China's Economic Dead End

Discussion in 'China' started by Daredevil, Dec 24, 2012.

  1. Daredevil

    Daredevil On Vacation! Administrator

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    China's Economic Dead End

    For corporate China, the music has stopped playing. Profits of China's industrial companies in aggregate could fall this year for the first time in more than a decade, threatening job losses that will make the necessary transition to consumer-driven growth difficult to achieve. Firms are struggling under the burden of investment excesses, suddenly high real interest rates and slowing global growth.

    The problem here is government policy. Beijing engineered a spectacular stimulus in the wake of the financial crisis but misguidedly aimed it at investment and exports. Investment as a share of output was already exorbitant at 41% in 2004, yet went up to 46% in 2011. Just to compare, Japan's investment rate peaked at 36% and Korea's at 39% during their boom eras.

    The stimulus, and all that investment in general, may have helped many capital-intensive businesses start projects, but what after that? With so much capital being invested, the marginal unit of investment was probably getting wasted. It made companies inefficient, which explains their losses.

    This marginal unit matters for efficiency and hence growth, but the China bulls won't tell you that. They argue that China's capital stock is low, both relative to output and even more so relative to its huge population. But the amount of capital in China doesn't tell us anything. What matters is the flow of capital, and where it's flowing to.

    The fundamental flaw in China's economy is that it doesn't serve its consumers. The flipside of its high investment rate is low consumption, down to 35% of output in 2011, from 45% a decade ago. This gets economic theory backward: We produce in order to consume and we invest in order to be able to produce more. A country cannot increase its investment relative to output forever.

    Ultimately, China's economic strategy is a dead end because, after a while, such investment becomes unprofitable. A point comes when companies cannot sell the extra products made possible by the extra investment. Their profits slump, as we see in China today.


    If this weren't bad enough, companies have to contend with other adverse changes too. China's massive monetary injection after 2008 produced such a burst of inflation that it made its way into labor markets. Wages have risen 43% since 2009 and unit labor costs in dollar terms 22% since 2007. This has wiped out China's cost advantage in world markets. Plus, the yuan is no longer undervalued against the dollar.

    Besides the vise of excessive investment and rapid wage inflation that have squeezed corporate margins, real interest rates shot up as Beijing tightened starting late 2010, in response to the economy's overheating. The global recovery also floundered and deprived China of the market its investment-led model needs for growth.

    In this environment, private companies have reassessed their need for investment and are likely to slash capital expenditure further. Beijing eased monetary policy a bit in the late summer, but that has helped only large state-owned enterprises—which don't create new jobs—and perhaps contributed to a slight industrial expansion that data this week point to. Capital-goods exports to China from Korea and Taiwan have also picked up pace in the past couple of months.

    However, if Beijing eases financing conditions dramatically to go for state-driven muscle-bound development, as it did in 2009, it still won't help. The government debt burden is much higher than official figures suggest, when you include the hidden liabilities in the state-owned banks. Beijing doesn't have much scope for stimulus before debt becomes excessive.

    Moreover, large capital outflows have undermined bank liquidity, making it harder to use the banks to finance expansion. Activity could perk up in coming quarters if the government pushes more investment, but the prospects for growth further down the line will be undermined even more.

    Those among the China bulls who acknowledge wasteful investment still suggest the consumer will take up the baton, and ensure decent growth. But if companies are to slash investment, consumer incomes will be hurt as unemployment rises and wage growth wanes. That risks a demand deflation spiral, which is sure to increase the debt burden and sharply slow down growth, not to mention stress the financial system.

    So the likely scenario China will see over the next few years is the share of consumption rising, but with overall growth weakening to at most 5% a year, as the investment share falls. A rising share of consumption won't drive strong growth and help China stay close to its previous rates of expansion, as the bulls like to think.

    Such a slowdown may be good for China in the long run as economic policy becomes more rational. If Beijing stops mollycoddling state firms, reforms to ensure that investment is efficient and that the share of household income in output rises, and cuts red tape, growth in China will be on much sounder footing. As for businesses, they will need to reorient themselves toward consumers. Chinese people will welcome higher growth of their incomes and consumption much more than "roads to nowhere."

    But all this will only take place if Beijing reforms in earnest, and loosens controls on interest and exchange rates significantly. That's a big "if" for the Communist Party.

    Diana Choyleva: China's Economic Dead End - WSJ.com
     
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  3. Daredevil

    Daredevil On Vacation! Administrator

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    Corporate China's Black Hole of Debt

    For China bulls, things are starting to look up. The property market has been showing signs of life, and October retail sales, investment, and industrial production have come in above forecasts. A manufacturing index also showed improvement, and exports increased 11.6 percent in October, the fastest pace in five months.

    Yet one figure is going in the wrong direction: China’s corporate debt has risen from 108 percent of the entire economy last year to 122 percent in 2012, its highest level in 15 years, estimates GK Dragonomics, a Beijing-based economic consultancy. That makes China’s corporate sector one of the most debt-laden in the world. “Companies have seen their business slowing down and revenues were not what they had expected. They have bridged the gap by taking on more debt,” says GK Dragonomics Research Director Andrew Batson.

    [​IMG]

    Key industries such as steel, construction machinery, aluminum, and coal are facing overcapacity, squeezed margins, and most alarmingly, debt. “That is dragging down corporate investment, and that matters for the overall economy,” says Louis Kuijs, chief China economist at Royal Bank of Scotland (RBS) in Hong Kong. “I don’t expect the uptick in growth to be very sharp.” He predicts fourth-quarter gross domestic product will rise 7.1 percent, below the average forecast of 7.7 percent in a Bloomberg survey of economists. Kuijs expects most companies to focus more on debt reduction than on building another plant or opening another mine.

    Complicating matters is that many of the heavily indebted companies are state-owned, and the banks that lent to them are state-controlled, too. That means the government may have to pick up the tab if any of these companies is unable to manage its debt. The sudden bankruptcy of a giant state corporation would have political as well as financial consequences. This implicit government guarantee behind a portion of China’s corporate debt means the government’s actual obligations are likely higher than the 49 percent figure estimated by GK Dragonomics. Lump together corporate, public, and household debt, says the research firm, and you get a figure close to 206 percent of GDP.

    One sign of how tough it is for companies is the return of a problem that plagued China in the 1990s: triangular debt. That’s when a manufacturer that hasn’t been paid for its product is unable to pay its suppliers, which in turn struggle to pay their suppliers. By Sept. 30, total accounts receivable—money owed for products already delivered—for China’s industrial companies had reached 8 trillion yuan ($1.3 trillion), up 16.5 percent from September 2011, according to the national statistics bureau. “China has already tipped over the precipice into a very bad debt crisis,” warns Anne Stevenson-Yang, co-founder of J Capital Research, a Beijing-based equities analysis firm.

    The origin of this morass dates back to late 2008, when the country unleashed a massive wave of loans from its state-owned banks to the corporate sector. That stimulus helped Beijing avoid the major unemployment and dire downturn that afflicted much of the world. Hopes were that the surge in loans would be a temporary measure. Instead, China’s banks, trust companies, and other financing operations are on track this year to issue new credit equal to one-third of GDP, the fourth year in a row of such a sizable expansion, according to Fitch Ratings.

    China’s banking assets will have grown by almost $14 trillion between 2008 and 2013 (Fitch includes an estimate of loans issued by the informal banking sector and offshore banks—data not included in Beijing’s official figures). “This is equivalent to replicating the entire U.S. commercial banking sector in just five years,” says Charlene Chu, head of Chinese bank ratings at Fitch, in a Nov. 8 note. “Rising leverage either will swamp borrowers’ ability to repay, or banks’ funding and capital needs will fall short of existing resources.”

    Accounts are appearing in the Chinese press of litigation by companies that haven’t been paid. As of the end of September, a logistics unit of state-owned Anhui-based Maanshan Iron & Steel had filed 23 lawsuits for the recovery of money and goods it was owed, reported the official Xinhua News Agency. Maanshan announced on Oct. 8 that “the logistics company has become insolvent.” Maanshan did not respond to requests for comment.

    In August, state media reported that China’s central bank, as well as various commissions and ministries, had launched an investigation to uncover the scale of corporate indebtedness among state and private companies. “The lurking debt risk, which once hit China in the 1990s, could take a huge toll on the real economy,” warned Xinhua on Oct. 28. At China’s top four listed steel companies, debt as a percentage of equity now averages 80 percent, with anything above 50 percent considered very high, says Helen Lau, senior analyst for metals and mining at UOB Kay Hian (UOBK), a Singapore-based securities company.

    Any turnaround in the corporate sector will involve tackling overcapacity. Lau estimates that the steel industry has 900 million tons of productive capacity, some 200 million tons too much. Yet shuttering the excess production lines may not happen anytime soon. “All the big producers have strong backing from the state banks. That is why they have been adding new capacity. This is not a commercial decision but a political one,” says UOB’s Lau. It’s happening because “the government wants to boost local economies.”

    One likely result: a jump in bad bank loans. Standard & Poor’s (MHP) is predicting that the portion of nonperforming loans will grow from about 2 percent of total bank lending at the end of 2011 to 3 percent by the end of the year. That could rise to 5 percent by yearend 2013, says S&P’s Liao Qiang, director of ratings for financial institutions in the Asia-Pacific region. “The challenge for China,” says GK Dragonomics’ Batson, “is to look for ways to not just mobilize vast amounts of money but to put their money in the right places.”

    Corporate China's Black Hole of Debt - Businessweek
     
  4. G90

    G90 Regular Member

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    :rofl: The jokers have been predicting China collapse for the past 30 years and counting, a broken clock get a VASTLY better forecast record comparing to these hopeless jokers
     
  5. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    The jokers vastly overestimated CCPs willingness to go into debt just to stimulate an unsustainable economy. The end result is worse every year they let it continue, hence the exodus of Chinese elites.
     
  6. roma

    roma NRI in Europe Senior Member

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    whichever the jokers were - more important question is - is there a better economy than chinas' s for te longer term - is indias strategy showing a better long-term prospect ? any other nation's ? brazil 's is better than chinas ? other wise we are merely knocking the best model the world has ----im pro india ...but im also pro accuracy !! - i dont believe in fooling ourselves
     
  7. Daredevil

    Daredevil On Vacation! Administrator

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    Then why the Chinese millionaires and elite who made millions out of China are abandoning with alacrity?. Perhaps they are abandoning sinking ship called China.
     
  8. badguy2000

    badguy2000 Respected Member Senior Member

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    Again appearing is the 2013 version of "the coming collapse of CHina" by Gordon Chang !
     
  9. G90

    G90 Regular Member

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    Guess what? thats because in China, corrpution typically recieve death penalty or other very hush punishment if caught, if I were some dirty rich man who get its wealth through illegal channel, I will also try to get a foreign passport as well, since basically the US or the west, is a heaven for richs, and their law system is basically non-existing for these rich and powerful.

    Whilst, in China, richest guy like Huang Guangyu can be thrown into prison, and top level officials like Cheng Kejie, can get death penalty, whilst Dick Chenery still in his mansion comfortably, and cheaters from Goldman Sachs still force the 99% to cover GS's loss in their failed finanical fraud missions :rofl:

    So, unlike the west, in China, the 1% can also get death penalty, thats why they feel very insecure in China, especially if they have offended the law, the west should learn alot from China.:cool2:
     
  10. cir

    cir Senior Member Senior Member

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    This is so boring。

    Let‘s be clear about this:India’s economy is far likely to collapse than China's。

    Let's also be very clear about this:The US's economy has far higher a possibility of total collapse than China does。

    Let's be absolutely clear about this:Japan's economy has been in a state of collapse for over 20 years and will remain so for the next 20 years。

    Europe?Forget about it。

    China's will be an 8.5 trillion dollar economy this year and 9.75-10 trillion dollars next。
     
  11. hbogyt

    hbogyt Regular Member

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