Is the Chinese Economy About to Fall Off a Cliff?

Rushil51

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Source:- http://www.newyorker.com/news/john-cassidy/chinese-economy-fall-off-cliff


The Conference Board, an international economic-research organization financed by donations from large corporations, is out with a new report claiming that the Chinese economic miracle is over, and that things are about to get sticky for what is now, by some measures, the world's second-largest economy. During the next few years, China probably faces a period of turbulence and uncertainty, as well as the possibility of a serious financial crisis, the report says. And, over the long term, it will have to be content with annual G.D.P. growth of about four per cent—less than half the rate seen in recent decades.

It's not surprising that the Wall Street Journal and other media outlets have picked up on the report. Its conclusions, if they hold up, have important implications for everything from the future of the Chinese Communist Party to the price of oil to the security situation in the Far East. But how plausible are they?


Some things we know for sure. The Chinese economy, after growing at an average annual rate of about ten per cent between 1993 and 2011, is already slowing down. This year, G.D.P. growth is expected to be about seven per cent. By Western standards, that's a very rapid rate of expansion: recent estimates peg the long-term growth potential of the U.S. economy at about 2.5 per cent a year, or even less. The Chinese government, which helped engineer the recent slowdown by restricting the supply of credit (for reasons I'll get to in a moment), would be delighted to see seven per cent growth continue indefinitely. If such a rate could be sustained for the next ten years, the Chinese economy would once again double in size, and it would overtake the U.S. economy as the world's biggest. (In terms of domestic purchasing power, this may already have happened. Earlier this month, the Financial Times, citing data from the International Monetary Fund, reported that China's G.D.P., when it is adjusted for the fact that the prices of many things are considerably lower there, is already slightly bigger than American G.D.P.)

But can Chinese policymakers pull it off? They face two separate challenges. Right now, the task is to slow things down without precipitating a property crash and a banking crisis. After a period in which the amount of credit being extended has grown much faster than G.D.P., and in which property bubbles have emerged in some cities, this won't necessarily be easy. The second challenge is to make the transition from one growth model to another—from expansion fed by the country's resources, and by heavy investment in industry and the recruitment of hundreds of millions of workers from rural areas, to growth that relies more on innovation, increased productivity, and consumer spending. The authors of the Conference Board report, David Hoffman and Andrew Polk, argue that the China optimists have underestimated both of these tasks. "In the short term (i.e., the next two or three years), we have difficulty seeing anything but a rocky and turbulent adjustment," the report says. And it goes on: "The full transition of China's economic growth model is likely to be a long slog as it presents many challenges: political, economic, social, and even cultural."

I find it hard to argue with the first conclusion. The report shows just how reliant China has become on credit growth, particularly on bank loans to property developers and other businesses. "Private sector debt, now at almost 200 percent of GDP and up from 117 percent at the end of 2009, is still accruing at 15 percentage points per year," the authors note. This pace of credit creation is unprecedented for China, and the result has been over-all debt levels that are now "well in excess of the thresholds that have historically triggered financial crises in other countries."

If China were a fully capitalist economy, the outcome would be eminently predictable: a 2008-style "Minsky moment" in which something bad happens, creditors panic, new lending dries up, and a crash ensues. China would join the United States, the United Kingdom, South Korea, Argentina, Mexico, and a long list of other countries that have experienced credit binges that ended badly.

The complicating factor is that China, despite all its reforms, is still a country where the government controls large segments of the economy, including much of the financial sector. If there's a crisis, optimists say, the government will step in and rescue lenders, writing off many of their bad loans. And the fact that people are aware of this will help prevent a crisis in the first place. (When depositors and investors know there's a safety net in place, there's less incentive for a bank run.) "Even if a huge swathe of loans go bad, the consequence is unlikely to be a Lehman-style financial collapse," the editors of The Economist argue in this week's issue. "For that, thank the Chinese regime's vice-like grip on its financial system."


The Conference Board analysts aren't reassured. They argue that, as the rate of economic growth falls and bad debts pile up, there may well be too many stricken lenders for the state to rescue. And, even if the government does step in, the economic consequences will be severe. "While it is difficult to determine with precision when the breakpoint will be reached "¦ a major deleveraging must occur at some point—it cannot be forestalled forever," the report says. "Nor can China grow out of the problem. Anticipated nominal GDP growth comes nowhere close to being able to service the debt that has been accumulated since 2009. Something's got to give."

It shouldn't be very long before we know which side in this debate is right. However, it could be decades before we know whether China has succeeded in adopting a new growth model. The pessimism that runs through the report is based on two questionable assertions: that China has already exhausted much of its potential for "catch-up" growth—the sort that comes from getting a late start in industrializing—and that its Communist government is incapable of introducing productivity-enhancing reforms.

Even after all the progress China has made, it isn't a rich country. According to World Bank data, its per-capita G.D.P. in 2013 was $6,807, which puts it on about the same level as Iraq and South Africa. By comparison, per-capita G.D.P. in the United States was $53,143; in South Korea, it was $25,977. Looking at the experience of South Korea and other "Asian tiger" economies, there is no obvious reason for the rate of economic growth to slow down dramatically at the income level China has reached. Unless, of course, the government puts a wrench in things.

That's what the report says is likely to happen. The Communist regime is so tied up in the current system, it argues, that it won't be able to introduce necessary changes. Rather than dealing with the debt problem, modernizing the tax system to encourage consumption, and promoting competition, the government will stall and stall, "because of the impact reforms would necessarily have on the business interests and financial fortunes of elites and their families across all levels of government in China."

This is a powerful argument: if you run a state-owned bank in a provincial Chinese city and your brother is the biggest real-estate developer in town, you may well be reluctant to refuse him a loan. But the report may push the critique too far. In addition to corrupt local officials, the Chinese Communist Party contains plenty of highly educated technocrats who are devoted to expanding the country's power and influence, and they aren't just sitting on their hands. Credit has been tightened, the value of the currency has been allowed to rise modestly, and a vigorous anti-corruption campaign has been launched. The reforms haven't gone far enough, but they can't be wholly dismissed.

China shouldn't be underestimated. Whatever one thinks of the authoritarian state-capitalism model, its success in building industries from scratch cannot be denied—and I'm not just talking about low-value-added activities, such as manufacturing clothing and assembling electronic devices. In inviting foreign companies to operate in China only if they did so in partnership with local companies, Beijing helped lay a basis for industries that now produce everything from automobiles to electric power to commercial aircraft to high-resolution liquid-crystal displays. These new industries provide plenty of avenues for raising productivity. China is already the world's biggest purchaser of industrial robots, for example, outpacing both Germany and Japan.

Rather than focussing on China's record of success, Hoffman and Polk emphasize over-investment, cronyism, and discrimination against foreign competitors. "Local champion firms now span all sectors, from industrials to consumer to services," the report laments. "They enjoy opaque, non-market competitive advantages that serve to smother the real private sector and its dynamism. In many sectors, these firms have emerged as the chief competitors for MNCs." ("MNCs" stands for "multinational companies," such as General Electric, Monsanto, and Intel, all of which happen to be financial supporters of the Conference Board.)

If you speak to senior executives from some of the big firms that have set up operations in China, they will tell you, off the record, that China's success was built in part on the theft of their intellectual property. If that's true, it's pretty similar to what American textiles manufacturers did to British market leaders during the early nineteenth century. The jackdaw strategy worked for the Americans then, and it has worked for the Chinese over the past twenty years; but it's only part of the story. In addition to bringing in Western expertise, the Chinese invested heavily in infrastructure and education, particularly scientific education. This strategy provided a platform for rapid growth which, once China gets through its current problems, could well prove more durable than the Conference Board report acknowledges. But it's an interesting and provocative study.
 

Hari Sud

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We have been waiting for this event to happen for along time. Somehow it gets postponed. Americans kept sending a huge flow of FDI from 1993 to 2011, almost a trillion dollars worth to China, which built their factories. On top of that the value of Chinese currency Yuan in relation to dollar was artificially kept low, as much as 30 to 40% low, which kept Chinese products cheaper in US. Imports to US went unhindered as cheaper products sold at a medium to high prices ensured huge profits to Walmart, Penny, Target and other stores. As I much as one trillion dollars worth of imports came to US from China every year for the last six years with practically next to nothing American exports to China. Result was huge and huge trade surplus in China's favour. US kept cleverly half of the Chinese merchandise cash in America and allowed half to be taken back to China to build their infrastructure, roads, rails and power plants and above all Chinese military.

The above good life Chinese thought is never going to end. American merchants were happy with higher profits, American Treasury was happy that Chinese were buying $300 billion worth of treasury bonds every year, stock market was happy because remaining cash was sending stocks sky high.

Alas!!! , it is about to end now.

Chinese, have begun to confront America, militarily. Stock market has reached ultimate were in next little while it can go no higher and merchants are feeling the pinch of higher labor cost in China.

Down with China, they cleverly manipulated Americans with promises of confronting Soviet Union (that is what they promised Nixon), Now they are confronting US instead. They have created trouble all over the Asian neighbourhood.

All the above happened in just thirty years. Nothing would have happened if the US were a bit less anti Soviet and less trusting of China.
 

sorcerer

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HSBC: China manufacturing shrank again in January
By Kelly OLSEN
Beijing (AFP) Feb 2, 2015


Chinese factory activity contracted in January for a second straight month, a closely watched private survey showed Monday, a day after the government announced the first official decline in the sector in more than two years.

British banking giant HSBC said its final purchasing managers' index (PMI) reading for January edged up to 49.7, from 49.6 in December.

But the result still showed shrinkage in the manufacturing sector of the world's second-largest economy, a key driver of global growth. PMI readings below 50 point to contraction and anything above suggests growth.

The final number was also slightly worse than the preliminary reading of 49.8, HSBC said.

The index, compiled by information services provider Markit, tracks activity in China's factories and workshops and is a closely watched indicator of the health of the Asian economic giant.

The figure came after an official Chinese survey on Sunday showed manufacturing activity contracting for the first time in more than two years.

China's official PMI for January, released by the National Bureau of Statistics, came in at 49.8 last month, down from 50.1 in December. That was the first official contraction reading for 27 months.

"We think demand in the manufacturing sector remains weak and more aggressive monetary and fiscal easing measures will be needed to prevent another sharp slowdown in growth," Qu Hongbin, HSBC chief economist for China, said in the release announcing the bank's figure.

- Global weakness -

Manufacturing output expanded slightly in January for the first time in three months, HSBC said. While weak demand weighed on growth in new orders both domestically and overseas, the bank described the situation as having "broadly stabilised".

Factory employment also fell for the 15th straight month, HSBC added, though the pace of decline was the slowest in the same period.

"While the PMI readings for January are less downbeat on conditions among small firms, they suggest that momentum has continued to deteriorate among larger firms on the back of softening external demand," Julian Evans-Pritchard, China economist at Capital Economics, wrote in a report.

While growth in the United States, the world's largest economy, has been a relative bright spot -- gross domestic product (GDP) grew 2.4 percent in 2014 for its best result in four years -- other key regions such as Europe and Japan have lagged.

The 18 eurozone economies expanded by a mere 0.2 per cent in the July-September quarter of last year -- the latest figures available -- while Japan, the world's third-largest economy, slipped into recession in the same period.

GDP in China, meanwhile, expanded 7.4 percent in 2014, slower than the 7.7 percent in 2013 and the worst result since the 3.8 percent recorded in 1990.

China's economy has been beset by problems including soft manufacturing, weak exports and falling property prices, though the government has been satisfied so far that the slowdown is under control as employment has remained resilient.

Nevertheless, authorities have taken some steps to put a floor under growth, carrying out limited stimulus measures last year and even cutting benchmark interest rates in November for the first time in more than two years.

"The fall in the official PMI is consistent with our expectations that (first-quarter) growth will likely be weak," economists at Goldman Sachs said in a report.

"As the official PMI is viewed as more important by the government, the likelihood of further loosening measures has increased further."

HSBC: China manufacturing shrank again in January
 

karn

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China’s Monumental Debt Trap—-Why It Will Rock The Global Economy | David Stockman's Contra Corner
ome startling graphs from McKinsey's latest update on the worldwide debt tsunami. If you don't mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.


Source: McKinsey
The implied 2.9X global leverage ratio is daunting in itself. But now would be an excellent time to recall the lessons of Greece because the true implications are far more ominous.

Today's raging crisis in Greece was hidden from view for many years in the run-up to its first EU bailout in 2010 because the denominator of its reported leverage ratio—national income or GDP—–was artificially inflated by the debt fueled boom underway in its economy.

In other words, it was caught in a feedback loop. The more it borrowed to finance government deficit spending and business investment, whether profitable or not, the more its Keynesian macro metrics—-that is, GDP accounts based on spending, not real wealth—-registered a falsely rising level of prosperity and capacity to carry its ballooning debt.

Five years later, of course, the picture is much different. Greece's GDP has now shrunk by more than 25%. The abysmal picture depicted in the graph below explains what really happened. Namely, that the bloated denominator of GDP came crashing back to earth, exposing that Greece's true leverage was dramatically higher than the 100% ratio reported in the years before the crisis.

In economic terms, the graph below simply documents how the false prosperity from Greece's hand-over-fist borrowing binge was purged from the GDP accounts after the debt party came to a halt in 2009. Needless to say, the reason the Greek story is so relevant is that this condition is nearly universal, meaning that the 2.9X leverage ratio for the global economy pictured above is also drastically understated.

Historical Data Chart

The fact is, since 2010 Greece's total debts outstanding have risen only modestly. The reason that the debt-to-GDP ratio shown below has gone parabolic is that Greece's phony boom time GDP has been sharply deflated.

Historical Data Chart

To be sure, today's Keynesian pettifoggers insist these pictures reflect a big policy mistake. Namely, that the consequence of "austerity" policies forced on Greece by the Germans was the evisceration of its "aggregate demand" and therefore an unnecessary intensification of its debt burden. By allegedly causing Greece's GDP to fall, austerity policies forced its leverage ratio to keep rising—-even after a lid was placed on its borrowing.

That contention is not just baloney; its a stark example of the incendiary circular logic by which the Keynesian apparatchiks of the world's governing class and their fellow travelers on Wall Street are pushing the global economy and financial system to the brink of disaster.

Put a ruler from the beginning to the end of the graph above, and you get a doubling of nominal GDP and a 14-year CAGR of 5.5%. That's probably more nominal growth than could reasonably have been expected from the Greek economy at the turn of the century—–given the debilitating inefficiency and corruption of its long standing crony capitalist oligarchy and Athens' devotion to mercantilist waste, bloated state payrolls and unaffordable welfare state pensions, among countless other economic sins.

Accordingly, the huge bulge in reported GDP from 2001-2009—reflecting a 13% annual gain—–did not even remotely reflect sustainable output growth; its was merely the feedback loop of exuberant debt financed spending that had not been earned by new inputs of labor, productivity and entrepreneurial activity.

Accordingly, the big hump of GDP recorded during the pre-crisis boom was phantom GDP; it was not remotely sustainable, and it most surely does not represent "aggregate demand" lost owing to "austerity" policies. Instead, the subsequent deflation merely tracks the permanent evaporation of public and private spending that could not be supported by current production and income.

The truth of the matter is that production and income come first. "Spending" or GDP growth can only exceed production growth when leverage ratios are rising. Indeed, the very concept of "aggregate demand" is nothing more than an academician's word trick. It has no substance beyond the sum of changes in production and changes in leverage.











Consequently, when Keynesian economists jabber about "stimulating" or "recovering" putatively lost "aggregate demand" they are talking about an economic unicorn. Aggregate demand can only be accelerated beyond production by new borrowing, and that can't happen when balance sheets are tapped out.

Needless to say, Greece is only the poster child. The McKinsey numbers above suggest that "peak debt" is becoming a universal condition, and that today's Keynesian central bankers and policy apparatchiks are only pushing on a giant and dangerous global string.

Moreover, bad as this is, its only half the story. Not only do unsustainable debt booms eventually stop, as depicted in Greece GDP accounts above, but they also generate enormous deformations and malinvestments while they are inflating. That is, they cause economic waste in the form of capital investments which are latter written down or abandoned because they do not produce sufficient returns to cover their front-end financing cost; and they also result in the allocation of labor to activities and occupations that disappear when the debt boom ends, generating unemployment and skill redundancy that lowers output and efficiency.

In Greece's case, its debt binge got up a full head of steam at the time of the 2004 Summer Olympics in Athens. I was there that summer and marveled at the skyline of construction cranes, the oppressive din of jackhammers and the bustling constructions sites that were so numerous and expansive that traffic had virtually ground to a halt.

The Greek government spent something like $15 billion on the Olympics, but that was just the tip of the iceberg. With cheap euro denominated debt literally falling from the northern skies of the French and German banking system, there was no end to the commercial construction of hotels, retail, offices and apartments designed to feed on the alleged multiplier effect of the Olympics and the belief that they were a catalyst for permanent growth.

Below is an epigrammatic picture of the 2004 Olympics boom today. In a narrow sense, the whole boom was a debt fueled national vanity project that is not atypical of these promotional event schemes. But it illustrates a crucial point that has universal application in today's global financial Ponzi. Namely, that the value of assets generated during the debt boom can shrink drastically or disappear entirely after the party ends if they do not produce useful services and a commensurate cash flow.

By contrast, the debt is fixed and contractual until its is written off and holders of the paper take a current loss. Upon that liquidation event, of course, balance sheets shrink and paper wealth evaporates. That's why debt booms are inherently and ultimately deflationary.

Needless to say, the abandoned multi-million dollar Athens stadium pictured below is worth nothing, yet the debt which funded it has not been liquidated. It still hangs somewhere in financial hyperspace—- having been transferred by the EU superstate politicians and bureaucrats from the accounts of the banks or bond investors which originated the funding to Greece's make pretend IOU accounts at the IMF and EU.

Call this financial constipation—-the end result of the current global game of "extend and pretend". It amounts to a financial Ponzi in which current debt is serviced with more debt, and in which the unsustainability of the entire edifice is obfuscated by the zero interest rate policies and massive debt buying campaigns of the world's central banks.

When bad debts are not liquidated—– we already know that you get a Greece calamity with $350 billion of debt that cannot possibly be serviced or repaid by its now ruptured economy. But what will only become evident with time is that the entire global economy is not too far behind. It is now burdened with $200 trillion in debt, but owing to debt-bloated GDP, its true leverage ratio, like that of Greece in 2009, is far higher than the 2.9X computed in the McKinsey charts above.





So now we get to ground zero of the global Ponzi. That is the monumental pile of construction and debt that is otherwise known on Wall Street as the miracle of "red capitalism". In truth, however, China is not an economic miracle at all; its just a case of the above abandoned Athens stadium writ large.

The McKinsey graph on China tells it all. For the moment, forget about leverage ratios, debt carrying capacity and all the other fancy economic metrics. Does it seem likely that a country which is still run by a communist dictatorship and which was on the verge of mass starvation and utter impoverishment only 35 years ago could have prudently increased its outstanding total debt (public and private) from $2 trillion to $28 trillion or by 14X in the short span of 14 years? And especially when half of this period encompassed what is held to be the greatest global financial crisis of modern times

And don't forget that most of this staggering sum of debt was issued by a "banking" system (and its shadow banking affiliates) which is bereft of any and every known mechanism of financial discipline and market constraints on risk and credit extension. In effect, it is simply a vast pyramidal appendage of the Chinese state in which credit is conjured from thin air by the trillions, and then cascaded in plans and quotas down through regions, counties, cities and towns.

When it reaches its end destination it finances the building of anything that local politicians, bureaucrats and red capitalists can dream up. That includes factories, roads, ports, subways, bridges, airports, malls, apartments and all the rest of the construction projects being undertaken on Beijing's Noah's ark.

Undoubtedly, the plentitude of ghost cities, malls, apartment buildings and factories that are everywhere now evident in China do not look much different than Greece's Olympic stadiums did circa 2006—-that is, gleaming but silent. It will take another decade for the weeds to spring up and the rust and decay to become visible.

So it might be a good time to get a grip on the China Ponzi. There is virtually not a single honest price in the entire $28 trillion tower of debt shown below. When loans to coal mine operators got in trouble, for example, the so-called "bankers" at the big state banks simply invited their clients in the side door where they paid back the "bank" with a trust loan at 18% interest—-which "loan" was then resold to bank customers at 12%.

Hence, no NPLs and no need for new loss provisions. Indeed, China's big state banks book billions of profits each quarter—notwithstanding the absurd extent of the nation's credit pyramid.

Likewise, how did the local party cadres use the loans that cascaded down the system to their town? Why they established non-governmental development agencies—thousands of them—- that paid hugely inflated prices for city lands in order to build empty luxury apartments and zoos that are bereft of both people and animals. Meanwhile, local governments run huge GDP enhancing budgets that are funded by the false revenue of hyper-bloated land sales.

The skunk in the woodpile is self evident even in the simplified chart below. At least prior to the 2008 crisis, it could be said that part of the China boom was being financed by the Fed and other DM central banks which enabled their domestic consumers to borrow themselves silly, thereby fueling the China export boom. That's pretty much over in terms of growth owing to the tepid recoveries and outright economic stagnation in the US, Europe and Japan.

But never mind. The aging black-haired men who learned their economics from the Mao's Little Red Book had a solution. They would lift GDP and jobs by their own bootstraps, dispensing virtually unlimited credit to build public pyramids, otherwise known as infrastructure, at rates not seen since the Egyptian pharaohs.

Thus, since the eve of the crisis in 2007, China's GDP has doubled, expanding by $5 trillion in 7 years. But as shown below, it took a $21 trillion expansion of debt outstanding to accomplish that outcome.

That's right. The China Ponzi took on $4 of debt for every new dollar of freshly constructed GDP. And "constructed" is exactly the correct term because all of this new debt funded a orgy of construction—-much of which is for public facilities that will never produce enough user revenues to service the debt or which are essentially owned by local governments which have no tax revenue.


Source: McKinsey
In any event, China's $10 trillion of GDP is exactly at the Greek bulge stage. Its not replicable and sustainable unless the bosses in Beijing truly do intend to pave the entire country.

In fact, the Chinese economy is addicted to construction, and its rulers can't seem to let go—-even as they recognize they are heading straight toward the wall. At the present time, nearly 50% of GDP is accounted for by fixed asset investment—–that is, housing, commercial real estate, industry and public infrastructure. This ratio is so far off the historical and comparative charts as to be in a freakish class all of its own. Even during the peak "take-off" phase of economic development in Japan and South Korea this ratio never exceeded 30% and did not dwell there for long, either.

So China is caught in a monumental debt trap. Its rulers fear social upheaval unless they keep pumping GDP—and the associated rise of jobs, incomes and financial asset values—-with more credit and construction. Even then, they know better and have therefore hop-scotched from credit restraint to credit curtailment almost on alternate days of the week.

But now the edifice is beginning to roll over. Housing prices are falling and new footage put under construction has dropped by 30% over the last three months—something which has not even remotely happened during the last 15 years. At the same time, the consequent cooling of demand for construction materials and equipment is evident in China's faltering industrial production numbers and the global commodity deflation that has resulted from its vast excess capacity in steel, shipbuilding, cement, aluminum, copper fabrication and all the rest.

The excruciating debt trap in China was addressed recently by the redoubtable Ambrose Evans-Pritchard of the Telegraph, who has never seen a deflation crisis that he believed could not be relieved by the central bank's printing press. But in the case of China, even he has thrown in the towel:

China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years, that they cannot deflate a credit bubble safely"¦"¦

China faces a Morton's Fork. Li Keqiang has made it his life's mission to stop his country drifting into the middle income trap. He says himself that the investment-led model of past 30 years is obsolete. The low-hanging fruit of catch-up growth has been picked.

For two years he has been trying to tame the state's industrial behemoths, and trying to wean the economy off credit. Yet virtuous intent has run into cold reality. It cannot be done. China passed the point of no return five years ago.

Needless to say, this stunning conclusion from one of the world's greatest and most erudite believes in the power of money printing has enormous implications for the global economy and financial system. It means that China is the New Greece—-but one sporting 40X more GDP and 70X more debt.

Indeed, last year China spent upwards of $5 trillion on fixed asset investment—-a figure that is greater than the sum total for Europe and the US combined. Behind that towering number is an immense caravan of cement, structural steel, glass, copper and all the rest of the industrial commodities.

So when the China Ponzi finally crashes, the deflationary gales will propagate violently through the global economy and financial system. China's $28 trillion tower of debt will come tumbling down in the process; and a world floating on $200 trillion of the stuff will not be far behind.By Ambrose Evans-Pritchard











China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years, that they cannot deflate a credit bubble safely.

A year of tight money from the People's Bank and a $250bn crackdown on shadow banking have pushed the Chinese economy close to a debt-deflation crisis.

Wednesday's surprise cut in the Reserve Requirement Ratio (RRR) – the main policy tool – comes in the nick of time. Factory gate deflation has reached -3.3pc. The official gauge of manufacturing fell below the "boom-bust" line to 49.8 in January.

Haibin Zhu, from JP Morgan, says the 50-point cut in the RRR from 20pc to 19.5pc injects roughly $100bn into the system.

This will not, in itself, change anything. The average one-year borrowing cost for Chinese companies has risen from zero to 5pc in real terms over the past three years as a result of falling inflation. UBS said the debt-servicing burden for these firms has doubled from 7.5pc to 15pc of GDP.

Yet the cut marks an inflection point. There will undoubtedly be a long series of cuts before China sweats out its hangover from a $26 trillion credit boom. Debt has risen from 100pc to 250pc of GDP in eight years. By comparison, Japan's credit growth in the cycle preceding its Lost Decade was 50pc of GDP.

The People's Bank may have to cut all the way to zero in the end – a $4 trillion reserve of emergency oxygen – but to do that is to play the last card.

Wednesday's trigger was an amber warning sign in the jobs market. The employment component of the manufacturing survey contracted for the 15th month. Premier Li Keqiang targets jobs – not growth – and the labour market is looking faintly ominous for the first time.

Unemployment is supposed to be 4.1pc, a make-believe figure. A joint study by the International Monetary Fund and the International Labour Federation said it is really 6.3pc, high enough to cause sleepless nights for a one-party regime that depends on ever-rising prosperity to replace the lost elan of revolutionary Maoism.

Whether or not you call it a hard-landing, China is struggling. Home prices fell 4.3pc in December. New floor space started has slumped 30pc on a three-month basis. This packs a macro-economic punch.



A study by Jun Nie and Guangye Cao for the US Federal Reserve said that since 1998 property investment in China has risen from 4pc to 15pc of GDP, the same level as in Spain at the peak of the "burbuja". The inventory overhang has risen to 18 months compared with 5.8 in the US.

The property slump is turning into a fiscal squeeze since land sales make up 25pc of local government money. Zhiwei Zhang, from Deutsche Bank, says land revenues crashed 21pc in the fourth quarter of last year. "The decline of fiscal revenue is the top risk in China and will lead to a sharp slowdown," he said.

The IMF says China's fiscal deficit is nearly 10pc of GDP once land sales are stripped out and all spending included, far higher than generally supposed. It warned two years ago that Beijing was running out of room and could ultimately face "a severe credit crunch".

The gears are shifting across the Chinese policy spectrum. Shanghai Securities News reported that 14 Chinese provinces are preparing a $2.4 trillion blitz on infrastructure to combat the downturn, a reversion to the same policies of reflexive stimulus that President Xi Jinping forswore in his Third Plenum reforms.

How much of this is new money remains to be seen but there is no doubt that Beijing is blinking. It may be right to do so – given the choice of poisons – yet such a course stores up even greater problems for the future. The China Development Research Council, Li Keqiang's brain-trust, has been shouting from the rooftops that the country must take its post-debt punishment "as soon possible".

China is not alone in facing this dilemma as deflation spreads and beggar-thy-neighbour currency wars become the norm. Fifteen central banks have eased monetary policy so far this year.

Denmark's National Bank has cut rates three times in two weeks to -0.5pc in an effort to defend its euro-peg, the latest casualty of the European Central Bank's €1.1 trillion quantitative easing. The Swiss central bank has been blown away.

Asia is already in a currency cauldron, eerily like the onset of the 1998 crisis. The Japanese yen has fallen by half against the Chinese yuan since Abenomics burst upon the Pacific Rim. Japanese exporters pocketed the windfall gains of devaluation at first to boost margins. Now they are cutting prices to gain export share, exporting deflation.

China's yuan is loosely pegged to a rocketing US dollar. Its trade-weighted exchange rate has jumped 10pc since July. This is eroding the wafer-thin profit margins of Chinese companies and tightening monetary conditions into the downturn.



David Woo, from Bank of America, says Beijing may be forced to join the currency wars to defend itself, even though this variant of the "Prisoner's Dilemma" leaves everybody worse off. "We view a meaningful yuan devaluation as a major tail-risk for the global economy," said.

If this were to happen, it would send a deflationary impulse worldwide. China spent $5 trillion on fixed investment last year, more than Europe and America combined, increasing its overcapacity in everything from shipping to steels, chemicals and solar panels, to even more unmanageable levels.

A yuan devaluation would dump this on everybody else. It would come at a moment when Europe is already in deflation at -0.6pc, and when Britain and the US are fast exhausting their inflation buffers as well.

Such a shock would be extremely hard to combat. Interest rates are already zero across the developed world. Five-year bond yields are negative in six European countries. The 10-year Bund has dropped to 0.31. These are no longer just 14th century lows. They are unprecedented.

My own guess is that we would have to tear up the script and start printing money to build roads, pay salaries and fund a vast New Deal. This form of helicopter money, or "fiscal dominance", may be dangerous, but not nearly as dangerous as the alternative.

China faces a Morton's Fork. Li Keqiang has made it his life's mission to stop his country drifting into the middle income trap. He says himself that the investment-led model of past 30 years is obsolete. The low-hanging fruit of catch-up growth has been picked.

For two years he has been trying to tame the state's industrial behemoths, and trying to wean the economy off credit. Yet virtuous intent has run into cold reality. It cannot be done. China passed the point of no return five years ago.

Via The Telegraph
 

karn

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Make no mistake this will effect us all .India also has many real estate bubbles . If you look at the construction going on in the NC region there are a lot of empty apartments there.
 
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sorcerer

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Make no mistake this will effect us all .India also has many real estate bubbles . If you look at the construction going on in the NC region there are a lot of empty apartments there.
Is such because of economy or busted by regulation or illegal construction or money laundering?
 

karn

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Is such because of economy or busted by regulation or illegal construction or money laundering?
Some of it is a scam . The area I saw was owned by Vadra . But beyond that is the bubble . There are enormous apartment complexes rising out of farmland . Who is going to buy all this almost 10 lakh units costing 50-80 lakhs in one village (well formerly village)? I doubt that anyone can find 1 million Indians that will buy Rs 50lakh+ houses far away from the city. The developers know this half the constructions are just lying half finished as they are trying to sell off existing inventory . Read the news , the price of houses in Delhi is falling for this reason .
 

DingDong

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Make no mistake this will effect us all .India also has many real estate bubbles . If you look at the construction going on in the NC region there are a lot of empty apartments there.
Most of the Black Money in India has been invested in real estate. Lot of money has been blocked there, because it had been giving good returns in past. Shrinkage in Real estate is going to have positive impact over Indian economy because many rich people have started scouting for alternatives, I have already started to see the positive impact, a good part of it is going into new businesses.
 

karn

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Most of the Black Money in India has been invested in real estate. Lot of money has been blocked there, because it had been giving good returns in past. Shrinkage in Real estate is going to have positive impact over Indian economy because many rich people have started scouting for alternatives, I have already started to see the positive impact, a good part of it is going into new businesses.
Construction is the largest employer in the non agriculture segment . Nobody will benefit from a collapse in the real estate sector. Except people who want to buy houses . But a collapse indicates that there is nobody left to buy.
 

DingDong

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Construction is the largest employer in the non agriculture segment . Nobody will benefit from a collapse in the real estate sector. Except people who want to buy houses . But a collapse indicates that there is nobody left to buy.
NCR market had overheated. The business has moved to small towns and districts. It is not going to hurt the construction workers. The prices were artificially inflated by the middlemen. Many people had been purchasing for resale and not for possession. People had been investing in RE when the market was in recession, now there are better places for investment which give better returns, hence people have moved on.
 

s002wjh

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yea same old stuff been saying over and over and over again for the past 10-15years. china has issues, but whether these issues will crash china or not depend on how ccp manage its, so far they did much better job then other developing country.
 

sorcerer

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CCP has managed t inflate the economic figures into a nice economic bubble..
 

J20!

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There are economies (eg USA) that are printing hundreds of billions of Dollars a month and trillions a year just to stay afloat. Japan's economy went into recession in the last quarter of 2014. Major economies in the EU have been dipping in and out of recession for years.

Yet every year we get a "China is going to collapse" frenzy from the media, despite China being the indisputable engine of world growth for a decade+.

The word "bullshit" doesn't go far enough in describing these "Gordon Chang" like fantasies of a Chinese collapse. Going by the figures of the world economy, western economies would collapse before the Chinese economy does. Chinese economic problems are minuscule compared to the Trillions in deficit of the US economy or the debt problems and dwindling manufacturing in the EU.


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