Reading the weekly headlines of rapid economic recovery out of Beijing reminds one of Goebbel's gifted propaganda skills. Is China inflating one gigantic bubble of excess capacities that will end in tears (and hundreds of billions in non-performing loans in a few years)? http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=a6_rXxtBSsnk May 15 (Bloomberg) -- Chinaâs stock-market boom is as clear a bubble as you will find, the conventional wisdom says. When might it burst? Nobody knows if it will. The Shanghai Composite Index has surged 45 percent this year. Just because China has deep pockets in this time of global crisis doesnât mean its economic health supports this rally. Resources of Chinaâs magnitude are a nice thing to have at the moment. And while probably too late to buy into the market, investors who are already there wonât be disappointed. In a sense, buyers are betting on Chinaâs socialist tendencies rather than its success in fostering free markets. Cash-rich China has simply built a better bubble. Rather than boding well for Chinaâs long-term outlook, this rally serves as a reminder of risks facing the worldâs third-biggest economy. The strength of Chinaâs fiscal position got a headline- grabbing endorsement this week from Nobel Prize-winning economist Joseph Stiglitz. At a May 13 forum in Beijing, Stiglitz said China âhas taken very rapid action to address the crisisâ and may emerge as âa winner.â In the same address, though, Stiglitz undermined that argument in the long run. âWe are at the end of the beginning, rather than the beginning of the end,â Stiglitz said. âThe global economy may be declining at a slower rate and we may see a bottom soon, but it doesnât mean a full recovery.â Global Downshifting The rapid growth rates of the mid-2000s are a thing of the past. The downshifting of global expectations is taking place from New York to Shanghai. Even with the trillions of dollars of stimulus the U.S. is pumping into markets, American households face a multiyear process of saving more and spending less. That transition will prove painful for a world that relies heavily on the $14 trillion U.S. economy. The $4.4 trillion Japanese economy isnât much better off. Gross domestic product contracted an annualized 16 percent in the first quarter, following a fourth-quarter drop of 12 percent, according to the median estimate of economists surveyed by Bloomberg News. With the U.K., Germany and much of the euro area in recessions, feel free to engage in the fiction that Chinaâs $3.2 trillion economy will save the world. Far from that happening, global trends will increasingly close in on export-driven China. Stiglitz isnât wrong to think China will have a better 2009 than other major economies. Its 4 trillion yuan ($585 billion) stimulus plan and record bank lending are helping to fill the void left by plunging exports. The trouble is, thatâs a void too far, even for an economy thatâs as top-down as Chinaâs. Flawed Assumptions Be afraid when just about every economist agrees on something. Just about everyone seems to think China can pull this off, that it can artfully influence a vast, underdeveloped economy of 1.3 billion people without many of the policy tools at the disposal of the Federal Reserve or European Central Bank. The flaw in this assumption is that it takes for granted that all those stimulus yuan will be spent wisely and productively on worthy projects and companies. It assumes that those investments, much of them funded with debt, will morph into well-paying jobs that generate wealth for Chinaâs people. An even more fantastic assumption is that little of Chinaâs stimulus efforts will be squandered by corruption. Itâs hard to know how China can avoid vast amounts of public money being siphoned off by local government officials to speculate on stocks or property or to make luxury-good purchases. At What Cost? Even if China ekes out healthy growth this year, the question is what it will cost. China may be setting the stage for a Japan-like bad-loan crisis a few years from now. One also has to wonder if China is moving fast enough to rebalance its economy away from exports toward domestic demand. Itâs the âqualityâ of the growth that China produces that is the focus of economists such as New York Universityâs Nouriel Roubini. Chinaâs public-relations machine is working overtime to spin this story. Its success in getting the global media to play along explains why investors are rushing into Chinese shares. Just because China has built a more sustainable bubble, supported by the promise of ever more government largess, doesnât explain away the challenges facing the fastest-growing major economy. Government-directed bank lending has pretty much reached its full-year target and is poised to slow. The global export slump will increasingly take its toll. If China is a winner this year, as Stiglitz says, itâs a point that has many caveats. Officials in Beijing will be hard-pressed to replace the role of the U.S. consumer. Chinaâs stimulus efforts are no substitute for demand from American households, which are entering into a rare period of thrift. If you are sitting on big paper profits in China, it may be time to take them.
Makloda Reading the weekly headlines of rapid economic recovery out of Beijing reminds one of Goebbel's gifted propaganda skills. Is China inflating one gigantic bubble of excess capacities that will end in tears (and hundreds of billions in non-performing loans in a few years)? ........................................................ Good insight..... The C word is something the US does not have.... A recent example would be the Chinese effort to make better batteries... Where else would you see a govt. imposition of hundreds of engineers basically living in a building whose purpose is to improve the battery.... The issue being....where is the outlet ? ....................................................................................... When there is several billion at 2800.....How does this fair with 300 million at 20000....and what would be the real demand from these numbers.... A move from 2800 to 3200 X several billion that is multplying....would be better vs seeking more from 300 million X 15000 declining from 20000 ....that is multiplying.... The point being how are these numbers truly tapped....What are the truly capable demand numbers from the total.... ie.... How many in the room can do this ....raise your hand....
Excellent, timely article, makloda. I am growing very, very weary of the official numbers being put out by China's government as to all things economic, and am starting to suspect things are far worse in China than even the recent reports of drops of more than 30% in both exports and imports would suggest. I have similar reservations and concerns about India, also.
add east EU to the list. With birth rates negative, property prices in strathosphere, residential building activity and its prices amazing. It must be printed buyers somehere. Like printed money? All this crisis reminds me of an old russian book I had to study at school. Translates "Deads Souls" or similar. Local emperor, to boos his income from fed government, increased the number of souls he manages by adding all dead people that ever lived in that area.
The real numbers..... http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita .............................................................. So the question remains.... Who can take up the slack from the 20+ year credit surge in the "higher income per capita" developed countries.....? Particularly as the incomes/jobs decline....? ................................................................ Once upon a time there was a $70 Trillion economy.... Over $30 Trillion was taken out....lost by BANKERS......for various reasons....ie credit rating agencies, govt. policies, bankers greed, govt. regulations/regulators....etc.... This leaves 40/70's left to price all goods and services.... Clearly downsizing is in order across the board.... And if govt. does not downsize.....then it automatically becomes a bigger portion of the total economy vs the private sector.... So the question remains.... The govt. insists that it must get bigger in that it is the only solution.... Is bigger govt. the only solution ?
2 important things to consider are that China is sitting on 2 trillion dollars reserves which they can spend on the recovery. Second is that the GDP per capita is still 7 times less than in USA or Germany. So the amount of growth that can and will be made during the next decades is still enormous. Of course there will be a lot of problems inbetween but right now if I have to out my money somewhere for the next 20 years I would rather invest it in China when in USA. China also has the better position to deal with problems because its NOT a democracy yet. But anyway the question I still ask myselve since several month is where should we put our money ? Bonds, Gold, Cash or stocks ? If I would have to decide for the next 10 years where to put my money I would rather prefer anything compared to US-Dollar.
Building more empty skyscrapers? Build more idling machine parks? Build more bridges to nowhere? Build more high-speed magnetic monorails into rural Gobi desert? How is that going to help. All the trillions of Dollars the Chinese have won't change the fact that G7 consumers are sick of the idea of piling on more household debt to purchase more junk from China (or Japan, or Germany etc.). Just to keep things in perspective, given that domestic Chinese household consumption represents 2% of global GDP as opposed to 18% for the US consumer... if US consumers were to cut back 10% of their annual consumption that would roughly have as big as impact on global GDP as the entire current aggregate Chinese household consumption. The Chinese consumer is likely decades away from being of relevance -- this could set up China for a period of depression, namely a period between running out of stimulus funds currently going into fixed asset investment ratholes and a point where China becomes less export dependent with stronger domestic consumption.
Great article and discussion makloda. I would not underestimate China's determination and ambition on the world stage. I certainly would not put manipulating data and spreading propaganda exaggerating the actual efficiency of the Chinese economy off the table. http://www.uscc.gov/pressreleases/2009/09_04_21pr.php It is possible that they have overplayed their hand during this economic crisis by calling prematurely for the demise of the dollar as reserve currency and advocating a sino centric future world. They may well be correct in the long run but imo their economic model is hardly proven to be self sustaining at this point.
my business is quite special and maybe not very represantative but my sales volume with china the last 2 years has by far offset the reduction in other countries I deal with. I am travelling there a lot and you can throw around with numbers and everything but I think you get another perspective if you work there for some weeks (not just a short business trip). And its so funny that Stiglitz is blaming china for manipulating numbers (I have no doubt he is right there) and he himselve comes out of a country who is world champion in this disciplin. Nobel price winners in economy don't always get it right, a good example for that is LTCM.
China is a Joke. A house of cards. No rule of law, communist, no history of accomplishment relative to the outside world. No history of innovation. The People who say China is wealthy because of the Dollars they have are the same people who claim the dollar is worthless. If the Dollar is worthless then China has nothing.