China May Have $5.8T in Hidden Debt with ‘Titanic’ Risks
bloomberg.com
bloomberg.com
In contrast to state governments in the U.S., most local governments in China are forbidden to borrow money directly.
Historically, land sales have been a large revenue source for local governments, but since the global financial crisis this revenue source has diminished. Yet local government spending, especially on infrastructure investments, has accelerated...
Detroit filed for bankruptcy with debts of $18 billion on July 18, but this is the average amount of debt for many Chinese cities. A 2012 audit of 36 local governments found $624.6 billion in debt -- suggesting there are at least a few Chinese cities with debt equal to, or in excess of, the $18 billion that sunk Detroit.
So the news is that what was understood to be ~$625 billion in debt six years ago has turned into $5.8 trillion in debt today. Which is, like, 322 Detroits.
It is also difficult to compare the Detroit number to a Chinese city unless we know what are included in the numbers. Detroit doesn't own many of its infrastructure. For example its prison borrows separately, and so does its water and sewer district. Presumably comparable numbers are included in S&P's LGFV total.
And before you complain about that being a much bigger area, here's the land area for metro Detroit compared to some of China's biggest cities:
Detroit metro: 1,337.1 sq mi
Guangzhou Urban: 1,483.95 sq mi / ~11 million
Shanghai Urban: 1,550 sq mi / ~24 million
Chengdu Urban: 1,760.0 sq mi / ~11 million
Chinese cities typically have boundaries roughly equivalent to US metro areas. They certainly have larger populations than Detroit, but not as much as you guys think.
[1]https://en.wikipedia.org/wiki/Metro_Detroit
[2]https://en.wikipedia.org/wiki/Guangzhou
But given the unique situation of Detroit, and the fact that US cities are generally organized in quite a different fashion to Chinese cities there's really no good use in comparing the two IMO.
Then it fell to a 0.7M population.
When your city infrastructure and services are sized for 2 to 3 times your population, said population cannot sustain these infrastructure and services, and it's also really difficult to scale down these.
This is in sharp contrast with Chinese cities that are nearly all growing at a fast rate, maybe too fast in fact.
I'm aware it's an over simplification, but it illustrates the twos are not really comparable.
China might undergo a crisis when they start losing exports due to other countries re-industrializing (ie the US). My guess would be that they won't go into the red on average. Their growth will slow and some very export-oriented industrial areas will suffer, but their internal market is huge by now so they'll just keep growing, but not as fast.
1) Central government gradually inflates the currency to monetize the debt with a few defaults along the way. Damage is funded by Chinese creditors (defaults) and Chinese citizens (inflation), and it takes 20 years to fully play out.
2) Central government bails out bad loans by selling a portion of their $3T in foreign reserves, including $1T of US government debt. Chinese creditors, investors and citizens are made whole. Foreign bond prices fall and interest rates rise, causing recession and financial crisis in the US.
3) Central government bails out a few well connected players, but mostly allows market forces to run their course. Shadow banks and local government financing vehicles go bankrupt, causing a cascade of bankruptcies in the real economy, and economic growth is 200 basis points under potential until 2022.
What matters for each scenario is (a) how much it costs, (b) who bears the cost, and (c) how long it takes.
If Chinese creditors, investors and citizens bear 100% of the cost in scenarios 1 and 3, but they only bear 30% of the cost in scenario 2, then scenario 2 is preferable isn't it?
But what if Chinese citizens don't have a vote, and the damage to well connected elites is lower under scenario 1? Maybe that winds up the preferred course even if total cost is greater.
Who knows without the ability to even roughly quantify the primary, secondary and tertiary effects?
What exactly is it that you think is happening, if I may ask? Does a Chinese citizen, perhaps vacationing in the US, walk into BoA or WF and ask a wealth management advisor how to move money to their newly opened account there?
PS: Bitcoin mining is another story, but it’s little different than building anything in China and selling abroad.
Most wars are great for business actually, even world wars! Let's not forget that WW2 was mostly responsible for dragging the US out of the great depression.
So when you see interest rates rising, that means there is more selling pressure than buying pressure.
Just like anything else, it is harder to sell bonds and get the price you want when bond prices are falling (and interest rates rising).
It's easier to sell and get a good price when bond prices are rising (and interest rates are falling).
This is econ 101.
How much would interest rates rise if $1T gets sold into an already weakening market?
I don't pretend to know the answer, but I'm pretty sure it's greater than zero.
[1] https://www.cnbc.com/2018/10/11/trump-says-the-stock-market-...
One of the dangers inherent in this strategy comes in the timing of the rate manipulations. Be too aggressive with raising rates and you may lose large amounts of economic momentum. Be too slow to raise rates and you may have nothing to lower in the event of a recession.
So if China sold off a ton of US debt and it negatively affected the world economy, the Fed would likely cut interest rates in an attempt to counter the downturn.
[0]: https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
The Fed doesn't just dictate interest rates, because who would listen to them? Instead, interest rates are set by the market.
If the Fed wants higher interest rates, they sell bonds in the market. If they want lower interest rates, they buy bonds in the market.
So if China sold a ton of US debt, that would reduce bond prices and increase interest rates. If the Fed wanted lower interest rates, it would need to buy a lot of that additional supply that China dumped on the market.
Aye, mostly. It's important to remember that the Federal Govt. has the ability to manipulate the money supply by printing money and the ability to nearly indefinitely borrow whenever they get into trouble. Note that borrowing implies issuing bonds, which will lower interest rates.
So the Fed cannot simply dictate interest rates, but if it wants to manipulate the rates there is not a whole lot stopping them. In a recession scenario I imagine they would not have much trouble justifying more borrowing to the American public.
With regard to the effect a Chinese selloff would have on the market (both the US bond market and the wider global economy) I don't know enough to comment. However, I am fairly confident that if such a selloff resulted in a major economic downturn the Fed would try to lower rates to stimulate the economy.
You have it exactly backwards.
Issuing bonds means selling bonds. Selling bonds or anything else puts downward pressure on the price.
When price of a bond falls, its yield (interest rate) rises.
Whoops! You're exactly correct. Issuing more bonds increases the risk of the issuer not being able to repay the debt and thus the debtors will demand higher rates to offset this increased risk.
Although, unlike other bond issuers, the Fed has other tools in it's arsenal that would allow it to manipulate the yield curve.
Of coz for those of us who are in it for multiple decades.... 4% drop doesn't surprise us.
No one cares about investors who only got into the stock market after 2008. They don't have enough capital to really impact anything.
Forget about the share of outstanding debt. That's money under the bridge. Think about the year-over-year change in the share of deficit spending funded by foreign buyers. Considering how explosive deficit spending will be over the next decade because of the tax cuts, compounded by higher interest rates, we could be in for a very bumpy ride.
What once were irrelevant swings in interest rates, current account deficits, domestic savings rates, etc, could quickly come to dominate the trajectory of the economy.
Sure, the Federal Reserve could soak up the deficit. But that would be much more likely lead to inflation than in previous periods.[1] Higher inflation means foreign buyers pull out, which leads to greater inflation and less capacity to purchase the imported goods that we're completely dependent on. It also means less profit on the international market for the high-margin services and industrial products we specialize in. Europe is doing a much better job than the U.S. at controlling deficit spending, and the Euro could easily become the new reserve currency.
[1] And don't forget, the Federal Reserve's mandate is low inflation and low unemployment. Congress may need to step in to change their mandate to de-prioritize low inflation, which would send a very nasty message to investors. Decades of easy money because of our current account deficit (aka trade imbalance) and strong domestic savings (via Social Security) has left people with a twisted perception of the consequences of budget deficits and inflationary monetary policy.
Surely you cannot be serious here. Europe is one (insert name)-exit away from total implosion. The Euro project was doomed from the very beginning: you cannot have a joint monetary policy without a unified fiscal policy (which never materialized through European consent - after failure of conquest i.e WW2)
The Euro area had a 2017 deficit of 0.9% of GDP, as compared to the U.S.'s 3.5%. And this is during a boom in the U.S.
https://ec.europa.eu/eurostat/documents/2995521/8824490/2-23...
The Euro isn't a better vehicle than the USD today, but it could easily become one. Not because the Euro improves but because USD will become less stable and attractive and the only realistic alternative is the Euro. Or maybe we end up with a more diversified system. Either way USD loses.
Get back to me when Saudi Arabia starts selling oil exclusively in Euros, or better yet, once European union surpasses the US in the number of aircraft carrier strike groups. You don't seem to understand the concept of a "foreign reserve currency" if you think Euro has a chance against USD. There is more chance of physical gold replacing USD as an inter-nation trade/reserve rather than Euro!
The U.S. is the world's reserve currency because everybody trades with the U.S. and the U.S. has run a current account deficit consistently since 1950, and with most of the world. That means everybody is holding USD and thus you can sell something to anybody else without needing sufficient imports from that buyer to cover the transaction. (Countries can't just buy USD willy-nilly; they need to find someone willing to trade USD for their local currency, which requires exporting some good or service.)
But that can change. Indeed, politicians are hell bent on changing it. And the global economy is exploding, meaning the U.S. won't be able to remain the center of the global commercial universe even if it wanted to.
Who would be hurt in this scenario? Who are the lenders that don't get paid back? Are they banks? Ordinary citizens saving for retirement?
When those people don't get paid back, what are the second-order consequences? Is there a cascade of defaults when they can't make good on their obligations?
That is unlikely to be the result. The US national debt is over $21T now. $1T is <5%. Dumping that much on the market at once would certainly affect interest rates, but not at a catastrophe-inducing level, and all of the normal tools used to control interest rates remain available.
By comparison, the US deficit this year is ~$0.8T, i.e. the US itself is dumping nearly that amount into the market. The Quantitative Easing program after the housing crisis was $3.5T over a few years.
It's also unlikely that they would dump the entire amount at once, because causing a sudden short-term rise in interest rates is not to their advantage (they would take a bath on bond prices). But if they divested something like $100B/year, the effect on the market would be minimized.
1) to avoid future potential sanctions
2) a trial-run to gauge how the market would react to a similar move by China.
At its peak Russia held less than $0.2T, Russia liquidated approx $50B per month for 3 months. If China dumped $75B per month for 6 months, there would be pain that would likely spread into corporate bonds.
https://money.cnn.com/2018/07/30/investing/russia-us-debt-tr...
https://www.bloomberg.com/view/articles/2018-10-16/russia-s-...
(edit: formatting)
The Kremlin may be trying to pull off a balancing act by mostly shifting its cache offshore, rather than selling outright.
Analysts at the Council of Foreign Relations this week found that holdings of American bonds in Belgium and the Cayman Islands increased by about $45 billion in the same period that Russia was reducing its U.S.-based hoard, meaning it may have been an attempt to protect against seizure.
https://www.bloomberg.com/news/articles/2018-08-15/russian-g...
I had assumed (without evidence) it was the US. A plunge protection team of sorts.
ZH suggest the buyer was China.
https://www.zerohedge.com/news/2015-05-18/revealing-identity...
Selling treasuries is a double edged sword. Driving up borrowing costs for the US also lowers bond prices, wiping out the Chinese government's portfolio value, right when they need the funds for a bailout. Dumping a lot of dollars on the market will drive the dollar down relative to the yuan, hurting Chinese exporters right when their economy needs it most. China has really twisted itself into a knot on this one.
Here's another article that goes into more detail:
Local government funding vehicles (LGFVs) are companies owned and funded by a local government in order to raise funds for municipal projects. These firms stem from the taxation system in China that allocates the lion’s share of revenue to the national government, and from regulations implemented in 1994 that prevent the government from selling bonds. This strict budgetary regulation was intended to promote sound financial management and prevent local governments from spending themselves into deficits. LGFVs became prominent after the Asian Financial Crisis of 1998 and the Great Financial Crisis of 2008 when central government stimulus packages put the onus on local governments to raise necessary funds. LGFVs are effectively state-owned enterprises (SOEs).
https://www.strangemarkets.com/chinese-lgfv-bonds-the-next-g...
Those concerns got louder during the repeal of the Glass-Steagall Act in 1999 [2], as that removed depression-era regulations that kept banks from a lot of financial speculation.
But this all didn't really blow up until the financial crisis of 2007-8. [3] Financial instruments with long time horizons (e.g., mortgages and long-term loans to governments) can be dangerous a long time before the truth comes out. And large organizations like banks and governments may end up exacerbating the problem by smoothing over what they think of as small problems but are really the canaries in the coal mine for major systemic issues.
Closer to home, we could look at Theranos, which took a full 15 years to go from founding to criminal charges despite never really working. Enron and Worldcom are two other good examples where booming markets covered up all manner of sins for years before the music stopped.
[1] https://www.nytimes.com/1994/12/08/business/orange-county-s-...
[2] https://en.wikipedia.org/wiki/Aftermath_of_the_repeal_of_the...
[3] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
The real collapse didn't occur for several years.
They were wrong on the timing, which is fairly common, while being right about the cause and ultimate outcome.
China of 10 or 15 years ago is not China of today, as it pertains to their debt situation. Going from a 130% debt to GDP ratio, to 300% (or higher if you count shadow debt), puts you in a fiscal place that few nations have ever navigated successfully. Now China is reversing course on deleveraging and proceeding to leverage up further, likely making the situation worse.
300% debt to GDP may be sustainable with 8% real growth. How about at 5.5% growth? 4.8%? How about 450% debt to GDP, at 5.5% GDP growth? There are limits to this sort of approach to propping up an economy with very large sums of debt and slowing growth. How much does their growth drop off if they can no longer continue to expand the debt so dramatically? And when that happens, can they still service their debts well? The question is exactly where the limits are and what the consequences will be as they're hit. That varies from country to country, depending on the unique circumstances, and depending on the type of debt. What you can be certain about with China, and what it's doing, is that it's not good. Even if that immense pile of total debt - which continues to grow rapidly - doesn't implode their economy, it is very likely to stagnate it at a minimum by robbing the economy of the growth capital it needs (diverting it to rather incredible debt interest payment sums, as is the case now). As that debt goes higher, more and more of each incremental dollar of GDP growth is going to maintain it.
While all of that is happening: China has large pension funding problems, very high real corporate tax rates that are smothering its economy, a weak social safety net, a shrinking small business market and expanding government-corporate sector that is far less efficient than the private sector, a rapidly aging demographics problem, contracting labor force, and soon to be contracting population. Now juggle all of that with their debt load, before they get rich/affluent at the median, and before they even build out a meaningful social safety net for the bottom billion people (social safety nets & welfare policies being the usual primary cause of large debt accumulation in the developed world).
Should the CCP decide to reset all debt, they could likely get away with it through measures that insure a lack of debt collection doesn't cause a dominoeing effect.
A one-party "democratic republic" is not a democratic republic.
A country that's doing what China is doing in Xinjiang to the Uighurs isn't a country with a bill of rights that matters.
I'll agree that China is not at the moment particularly communist/marxist. That doesn't make them a democracy.
They're communist.
You seem to be unaware of the role of the Communist Party in Chinese government.
https://en.wikipedia.org/wiki/Communist_Party_of_China
Xi is currently consolidating power into more of a straight dictatorship, though. It's pretty interesting to watch.
The primary debt problem in the US, is the public debt of the US Government. The US Govt can decide to 'forget' their debt, they're going to use inflation to do it over time (that is, quantitative easing, debt monetization). US Government debt will increasingly be held internally as a percentage, as it expands by $700b-$1t per year. There are no external buyers for that much debt and they can't afford the high interest rates it will take to attract that much private capital over time (it'd rapidly swamp the US budget), only the Fed will be able to keep up with it. They'll follow the Japan recipe, holding rates artificially low perpetually to keep debt cheap, while debasing the dollar to stealth default on the debt in order to reduce its real value vs the economy and government finances. That's how Western nations forget their debts.
This is absolutely false. The US has been in debt it's entire existence. Debt is a problem for the private sector, not the public sector. Why? Because the debt the US is denominated in dollars, which it has the sole ability to create. Imagine a household with the same power, let's say you "adventured" are able to print "adventure dollars". When you give out these adventure dollars, you run a deficit of X adventure dollars. You are now X dollars in "debt". That's exactly how public debt is measured. It's silly to think the US could not pay any debt denominated in dollars.
Yes, he could do that, but the problem is that state-capitalist economies do poorly in the modern world. That's why Dung Xiaoping abandoned Maoism and turned to the free market in the first place.
By the way, the term "state capitalism" was invented to communicate that the economy in the Soviet Union was radically different from either a free market economy or the anarchistic, democratic socialist economy that the Bolscheviks had promised.
Most of that $5.8 Trillion valuation is not going to vanish because they are real investments into infrastructure. Most problems come from wrong cash flow estimates, and lower than estimated returns and some nonprofitable investments. The actual potential loss or haircuts investors are facing is some percentage of that sum. Probably few $100's of billions, maybe even close to $1T.
The reason why there are defaults is because Chinese government wants to fight moral hazard problem that comes from bailing them out. The government will allow certain number of LGFVs to default to set an example (like Lehman Brothers) but if the credit squeeze starts to hurt "Chinese main street" they will step in.
I don’t doubt that it won’t be an entire haircut, but to say these function like regular bonds seems odd.
Is there a contagion concern here? What other products are collateralized using these? We saw this of course with well-rated packages of loans actually being manure. Anything like packaged LGFVs with hedges?
Asking because I have no idea and am legitimately curious about the possible downsides.
I got the impression that they just weren't ready to respond and it was less so "hey let these guys fall to set an example".
I could see that working for land development, maybe some infrastructure... but if they are selling bonds to cover day-to-day public affairs, that doesn't seem sustainable. If those expenses aren't covered by current tax revenue, where are they going to get the future revenue to pay the investors, plus interest, plus ongoing day-to-day expenses at that point?
Does anyone know what expectations or models they are using in issuing these, or what the buyers' assumptions are? That would seem to be important. If someone is buying a 30-year note expecting the tax base growth to be 8% p.a. over that 30 years, with that compound growth covering the principal, interest, and still keeping things going down the line, things could get really ugly if growth is even a bit below that. The municipality would have to choose between day to day expenses and interest payments, potentially.
LGFV do not look like a financial product that can be bought so there does not seem to be any risk of contagion.
This is all government matters so the moral hazard can be easily avoided if the government is willing to punish harshly the officials that put their cities in this situation. Financial punishment is not the only way to punish unwise risk taking.
I'm not saying it's not a crisis, I'm just saying I can't tell if it's a crisis because it's China, everything seems way too big to me, and lots of it just continues that way for many years.
Indeed China's MO is usually to do that indirectly every time, which is why articles like this have popped up like clockwork for the last decade in spite of China not facing a recession in that time. Counter cyclical fiscal stimulus always headed it off.
An analogy is like a company whose sales department generate all the cash and the engineering department generates no cash and owe billions to the sales department. Is the eng department in crisis? Obviously not. Still, oversight needs to be exerted over the eng department to make sure that it doesn't overspend or develop projects that are low in ROI... an eternal challenge.
If you squint, it looks like an interesting parallel to the lending issues that plagued Japan in the 90's and eventually brought the economy there to a standstill. The monetary equivalent of "vapor lock" in a hydraulics system.
I am the first person to admit that the complexity of bond financing in the Chinese economy really challenges me because it operates on some fundamentally different assumptions about fiscal policy and monetary policy. That said, I'm not sure how they unwind that debt without sufficient domestic demand to keep the system operating.
If they were a third world country they could just devalue the RMB by 1000:1 and then settle the debt with devalued currency, but that option isn't really available to them.
[1] "The Law of China’s Local Government Debt: Local Government Financing Vehicles and Their Bonds", D. Clarke -- https://sci-hub.tw/10.1093/ajcl/avx036
If Chinese wealth per capita is roughly 1/10th that of the average US citizen -- both in terms of median and mean -- and if Chinese wages are roughly 1/6th that of the average US citizen -- both in terms of median and mean... How on Earth are Chinese houses on average MORE EXPENSIVE per square foot than houses in the US?
My brain just can't understand.
Edit: it might be interesting to see if there is a recession in China (or globally), how the central bank there might respond in contrast to QE schemes that the US and European central banks used.
"By the end of 2017, the ratio of total household debt to disposable personal income hit 107.2 percent. This number is above the level in the US before the 2008 financial crisis. The structure of China's household debt has also diversified. Housing mortgages only increased slightly in 2017. ... But other types of loans, especially short-term loans, increased rapidly last year. One reason for this is that families have to seek other ways to finance their home purchases due to the tighter controls on mortgages. "
http://www.globaltimes.cn/content/1115334.shtml
"China’s household finances look more stretched than those in most emerging markets, though the level of household debt remains less than that in most developed economies, Fitch Ratings said in a report on Tuesday. China’s household debt-to-disposable income ratio, a gauge of indebtedness, has jumped 9 percentage points every year since 2015, driven by mortgages and other consumer debts. If left unchecked, the ratio could hit 100 percent by 2020 versus 82 percent at end-2017, Fitch said. That would put China on par with the United States and Japan, whose household debt ratios are estimated to be at 105 percent and 99 percent, respectively."
https://www.reuters.com/article/china-economy-household-debt...
"On the back of a boom in property prices, household borrowing has been climbing for 10 years straight, at a pace that rivals any such run-up in major economies. At $6.7 trillion, and a record 50 percent of gross domestic product, private debt is now approaching developed-world levels and crimping consumer spending power."
https://www.bloomberg.com/news/articles/2018-04-24/the-7-tri...
https://www.elledecor.com/life-culture/fun-at-home/news/a765...
Another difference is that historically Australia has also had poorer quality of housing as well, eg. inadequate insulation (https://www.abc.net.au/news/2017-01-03/why-bad-housing-desig...). But yes we do have some pretty big houses, at least compared to most of Asia, much of the UK etc.
What is artificially created demand for real estate? Isn't all demand for real estate "real", whether as a home or an investment.
But in Australia you cannot tax-deduct the interest on your own home, whereas in the US (IIRC) you can. I would expect the artificial inflation to be higher under the US system.
The real causes of the high house prices IMO are: a) poor government policy, from federal to council level, the net effect of which is preventing the market to be adequately supplied with new housing; and b) a range of cultural factors (notably the image of housing as a safe investment, that is being cultivated with increasing desperation by the real estate industry) that results in channeling of investment into established housing.
What most people ignored is that it would spike rents and cause more short-term harm, especially as lending tightened
Everybody was casting for something to blame and ignored the most obvious solution staring them in the face - an increase of property supply (as you've said)
The other factor is that the Chinese government places very strict controls on where rich people can "park" their money- Since they can't take large sums of money out of the country, they have resorted to using local real estate as a sort of gold substitute for stockpiling their $$$.
I'm curious about the no property taxes comment though - does that refer to China or Japan? I thought China had taxes on everything, including property.
Are the number of people per square foot much higher? I know in Tokyo people's expectations are very different.
But wealth is about 2000% higher and wages are 440% higher in Japan.
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi... https://en.wikipedia.org/wiki/List_of_countries_by_wealth_pe... https://www.numbeo.com/property-investment/compare_cities.js...
The average house is not at all more expensive in China than in the US.
It is true that in particular cities like Beijing or Shanghai the average sits around $7-9k per square meter (divide by 10 roughly for square foot), far higher than the average in the US. (divide by ten roughly for square foot). That's way more than in the US. But then consider these are megacities with a GDP of roughly half a trillion dollars. About half a million millionaires live in Beijing, Shanghai and Hong Kong. These are the top tier cities of the 22nd century's superpower, prices are going to reflect the notion that property in these cities should keep its value and appreciate strongly.
Median wages are already on par in these cities with various eastern-european countries. And income inequality is among the worst in the world, so you've got this small percentage of people who can elevate property prices to ridiculous heights. Only Shanghai and Beijing each have a population equivalent to 25 times San Fransisco, so a few rich people adds up to ridiculous prices.
I'm not saying these prices necessarily make sense, I certainly wouldn't buy there. But it's also not impossible to see why they're this high.
The median income in Beijing is around 18k RMB/month. The one bedroom we were renting was 7500 RMB/month, which was considered neither cheap nor expensive...it was definitely cheap for what I was making but then I had to forgo a lot of niceties that I wanted (like a real shower). My rent in the states is much higher but I don't have to worry about the same crappiness that even a high-end Beijing apartment has.
Never drink the water though. Even boiling isn't that safe anymore, just use bottled.
The median income in Silicon valley California is around $7000/month. The one bedroom rent is $2000/month.
so it seems, Silicon valley and top Chinese cities comparable when it comes to expensive housing ...
Still, paying half your before tax income on rent vs, less than 30% is really significant.
About half of Chinese are peasants, for lack of a better term. Is that 'abject poverty?' They're living primitive lives. I think applying the term 'abject poverty' may be a little inappropriate. Many enjoy a good bit of property, autonomy and are not living drastically foreshortened lives.
> and shouldn't even be considered a part of the market where those houses lie ... should be normalized
Yes, analysis of China is frequently misleading due to the vast peasant population. Unfortunately attempts to correct for this run into a very serious problem; the US CO2 per-capita figure ceases to be a multiple of China for hundreds of millions of Chinese. A highly undesirable result for a number of reasons.
So don't expect that sort of analysis to become a thing any time soon.
Compared to who?
http://articles.latimes.com/2012/mar/18/world/la-fg-china-ca...
“The U.S. Department of Housing and Urban Development released its annual Point in Time count Wednesday, a report that showed nearly 554,000 homeless people across the country during local tallies conducted in January. That figure is up nearly 1 percent from 2016.
Of that total, 193,000 people had no access to nightly shelter and instead were staying in vehicles, tents, on the streets and other places considered uninhabitable. The unsheltered figure is up by more than 9 percent compared with two years ago.” (To scale, that would be 2.5 million homeless in China which has roughly similar figures: https://en.wikipedia.org/wiki/Homelessness_in_China).
Would you prefer to live in a tent on land you didn't own or in a cave dwelling you did?
This is what a cave dwelling is: https://en.wikipedia.org/wiki/Yaodong
From the article you posted it says, “The thriving market around Yanan means a cave with three rooms and a bathroom (a total of 750 square feet) can be advertised for sale at $46,000.”
I have been to Granada in Spain where they have similar dwellings carved into the hill-sides: https://en.wikipedia.org/wiki/Sacromonte#Origin_of_the_caves
I imagine that cave dwelling is a thing in many parts of the world and, though traditional, it should probably not be confused with destitution.
“In the last decade, yaodongs have been brought to the attention of scientists and researchers. These traditional dwellings have been regarded as an example of sustainable design.”
Ref: https://en.wikipedia.org/wiki/Under-occupied_developments_in...
And traffic/parking was pretty bad at that complex, if 25% of the units were unoccupied, I couldn't fathom what full occupancy would actually look like.
Also, does it ultimately matter with an economy as productive as China's? Other commenters are comparing it with Detroit, which has lost most of its tax base, so I'm not sure that's a fair comparison.
And, if they are state run funds/bond issuing, than isn't it roughly equivalent to any other kind of monetary stimulus? (genuinely asking, this isn't my area of expertise)
It seems like a lot of Chinese cities have equal to or greater debt than Detroit. How bad this is depends on the tax base of said cities and how the debt is structured, but it’s eyebrow raising at best.
As far as I understand, a lot of valuation of the risk in muni bonds is based around the assumption that municipalities won’t go bust together at once. It’s this way in the US. This let’s someone spread their money safely, in theory.
The Chinese economy is so export and manufacturing dependent, it wouldn’t surprise me to see a lot of cities go bust together at once if the economy shrinks. They have very little other economic activity to fall back on.
For my part, I think any good usage of debt requires transparency about the amount and purchase. Any entity, private or public, that tries to hide its total debt load is suspect at best. I would expect such an entity to have other hidden debts, and possibly be leveraged to an insane degree, hence the privacy.
https://en.wikipedia.org/wiki/List_of_countries_by_incarcera...
https://www.wsj.com/articles/chinas-re-education-camps-15354...
http://english.alarabiya.net/en/views/news/middle-east/2018/...
https://www.weeklystandard.com/the-editors/chinas-crackdown-...
https://www.theatlantic.com/international/archive/2013/02/ch...
https://www.digitaltrends.com/gaming/only-in-china-prisoners...
https://www.quartertothree.com/fp/2015/08/13/this-is-how-the...
I mean, if the US doesn't consider it a credible organization, and if your sources are the Saudi owned AlArabiya, the Murdoch owned WSJ, and Bill Kristol's Weekly Standard then why shouldn't I believe what I read in the Irish Times?[1]
"" China blames anti-China forces for the criticism and says Xinjiang is under threat from Islamist militants. Foreign ministry spokeswoman Hua Chunying said the UN experts remarks were “without factual basis” and said that Chinese people’s satisfaction with Xinjiang’s security and stability had risen dramatically.
“The policies and measures in Xinjiang are aimed at preserving stability, promoting development and unity, and improving livelihood,” Ms Hua said.
In a letter to The Irish Times on August 27th, a Chinese embassy spokesman said measures taken by the local government of Xinjiang, “are in fact continuous actions supported and embraced by all the people in China fighting against terrorism”. ""
and
"" There have been terror attacks by Uighur separatists in China, including an attack in 2014 where a group of Uighurs attacked Kunming train station with knives and killed 31 people.
Beijing says there are links between Uighur separatists and fundamentalist Islamist groups. Uighurs have fought with Islamic State and the al-Qaeda affiliate group Jabhat al-Nusra in Syria. ""
You don't oppose a government's efforts to counter radical Islam, do you?
[0] https://www.bbc.com/news/44537372
[1] https://www.irishtimes.com/news/world/asia-pacific/china-rej...
The government found a final solution to the Muslim question! Why would anyone oppose it?
It may have been a bit subtle but I was implying that if one opposes the Chinese government's method of dealing with Radical Islam then one ought to oppose the US solution in the Global War on Terror which is boots on the ground and bombs from the air – in what?, 15 countries with combat troops and 7 countries with air & drone strikes at the moment. If, however, one supports US intervention in these places then one ought to support the Chinese in their methods. To support one and not the other is jingoism and misplaced patriotism.
[0] http://www.tomdispatch.com/images/managed/costofwar_projectm...
I'll just contribute a little bit about the Jiaozhou Bay bridge. My grandparents live near there. It actually makes much sense if you take a look at the map below:
https://www.google.com/maps/@36.070127,120.2319581,82460m/da...
Basically, Qingdao is already a mega city with over 6M population in urban area. But it just cannot expand because it is located on a peninsula (similar to San Francisco) with its back facing a big mountain. So it's kind of natural to expand on the other side for more and cheaper land. So to reach the other land, options are:
1. Connect the tip of the peninsula to the other side. This is shorter but you're connecting city centers together (Brooklyn-alike), which doesn't work well for cargo traffics (Qingdao is also a major seaport). Actually this tunnel is already built and many people use it for commuting.
2. Connect the seaport area inside the bay to the other side. This is what you mentioned. With that, cargo can reach factories on the other side in a faster fashion without crossing the city center.
3. Improve the highways around the bay to handle increased demand. First it's a lot longer, which is something you cannot change. Second it's not cheap either given you need to get more land and might need more time.
And 2's price tag is not that high (roughly the same cost as San Francisco - Oakland bay bridge). If you were the decision maker, would you want to build it?
BTW, with 1 & 2's open, the other side already officially became part of Qingdao metropolitan area and cross-bay subway will open this year.
I am not sure where are the money comes from and I am afraid if everything comes crashing down for China they will go the military route and turn their economy into a military economy then take the whole 9-dash line area by force (as a keep people busy jobs project). I feel the 9-dash line thing is fake and designed to be able to stop shipping like we can stop oil coming out through the middle-east closing by closing shipping lanes.
Did you forget about the drug war here in the USA?
I'm curious if the prophecy will self-fulfill in 10 years or so. I'm also willing to hear independent voices and analysis.
As a matter of fact China not needling into military affairs is a huge disadvantage for the US.
One of the underlying themes of Donald Trump's campaign was to convince people regular politicians can no longer stop China. Because China is fighting it in an arena very different to what the US is used to fighting since a century.
Might as well read the source for yourself if you are interested in the issue.
And now that reminds me of another number. Apple and Amazon have 1 trillion valuation.
I don't understand if my scales are wrong or if something is seriously wrong pretty much everywhere.
We are at the end of generations of solving one bubble collapsing by inflating another one. There is a lot of money on paper. But in reality there are three main places where money can go.
1. The USA, which has been effectively printing money like crazy with low interest rates since 2008. This has been transferring wealth from the real economy to the paper economy.
2. Europe, whose common currency is unsustainable without political integration. There is no general support for political integration, and no reasonable way to untangle the common currency. (Plus Brexit will be a disaster.)
3. China, which has the largest asset bubble in history. When it pops they are likely to wind up in a deflationary spiral, like the one that Japan has been struggling with for decades since its real estate market collapsed in the early 90s. Our last deflationary spiral was during the Great Depression.
Of those options, investors see the USA as the least bad.
At which point does all this madness stops ? Whenever a new economy emerges that provides more sanity and so drains the inflated assets, i suppose ?
A more sane economy is unlikely to outgrow the existing (at least one paper), so that isn't a viable route out.
What's left is that some day, one of the financial disasters turns into a real collapse. We're talking a sufficient run on the banks that people stop believing that banks really have money. The last time this happened was 1933, and it was resolved by FDR closing all banks, auditing their books, deciding which to save, and then opening them up again.
Given our tighter electronic integration these days, the complications are likely to be greater. Think credit cards being refused, ATMs not working, and general chaos. For values of chaos that include people not knowing if their employers can pay, or how to buy food in supermarkets.
The possibility of that happening was the nightmare scenario that was used to convince lawmakers to pass TARP a decade ago. And it is a nightmare with a low but non-zero probability of happening each crisis.
Unfortunately every time we face that threat and successfully get rescued the markets become more convinced that big players will be rescued the next time as well. Which encourages more extreme financial brinksmanship and makes the next crisis more likely. That phenomena is called "moral hazard". See also "too big to fail".
Money is both a medium of exchange and a store of value. The "medium of exchange" function is traditionally represented in accounting with the income statement - it's a measure of how much money changes hands in a given time period. So a company's GDP measures the total value of all transactions performed within a year.
The "store of value" function is traditionally represented by a company's balance sheet, which is a measure of how much value has been accumulated at a particular instant in time. So when local governments in China have $5.8T in debt, that means that some other entity has previously loaned them $5.8T, collectively, and at some point in the future, has a claim on that. Note that this time period might be very long; it's not unusual for debt terms to be 30 years (eg. with T-bills or mortgages). Note also that everybody's debt is somebody else's asset; for example, you could have $5.8T in debt where each local government just deposited their working capital in a bank in the next town over and borrowed from the town to the other side, with no actual outside holders. (This is actually fairly close to the situation with the U.S. national debt, where 50% of the debt is actually owned by other portions of the government - notably the Social Security trust fund and Federal Reserve - and another 10% is owned by state governments.)
Here's a classic parable that illustrates the difference:
http://scienceblogs.com/evolutionblog/2009/06/15/an-amusing-...
If you take first year accounting in school, you'll find out that balance sheets are simply a static representation of your asset, liabilities, and retained earnings. Retained earnings is basically the difference in what you owe vs what somebody owes you.
In very, very simple language, balance sheets add everything to show your wealth. I think this is a bit simpler than "store of value," but basically says the same thing. Or, as my accounting professor, and probably every accounting professor likes to say, "they are snapshots."
Now you can say "but money can be used as a medium of exchange," but I think this really adds complexity. In accounting 101, we simply say income statements show the path by how those quarterly balance sheet snapshots change. If you balance sheet change, it is because some activity happened. Now we don't normally say "medium of exchange" for income statements.
Instead, we simply write the steps of making money, which is as follows:
Revenue = What you sell -COGS = What it cost you ----- =GM =The results in after the sell -SGA&RDA =What you paid your employees ------ =Net Income = What you made
You then add that profit to the balance sheet (less taxes and one time events). Your income statement bottom line perfectly shows up as a change in your retained earnings. So they are perfectly tied together.
The "classic" parable that you linked simply misses the point of accounting 101. In the parable, they talk about the "debt" that mysteriously goes away because a stranger comes into town and basically lends a $100.
This mystery is not new, and is well understood in accounting, and this is why we have "double entry" bookkeeping. This "paradox" was noticed by various cultures around 800-900 AD. However, the written rules was done by Luca Pacioli, a friar, in 1000 AD. To make it clear what actually happens, Pacioli pointed out that every transaction is both a lending and obligation to payback. Therefore, Pacioli said that all financial transactions have to be recorded twice. So, all of his ledgers recorded transactions on the left side of the T-ledger and on the right side of the T-ledger. Double entry bookkeeping was invented, and a thousand CPAs found lifetime security.
Thus all transactions generated a "owed something" and it was recorded on the left side of the ledger, which was something owed or latin debitum, or what we call "debits" today. Each debit entry must be also recorded on the right side with an offsetting entry of the same amount, or what you believed would be paid back or creditum (trust) at the same time. Both sides need to equal zero.
Thus if you were a bicycle store, and if you had a $800 bicycle (price you paid) on your balance sheet, and if you sold it for $1000, you would debit your cash by $1000 (add it), you would credit your bike inventory by $800 (remove it), and you would add the $200 profit to your retained earnings. (Well sort of. In your bicycle store, you probably had to pay employees, which would have been taken from the $200 profit, but I'm simplifying.)
In the "brain teaser" that you linked, they only do single side entry, which makes it look like everybody is in debt and was down $100. This is not true. Everybody in town both had "owed something" but also an offsetting "trust of being paid back." These two sides equaled zero. Before the $100 was circulated, everybody had a net worth of zero, and afterwards everybody had a net worth of zero.
With double entry, everybody in town would have recognized that everybody had an offsetting credit for the debit. Both before and after the exchange their net worth is zero, thus no change.
But this is an old thread, and I'll be typing this probably to myself and nobody will ever see it. However, I feel better for explaining it.
>"And that's a debt iceberg with titanic credit risks," they added, estimating that the ratio of all government debt to GDP was 60 percent last year. https://www.cnbc.com/2018/10/16/china-hidden-local-governmen...
60% doesn't seem that bad. Compare USA: 82%, UK 78%, Italy 120% etc. And at least China is still growing fast unlike say Italy which does have some issues.
It seems like the same story--different sector and different culture, same greed and assumptions.
The Chinese debt is something the world has known, to continue to accept the debt is the risk for the taker.
The worry is that this will ruin companies and the employees that work for them. It should be obvious how this cascades and affects the common person.
I also have concerns about the US economy given our comfort level with the growing debt.
The President and Congress ignored the CBO predictions publicly, because privately the intended purpose is to facilitate another debt crisis, as that is the only way to cut popular social programs.
The argument would be that it hasn't happened yet, comparing them to the Bush tax cuts (2001, 2003) that lead to problems in 2007/8.
Meanwhile, the Trump tax cut "increases the total projected deficit over the 2018–2028 period by about $1.9 trillion" after accounting for tax-cut-stimulated GDP growth, according to the CBO. [2]
For all we know, we could enjoy another 2 (or 6) good years before it all comes crashing down in 2020 with a Democratic president in power. Or not. If I could predict the future, I'd probably have better things to do than respond to Internet comments.
https://www.npr.org/2018/10/16/657790901/federal-deficit-jum...
> The federal deficit ballooned to $779 billion in the just-ended fiscal year — a remarkable tide of red ink for a country not mired in recession or war.
And people call me crazy to think BTC is going to perform better than USD over 10 years....
Maybe those 10 years will help some to think about a dogma different than "growth" ?
This is the primary driver behind my suspicion that some form of financial crisis the US economy has begun, but it's not yet visible when people look at the fundamentals. Unemployment is great, wages are rising, assets prices are growing, etc.
According to the indicators, the economy is as healthy as it can be. But our political situation suggests something is awry, people are way more pissed off than they should be.
Unless your indicators include wealth inequality, personal bankruptcies, wage stagnation, infrastructure repair costs.
You can't deny that most people are saying the economy is doing very well. Unemployment is low, wage growth is happening, large business profits and revenues are up, manufacturing activity is high, retail sales are the highest they've been.
Just about every economic indicator captured by the US Census Bureau is very strong. But people are still pissed the fuck off.
It's possible that people being angry and the economy are not connected. We've never been able to communicate as fast as we have in the past. Right now we live in a culture of "what to be outraged about next". Best thing to do, is not participate in the toxic culture.
At some point, a lot of us in the US will be asking:
"Is a trillion dollars in interest payments every year, with social security cuts, medicare cuts, bad school funding, high taxes and abomination-level healthcare costs worth it?"
https://en.wikipedia.org/wiki/Economic_policy_of_the_Bill_Cl...
For that matter, the previous Democratic president to balance the budget was Andrew Jackson, so don't act like the Democrats are the party who balances the budget.
But Republicans only seem to care about financial prudence when they're not in power (or at least, not in the White House). If you actually care about a balanced budget and financial responsibility... the US may not be the right country for you. (Maybe Switzerland?)
First Past The Post Voting- https://www.youtube.com/watch?v=s7tWHJfhiyo
Range Voting- https://www.youtube.com/watch?v=e3GFG0sXIig
Single Transferable Vote - https://www.youtube.com/watch?v=l8XOZJkozfI
Alternative Vote - https://www.youtube.com/watch?v=3Y3jE3B8HsE
Mixed-Member Proportional Representation -https://www.youtube.com/watch?v=QT0I-sdoSXU
Carter made the tough call of appointing Volcker and taking an economic hit to fix the inflation problem.
Bill Clinton did in fact leave office with a budget surplus. He deserves at least 50% of the credit, maybe more, for keeping the government running effectively while being starved by the Republicans.
Obama inherited a record deficit and economy in free-fall, he still managed to cut that deficit in half.
I'll take that record on deficits over those of Reagan, GWB and Trump any day.
The other party happily ushers in an era of austerity and has an attitude of "not my problem" when people lose their jobs, health insurance and homes.
McConnell is all over the news today saying the big deficit increase just announced had nothing to do with the tax cuts or the big increase in military spending. He's trying to blame it almost all on not cutting social security and medicaid.
Both parties like to drive toward cliffs, but the cliff the Democrats drive toward is farther away. I'd rather not be driving toward any cliff, but if I have to I'd prefer the farther one--that gives more time for someone to figure out a better course.
That's gonna need citations. The way I see it, government spending has ALWAYS been increasing and taxes as well. Maybe both parties should stop sending money to countries for foreign aid and start paring back spending.
note, this is from 2012, but still relevant because the upward trend is still happening.
https://www.forbes.com/sites/joshbarro/2012/04/16/lessons-fr...
However, for whatever reason, Democrats don't seem to do big tax cuts coupled with big tax increases. In fact, I don't see offhand any major Democrat Federal tax cuts since the '60s (Johnson administration).
What this tells us is that no matter how much debt we rack up, the rest of the world will fund our profligacy at whatever bid we demand not only at auction, but in secondary markets as well.
No matter how much we anger China or KSA, they will buy our debt at any price, at any coupon, and beg for more. And of course our allied central banks like ECB, BOJ, SNB, will always be there at our beckon call.
Politicians know this, and so they are not overly concerned with deficits. Given human nature, I wouldn't count on any politician, R or D, to care even the slightest bit about this until the rest of the world bothers to demand a non-negative real rate of return on their investments.
But we (average citizens) vote to keep making the rich richer and then complain that the rich get richer at our expense? Something is off and most people don't even know it.
I'm not sure it is realistic or works.
Priorities.
If you want to know why bloomberg and financial "news" is a joke and a waste of time. Nobody in the industry takes them seriously. Only the masses who don't know better think this is news.
Sept 2018 : "China’s Debt Bomb"
https://www.bloomberg.com/quicktake/chinas-debt-bomb
Feb 2018 : "Sizing Up China’s Debt Bubble: Bloomberg Economics"
https://www.bloomberg.com/news/articles/2018-02-08/sizing-up...
Nov 2017 : "China's Debt Surge May Increase Risk of Financial Crisis"
https://www.bloomberg.com/news/articles/2017-11-21/china-s-d...
Aug 2016 : "China’s Growing Debt Problem Isn’t Quite What It Seems"
https://www.bloomberg.com/graphics/2016-china-debt/
May 2015 : "China's Very High Mountain of Debt"
https://www.bloomberg.com/news/articles/2015-05-08/china-s-v...
Nov 2014 : "Distressed Debt in China? Ain’t Seen Nothing, DAC Says"
https://www.bloomberg.com/news/articles/2014-11-20/distresse...
There's more but you get the idea. I guess eventually they'll be right. Wish they'd throw in a "ghost city" or some other china doom story for variety.
I'm just pointing out the pathetic chicken little clickbaiting by bloomberg.
As I said, it isn't news. It's just nonsense they created to sell you ads.
They mainly make money from data feeds of financial markets and their terminal offering.
The Soviet leaders were omnipotent enough to plunge half of the developed world into 70 years of darkness and decay.
My guess is that the Chinese communist leaders are no less potent, just a bit less self-destructive.
Please read a history book.
Mind, it's just an intro. And its not a happy book. But one doesn't need to exaggerate or parrot shallow condemnations of a part of the world that had its triumphs as well as its tragedies.
My understanding (and, yes, my bias) is that those few bright spots in Soviet life weren't worth it. We might disagree if, for instance, Hosking extols the fact that the Soviets were first to feed, clothe and house their entire population, because I don't agree that housing a large fraction of them in prison camps while exiling another is a valid solution to that particular problem.
As an additional example, my thinking is someone, presumably the US, would have been first to launch an artificial satellite in the absence of Sputnik. Someone, again presumably the US, would have educated and encouraged the first female astronaut. It's true that we missed out on those 'firsts'... but how many opportunities did the Soviets miss because the prerequisite researchers and teachers died in a gulag somewhere for purely-ideological reasons?
Am I overlooking any other instances of triumph mentioned by Hosking?
We detached this subthread from https://news.ycombinator.com/item?id=18233152.
Fairly downvoted, as expected.
In my head I see the typical HNer as a scared American, being comforted by the powers that be, that they will be able to retain and improve their quality of living by the imminent collapse of their "predatory enemy".
Relax. It's just another country, with a different system, which is managing to improve the quality of living of millions of people, within and outside China.
The article I'm referencing: https://www.bloomberg.com/news/articles/2018-10-09/new-evide...
However, my conclusion is based on how the reporting on this is being done, and the fact that we already know that the NSA has backdoored the entire telecom industry, or close to it.
When every statement says "we do not allow governments direct access to servers"...well, what's the logical conclusion? Indirect access, via hardware backdoors, that were leaked and are now widely known to exist. To me, it does feel like there's a wave of 'Blame China' right now, and that maybe Bloomberg is being disingenuous with its reporting on this, if there's even a story to report.
There was an article on HN last week on how Bloomberg pays more to journalists who write stories that "move markets". Seems to be a lot of market moving articles recently. Excuse me while I go back to my corner with my tinfoil hat.
In the end, I really wonder if any of it actually matters. The people suffer because of this magical, invisible money, sure, but only because we let it matter.
Long term, I don't think it matters in the end, because governments will try to prevent any sort of huge collapse (which will happen anyway, but will recover over time).