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[Dalek]

How China Fell Off the Miracle Path

FOR years now, Donald J. Trump has been sounding the alarm on China, calling it an economic bully that has been “eating our lunch.” The crux of Mr. Trump’s attack is that Beijing manipulates its currency to keep it cheap and give Chinese exports an unfair advantage. But that narrative is so last decade. China is now a threat to the United States not because it is strong but because it is fragile.

Four key forces have been shaping the rise and fall of nations since the 2008 financial crisis, and none of them bode well for China. Debts have risen dangerously fast in the emerging world, especially in China. Trade growth has collapsed everywhere, a sharp blow to leading exporters, again led by China. Many countries are reverting to autocratic rule in an effort to fight the global slowdown, none more self-destructively than China. And, for reasons unrelated to the 2008 collapse, growth in the world’s working-age population is slowing, and turned negative last year in China, depleting the work force.

It will be difficult for any country to grow as rapidly as 6 percent, and all but impossible for China. Nevertheless, in an effort to exceed that target, Beijing is pumping debt into wasteful projects, and digging itself into a hole. The economy is now slowing and will decelerate further when the country is forced to reduce its debt burden, as inevitably it will be. The next step could be a deeper slowdown or even a financial crisis, which will have global repercussions because seven years of heavy stimulus have turned the world’s second largest economy into a bloated giant.

In Beijing, confidence has given way to a case of nerves. Local residents often sense trouble coming before foreign investors and are the first to flee before a crisis. Chinese moved a record $675 billion out of the country in 2015, some of it for purchases of foreign real estate. If China were eating America’s lunch, its people would not be rushing to buy safe-haven apartments in New York or San Francisco. Far from conspiring to cheapen its currency, as Mr. Trump charges, Beijing is struggling to keep the weakening renminbi from falling more, which would further erode local confidence and make a crisis more likely.

Try as the Chinese authorities might to steer the money into industry, they could never fully commit to stopping shadow banks from financing an increasingly questionable array of borrowers speculating in real estate. When I visited Shanghai in August 2010, I was stunned to see apartment blocks rising two to three rows deep all along the 110-mile route to Hangzhou. Many of the biggest debtors are front companies set up by local governments to evade national regulators. Small cities are borrowing to build futuristic museums, aquatic centers and apartment blocks that exceed local demand and are often as empty as ghost towns.

My research shows that during the 30 worst debt manias of the past 50 years, private debt — which in China is often held by local governments — rose over five years by at least 40 percentage points as a share of gross domestic product. In all 30 cases, the economy slowed sharply, typically by more than half, in the next five years.

Much more at the link...seems like all these people moving their money to "safe-haven" apartments is telling and shady as hell.

 

[kirblar]

China's been in a gigantic self-created bubble for years. They can only hold back the dam by building useless dams so long.

 

[Timbuktu]

I thought that's known for a while now. The world need to find another engine to drive global growth because China isn't going to keep it up.

 

[TheMan]

remember back in the late 80s when everyone thought we'd be speaking japanese by now or some shit? These bubbles, they pop.

 

[snacknuts]

I thought that's known for a while now. The world need to find another engine to drive global growth because China isn't going to keep it up.

To India!

 

[LUFTRAUSER]

When the China Bubble bursts it will be something spectacular. Still I hope it doesn't happen all at once because it will probably cause a global economic crisis.

 

[kirblar]

When the China Bubble bursts it will be something spectacular. Still I hope it doesn't happen all at once because it will probably cause a global economic crisis.

I think they've had to manually intervene twice in markets so far to stop a crash from happening.

This is the big reason you see all the Chinese buying land in Canada and such- they want their funds OUT of the country when the bust happens.

 

[afternoon delight]

To India!

More funny than it really deserves to be. :/

 

[LUFTRAUSER]

I think they've had to manually intervene twice in markets so far to stop a crash from happening.

This is the big reason you see all the Chinese buying land in Canada and such- they want their funds OUT of the country when the bust happens.

Pretty much! It's not looking too good for the Communist Party right now. There's only so much autocratic technocrats can accomplish.

 

[Suikoguy]

Using stimulus spending to try maintain that high of a GDP Growth is so damn stupid.
Putting that stimulus money into useless projects is even dumber.

Meanwhile, the US is on the other polar end of the spectrum, where we have a ton of infrastructure that needs replacement or updating, that would not be useless spending.

 

[Piecake]

I thought this was a good article about the increasing worrying nature of China's shadow banks

he risk of a default chain reaction is looming over the $3.6 trillion market for wealth management products in China.

WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other. Such holdings may have swelled to as much as 2.6 trillion yuan ($396 billion) last year, based on estimates from Autonomous Research this month.

The trend has China watchers worried. For starters, it means that bad investments by one WMP could infect others, causing a loss of confidence in products that play an important role in bank funding. It also suggests WMPs are struggling to find enough good assets to meet their return targets. In the event of widespread losses, cross-ownership will create more uncertainty over who’s vulnerable -- a key source of panic in 2008 when soured U.S. mortgage securities triggered a global financial crisis.

“There’s abundant liquidity in the financial system, but a scarcity of high-yielding assets to invest in,” said Harrison Hu, the chief Greater China economist at Royal Bank of Scotland Plc in Singapore. “All the risks are accumulating in an overcrowded financial system.”

“We’re starting to see layers of liabilities built upon the same underlying assets, much like we did with subprime asset-backed securities, collateralized debt obligations, and CDOs-squared in the U.S.,” Charlene Chu, a partner at Autonomous who rose to prominence in her former role at Fitch Ratings by warning of the risks of bad debt in China, said in an interview on May 17.


“My concern is that bond defaults might trigger some losses that will lead to WMP impairments or WMP investors being unwilling or unable to roll over the funding, which then leads the bank to take some of these assets back onto the balance sheet,” said Matthew Phan, credit analyst at CreditSights in Singapore. “If this happens in a large scale, it could cause some issues, given the mismatch between the duration of the WMPs and the bonds.”

http://www.bloomberg.com/news/artic...n-reaction-threatens-products-worth-35-of-gdp

Bloomberg seems to be very pessimistic about China, so that is something to keep in mind, but this is still pretty worrying.

 

[AxeMan]

In my city here in Australia it's Chinese buying up most of the available land for homes. At auctions they just outbid everyone

 

[DedValve]

To India!

Perfect. Africa needs just a bit more time before harvest. India will be this cycles sacrifice.

 

[Z3K]

I think they've had to manually intervene twice in markets so far to stop a crash from happening.

This is the big reason you see all the Chinese buying land in Canada and such- they want their funds OUT of the country when the bust happens.

It's actually very scary to think about China's economy crashing as it will signal the start of very dark times for the world.

 

[LJ11]

I thought this was a good article about the increasing worrying nature of China's shadow banks





http://www.bloomberg.com/news/artic...n-reaction-threatens-products-worth-35-of-gdp

Bloomberg seems to be very pessimistic about China, so that is something to keep in mind, but this is still pretty worrying.

I'm going to recommend a book, Red Capitalism. It's not very well written, some Bankers can't write, but it really digs deep into the financial machinations of the Banks. Really worth checking out, you'll see how their bad bank spin offs at the start of the decade just went back on to the good banks books by the end of the decade. Its an older book, about 6 years old but they wrote about all the off balance sheet junk earlier than most.

 

[Snwaters]

It's not just Bloomberg that is pessimistic about China; I've been seeing more and more reports like this over the past few years. Pretty much all saying a similar tune; that the Chinese miracle is turning into a nightmare.

The real worry is not just about the economic implications, but sociology-political ones as well. The CCP (Chinese Communist Party) gets much of its legitimacy from economic prosperity. One should not underestimate the importance Deng and his Moderates had on restoring the Chinese people's faith in the government after Mao. In addition, there was the CCP's propaganda that they were the only thing keeping China from going the route of other post-Communist countries. This was not difficult, as after the fall of the Soviet Union, many former communist states fell into chaos. It was easy to want to remain under CCP rule. After all, the economy was booming.

But when the bubble bursts (at this point, it seems to be not a matter of if, but when and how severe), the thing that saved the CCP after Mao and gave it much legitimacy will be gone. In which case; what comes after?

Looking at fat cats like Xi Jinping, who try to increase their power all the time, will not give it up by any stretch of the means. Any attempt at outside reform (reform done outside the Party) will likely be met with military force, ala Tiananmin Square, but probably on a much broader scale.

No wonder many Chinese with the means are looking for a way out while the money is still there and the system still in place. What's that old term about a certain animal fleeing ships?

I hope this is all doom and gloom, but as time goes on this looks less like a Chicken Little situation, and more like certain individuals pointing out the 2007-08 Crash back in 2004-05.

 

[Nikodemos]

Well lately they've been trying to rattle the saber and wave the flag, except it doesn't work that well, since a) the more they do it, the more headway the Americans make into the other SEA countries; b) the US love to call off Chinese bluffs.

 

[Fuchsdh]

To India!

Certainly Apple is already pivoting to India, not expecting their growth to come from China anymore.

It is pretty weird since I wasn't old enough to be around for the Japanese stuff but the 2008 and 2012 election had tons of Chinese doom and gloom.

And yeah, Chinese authoritarian rule is pretty much predicated on economic prosperity. What happens if the economy seriously tanks is nothing good.

 

[TheLaughingStock]

In Beijing, confidence has given way to a case of nerves. Local residents often sense trouble coming before foreign investors and are the first to flee before a crisis. Chinese moved a record $675 billion out of the country in 2015, some of it for purchases of foreign real estate. If China were eating America’s lunch, its people would not be rushing to buy safe-haven apartments in New York or San Francisco. Far from conspiring to cheapen its currency, as Mr. Trump charges, Beijing is struggling to keep the weakening renminbi from falling more, which would further erode local confidence and make a crisis more likely.

Why would the US gov't and the Chinese allow the locals to exchange renminbi for US dollars and clear these transactions for housing?

 

[Dennis]

First Japan was supposed to take over the world then they faltered.

Then China was supposed to take over the world and now they are faltering.

India? Brasil?

 

[LJ11]

Why would the US gov't and the Chinese allow the locals to exchange renminbi for US dollars and clear these transactions for housing?

They don't, but wealthy Chinese find ways to get around the barriers.

Edit:^ There are a lot of similarities between the Japanese and Chinese models, no shock that China may be going down the same road.

 

[Quixzlizx]

First Japan was supposed to take over the world then they faltered.

Then China was supposed to take over the world and now they are faltering.

India? Brasil?

From what I've read, Brazil isn't currently zooming up the charts.

 

[Fuchsdh]

From what I've read, Brazil isn't currently zooming up the charts.

BRIC countries in general are doing pretty badly. Not like Russia is some oasis of stability.

 

[LJ11]

Brazil went through a similar boom bust during the 70-80s.

 

[Piecake]

I'm going to recommend a book, Red Capitalism. It's not very well written, some Bankers can't write, but it really digs deep into the financial machinations of the Banks. Really worth checking out, you'll see how their bad bank spin offs at the start of the decade just went back on to the good banks books by the end of the decade. Its an older book, about 6 years old but they wrote about all the off balance sheet junk earlier than most.

Interesting, Ill put it on my list.

First Japan was supposed to take over the world then they faltered.

Then China was supposed to take over the world and now they are faltering.

India? Brasil?

Definitely not Brasil. They stumbled into a big pile of smelly corruption and economic depression that is going to take a while for them to get back on track

 

[Manmademan]

First Japan was supposed to take over the world then they faltered.

Then China was supposed to take over the world and now they are faltering.

India? Brasil?

we're literally right in the middle of the the "Brasil is booming- oh no brazil is a dumpster fire" narrative

 

[Snwaters]

First Japan was supposed to take over the world then they faltered.

Then China was supposed to take over the world and now they are faltering.

India? Brasil?

From how things are going and how it's being portrayed, I'd guess the next "Great Threat" will be Islam.

Also, It'll be 'interesting' to see what a post CCP China will look like. I say interesting in quotes because the CCP will not give up power without a fight. Again, like Tianinmin Square, but Tianinmin Square was fairly contained to Beijing only; the other cities and countryside didn't really get on the revolution bandwagon. This scenario the would. The conflict would be much more widespread.

Would China remain united, or would we see a return to several smaller states based on region?

 

[Ether_Snake]

In my city here in Australia it's Chinese buying up most of the available land for homes. At auctions they just outbid everyone

The thing about this is, rich Chinese are buying those foreign assets as safe-havens for their money, but imagine a scenario where China's economy goes into a crisis; presumably those folks would lose a lot of money as far as their share of wealth that is still in China would be concerned. But then ask yourself, the assets that they purchased abroad, what do they do with them? Either they would start liquidating them to make up for their losses in China and get some money to deal with their situation there, or they would pretty much just give up on their Chinese assets and live off from the foreign assets, but the later is not even slightly feasible when you think about the various implications.

So that means if China tanks, two things happen:

1- The Chinese who stored money abroad by buying foreign assets will be in need of liquidity. The Chinese government would be really stupid to not let that money come back in China, so they would probably facilitate this, but obviously people will be hesitant to bring the money back in, so that money could just end up in foreign bank accounts. But then why not just leave it in the assets themselves? Because...

2- If China tanks, you can bet those foreign assets will also start losing value. Chances are those Chinese will liquidate the assets and buy gold or whatever's said to be the must-buy asset in that situation. In that scenario, foreign governments would try to accommodate those Chinese "investors", preferably to have them leave China and migrate permanently to wherever their assets are, reducing the speed at which their assets' values would fall, which would be less a result of liquidation and only of China being in a crisis affecting global demand, rather than both.

Whatever happens, it will have a domino effect on real-estate prices. Their shares of the market aren't that big, but enough to bring the bubble down slightly, which itself would trigger losses that couldn't be handled by all of those who got a mortgage thanks to Bank of Mom, and probably a whole lot of other folks too.

edit: If the CCP falls, the army takes over, and will call the shots for as long as there is a chance that the country might split.

 

[Tal Shiar Agent]

Certainly Apple is already pivoting to India, not expecting their growth to come from China anymore.

It is pretty weird since I wasn't old enough to be around for the Japanese stuff but the 2008 and 2012 election had tons of Chinese doom and gloom.

And yeah, Chinese authoritarian rule is pretty much predicated on economic prosperity. What happens if the economy seriously tanks is nothing good.

The Kuomingtang retakes the mainland.

 

[jellies_two]

Chinese with means are not just salting their money away in overseas enclaves they are also obtaining passports through whatever means: family members sent to study abroad then gain residency, and bring over relatives in future using family immigration rules, significant investor passports whatever it takes.
So if China goes to hell the 0.1% will simply leave. It doesn't matter that their overseas property has tanked it's better to have 50%'of a large amount of money than nothing plus the long knives out back at home.

 

[sphagnum]

The Kuomingtang retakes the mainland.

There is no chance on Earth that Taiwan could reconquer China.

What I'd be interested in seeing is, supposing the Chinese economy does tank soon, whether the Bo Xilai types come back screaming "See! I told you we should've stuck with Maoism!" and what the repercussions of that would be.

 

[TheLaughingStock]

They don't, but wealthy Chinese find ways to get around the barriers.

Edit:^ There are a lot of similarities between the Japanese and Chinese models, no shock that China may be going down the same road.

I don't think it's smart for banks in the US and China to be shifting ownership of assets like this. You definitely don't want too many foreign claims on production creating headaches for the locals in the US who want to purchase housing or cause stability issues in a country where private debt to GDP is too high. And China is a top flight economy to boot.

 

[F!ReW!Re]

So I've never had much an interest in economics and my general understanding of it and financial markets is basic at best.

But how much would such an inevitable collapse impact the Chinese currency? Since I'm currently working in China till about November (when I'm moving to Australia), it would be nice if my savings don't suddenly decrease drastically in worth

Although articles and people seem to suggest the collapse is a bit farther into the future than say a couple of months....

 

[LUFTRAUSER]

There is no chance on Earth that Taiwan could reconquer China.

What I'd be interested in seeing is, supposing the Chinese economy does tank soon, whether the Bo Xilai types come back screaming "See! I told you we should've stuck with Maoism!" and what the repercussions of that would be.

Somehow I doubt that will happen.

 

[Cerium]

Here's hoping that when they do crash they at least get a Democracy out of it.

 

[B-Dubs]

So I've never had much an interest in economics and my general understanding of it and financial markets is basic at best.

But how much would such an inevitable collapse impact the Chinese currency? Since I'm currently working in China till about November (when I'm moving to Australia), it would be nice if my savings don't suddenly decrease drastically in worth

Although articles and people seem to suggest the collapse is a bit farther into the future than say a couple of months....

The currency would be fucked. It is a lot further off though. If you can I would definitely turn those savings into USD.

 

[Ether_Snake]

There is no chance on Earth that Taiwan could reconquer China.

What I'd be interested in seeing is, supposing the Chinese economy does tank soon, whether the Bo Xilai types come back screaming "See! I told you we should've stuck with Maoism!" and what the repercussions of that would be.

Not gonna happen.

 

[Snwaters]

edit: If the CCP falls, the army takes over, and will call the shots for as long as there is a chance that the country might split.

Will the Chinese people go for that though? Authoritarian rule is accepted as long as the economy keeps booming. Plus, who is to say the military will be united? The CCP, and by proxy, the PLA, is broken into local Cadres. When things go south, couldn't we see the rise of local warlords at that point? It happened after the Qing dynasty fell, though was overtaken by the KMT and later the CCP.

If there is a split, you can bet it will start with divisions between Beijing and Shanghai. As I understand it, much of Party politics in China are what they are due to balancing those two dominant (and different) interests.

 

[Laekon]

I bring this up often but I think TPP could have a big negative effect on China. If import duties on things like clothing get removed all of sudden a shirt from Vietnam is 30% cheaper to import then one from China. Since a lot of the countries that will benefit from TPP are in the South China Sea it could really escalate military tension.

 

[AbortedWalrusFetus]

Wouldn't decreasing reliance on Chinese exports and increasing investment in domestic markets help offset that? I guess the challenge is you lose China as a potential buyer of US exports, but if US manufacturing as a whole becomes more efficient and cheaper, or considered luxury/premium goods it may increase available foreign markets for US exports. Either way I still fail to see how a protectionist shift for US manufacturing makes things worse for the US if China declines.

 

[farmerboy]

Debt debt everywhere. China in debt. America in debt. Australia in debt.

A financial collapse will happen. All measures taken so far only amount to "kicking the can down the road".

When this collapse occurs, and if it's China first, it's going to be huge and almost no one will be spared. The GFC was just a taste.

 

[Aztechnology]

I remember Vice did a pretty interesting piece on this a couple of years back. Mainly focusing on their self inflated growth. This was a great extrapolation on that piece for me. Thanks OP.

 

[Mumei]

There was an interesting piece on The Atlantic recently about China's demographic trends (specifically the challenges presented by an aging population), and one thing jumps out:

Recent events may well provide a preview of this reality. When Xi Jinping announced last year that he was slashing China’s armed forces by 300,000 troops, Beijing spun the news as proof of China’s peaceful intentions. Demographics provide a more compelling explanation. With the number of working-age Chinese men already declining—China’s working-age population shrank by 4.87 million people last year—labor is in short supply. As wages go up, maintaining the world’s largest standing army is becoming prohibitively expensive. Nor is the situation likely to improve: After wages, rising pension costs are the second-biggest cause of increased military spending.

 

[Quixzlizx]

Wouldn't decreasing reliance on Chinese exports and increasing investment in domestic markets help offset that? I guess the challenge is you lose China as a potential buyer of US exports, but if US manufacturing as a whole becomes more efficient and cheaper, or considered luxury/premium goods it may increase available foreign markets for US exports. Either way I still fail to see how a protectionist shift for US manufacturing makes things worse for the US if China declines.

Or we could just sign the TTP.

 

[Dalek]

There was an interesting piece on The Atlantic recently about China's demographic trends (specifically the challenges presented by an aging population), and one thing jumps out:

Holy shit. How can that be?

 

[LUFTRAUSER]

Holy shit. How can that be?

The One Child Policy. Turns out it was kind of a mistake.

 

[sphagnum]

Holy shit. How can that be?

One child policy + gender imbalance.

 

[AbortedWalrusFetus]

Or we could just sign the TTP.

Signing TTP does nothing to promote domestic US growth due to internal demand, and it does nothing to reduce Chinese investment in US securities and probably does little to increase US export potentials. It would hurt China's ability to export, but wouldn't do anything to change trade deficits for the US.

 

[Quixzlizx]

Signing TTP does nothing to promote domestic US growth due to internal demand, and it does nothing to reduce Chinese investment in US securities and probably does little to increase US export potentials. It would hurt China's ability to export, but wouldn't do anything to change trade deficits for the US.

How does protectionism increase internal demand? The last time the world tried that, we caused the Great Depression.

Why is Chinese purchases of US securities a bad thing?

Why do you think a free trade deal with advanced economies like Japan and South Korea won't increase US export potential?

 

[kess]

The One Child Policy. Turns out it was kind of a mistake.

The Chinese fertility rate is 1.6 and has been tending upwards for the last fifteen years. That's about the same as Canada and more than most of Western Europe.