The China Bubble's Coming -- But Not the One You Think | Hacker News Reader

The China Bubble's Coming -- But Not the One You Think

foreignpolicy.com

38 pointsrfreytag29 comments

One exit few have considered is for the PRC (China) to adopt dollars as their external currency. It would seem to strengthen their faith in the dollar while actually not changing the fact the central government still controls the exchange rate into and (crucially) out of yuan.

No I don't think it is likely as it would seem like an abrogation of national sovereignty. But it would probably work long enough for the PRC to sell a significant number of dollars.

Just thinking outside the bamboo box here.

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This article is full of naive propaganda bits (state-owned roads destroying state-owned schools), but it has one important observation.

China has been keeping its currency pegged to the dollar and lived off US consumption. Now US will not be consuming much for a long time, so China has nowhere to sell their goods to. Unemployment and riots are at hand, it seems.

Of course, that's wrong. China can and will continue growing, but this time the engine of growth will be their own consumer market. Which is huge. There are already more internet users in China than people in the US.

When renminbi will start appreciating vs. other currencies, the population will start feeling richer and will consumer more, import more and borrow more. Today they already have shortages of consumer goods on the mainland, such as cars, even though dozen of producers are struggling to keep up with demand.

China, in other words, is where Japan was in the 60s and early 70s (maker of transistor radios and cheap scooters, export-oriented mostly). And it will go on to become what Japan was in the 80s, only with 1 billion population.

Sorry,

The article is correct in stating that internal consumer demand is not a proportionately large part of China's economy. The two largest, disproportionately largest, sectors of China's economy are real estate and exports.

Further, China's recovery program is not oriented towards increasing the relative size of this sector of the economy but rather, as the article says, increasing the amount of internal capital investment through forced bank loans.

There is no point in arguing with the statements of today's facts. Such statements are also not very interesting, since they are common knowledge. What is interesting, is the dynamics and the direction of the change.

In all emerging market economies that managed to stabilize their currencies and make them appreciate (Latin America in the 90s) this has led to domestic consumer booms and reduction of current accounts surpluses (or running up deficits). China has not gone this route yet, but this is a massive reserve of growth. I am sure their leaders understand this. Of course, to focus on domestic market instead of exports, it represents a major policy change. But fundamentals increasingly point at this scenario, so we may reasonably assume that this is what will eventually happen.

I also do not buy the 'forced loans' concept. Throughout last years of rapid growth Chinese authorities have been in fact imposing artificial caps on domestic credit growth, since they don't have developed domestic debt market, and therefore lack effective tools to sterilize their dollar interventions. Immediately after financial crisis, the Chinese have removed many of those lending restrictions, as part of their 'stimulus'. Now, because of the developing stock market bubble in domestic Chinese stocks, the authorities are bringing the lending restrictions back.

I think the idea of 'forced loans' came from the same area as fables of state-planned road running through schools and kindergartens (but not through villas of state officials). It is so heavily mixed up with ideological propaganda and clichés, that it does not really deserve a serious discussion.

Hmm,

The fact that state imposes cap when it wishes should make it more likely that the state can also impose loan levels when it wishes. Moreover, I have read a number of news items

I think the idea of 'forced loans' came from the same area as fables of state-planned road running through schools and kindergartens

Uh, the point was not about exactly which projects the Chinese state choose to impose but that the Chinese can impose project and solely and only on bureaucratic initiative, even those projects involve considerable hardship on people. A well-known example of this is the Three Gorges Damn - up to a million people are thought to have been displaced by this initiative.

"Why is China doing this? It doesn't have the kind of social safety net one sees in the developed world, so it needs to keep its economy going at any cost. Millions of people have migrated to its cities, and now they're hungry and unemployed. People without food or work tend to riot. To keep that from happening, the government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system stabilizes. It's literally forcing banks to lend -- which will create a huge pile of horrible loans on top of the ones they've originated over the last decade."

There are a lot of news reports that confirm fear of general unrest on the part of the Chinese leadership. Here is a recent New York Times article on the subject:

http://www.nytimes.com/2009/07/18/world/asia/18xinjiang.html

China has a long history of revolution when the rulers "lose the mandate of Heaven." It has happened many times.

http://en.wikipedia.org/wiki/Confucius#Politics

I hope this was a joke. Concepts like a "mandate of Heaven" are completely irrelevant in modern China. Also as a side note, China really hasn't had disproportionately more "revolutions" than any other nation with such a long history.

I did not say China has disproportionately more revolutions.

I'm interested why you believe that modern China will not repeat 4000 years of history. It is not an accident that "history repeats itself" is a well worn phrase. I see no reason why it should not apply to modern China any less than the modern China of 1980's (Deng), 1960's (Cultural Revolution), 1950's (Communists), 1910's (Nationalists), or earlier.

http://en.wikipedia.org/wiki/History_of_China <- tiny sample.

In a twisted way, the US government, via its reckless spending, actually provides a service to foreign governments [1]. By selling an unlimited supply of debt abroad and being a black hole of unlimited consumption at home, the US allows foreign governments to keep their people both busy and poor.

[1] Note that I didn't say a service to foreign people.

So this is why we'd define the US as having a "service economy"?

I can't help but think while reading this that the writer is looking at bubbles from the point of view of someone without a coherent theory to explain the origin of bubbles and why busts happen. The Chinese economy has been based on saving and investment not inflation and malinvestment like the United States has been for the better part of almost 20 years now.

The Chinese economy will suffer as a result of the business cycle in the United States but they've resisted calls to borrow and spend recklessly as those in Washington would have them do. The notion that bubbles are caused by growth on its own is a terribly flawed notion. Even the Federal Reserve admits that their own loose monetary policy contributed to our present woes.

The Chinese for now are committed to the dollar but when they aren't that spells bad news for us and good news for them. When they realize that they can spend that money at home on the goods they make at home I feel like the party is going to be over for the United States. We're seeing the beginning of the end of the American empire now and the ascent of China and for now at least the ascent of China is based on sound fiscal policy just as the United States during its formative years was.

I see a good but maybe rocky future for China in the short term and a good future for China in the medium and long term.

Bubbles are driven by poor investments. Which is obvious in the dot com days, but you see the same thing with other bubbles. EX: The real source of the US housing bubble was people buying up all those overvalued loans which let banks make even more of them. Which drives people to build and buy more houses than people actually need.

The problem with bubbles is the economy recovers to a more efficient system where the greatist fool is now broke, which is less comfortable than the mid bubble / pre burst days. China like Japan is going to over invest in infrastructure / housing and have the same issues.

There's one fundamental difference between China and Japan: Japan doesn't have more land upon which to build, which is what drove much of their housing craze (even our hottest markets were never even close to the Japan bubble)

China is much closer to the US when it comes to infrastructure: they need a lot for such a big country. Whether they spend it wisely will be the issue.

Population density is the number one factor for infrastructure. Witness the US cell phone industry compared to Japan.

China's population density is far higher in key regions: http://www.demographia.com/db-intlua-area2000.htm

That was more than three years ago - it will be slightly lower in Japan now, and higher in those Chinese regions.

> There's one fundamental difference between China and Japan

Another that people seem to keep forgetting is that the Japanese people are largely a single people and had something approaching a functional parliamentary system during their rise. The Chinese are trying to maintain centralised planning for the largest show on earth, and their social systems are unhealthy.

From afar it may seem like central planning is the name of the game in China. On the ground, its highly regional; whith districts inside regions doing their own thing. There are high level "mandates" of sorts and a few central programs that reach deep but its hard for any program to keep control for any length of time. Mostly China is regionally run and managed.

The Chinese economy has been based on saving and investment not inflation and malinvestment

The article says, and gives examples, that China has been malinvesting for quite a while, a fact confirmed by other observers,

http://www.rgemonitor.com/asia-monitor/257180/chinas_present...

and that current international conditions basically force China to "invest" thoughtlessly for domestic political reasons, in disregard of economic reality.

This article is quite a bit short of right. China doesn't need to dump US $ to stimulate internal demand. They do have to convert some into yuan to buy things that absolutely positively can only be traded in yuan. But a whole lot of other things can be purchased in dollars. This does depress the prices of dollars with respect to oil or steel or what ever is being bought but that's not nearly as inflationary as dumping the dollar for the yuan or some other currency.

Further more, if it weren't for the US, China would already be running a net deficit. That's how strong and big the internal demand is in China. That doesn't mean their economy can't overheat, but it does mean that even in a recession they would still be a BIG consumer.

And lastly China is successfully and very slowly reducing it's US dollar exposure.

successfully and very slowly

I think the author's point is that very slowly may not be successfully in current conditions.

"And lastly China is successfully and very slowly reducing it's US dollar exposure."

Disagreed - as the article and in other analysis points out, China has over 2 trillion in US dollars -slowly reducing or not adding to this huge pile of US dollars will have little impact on the near to mid term situation. China has alluded to reducing their treasury holdings but have not done anything thus far, IMO, it is just a leveraging tactic for negotiations - China must keep the yuan down in order to subsidize its exports without which they do not have much else driving their economy.

`And lastly China is successfully and very slowly reducing it's US dollar exposure.`

What's the basis for this claim? How are they doing it?

Excellent point.

If "slowly reducing its dollar exposure" means selling dollars in the morning and buying more in the afternoon, then it might be true but ...

"They also cannot force corporations and consumers to spend. Since China isn't a democracy, it doesn't suffer these problems."

This article is full of stupid statements like the above. A democracy can do whatever the voters tell it to do, including telling banks to make loans or not make them, including dissolving corporate structures, including redefining corporate person-hood. There are _some_ limits imposed by the constitution, but even those can be dealt with.

China may or may not have economic failure on the scale the U.S. is dealing with. At the moment its really hard to say. This article contains little to prove the author's thesis.

Here is an outside the bamboo box idea - PRC (China) adopts the dollar for its external currency while keeping the yuan. This allows them to appear to support the dollar while retaining control over the flow of (yuan) currency in and, crucially, out of the country. They might be able to sell T-bills in this environment.

Won't happen of course as it would be perceived as a loss of sovereign power but remains an interesting speculation.

Sorry but this is not a new idea but close what China did for twenty years. For most of the PRC's history, Chinese currency was usable only in China with exchange rates closely controlled. Even today the currency is not fully convertible. Starting in the nineties, this situation worked well for them until things got so unbalanced that we have ... well, the situation that we have today.

I believe you missed my point which was that people do not speculate that the Renminbi might be replaced by the US dollar. And that this might happen because it would retain the currency controls presently afforded by the yuan being distinct from the external currency (RMB).

That -is- new, but unlikely for the reason I gave.

Nitpick:

Since China isn't a democracy, it doesn't suffer these problems.

Liberty and democracy aren't the same thing. If anything, a more democratic country would be more able to coerce banks in (something resembling) the public interest than a country with a more aggressively limited government.

"put simply, mean reversion is a bitch"

Sometimes someone says something so asinine that it saves you the trouble of having to consider their other arguments. Assuming a Gaussian where none exists is a pretty amusing mistake to make considering the events of the past couple of years.

Distributions can have means without being Gaussian distributions.

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