China: the coming costs of a superbubble

Vitaliy Katsenelson's picture

Christian Science Monitor approached me to write an article on China after they saw my presentation – China the Mother of All Black Swans.  This article is a combination of this presentation and articles I’ve written in the past.  It was published in the March 16th paper

 China: the coming costs of a superbubble

By Vitaliy N. Katsenelson

The world looks at China with envy. China’s economy grew 8.7 percent last year, while the world economy contracted by 2.2 percent. It seems that Chinese “Confucian capitalism” – a market economy powered by 1.3 billion people and guided by an authoritarian regime that can pull levers at will – is superior to our touchy-feely democracy and capitalism. But the grass on China’s side of the fence is not as green as it appears.

In fact, China’s defiance of the global recession is not a miracle – it’s a superbubble. When it deflates, it will spell big trouble for all of us. 

To understand the Chinese economy, consider three distinct periods: “Late-stage growth obesity” (the decade prior to 2008); “You lie!” (the time of the financial crisis); and finally,  “Steroids ’R’ Us” (from the end of the financial crisis to today).

Late-stage growth obesity

About a decade ago, the Chinese government chose a policy of growth at any cost. China’s leaders see strong gross domestic product (GDP) growth not just as bragging rights, but as essential for political survival and national stability. 

Because China lacks the social safety net of the developed world, unemployed people aren’t just inconvenienced by the loss of their jobs, they starve; and hungry people don’t complain, they riot and cause political unrest. 

Remember the 1994 movie “Speed”? A young cop (Keanu Reeves) had to save passengers on a bus that would explode if its speed dropped below 50 m.p.h. Well, China is like that bus with 1.3 billion people aboard. If the Communist Party can’t keep the economy growing at a fast clip, the result will be catastrophic. 

To achieve high growth, China kept its currency, the renminbi, at artificially low levels against the dollar. This helped already cheap Chinese-made goods become even cheaper. China turned into a significant exporter to the developed economies. 

Normally, if free-market economic forces were at work, the renminbi would have appreciated and the US dollar would have declined. However, had China let this occur, demand for its products would have declined, and its economy wouldn’t have grown at roughly 10 percent a year, which it did during the past decade. 

The more China sold to the United States, the more dollars it accumulated, and thus the more US Treasuries it bought, driving our interest rates down. US consumers responded to these cheap goods and cheap home loans by going on a buying binge. 

However, companies and countries that grow at very high rates for a long time will inevitably suffer from late-stage growth obesity. Consider Starbucks: In 1999, it had 2,000 stores and was adding 1.8 stores a day. In 2007, when it had 10,000 stores, it had to open 5.5 stores a day in a desperate bid to keep growth rates up. This resulted in poor decisions and poor quality – a recipe for disaster. 

In China, political pressure for full employment has led to similar late-stage growth obesity. In 2005, China built the largest shopping mall in the world, the New South China Mall: Today it’s 99 percent vacant. China also built up a lavish district in a city called Ordos: Today, it’s a ghost town. 

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Madcow's picture

@ China and Africa.  China has been cultivating relationships in Africa for the past 20 years. They'll go to places the West is afraid of. They'll invest not only money but also time and political capital. Take a look at what is happening in Mauritius. This is not something that is going to happen but rather a continuous process that began long ago.


caconhma's picture

Apparently, Vitaliy (as many posters at ZeroHedge) has no clue what he is talking about but it sounds very interesting.

fetchpuppy's picture

1.38 billion and growing is a lot of people. I believe China will someday, sooner than we expect, will close itself off from the rest of the world once again. After we and the rest of the world help them build their high tech factories and they squirrel away or grab the resources they are lacking the Great Wall will once again rise.

I'm sure this posting will get many laughs but it won't be long before they really won't need us.  

three chord sloth's picture

Interesting. There does seem to be a yen for racial purity in many Asian cultures. North Korea is said to be obsessed with it. The Khmer Rouge demanded it. Viet Nam never was too welcoming of its mixed race children. Even Japan gets all ookie over it.

Yeah, I could see China turning inward once again to preserve itself.

pawninthegame's picture

wouldn't want any dirty laowei genes in the gene pool


but flipper babies are A-OK!

Hubbs's picture

Go back to the farm? EXACTLY!


If you can not produce for the rest of the world, including members of your own society, then you should at least try to be self sufficient. I have tried to get in-laws  of my Philippine family to go back to farming and agricultural school, but they will have none of that. They expect me and their overseas family members  to remit monthy allowances so they can continue to live in the city,unemployed, and enjoy a life of TV and text messaging while wasting thousands of remitted dollars on these Nursing degree diploma mills and placement agencies.

Bob's picture

Waiting for the punch line: So what do you do

pawninthegame's picture



he's an american now - he doesn't enjoy a life of TV, he lives a life of TV

asiablues's picture


lol. It looks like neither of us will give up on our China views.  China will go through its normal up and down cycles, though I can't say for sure about PIIGS/US/UK.  Look to the West for fast approaching black swans rather than the Sleeping Lion Now Just Awakened.  

Meanwhile, it would appear our debate shall continue  ... 

Shameful's picture

I enjoy your posts and I must agree with many of the things you are saying.  But I still think there is long term possibilities.  No country on in history to my knowledge ahs sustained massive growth without corresponding downturns corrections and bubbles.  I use it as an example often but look at the rise of the USA as a world power.  We had a lot of depressions, with booms and busts.  I fully expect a massive pop and a lot of problems happening in China this decade, probably sooner rather then later.  But for me I have to ask who is better positioned China, the USA, Japan, or Europe?  Everyone has problems and many fortunes will be lost, but I'm inclined to think those that have the ability to make things will do better in the long run.

tahoebumsmith's picture

Build it and they will come? Trillions of Yaun spent to stimulate growth in China. “Late-stage growth obesity” = 8.7% GDP...Speculation run rampant keeping the nearly 1.3 billion employed. Now you have empty cities, shopping malls, skyscrapers...The bubble is bigger and more dangerous then any created in America because when the stimulus hangover sets in and the jobs dry up in China they have 1.38 Billion people to deal with. Oh, and lets not forget to mention they will not be able to finance the debt of America any longer. Now they have built, but will they really come?

Rogerwilco's picture

Hangover medicine - Take as needed:

1) Taiwan

2) Australia

3) New Zealand

4) Nigeria

5) Chile

pawninthegame's picture

have you been to Vancouver lately?

tmosley's picture


The author doesn't seem to understand the concept of *savings* and refuses to believe that a) China has a free market within the free economic zones surrounding its major cities and/or b) that free markets can and DO produce just that type of growth, and do so on a fully sustainable basis.  If a Chinese worker loses his or her job, they have a huge amount of savings to live off of.  Further, due to the immense economic freedoms alloted to their urbanites, it is easy for them to start their own business.  Indeed, many MANY people there start not just one or two, but have 4, 6, 10 or even 15 businesses which they have started.  This is what allows for such amazing economic growth.

China has a long way to go as far as personal freedoms, but when it comes to economics, they are on par with the US circa 1880.

Rogerwilco's picture

"If a Chinese worker loses his or her job, they have a huge amount of savings to live off of."

Only partially true. The majority of factory workers send money to relatives, they have no savings. If they lose their jobs and can't find another, they go back home to the farm. Millions of young adults come to the cities every month looking for work, any work, and that is what the Chinese government has to deal with. Unless they are somehow employed, there will be trouble. To accomodate these new workers, Chinese GDP must grow at 6%-8% minimum.

You can wax poetic about economic freedom and 10% growth rates, but that kind of growth is not sustainable for one fourth of the world's population, without access to more resources than are available to mainland China.

tmosley's picture

You make the mistake of assuming that there are an infinite number of people on those farms that will come looking for work.  Of course 10% growth is unsustainable.  That doesn't mean that it's a bubble.  It's a phase change from an agrarian society to an industrial one.  We have seen the exact same process play out in dozens of nations over the past several hundred years, but when China does it its called a "bubble".

China can have access to any and all the resources it wants, so long as it pays for them by being productive.  And they are, and they continue to become increasingly productive.

Rogerwilco's picture

Without transparency we can only speculate, and that applies equally to the U.S. and Chinese economies. Our Federal Reserve is as opaque as their Politburo and both have goals and objectives quite different than what most would expect. China's super-bubble will not collapse, it will simply morph into a new set of goals and strategies. Countries with plentiful resources, small populations, and a weak military should be very concerned at this point.

Shameful's picture

Africa.  China's future is in Africa.  Asia is full of people, and a little light on resources for the trouble.  Siberia is "occupied".  Africa is a prize.  Rich in natural resources, and suffering under the gentle mercies of NGOs for a long time.  Who would you rather deal with, the Chinese or the IMF?  China moved into Zimbabwe as the West would not deal with them.  Not saying this is good, as it has a strong possibility of looking like a new wave of colonialism in Africa but it is a land rich in resources that some might view as "up for grabs".

DoChenRollingBearing's picture

While I agree with you on Siberia, I do not think China is going to have Africa as their own exclusive resource reserve.  At some point they are going to be looking to send in some of those 100,000,000 more males (than females) to Africa to protect their holdings. Then THEY get to find out what it is like to be fighting in hostile places far away.

Oh, and we have lots of assets (that, I think, you pointed out some time ago) between China and Africa.  All those straits and bases and carriers and stuff.

Shameful's picture

No China will not be able to grab up Africa unopposed.  Was reading that a US admiral was having kittens about a Chinese naval base being built in Africa, they know what is happening.  For years it looks like Africa was being held for future exploitation.  The west bribing them not to develope and continue will low level resource exploitation.  Now China is on the scene and wants those resources.

China at war with Africans, why?  They can trade or bribe the leaders as well as Westerners can.  They don't need to fight the locals, though you might see them try to move settlers in at some point depending on the Wests actions.  Now I expect the West to fight China over Africa.  To many awesome untapped resources in a world of increasing scarcity.  America has a lot of military power, but unless we get into the fight fast we are going to be bankrupt, and bankrupt nations have a hard time fighting global wars.

three chord sloth's picture

I think much of Africa is about to abandon the Westphalian nation-state, and revert back to a city-state model. Tribal loyalties run too deep, deeper than the loyalty to nation, so I expect the continent to redraw their boundaries to reflect those loyalties. For the majority of tribes in most nations the nation-state relegates them to second class status (unless they are the largest tribe). Most would rather rule a smaller city-state than scrounge for scraps in a larger, but oppressive nation.

In short, its gonna get wild over there. The bribes should flow and the intrigue run rampant.

CookieMonster's picture

It has been said that as this Depression unfolds, China will act and feel like the USA of the 1930's (pre New Deal) and that the USA will act and feel like Britain of the same time period. With the forced passage of health care for most, seems like this is a pattern to look at except that the kleptocrat-elite in the USA are a lot more efficient than Britain's ever were.

three chord sloth's picture

I still say China is more like the US of the 1890's, only with the robber barons and the gov't. the same people... so no Teddy Roosevelt, no trust-busting, and no pure food acts for you!

ozziindaus's picture

I think China is more like the Germans of the 30's, the Soviets of the 50's, the Japanese of the 80's and Americans are panicking like they always have. 

pawninthegame's picture

but with BMW X5s everywhere