% in 2015)
- China's government has $3.9T in cash reserves vs the US' $434B.
- China has twice as many children enrolled in primary and secondary school and 50% more undergrads than the US.
We can only say but, but, but for so long.
The US "owes" China a trillion USD because the Chinese, investing on a national scale, need a safe investment that can support trillions and trillions of yuans. And in that regard right now, the US is the only game in town.
China's GDP growth is high, but that's because they're starting from a GDP that's much lower than that of the US. As with any logarithmic curve, growth starts quickly and then becomes harder over time. China has a ways to go.
The number of cars sold and the number of children enrolled in school are indicators that China does indeed have a much larger population than the US. Almost all of the BRIC nations have large populations, but are still in the process of turning that into wild economic growth. We'll see.
Other than the missing context for the numbers you provide, I agree with your general sentiment. There is a bit of schadenfreude among the US media whenever China struggles economicallly. This is probably because China is the US's biggest economic and military rival now that the Soviet Union is gone. It's natural to cheer for your team and boo the other team. I wouldn't take too much offense.
It is a primitive behaviour because it fosters racism and hatred for others instead of cooperation. The one thing we do not need more of right now is hatred, there's enough of it in the world.
Edit: It is also one thing if a private person holds his opinion (however detestable it might be - I don't care) and if we get this shoved down our throats on a large scale via all types of media and politicians. The latter is what I feel is offending.
There'd be no society, institutions, states, healthcare, education, families and friendships without cooperation.
Furthermore, entire social theories are built on the idea that selfishness is the driving force behind all human behavior. I could quote Nietzsche or Schopenhauer, but there are also contemporary examples (Dawkins and Singer, to name a few). I don't know if I agree with them or not, but there's plenty of conceptual drilling to do before dismissing them as "sociopaths."
An exponential curve, by definition, does not decrease over time.
Yes, soon China will have a financial crisis. It will have to undergo restructuring and debt forgiveness. It isn't going to evaporate from the earth.
As an interesting side note, the US has the largest shadow banking sector (as % of all financial assets) in the world: https://www.imf.org/external/pubs/ft/gfsr/2014/02/pdf/c2.pdf
China also holds more US debt than any other country
The reason that a bank holds government bonds is different than the reason a private investor would do so. Government bonds are the strongest type of reserve a bank can hold. Less safe reserves require a discount from face value. So for a bank there is a balance of risk between cheap and safe reserves like Treasuries and more expensive but better returning paper. A bank is always going to hold a mix of paper as a reserve[1].
China? China hold's US debt in order to be able to stabilize their currency against the dollar. And to backstop the value of their currency on the world market.
I don't see anything abnormal about any of this.
[1] For a bank, if the ratio of loans outstanding vs reserves in hand gets too low they can't loan out any more money. And since a bank makes money on fees inability to make loans is bad bad bad.
http://www.masslive.com/politics/index.ssf/2013/09/house_rep...
Oh yeah, now I remember why our credit rating was lowered.
Now you have a choice. You can try to maintain the postmortem reputations of your parents, by accepting their debt and making the payments. Or you can tell the creditors to FOAD.
For some reason, not only did our parents do that to us, but our grandparents did it to them, they chose to inherit the debt, and they still borrowed more money to throw their own party.
With government debt, the generational boundaries are not so clear, and the inheritance of debt smears together across thousands of deaths. But essentially, previous generations have been paying forward their debts instead of paying them back, to the point where almost everyone in the society is essentially born owing money to someone else. We already have so much inherited debt that we just can't afford to borrow the money for our own party. Also, we can't opt out.
That's not altogether untenable. I'd be willing to save up money and wait to throw my party until after the budget requirement is met. But it's hard to save anything when so much of your income is being sucked up by your elder generations' debt payments. And it is especially galling when people the same generation as you appear to be enjoying a party to which you were not invited.
That's the most persuasive rhetoric I know of in favor of repudiating national debt. To not do so is to reward the gross fiscal irresponsibility of our forebears.
The rhetoric against it, and also against mere default, states that it would devastate the ability of the current government to borrow more money. In other words, it would require the government to be more prudent and rational in regard to its budgeting. How is that a negative?
But that wasn't why the House Republicans threatened default. They were sending a big "F U" to the Obama administration, and playing a juvenile game of Chicken to do it. And they were only going to force some missed interest payments, without questioning the principal. Repudiating the debt would mean no more interest payments, and no repayment of principal, either. That would also, of course, cause a massive financial catastrophe that would preclude any partying for a long, long time, but at least it would temporarily stop the vicious cycle of kicking the snowball further down the mountain until it is so large that it starts killing any people unlucky enough to get in its way.
I'd love to have the national credit rating lowered. It would help stop the party-goers from running up another trillion that the non-invitees are ultimately tasked with paying off.
Don't presume that the government is necessarily using the sale of lower-interest bonds to pay off the principal on its higher-interest debts.
https://www.washingtonpost.com/news/wonk/wp/2013/03/05/john-...
As long as the principal on the bond cannot be repaid out of actual revenues, every bond you sell at a negative yield is one that may have to be refinanced at a positive yield later.
>Bass said in his letter that some of China’s reserves already are tied up in institutions such as policy banks and one of its sovereign-wealth funds.
>“The view that China has years of reserves to burn through is misinformed,” Bass wrote. “China’s back is completely up against the wall today, which is one of the primary reasons why the government is hypersensitive to any comments regarding its reserve levels or a hard landing.”
http://www.marketwatch.com/story/kyle-bass-warns-chinas-fore...
There are a lot of underlying facts to China's investment driven growth cycle that can be explained in math and global trade balances. Their reserves can be spent very fast. GDP growth doesn't matter so much if it's being spent on infrastructure that won't be maintained and will fall apart. In the past year or two, a giant piece of the GDP growth may have been from financial tricks as insolvent companies try to shift money around, offering high interest rates in the process (continous economic growth for a really long time mean no recession to shake out the leveraged companies which are surviving by finance alone, or outright scams.)
In the very long term, I think what will matter is the messed up demographics (shrinking population off balanced by too many males) and lack of diversity.
Japan had a similar death of growth situation after their investment driven model ran out of steam and their demographics shrunk. The big difference being their population was nearly all living a first world lifestyle by that time. China's isn't.
China can still be an important country. They can make a ton of stuff. They can wield outsized military influence globally thanks to nuclear weapons.
At the least I believe that this gives the US a huge advantage in attracting talent because the best from around the world can feel more at home here.
This needs to be observed through long term economic endurance rather than measurements of shorter term investment-driven growth like China, Japan, or Brazil experienced.
You can't sell into a vacuum. Hence, if they are "selling-off" at a strategic time, then there is someone "buying up" at the same strategic time.
China chose to put their own wealth into U.S. Treasuries, and therefore China will do everything it can to ensure that it can extract at least that much wealth out of U.S. Treasuries. They don't have a $1 trillion of free money that they can burn up just to hurt the U.S. by selling low. They need that money back!
The amount of U.S. debt held by China is often viewed as a negative thing, but it actually does a lot to stabilize our relationship with them. They want us to succeed financially, so that they can get their money paid back, and so that they have a place to sell the products they make.
Strong economic ties are the major reason we do not have a Cold War with China the way we did with Russia. Neither country wants to change that.
Edit to add: This is why there is so much U.S. reporting on China's economy. Not because Americans want it to fail, but because Americans want it to succeed, and have concerns.
Rates (i.e. yield) and price have an inverse relationship. If China were to sell their bonds, this should reduce the price of bonds (i.e. increase their yield). So, regardless of what we think about the likelihood of this happening, or the magnitude of the impact, 'historically low rates' do not provide any backstop.
Can you explain how that devalues a currency? Isn't a simpler explanation that the reason they hold so many is because US government bonds were and still are the safest way to invest your money?
You could worry that someday the Chinese might want to cash in on this investment, but increasing US exports to China isn't actually a problem. Increased demand for US exports would improve the US economy.
People like to try to figure out which side is exploiting the other, but both sides are largely getting what they want out of this deal.
QE programs have been propping up Wall Street for years now, and it would be just more of the same.
Certainly China could refuse to buy additional bonds that we put out which may impact liquidity but there are always buyers for US debt - Japan was the largest foreign holder of US debt just last year.
I'd have gone with GDP, military strength, set of advantageous alliances, or some other measure of economic, military, or political power.
We are declining? I wish someone had told me.
And again, I don't understand why having 1 trillion dollars in a reserve bank is a useful measure of economic power. The Chinese economy has a GDP of $10tn compared with the U.S. economy of $17tn. That is an example of a meaningful metric of power.
^^^ the parent commenter edited his entry after I submitted my original comment, which changes the relevance of my comment.
You simply cannot trust Chinese government statistics at face value. Every level of government lies to make itself look better, because they are not accountable to the people but instead to punitive development goals that could have moderately successful bureaucrats uprooted and replaced in a nanosecond if they fall short anywhere.
China is the Titanic of nations: huge, ostentatious, and easier to snap than it looks.
- Money spent counts toward GDP, even if the money comes from a bank loan that will never be repaid (Example: big real estate project in a third-tier city that will never sell for its listed price)
- China's foreign reserves can not be used to pay back debt denominated in Chinese Yuan (foreign currency reserves are the result of people/institutions giving the Chinese government foreign currency in exchange for Chinese Yuan -- you can't do the conversion twice)
- China has a shrinking workforce due to demographic shifts. Specifically, they have moved from an agrarian birthrate to an industrialized one.
You are correct that China has a huge population and workforce. Their wages are rising (which is good for China!) which makes them less competitive as the factory to the world. The Chinese are making progress at moving up the value ladder to help justify those higher wages, but they aren't quite at the top yet. And the workers are very much getting squeezed between high living costs and soon-to-be higher costs to service all that debt and pay benefits to those not in the workforce. These are some reasons why experts are suggesting that China needs a new and more sustainable growth model.
The Chinese government will not allow the Chinese banks to fail the same way the USG did for Bear Stearns. They will likely buy the bad loans from the banks at face value and put them in government-owned asset management companies who will attempt to restructure them.
The cynic in me expects it will probably go worse than Japan since the '90s.
https://www.cia.gov/library/publications/the-world-factbook/...
I was in Tibet with some friends in October. At one point, our tour bus was detoured, because the bridge on our scheduled route wasn't big enough for it, so we drove a couple hours out of our way, and just happened to pass a 10MW solar plant. In the middle of Nowhere, Tibet. A thing we wouldn't even have seen if we hadn't had to detour down a dirt track road, still under construction (to the point that we had to stop and wait for the equipment that was carving the road bed out of the mountain face to clear enough room for our bus to pass). Who knows how many other such hidden infrastructure gems there are, down other roads that tourists don't get permission to use?
Later, we passed a seemingly endless convoy of dozens of fuel tankers and flatbeds loaded with construction equipment — all military green — headed south, as we were returning to Lhasa from Mt. Everest base camp. Doing some digging, it turns out this materiel was all accumulating at the Nepalese border.
See, just a week or two previously, Nepal had passed its new constitution, which favored closer ties with China over India. India, used to being Nepal's big brother and pushing it around, subsequently closed their border with Nepal — the border which, by treaty, was the only route through which Nepal could import fuel. Consequently, Nepal was starting to experience a ridiculous fuel shortage. (Talking with a taxi driver in Kathmandu a few days after having seen this convoy, the petrol rationing was down to 7L per family per week. Our flight from Kathmandu to Lhasa — about a 90 minute flight, going the long way, so people could get a view of Everest — was on an Air China A340, because they needed to send a plane that could carry enough fuel for the round trip, as there wasn't enough Jet A at KTM for the return.)
These convoys of fuel and construction equipment were waiting for a new treaty to be signed between Nepal and China, allowing emergency fuel imports from China. The purpose for all the construction equipment? The Nepalese side of the road that runs from Kathmandu to Lhasa was still destroyed from the Gorkha earthquake. The estimates I was reading suggested that, once the border was opened, the Chinese would be able to rebuild the road from the border to Kathmandu in about three days, and have fuel continually running down the repaired road as long as Nepal needed it.
China just happened to have the materiel on hand, in Tibet, to respond within days of India closing the border and Nepal going into crisis, with sufficient manpower, equipment, and fuel to rebuild a hundred-odd kilometers of mountain road in a few days and keep a city of a million people, and who knows how much of the rest of Nepal, from collapsing.
But they're completely backwards and corrupt, and have no idea what they're doing.
What is perhaps more alarming is their development of Africa. I passed through a few African countries last year and China was everywhere. They're in the up-and-coming metropolises like Addis Ababa, they're in despot states like Zimbabwe and they own vast numbers of resource mines in places like Zambia (copper) and Namibia (uranium).
Now almost every sub-Saharan African country has Chinese mining activity.
And the story is the same in all these places. China promises roads and power stations for mining rights, then they do all the work. They ship everything over, including workers. If there is any untrained scrot work for locals, they get paid a tiny fraction of what a Chinese worker would —let that sink in— but anything else is Chinese. There's no local training, no real number of local jobs.
They're investing hundreds of millions in exchange for the infrastructure they use to strip-mine a country.
While we're all fretting about how much cash China has, they have built a resource network that covers half the planet. They have millions of engineers and ton of resources and the political power (the debts of every other major power) to get away with nearly anything.
> They're investing hundreds of millions in exchange for the infrastructure they use to strip-mine a country.
They aren't even investing that much. The equipment is all being bought — from government-owned companies — with government grant money.
They're playing a very long game, and they're incredibly good at it.
But the "hundreds of millions" is what it would cost a western country to buy [from China]. You're right though, China isn't losing hundreds of millions for the investment. Probably only a tiny fraction of that.
People underestimate the ability of a country like China to utilize decades of modern economic thought and their willingness to apply it.
Yes Chinese are not saints but pure capitalists, I see no evil in their actions. On the other hand, white man's actions there were evil on quite a few occasions
From where I stand, China NOT being pure capitalists for the good of their citizens is more evil.
It's well and good when a developed country talks about ethics and capitalism - they have the luxury to. But when a country where millions live in humiliating poverty, don't have enough to eat, and have no hope for the future, it would be far more evil to follow the book and let down these millions.
Should the people living there leave, like they are leaving Alberta and North Dakota now? Is your country going to take them?
They don't though. We should all be helping underdeveloped African nations reach a basic level of education, economy and healthcare so they can decide their own future in the world.
As it is, they're being economically suppressed.
The best way I can think of to help a developing nation is to buy the exports of its domestic companies.
Foreign investment into resource extraction sends money in when the goods come out, but then it goes all the way round in the revolving door and comes right back out to pay the foreign investors. (Foreign investment in infrastructure at least leaves the roads/wires/pipes behind when the money goes.)
You want to help Africa? Buy African goods and services from African-owned companies, whenever they are competitive in the world market. Treat them like economic grown-ups, and eventually they will shake off the memory of living in their colonial power's basement apartment and getting a weekly allowance.
Stop sending free money. It just ends up fueling corruption and making local business less competitive.
Africa, like everywhere else, is perfectly capable of addressing and solving its own problems when outsiders aren't constantly intervening in its affairs.
Nepal passed the constitution barring a large section of its own population (Madehsis et al) from participation in the government function.
This has been the bone of contention. The barred ones are culturally tied to Indian state of Bihar, almost to the extent of having common identities.
There were violent protests in southern Nepal, and slowly the situation got out of control for Nepal government to handle. The same protesters were blocking the major connecting roads from the Nepalese side of border. While on the Indian side there were long queues of trucks lined up.
It is rumored that Indian government helped orchestrating these protests, just as much as it is rumored that Chinese government influenced to keep the Madhesis out.
But at the end of day a that constitution is certainly failing in many aspects.
Really? They have it ingrained in the constitution? If Geo-political situation changes, and they need to re-balance their ties? They are going to need constitutional amendments?
They look back to the men that wrote it hoping to divine their intent much like those who read the bible.
I don't see how a constitution can go "out of date". It's the founding document for a nation - the individual states that compromise the US ratified a document that forms the basis of their association. Individual words and phrases have gone out of common parlance, but to change the meaning of the document would require the agreement of the parties, i.e. the states. Is it ever reasonable for the other party to tell you "Now that you've signed this contract, we're going to change it"?
The genius of the US constitution is that it sets up a mechanism for a system of government without getting into policy. Policy is decided by the legislature, and the legal code changes all the time.
But the structure has served us well and is better than, or at least no worse than, that of anyplace else. Human nature hasn't changed, after all, and there hasn't been any real advancement in government for thousands of years.
The lawyering over language happens because a document is just a means of communication, after all - there's no purpose in a written agreement if you're going to allow the meaning of the words in that agreement to change.
> Rather than try to stretch a document written for a very different time to apply to modern disputes, why not hold a new convention, with a remit not to figure out what people were thinking 200+ years ago, but to figure out the best answers to the questions we have today?
Because you don't need to change the structure of a government to change policy. The legislature is there to provide "the best answers to the questions we have today".
Southern Nepal — the part of the country that is very closely tied, culturally and economically, with India — went on a general strike for weeks, to the point that there were police killing strikers and strikers lynching police, because they were bored?
Sorry, I didn't read the constitution, myself. I took the word of our local guide, an incredibly bright, aware Nepali gentleman and professor of anthropology in Kathmandu, and pretty much everyone else in the country with whom I spoke about the situation. (The exceptions being people who either didn't understand the situation well enough to comment, or didn't feel comfortable discussing it with a foreigner.)
http://www.inseconline.org/linkedfile/Bill%20Of%20Constituti...
Meanwhile, Wikipedia claims, "The promulgation of the new constitution was immediately followed by virtual blockade of all checkpoints at Nepal-India border." but without any citation.
turtles all the way down...
What do you mean by that?
(Your story seem to tell quite the opposite.)
No we did not close any border. This is false information.
How about the guy whose hands were cut off when he tried to smuggle fuel across the border that wasn't closed?
Or did that also not happen?
EDIT: To be fair, I do remember noting a rather curious difference in tone and content in the reporting about the Nepali constitution's passage and the subsequent border situation between Indian media and everyone else's.
What? I've never been anywhere near the Nepali border, but have spent enough time in India to know that it's not lawless anarchy. I'll have to ask you for a source on this please.
A couple quick comments:
1 - We'll feel the economic threat of China when they have a crisis. The world was less interconnected in the 90s, yet troubles in Mexico, Thailand and Russia caused global damage.
2 - The GDP growth #s are suspect, and off of a smaller base. Hard to make an apples to apples comparison.
3 - Hard to compare absolute #s of cars or people in school - given that it's a country of a billion people, they should have a lot more cars and people in school. (If anything, it should be 3X)
More then half of china lives in very poor farming villages - and the government intends for them to continue living that way.
The fair comparison you want to be making is the American urban vs Chinese urban population (Which is now close to the total population of America).
OH MY GOD THE WORLD IS ENDING.
oh wait, a country with a much higher population is able to sell more cars. Carry on.
I agree the articles we see are biased, and there's an undercurrent of fear in trying to downplay China's rise.
That said, I feel that the forces trying to explain away or ignore China's outright fabrication and lies about its growth are more, how shall I say, insistent.
http://grist.org/climate-energy/china-is-totally-crushing-th...
>J. Paul Getty
we have powerful enough printing presses to print $1T USD.
As a percentage of total debt, the article says bad debt is at 1.67%. This is up 51% from 1.25% in the last year. Considering the amount of margin that's been wiped out as a result of the stock bubble popping, this doesn't seem terrible. In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing.
Maybe Chinese banks are consistently increasing the amount of debt they issue and the risk they take per unit debt as a rational response to increasing productivity of Chinese businesses. This implies a greater amount of leverage for the Chinese economy, but not necessarily extreme irrationality.
Maybe there's something here (I actually think there are structural problems in the Chinese economy) but this article does not make a compelling case.
Quarter Total Loans Nonperforming Perc 2013 Q1 7,658,238,093,000 261,202,393,000 3.41 2013 Q2 7,732,341,313,000 239,430,499,000 3.10 2013 Q3 7,802,034,024,000 221,209,596,000 2.84 2013 Q4 7,893,109,125,000 207,256,779,000 2.63 2014 Q1 7,930,820,793,000 195,236,127,000 2.46 2014 Q2 8,109,181,723,000 181,567,784,000 2.24 2014 Q3 8,160,095,554,000 171,922,840,000 2.11 2014 Q4 8,309,545,800,000 162,654,076,000 1.96 2015 Q1 8,362,016,000,000 152,966,093,000 1.83 2015 Q2 8,546,950,627,000 144,686,145,000 1.69 2015 Q3 8,642,299,288,000 139,164,401,000 1.61 2015 Q4 8,839,565,653,000 137,835,965,000 1.56
1. Freer movement of capital. This is a false herring in my opinion. Virtually no countries outside the US/EU offer completely free movement of money. The thing that matters is whether this prevents foreign capital investment (because people are scared of not being able to get their money back). In China, I don't think it does based on the last few decades of foreign investment.
2. External investment. As above, I don't think people are discouraged by the rules. Yes, you have to make a 50% joint venture, bribe government officials, share technology, have no copyright/IP protection, and risk your partner entering the market as a competitor once they learn your business (see Asus). But, you can still make so much money that it's probably worth it (or so American corporations seem to believe).
3. Ghost cities. I don't know much about this one honestly. I've been hearing about this since 2009, but consider that China is increasing their urbanization rate by 1 percentage point per year (~10M people/yr). If I were asked to manage that as a central planner, having excess inventory of housing would be critical to prevent slowdowns and allowing for some burstiness. Yeah, there's probably ghost cities, but how long do they remain before becoming occupied. Are the same cities hanging around forever (and people complaining about them forever), or is it new stock every year?
4. Illiquid foreign debt. Most of China's debt is in two categories: 1) Popular debt (US/EU) or 2) strategically important countries. For (1), there's likely some market. You're right that they can't sell too much, but they've already notified the world that they will begin selling their holdings over the next decade and since central banks in the western world are trying to increase the reserve interest rate there should be people willing to buy this stuff (or the government can buy it and reissue at a higher interest rate to make people want it). For (2), don't think of it as debt, but operating expense, never to be recovered.
From your original comment
> In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing.
That is the overall percentage of bad debt increasing linearly, meaning accumulation of bad debt is accelerating faster than growth of "good" debt. This was also the case in the US mortgage crisis.
From this comment
1) It would be less of a concern if China had less liquidity while Chinese companies were also getting less access to liquidity. Shadow lending from wealth management product (WMPs) is a massive structural issue for the Chinese economy. When the underlying assets fail, you have a recession. It also means a centralized economy with lots of the downsides (bribes, joint ventures, etc.) but without the control.
2) American corporations believe there is tons of money to be made, but not many have been successful. In the event of a Chinese recession, those experiments will be vastly drawn back when Chinese consumers become pessimistic. In the event of an American correction, they'll pull back to invest in proven markets.
3) I haven't seen evidence that these ghost cities are the result of central planners building slack for expected growth.
4) Internal private debt (see 1) is a much larger problem. Most of that is owned by the central government, which means either a bailout when companies fail, continued lending until a bailout, or letting their economy correct.
1. That's a fair point. But I suspect this has more to do with less developed capital markets in China than systematic weakness. I wonder if local supply of capital will be able to step up in the next American recession.
2. I think many have been successful in lowering their manufacturing costs. Not sure how an American correction would affect the Chinese economy.
3. Fair.
4. I'm generally skeptical of this argument. US corporations and households have maintained a high level of debt for more than 50 years without significant effect. I guess the Federal gov hasn't been the holder of that debt, but it actually seems better that way because they have the ability to print cash and add a stabilizing effect.
I guess my point is that none of these individually seem extreme enough to cause a problem. Maybe in aggregate there could be a storm.
I wasn't thinking of (2) that way, but in that case you're right that southeast asian competition is a bigger factor. If cheap manufacturing leaves, China would need to shift to consumer growth, which American companies thus far haven't really cracked (except Apple to an underwhelming degree.)
An interesting aside on (2) would be if a trade-protectionist president is elected in the US. This would re-prioritize from cheap manufacturing overseas to better jobs at home—triggering or accelerating what you were talking about. The New Yorker had a great piece today on how both Sanders and Trump are of that mindset.[1]
(4) might be a case of six in one hand, half dozen in the other. Turned out that the US government did (indirectly) hold all that mortgage debt when it bailed out the banks. That said, it looks better externally to institute QE to bailout companies who backed bad debt than to print money to pay off your own debt.
Either way, I'm not sure we are or aren't at a crisis yet, but they also haven't fixed some basic structural problems.
[1] http://www.newyorker.com/magazine/2016/02/22/trump-sanders-a...
I think this reveals some bias. The evidence is the cities themselves. Or do you think that it's central planners merely trying to improve GDP numbers, but completely oblivious to the fact that Chinese citizens are urbanizing at a scale not seen before in human history?
China is urbanizing, but it is not clear those poor farmers can afford the $200k+ apartments being built...even if they come down by half or more. Not only that, but these farmers can't even get hukou, making them second class citizens in the cities they might move to, ineligible for schooling for their kids or even subsidized healthcare. China needs to do a lot of reforming before this massive urbanization can happen, and they haven't really prepared for it (e.g. By focusing on luxury apartments vs. mass social housing with schools and hospitals enough to give those farmers proper urban hukou).
Finally, farmers can't even sell their land to buy an urban apartment. Instead, they have to wait for it to be appropriated by the local government (if near a growing urban area) or otherwise, they are just SOL. It really is quite a mess.
All legitimate companies have strong rules against bribing officials, and it's illegal, so don't expect the company to have your back if you get caught.
How can value be justified with whole half-finished cities with no customers?
Sounds like deferring a real-estate crash is only making a future event even more painful when that paper value evaporates and takes real comparables along with them.
I guess, googling "ghost cities in China" may bring out many interesting statistics about this. From the top links you get there one can fairly say that the "ghost cities" are in reality a biggish problem. Of course, we cannot get more complete picture just from these sites, but that is true for any communist regime: they will never allow any independent market study to happen in the first place.
I'm generalizing and neither list of countries is exhaustive.
The United States plays strategy b, relinquishing a fixed exchange rate. Greece plays a, trading away its monetary-policy sovereignty within the eurozone.
China is trying to move from c (ex free capital flows) to b (ex fixed exchange rates). In the process, it's caught in the Impossible Trinity. Either coördinated decisiveness or some combination of a currency and/or capital-outflow will force them into a stable configuration.
- China's total debt risen to 346% of GDP in 2015. http://seekingalpha.com/article/3852886-chinese-debt-problem...
- China exports fall 11.2% in January, imports down 18.8% http://www.cnbc.com/2016/02/14/china-releases-trade-data-for...
- China’s $6.7 trillion bond market is flashing the same danger signs that triggered a tumble in stocks http://www.thestar.com.my/business/business-news/2015/10/10/...
- China Capital Outflows Rise to Estimated $1 Trillion in 2015 http://www.bloomberg.com/news/articles/2016-01-25/china-capi...
- China's Net Capital Outflows Probably Hit $113 Billion In January http://www.actionforex.com/analysis/daily-forex-fundamentals...
- "Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10 percent of assets" (all of its reserve would be gone) http://www.cnbc.com/2016/02/10/kyle-bass-china-banks-may-los...
Here's a recent post he did that's worth a read (at least through the nine point summary): http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-...
China doesn't have many complex financial engineerings as US did in 07/08.
Getting loans is way harder/regulated in China than 06/07 US. Currently 25+% down payment or 70% for 2nd home is required. -- Comparing in 2007 banks only asks for 3% down.
www.mingtiandi.com/real-estate/china-real-estate-research-policy/china-lowered-downpayments-but-will-it-help-sell-homes-in-the-hinterland/
See: The Next 100 Years: A Forecast for the 21st Century https://www.amazon.com/dp/0767923057
But the CPC repealed the law of gravity, so it doesn't apply to the Chinese economy. Maybe it's really different this time. But probably not. The only question now: will they inflate the currency turning all those savers into losers, or reign in credit and bad debts, choking the economy and growth. They won't be able to just hide behind growth now.
As I have explained over the years in many previous comments, China's banking system is partially privatized central planning, the government prints it's own money. Thus, when there is a credit crisis the government just recapitalizes the banks with freshly printed Yuan and sells off the bad loans at a discount. Bankers who behaved badly get executed or disappeared and the whole thing starts over.
Don't believe me? Let's take a trip down memory lane on HN:
China: Crisis Gauge Rises to Record High 2 points Cless 2 years ago 0 comments (http://www.bloomberg.com/news/2014-02-26/crisis-gauge-rises-...)
China Interbank Rates at Record High (think Lehman Bros.) 1 points teawithcarl 3 years ago 0 comments (http://m.theepochtimes.com/n3/118747-china-banking-crisis-in...)
China's Brewing Crisis Is a Thousand Times Greece's 8 points ytNumbers 6 months ago 4 comments (http://www.forbes.com/sites/panosmourdoukoutas/2015/08/25/ch...)
Skyscraper index points to elevated risk of financial crisis in China, India 2 points cs702 4 years ago 0 comments (http://www.scribd.com/doc/78470886/Index-Bubble-Building-100...)
China fears bond crisis as it slams quantitative easing 1 points chaostheory 7 years ago 0 comments (http://www.telegraph.co.uk/finance/newsbysector/banksandfina...)
China hit hardest by US Downgrade 2 points ca136 5 years ago 0 comments (http://gulfnews.com/opinions/editorials/us-crisis-hits-china...)
China’s Coming Economic Crisis? 3 points kercker 2 years ago 0 comments (http://www.nytimes.com/roomfordebate/2014/04/08/chinas-comin...)
Why China Will Have an Economic Crisis 1 points eande 4 years ago 0 comments (http://business.time.com/2012/02/27/why-china-will-have-an-e...)
Confidence of China VCs drops to new low 2 points ilamont 7 years ago 0 comments (http://www.thestandard.com/news/2008/10/29/global-economic-c...)
This has been tried by many governments and has a well-established track record as a disasterous solution. I believe the following is a well-established consensus in economics (though I may misremember some details):
Printing money on this scale doesn't add wealth to the economy, it just vastly increases the number of yuan available to buy each unit of actual value, increasing prices. For example, if you were in a universe of 10 people with $50 each in currency, and one day that increased to $500 each, you wouldn't be any wealthier: You couldn't buy any more; the numbers on the price tags would merely increase by a factor of 10 - inflation.
It creates high inflation, even hyperinflation, which has further consequences for savings (whose value is greatly reduced as prices shoot up - your $10,000 no longer can buy anything), receivables (which lose their value just like savings), people on fixed incomes (your pension's value drops just like savings), investment (what good is an investment that loses value quickly just from inflation?), interest rates, exchange rates, and international trade (when your currency is worthless, and is expected to lose more value tomorrow, few will take it as payment for anything).
Modern monetary policies don't "print" money anymore. Debt creation and destruction are used as the primary mean to create and destroy money. Below is a very simplified version of money creation, skipping many other aspects.
The banks lend their deposit out to the public and money is created out of the thin air and starts to circulate in the system. The banks are regulated by the central bank to maintain a certain reserve ratio on the deposit so there is a maximum level that can be lent out and that becomes the limit on the money supply. When loans are paid back, the money is destroyed but the returned money can be lent out again thus the money supply is not changed.
Central banks can influence the money supply by setting the interest rate. Lowering rate causes more loans to be made thus expanding the money supply, conversely for raising rate.
Now when a loan has gone bad, there is no money paid back to the bank. The bank is short of that amount of money. It still has to maintain the reserve ratio and can't lend that much out again. The money is gone; essentially it has been destroyed from the system.
So a bad loan actually shrinks the money in circulation, lowering the money supply. Too many bad loans would cause a credit crunch - the banks simply can't get the loan money back to re-lend them out and thus there's not enough money to go around.
Here's where the central banks step in. They recapitalize the banks (fancy word to create money out of the thin air), by either giving created money to the banks to write off the bad loans, or in the U.S. case in 2008 the Fed buying the bad debts from the banks with new money it created out of the thin air. In either case the banks get money for getting rid off the bad debts and can lend again, re-balancing the money taken out of the system due to bad debts. Thus the money supply is back to normal and life goes on.
The bad debts held by the central banks are simply some numbers on some papers, whose value are questionable. Someday it might be decided that they are worthless and, puff, they are gone.
The Chinese central bank is basically using the same mechanisms to deal with bad debts.
- There has been no economy that has been able to grow debt as fast as China has without accumulating a large amount of bad debt. This is just as true for the US in the 1920's, Japan in the 1980's, Greece, Spain, Iceland, Portugal, Brazil, Mexico, etc.
- China has grown debt to GDP at a breathtaking pace.
- Savings and debt are opposite sides of the same coin. Once a loan goes bad the debtor's promise to provide economic value is broken. At this point somebody has to bear the loss through a reduction in future consumption, there is no free lunch.
- There are choices in how those costs are allocated. For example they can be through the bankruptcy courts, inflation, reduced interest in savings, taxes and reduced social services (by taking it on the government balance sheet) and external default.
- How those losses are allocated are politically sensitive. They can and often lead to revolution and war.
- Savy investors are aware of these trade offs and will attempt to position themselves to avoid losses.
- The central bank has its own balance sheet which aren't just numbers on that can be written off. A central bank which bought bad debt and then wrote it off would be insolvent and would require recapitalization itself.
- Giving money is the prerogative of government. A central bank who gives money in the guise of a loan would quickly find themselves in conflict with the government. That is why the US had both TARP and QE.
- Even if the government gave permission for the central bank to montetize the bad debt Savvy investors would know that monetization of bad debt would lead to inflation. Investors would respond by hoarding commodities, capital flight and leveraging assets (which is happening now). This is happening now (capital flight, accelerating debt growth, hoarding of gold)
The main thrust of my comment was to dispel the notion that recapitalizing banks or QE to write off non-performing loans would cause uncontrolled inflation. This misconception is a misunderstanding of how fiat money creation and destruction work in the modern economies. The oppose is true. Not doing those would cause credit crunch. The Great Depression at 1929 was the result of credit freeze when banks saddled with bad debts could not function at normal money creation.
I'll address one of your points. Central banks writing off the debt it bought would not go insolvent and don't need recapitalization by others. Central banks can create all the money they need at will. Insolvent is when you can't pay back the debt. The central banks don't owe debt. They own the debt; they can do however they like with them, including forgiving the debtors.
The mandate for central banks, at least in the U.S., is to keep inflation at a modest low rate window and keep unemployment low. Everything else is secondary.
The only thing that is special about a central bank is that their special relationship with the government exempts them from the regulations that apply to other banks. However, they still have a balance sheet with debts, which are deposits with the central banks and federal reserve notes (cash) and assets which are assets and loans that have been purchased on the open market.
The central bank also has a small amount of capital which is the ownership stakes of the member banks. Half of which is on deposit with the Federal Reserve and half of which isn't invested but can be called if required. That ownership stake has a guaranteed 8% return (and an effective 16% return) which is a nice deal if you can get it.
Due to its special status a central bank can't be subject to bank runs or be forced into receivership by regulators but it can still be balance-sheet insolvent. And a balance sheet insolvent central bank is a wounded central bank because it loses some of it's ability to control monetary policy through reducing its balance sheets.
In severe deflationary conditions a central bank may take more risks that may put it in a position of being balance sheet insolvent. For example, through the purchase of long term zero coupon government bonds at face value. The effect is to tell the markets that the central bank is putting a ceiling on interest rates long term regardless of inflation which encourages speculation.
Ultimately if a central bank has a consequence free way of creating all the money they needed at will their would be no need for taxes because the central bank could just give the government all the money it wanted.
As an example, consider that perfectly good farmland in the central valley was being used to construct houses that would later be marked down to half their value during the bust. The land, labor and capital were being drawn away from other uses during that period of investment. So your argument that the payment must be made later in the real economy ignores the disruption that the initial boom created. The boom is not the free lunch that must later be paid for, the boom is the destruction of the existing structure of the economy that will hopefully increase efficiency enough to provide for increased consumption of consumer goods at a later time to make up for the restrictions during the boom.
In China, instead of creating a period of reseting to the previous price relationships that existed before the boom and returning all the property back to the lenders or those who lend new money from them, they simply warp the economy in yet another direction that the central planners and their partially privatized counterparts in the bank think will improve production capacity.
The government in China regularly lets very bad investments fail, and many important hedge funds and such have failed completely where in the west they would be saved.
The U.S central bank has a balance sheet but they can create unlimited liabilities. Federal Reserve Notes are debt of the federal reserve that is redeemable for 1 for 1 with other federal reserve notes and has the handy and unique property that it is the only valid legal tender for paying federal taxes and must be accepted for settlement of any debt, which is what gives its intrinsic value.
The default process isn't painless as losses have to be allocated between the banks investors, farmer, suppliers and construction workers. While the question of who takes the loss is worked out there is considerable uncertainty. Who's going to make large purchase decisions when they aren't sure how much purchasing power that they have?
The result is that while losses are being allocated the velocity of money slows which lowers GDP and as those effects ripple through the economy it creates deflation.
Briefly, the problem is that you are only looking at the supply of money and not the demand. If China increases the money supply 2x and goods and services output increases 4x there will not be inflation and this has been roughly the case during China's economic expansion. A country like Venezuela or Zimbabwe that has falling output will have hyperinflation if they tried the same thing.
Ceteris Peribus...
But when vast amounts of wealth vanish in a broad deleveraging you are merely replacing money. Case-in-point, the US pumped over $1TT into the economy since 2008, and yet the value of the dollar has gone through the roof, despite the cries that hyperinflation was around the corner.
If you are thinking of 9/11, before that we had the Cold War, against an enemy many orders of magnitude more dangerous and damaging.
I almost think that conservatives who sell crisis, to justify all sorts of things from civil liberties restrictions to wars, have unfortunately been believed.
I do think our government has functioned extremely poorly since 2000, as the GOP has put ideology before responsible governence. I know people will think I'm partisan, but how else can you characterize voting, multiple times, to not only shut down the whole government but actually trying to make it default on its debt?
I would argue that our reacttion is what changed us, not what they did.
A last ditch effort to try to bring some sanity to a budgeting process so broken that the the national debt has doubled since Obama became President.
Defaulting isn't sanity and would make our economic and fiscal problems far, far worse.
And, as a consequence, destroyed much of its middle class. The new service jobs that replaced them are largely... Not very good ones.
cf Peter Schiff, Meredith Whitney, Ron Paul.
Alan S Blinder estimated that a very severe recession in China would affect the US GDP by .2% So that kind of gives you an idea.
China holds about the same amount as Japan, and if you count Europe as a region, then Europe holds more than either of them.
Furthermore it doesn't really matter: it's not like they can 'call the debt.' China has to wait for their bonds to mature just like everyone else. Really it's rather nice of China to loan us the money.
The Chinese soil is dying or dead.
The population as a whole and the younger generations in particular are facing future health issues of cataclysmic proportions.
The pace at which the country moves is sure to leave dozen of millions of people in the dust. Those already left in the dust endure, because their living conditions are better than those of their parents. Yet their kids' might not be, and they will choose to endure or not (and vent in a way they think appropriate). That, added to the dearth of females, and the Confucianist view of a man's place in society are already proving explosive.
China has a lot of potential, but it also faces challenges of epic proportions. To me, the economic problems are more a symptom of the problem rather than the problem to worry about.
It's like there's no room for a China that is fallible. China is perfect the all knowing all seeing for these crowd. China is the future they claim.
Not with that ugly ass communist nanny state system suppressing free speech and censoring media you don't.
Financially China can handle it, though when those loans default, the chain of events will also have some global consequences.
The question is, when the loans do default, and with it some effects to the real economy/people, what happens to the public perception of the government in China? There is a good chance of social unrest
The Saudis could maybe handle a situation like this, given their natural resources. As the current price of oil has shown, however, being rich in natural resources has its own issues.
The same principles apply across China, Saudi Arabia, and startups: at a certain point, you have to make money.
I would have to believe that within China there are many brilliant economists who knew that their "expansion" could not continue forever...
Further, I think government officials were informed of the same...
We have a vague idea of their "reserves"...that vagueness is a bit troubling...