May 222015
 
 May 22, 2015  Posted by at 3:13 pm Finance Tagged with: , , , , , , , ,
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NPC Dedication of Francis Asbury statue, Washington, DC 1924

The present Chinese leadership appears to be trying to gain (regain?) more -if not full- control over the country’s economic system, while at the same time (re-)boosting the growth it has lost in recent years.

President Xi Jinping, prime minister Li Keqiang and all of their subservient leaders – there are 1000’s of those in a 1.4 billion citizens country- apparently think this can be done. Yours truly doubts it.

As I’ve repeatedly said over the past years, I don’t think that they ever understood what would happen if they opened up the country to a more free-market, capitalist structure. That doing so would automatically reduce their political power, since a free market, in whatever shape and form, does not rhyme with the kind of control which the Communist Party has been used to for decades, and which the current leaders have grown up taking for granted.

I don’t think they’re fools or anything, just that their -preconceived- ideas of power don’t rhyme with the kind of economy Beijing, starting with Deng Xiao Ping, has created. In particular, they have allowed other segments of society to accumulate great wealth, and with wealth comes power.

And in fine Pandora’s Box fashion, it’s very hard, if not impossible, to reverse the process. This failure to grasp to what extent these ‘market liberation’ policies have had a Sorcerer’s Apprentice effect, may, if not must, lead to utter chaos and worse…

A closely related failure is that the rulers have allowed the shadow banking system to grow to ginormous proportions. Likely, in their eyes this ‘merely’ helped the economy grow at double digit speed for years, and they could stop it at will. But something else was growing along with it: the power of the shadow banks -and the people behind them-, both economic and political. Which is not acceptable in a one party rules all system.

And so there is a crackdown going on, presented as ‘reform’, and shadow bank loans have indeed diminished. But that is hurting the economy much more than it heals it. And so measures are reversed on the fly.

The official line is that China has to become a more consumer based economy, if only because exports are not what they used to be, due to lower living standards in the major customer economies in the western world.

The first part of the private citizens’ segment of this shift was the housing boom. Though the Chinese are traditionally strong savers, certainly compared to for instance Americans, they did borrow a lot, got into debt, to fund their real estate purchases. The first part of the problem is that not exactly all of that was borrowed from ‘official’ banks. The second is that home prices are now falling in most cities.

The Chinese are not only known as savers, they’re also notorious gamblers. That accounts for a substantial part of the housing boom, but it accounts even more for what came when that boom started fainting: stock market insanity. A craze that was fully encouraged by Beijing. As Bloomberg put it the other day:

[..] government officials and state media have encouraged the rally. China’s official Xinhua News Agency reported last week that the advance in stocks has further to go, while the China Securities Regulatory Commission has said that market gains reflect support for the economy.

Private investors, grandmas and teenage granddaughters, still believe Beijing controls the whole game. They undoubtedly must also think Xi and Li will make the housing sector rise from its ashes. This is a huge risk for the Communist Party. But they must have the illusion that they got it down. Government and citizens all believe.

The past few days have seen 2 notable companies, Hanergy Thin Film Solar and real estate/electronics conglomerate Goldin Group, lose about half their market cap within a day, for a total loss of some $50 billion. In Hanergy’s case, it reportedly took less than half an hour. And yesterday, Joyou, a Chinese branch of German bathroom giant Grohe, went straight from $400 million to just about zero.

It looks like all Beijing has left in its arsenal is extend and pretend. The question is, does it have the gunpowder to do that? While tons of people habitually point to Beijing’s $4 trillion sovereign bonds stock, they may not be a cure-all.

The same people might want to consider to what extent the Chinese growth ‘miracle’ has been funded by debt. By the printing press. And while they’re at it, they may want to ponder what’s going to happen to that debt, now growth has started sputtering.

There seems to be a consensus that Chinese debt is somewhere in the range of $28 trillion, which is almost twice US GDP, and almost three times Chinese GDP. And for all we know the debt may be much higher still. All we really have is official numbers, plus a few ‘indirect’ data. One thing we do know is that Beijing will always make everything look better than it is. Every politician does.

And we know that they have a substantial series of issues to deal with. In fact, there are so many it’s impossible to catch them all in one comprehensive essay. China’s not nearly as simple as Greece. Let’s try a few:

• China’s housing boom is deflating, with prices down up to 6% YoY in many places, though of course for now less severe in major cities like Beijing and Shanghai. As one comment said recently, paraphrased: ‘there are no more buyers, everyone around here already owns property.’

• China is in the grip of a stock mania, with millions who are losing out on their apartment investments trying to make up for their losses with stocks. Many borrow heavily for their ‘profits’ (and not always from official banks). The stock mania is already popping as well. It will probably rise a bit more at times and at places, but exchanges that skyrocket when economies flatline or worse, will be smacked down by fundamentals at some point. That is true on Wall Street and in Europe, and it’s also true in Hong Kong, Shanghai and Shenzhen.

IPO’s are falling out of the deep blue skies like so many frogs, and people seem to think there’s all this pent-up demand for them, but the Hanergy and Goldin examples should serve as huge red lights flashing. And besides: what does pent-up demand mean when people borrow substantial parts of credit used for stock purchases?

When you read that at the Shenzhen exchange, rallies of more than 500% aren’t unusual, and the 103 stocks listed trade at an average 375 times reported earnings, you should know you’re looking at an ordinary slot machine, not an exchange that reflects any underlying real economy.

• Local governments are heavily in debt to the shadow banking system. Their liabilities may well exceed $6 trillion The crack down on the latter does not change that. Beijing has introduced a swap system, where paper can be swapped for bonds of much longer maturity at lower rates, but that leaves the question of who’s going to pay the debt to the shadow system.

Do local governments now need to borrow more from state banks just to pay off their loans to the shadow banking system? Or are the state banks themselves going to pay the debt after the swap? Or is perhaps the PBoC itself going to pay off the shadow banks directly? It looks as if the swap measures, which are pretty absurd in themselves since they encourage more borrowing, do not -or hardly at all- involve the ‘shadow debt’.

• Chinese factory activity is contracting. This is not growth slowing down, this is negative growth. Chinese consumers don’t help to avoid this, because they’re not consuming. They are doing one of three things: pay off housing -margin- debt as prices are falling, go nuts for stocks, or they are saving. No consumer based society is in sight.

• Capital outflow was $159 billion in Q1. This should be a major worry for Beijing. It hurts China’s international financial position. The country’s also stuck in its US dollar peg, and it dare not risk get out because of the potential losses on its Treasurys holdings. It’s all nice and stuff that the IMF considers including the yuan into its SDR basket, but it’s not a one way street to glory, or to the demise of the USD as some would have you think, for that matter.

Meanwhile, China keeps investing billions abroad. Untold billions in Africa. $50 billion in Brazil to damage the Amazon even more, $60 billion in the new Silk Road project.

But where does that money come from? Why is there so little scrutiny of that? Why do we all allow the Chinese to purchase our homes and our land and our industries, and make them all more expensive for ourselves?

Given that $28 trillion debt load, how is this not monopoly money, and why couldn’t we just as easily print that ourselves?

Is this a sign of how great the Chinese economy is, or is it perhaps a sign of how awful our own economies are really doing, and how indebted we are compared to Beijing? Is it because they caused our manufacturing sectors to all but vanish? How and why can a country blow a $28 trillion+ debt bubble in a decade and proceed to use that debt to buy the world? What does that say about that world?

As for China itself, and the losses on homes and stocks that are in the offing, I’ve long been on record stating I can’t see how it will not descent into civil war, and I still don’t. As I said above, Beijing never understood what forces it unleashed when it started ‘freeing’ its market, and from what I can see, it still doesn’t.

Or maybe it has, and got too scared to call a halt to what’s happening. That recent sudden permission for all 1.4 billion Chinese to open 20 stock trading accounts may be an act of desperation, as it came when real estate prices started tanking. But Xi and Li still must know, and fear, what awaits them if and when those stocks and apartments start their descent into hell.

Home Forums Time To Get Real About China

This topic contains 13 replies, has 9 voices, and was last updated by  alan2102 1 year ago.

Viewing 14 posts - 1 through 14 (of 14 total)
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  • #21227

    NPC Dedication of Francis Asbury statue, Washington, DC 1924 The present Chinese leadership appears to be trying to gain (regain?) more -if not full-
    [See the full post at: Time To Get Real About China]

    #21233

    Raleigh
    Participant

    Good article, Ilargi.

    “Now the problem is that local governments borrowed so much the last seven years that, because they rely on land sales for revenue, they could only pay back what they owe as long as property prices were rising. They’re not now, though. In fact, housing prices are falling. It’s gotten bad enough that local governments have actually started buying land from themselves to try to prop up prices and keep revenues coming in. That’s quite literally moving money from your right hand to your left to make it look like you still have money coming in. So it’s not surprising that the central government stepped in and said it would guarantee new local government bonds. But even that wasn’t enough to make banks buy them once they saw how little the bonds would pay.

    So the central bank has tried to get them interested by saying it will let banks use local government bonds as collateral for cheap loans that they then have to re-lend to small businesses.”

    http://www.washingtonpost.com/blogs/wonkblog/wp/2015/05/04/this-is-how-china-is-trying-to-save-its-economy/?wprss=rss_business

    “…local governments have actually started buying land from themselves to try to prop up prices and keep revenues coming in…” quite literally says it all. Debt? What debt? I heard that this was occurring in the real estate market here (heavily Chinese), that when prices started to stall, Chinese realtors bought and sold to each other (or back and forth between numbered companies) in order to keep prices up. Don’t know if it’s true, but it wouldn’t surprise me. Monopoly money, all of it.

    QE, government stimulus – the greatest percentage of the gains went to the wealthy in every single country. The West went in and created China’s manufacturing boom (couldn’t have been done, otherwise, at least not as quickly as it was done), the Chinese elite got wealthy. When the West’s economy crashed, the Chinese elite created our housing booms by using their wealth to buy up our housing. One creates or props up the other in a great big blood-sucking circle.

    Collusion between the world’s central banks? I’m putting my money on “yes”.

    #21234

    jal
    Participant

    There will not be 75% market crash for the money printers because they can do the following.

    “One creates or props up the other in a great big blood-sucking circle.”

    ” Chinese realtors bought and sold to each other (or back and forth between numbered companies) in order to keep prices up. ”

    #21238

    John Day
    Participant

    “Project Bookend” an in depth study by the Bank of England, was a top secret investigation of the implications and consequences to expect if the UK exits the Euro, and likely different scenarios for doing that to minimize blowback. The existence of this research got “accidentally” emailed to The Guardian UK newspaper.
    http://www.theguardian.com/business/2015/may/22/secret-bank-of-england-taskforce-investigates-financial-fallout-brexit?CMP=share_btn_tw

    #21239

    Raleigh
    Participant

    Admin – have a great time this weekend! You are irreplaceable. Your site certainly has given me a voice I didn’t know I had, and I’ve learned a heck of a lot here. Some sites are so polite; the conversation is guarded and barely scratches the surface. But here, it’s like taking a sledge hammer to a wall. At first you hit it softly, the next time a little harder, and then you give yourself permission to pound that sucker. That’s what this site allows – anger (as much as words allow us to convey), frustration, laughter!

    Thank you, Admin. I’d walk through the 30 blocks of squalor (if I lived anywhere close to it) if you ever needed my help. I’m sure we all feel the same. First-class.

    Stucky – you’re a great piece of work too.

    #21243

    phil harris
    Participant

    There was always going to be a ‘reality moment’ (China @ 10% growth p.a. doubles in 7 years; and reducing to 7% just makes it 10 years). Presuming that world resources continue as yet to be available per day to keep the machine they have built alive (and no civil war or USSR-type break-up of politics) then Chinese middle-class will have to figure out how to control their oligarchs. The CP might be their Trades Union? The working class I guess needs a ‘Labour Movement’ to transcend the inevitable divisions on the factory floor and to provide solidarity. What that latter means for the CP I cannot guess.

    Given the break-neck rate of change, as you rightly say, the CP probably did not envisage what they were getting into. (Reminds me of Europe before 1914 thinking that industrial warfare could be managed by existing structures.) If China’s middle class expect a Japanese or for G-sake American prosperity model – and seriously copy into that – then 10 years might seem much too long before time is called on the project.

    Thanks a lot for continuing interest provided by TAE

    #21248

    tor
    Participant

    Hey Raul,

    Read your article on ZH. Great piece. Just to let you know, ZH is an active target of wumao. They will actively shitbomb any anti-China article you post and flood the comment section with bullshit.

    But I especially like your commentary on Chinese asset purchases globally. It’s quite obvious the Chinese are buying global assets with monopoly money and why the FUCK is the entire free world letting this happen????????????

    Good read and concur with much of your analysis. Keep it up.

    #21252

    Re: “flood the comment section with bullshit.”

    How can you tell? All comment sections at ZH are full of it.

    #21261

    V. Arnold
    Participant

    @ Ilargi
    How can you tell? All comment sections at ZH are full of it.
    ~~~~~~~~~~~~~~~~~~
    LOL. Indeed they are…

    #21264

    Professorlocknload
    Participant

    China, Russia, EU, The Middle East, Japan, U.S. et al,,,all have in common State Controlled Economic Systems. All will morph into the same fate, as participation on the part of “market” players progresses from voluntary to mandatory.

    Don’t have health insurance? They’ll force you to purchase it. Don’t want to pay for foreign wars? They will extract the funds from you through taxation. Don’t want to save for retirement? You will be forced to contribute to the MIC and Wall St through Social Security and other taxes. “Click it, or Ticket.” New Deal will be piled upon New Deal in this house-take-all card game.

    “Gulag Archipelago” might make appropriate bedtime reading about now, for the few non believers who would like to at least attempt a front run at all this. Or maybe to help them understand what happened to them on the way home from the polls, as they are shaken down and frisked by their benevolent community “Protect and Serve” paramilitary police force, that they, themselves constructed.

    Humm? There is that word. Force. Expect exponentially increasing abundance of that, as scared little people demand more and more of it to keep themselves “safe” from the hell they perceive as “Other People.” Apologies to Gene-Paul.

    #21285

    alan2102
    Participant

    I could not resist…

    Ilargi:
    “There seems to be a consensus that Chinese debt is somewhere in the range of $28 trillion”

    No, there is no consensus. What there is is a ton of blogs and other platforms all quoting from the same McKinsey study, which came up with that figure. In any case, McKinsey is a reliable firm and is probably right or close to right.

    Ilargi:
    “…which is almost twice US GDP, and almost three times Chinese GDP. And for all we know the debt may be much higher still. All we really have is official numbers, plus a few ‘indirect’ data. One thing we do know is that Beijing will always make everything look better than it is. Every politician does.”

    As I’ve mentioned several times (but apparently I’ve not been heard), a balance sheet which features ONLY liabilities, and fails to mention assets, is no balance sheet at all. Such a thing would be a joke. And yet that is precisely what TAE does every time I turn around — “debt rattle” this and “debt rattle” that. What about an “asset rattle” to impart some balance? In failing to do this, you cartoon-ize your own argument.

    Here we see the other side of the story:
    http://www.forbes.com/sites/jackperkowski/2014/01/21/chinas-debt-how-serious-is-it/
    “China’s net assets exceeded RMB 300 trillion ($49.3 trillion) in 2011, almost three times China’s total indebtedness.”

    $49.3 trillion in assets! And that was in 2011. For all we know the assets may be much higher, since then. We don’t really know. One thing we DO know is that TAE will always make everything look worse than it is. Every neo-Malthusian apocalypse-addict does.

    Ilargi:
    “Chinese consumers [are] not consuming… No consumer based society is in sight.”

    You’ve gotta be kidding! Chinese consumer spending is rising rapidly, almost in hockey-stick form:
    http://www.enterrasolutions.com/media/images/2009/10/6a00d8341c4ebd53ef0120a603d4f7970c-pi.png

    Consumer spending was a modest portion of their total economy for a long time for several reasons, not least that they had other and bigger priorities, e.g. building a great industrial civilization more or less from scratch. This will slowly change. Consumer spending will continue to rise in absolute terms and as a percentage of total economic activity — especially with the aging population.

    Ilargi:
    “Meanwhile, China keeps investing billions abroad.”

    Yes, and this is wise.

    Ilargi:
    “Untold billions in Africa.”

    Yes, VERY wise. Africa is great place for investment. It is where China was, say, 40 years ago. Africa will boom long after China has begun to contract (which is inevitable with the aging population, leveling and decline of population, etc.). Buying Africa today is like buying Apple at 10 bucks a share. We (the U.S.) would be doing the same thing, if we were smart.

    Ilargi:
    “$60 billion in the new Silk Road project.”

    Yes, a GREAT idea which will foster dramatic growth throughout central and south Asia, and the entire Eurasian continent, and will ultimately generate wealth many times its cost. Indeed, the Eurasian land bridge (the new network of high-speed rail lines) is one of the most exciting and promising infrastructure development projects of all time. I am speechless with astonishment that you (seemingly) cannot see this, and portray it instead as some silly waste of money, an expression of profligate spending. Although it is a grossly overused expression, I must say: NOTHING, truly NOTHING, could be further from the truth. You will see the impact of the Eurasian land bridge in as little as 5-10 years. It will be a sight to behold, I promise you. It bodes very well for the future of humanity and its peaceful development.

    Just one quick stat: the volume of freight moved across central Asia is expected to increase by THREE orders of magnitude, from thousands of tons to millions of tons, in just the next 5 years! That’s phenomenal, and it is only the beginning. The (favorable) impact on China’s economy, and the economies of the entire continent, will be profound.

    You should start thinking now about what you’re going to do, i.e. what you’re going to write on your blog, when the world — instead of collapsing, as you have predicted so tenaciously — enters a great economic boom, skyrocketing the living standards of billions of people, and bringing about unprecedented health and well-being. I am not certain that that is going to happen, but it is a distinct possibility, verging on likelihood. I suggest that you focus more clearly on the plight of the U.S., which is unlikely to participate in any such party. The decline-and-fall narrative will resonate here, and reflect the reality here, but not elsewhere, IMO.

    Ilargi:
    “Why do we all allow the Chinese to purchase our homes and our land and our industries, and make them all more expensive for ourselves?”

    Haha! The plaintive cry of the American who Just Doesn’t Get It.

    It is not a matter of us “allowing” them to do anything. They are doing what smart, increasingly-wealthy and forward-looking people DO. It cannot be stopped, short of complete isolation and withdrawal from the world stage.

    THEY ARE WINNING, fair and square. We are not “allowing” them to do something that they have no right to do. They have EVERY right to do as they are doing. They’ve out-smarted us, out-worked us, out-played us. They’ve been winning for many years now, and the pace is accelerating. Their wise investments are paying off, and will continue to pay off for a century, perhaps longer. They’ve been smart; we’ve been stupid. I’ve been saying this for a long time. I will continue to say it for decades to come, and sooner or later you will see that it is correct.

    We pissed-away probably upwards of $100 trillion (all-in cost including opportunity cost) on “defense” and other waste, while they built a great new nation, incredible new cities, stunning new infrastructure, vast industrial capacity, and so on. And now they are buying up our country and will soon outright OWN our asses. Hey, tough toenails for us! What the fuck did we expect? You can’t behave like a lazy fool for 50+ years and then expect everything to be hunky-dory — especially when your neighbor works hard, stays focused, and does the smart thing over the same period.

    They are winning, and they deserve to win.

    Ilargi:
    “How and why can a country blow a $28 trillion+ debt bubble in a decade and proceed to use that debt to buy the world?”

    It is not a bubble if there is a sufficiency on the asset side. You pretend that this was all a matter of monopoly money-printing. But that is false. Their debts are backed by spectacular ASSETS in the form of scores of $trillions worth of modern infrastructure, productive capacity and objects of physical economy. For some reason you choose to ignore this, even though to do so makes a mockery of your analysis.

    Cheers!

    Alan

    #21328

    alan2102
    Participant

    http://english.gov.cn/premier/news/2015/01/21/content_281475042663908.htm
    European analysts confident about the prospects for China’s economy in 2015
    Updated: Jan 21,2015
    European business leaders and analysts are confident about the prospects for China’s economy in 2015.
    “China has a very robust plan and a seamless execution of its economic transformation plan. This was the solid foundation that economic development had been successfully built on during the last 30 years and it will be a solid base for progress in the future,” president of the Swiss-Chinese Chamber of Commerce Kurt Haerri said.
    “Further, it shall be noticed that China — unlike many countries in the West — has a long-term view and is therefore addressing the need for reforms timely and thoroughly,” Haerri added.
    snip
    Nicolas Musy, managing director of the nonprofit organization Swiss Center Shanghai, said that Swiss companies are actually experiencing a faster expansion of their businesses than before. “The reason is that seven percent growth today represents more added GDP than 11 percent growth in 2008″.
    end quote

    …………………………..

    Musy’s point is important. In absolute terms, 7% growth today is like 12-14% growth a decade ago. A large, maturing economy like China’s cannot possibly continue to grow, forever, at breakneck double-digit levels. It MUST slow down. And it is slowing down. This is good, healthy. If it were not slowing down, it would be a sign of an overheated situation, subject to violent correction.

    China will probably settle into a 6-8% annual growth groove for the next decade or two. That rate would give a doubling each 10-12 years. Very healthy, very respectable.

    As usual, the China bears — wringing their hands about China’s growth slowing to 7% — are wrong. Newsflash: 7% is NOT slow in the sense of “too slow”. Not for China. For Myanmar it might be, but not for China. 7% is slowER than before, and it is good.

    The 10-12% growth days were possible, and necessary, for a good long while, to lift hundreds of millions out of poverty, and to generally expand the pie from its tiny starting size. That has now been accomplished, and the economy is beginning to mature. Not to mention the slowing population growth and aging population. With all that comes slower growth, in percentage terms (though still huge in absolute terms). It is all good. China is on a healthy trajectory.

    Looks fine to me:

    http://www.tradingeconomics.com/charts/china-gdp-growth-annual.png?s=cngdpyoy

    #21329

    alan2102
    Participant

    Bill Holter expresses things well:

    Quote

    http://www.jsmineset.com/2015/05/26/china-has-only-one-option/
    “China has built out their infrastructure and even “ghost cities” using credit. Once the credit markets begin to default, they will be left with “stuff”, in place and will last for the next 50 to 100 years. Roads, bridges, buildings, airports, ports, etc., you name it they have already built it. And yes, their stock market will crash, their real estate market is already softening, in reverse and declining. I am not saying it will be all rosy, to the contrary, there will be bankruptcies galore in China… with a caveat. The “government” of China will go through this liquidation phase with the most gold in the world.” end quote

    They will go through this liquidation phase with the most REAL ASSETS in the world, starting with the aforementioned roads, railways, buildings, ports, factories and so forth, and continuing with a massive amount of gold — as Holter points out in this article, a bare minimum of 10,000 tons. (Yet another of their VERY SMART investments.)

    And what will WE (the U.S.) go through this liquidation phase with? Why, with a handful of aging aircraft carriers and ICBMs, that’s what. And crumbling infrastructure. And a massive, unsustainable medical/industrial complex. And drained gold reserves. And an obese and increasingly disabled population. And so forth.

    Nothing that I’ve said should be construed as meaning that all will be smooth sailing for China/BRICs, or for anyone. There is without doubt a crisis ahead, a “liquidation” as Holter put it, or a “reset” as others put it. It will not be pleasant for anyone. Everyone will take a hit, including China. However, my point has been, and remains, that it will NOT signal or initiate the collapse of industrial civilization and Malthusian dieoff. There will be a great moment of reckoning… and then life will go on, better in some places, worse in others. My bet is that it will be better in Eurasia, worse in the states. China and the BRICs will pick themselves up, dust themselves off, and carry on, and they have the REAL ASSETS with which to do so. We, on the other hand…

    #29292

    alan2102
    Participant

    Ilargi:
    “Chinese consumers [are] not consuming… No consumer based society is in sight.”

    http://nextbigfuture.com/2016/07/chinas-middle-class-emerging-as-worlds.html
    China’s middle class emerging as the world’s consumption engine; will be over half of all online shopping by 2018
    Before the late 1990s China barely had a middle class. In 2000, 5 million households made between $11,500 and $43,000 (annual income of 75,000-280,000 yuan) a year in current dollars; today 225 million do. By 2020 the ranks of the Chinese middle class may well outnumber Europeans (50 million more households should become middle class).

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