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China's Syndrome
China's Syndrome
Thoughts on Zero Hedge’s "China: Proudly Demolishing Buildings Before Completed In Pursuit Of The Glorious Housing Bubble Perpetual Engine"
Courtesy of Terry Doherty (personal correspondence)
Interesting story there [at Zero Hedge]. China has created a monster for itself that has already begun to turn on its master, and will one day devour it.
The basic premise of economic growth in China is unsustainable. The government is trying various ways of forcing other economies to import more Chinese goods. But the saturation point has pretty much already been met. Now they are trying more artificial ways to stimulate foreign consumption, e.g. via currency manipulations.
What China is NOT doing is developing a consumer-based economy that can buy its own products (I mean, products that are largely controlled by Western companies, but manufactured in China, so these are in many cases not "Chinese" products at all). Right now, consumption in China accounts for only 30% of GDP, which is the lowest in the world. Moreover, this proportion is getting worse, not better. This is partly because of government policies re exceedingly low interest rates, which essentially systematically transfers wealth from the vast lower and middle classes into the upper class, and so pulls the rug out from under domestic consumption. Partly it is because of the gigantic stimulus package in China, which in terms of percent of GDP just dwarfs Obama’s stimulus package. That, combined with free money policy in China, merely diverts huge amounts of capital into doomed markets: stocks and real estate.
The stock market has already collapsed. This began back in early October 2007, and now the Chinese equities markets are 3 years into what will eventually be a 30 year+ recovery from the collapse of that bubble. You heard me right: it will be AT LEAST a quarter century before Chinese stocks again reach the October 2007 highs in real RMB terms, and it could be significantly longer.
We know this from previous post-bubble market behavior. To cite just one example, the NDX is currently over 10 years post-bubble collapse. At that time, QQQQ was trading at around $115. The highest QQQQ has gotten since that time was $54 in late October 2007. This peak is -53% below the March 2000 highs. Now, QQQQ is again approaching these same levels. As of today’s close, QQQQ is now -57% off the March 2000 peak. We see quite similar behavior after other bubble collapses as well: after an index or market collapses, it loses around 85% of its value, then trades in a range defined by the -55% line and the -85% line for several decades. There may be fleeting overshoots a bit above and below these lines, but these are always short-lived. Eventually, it breaks out of that trading channel to the upside, but in real-currency terms, the break even point is usually closer to 40 years down the road from the peak, or maybe even more. Right now, the Shanghai Composite is trading at about -55% compared to the peak in late 2007. So the Chinese stock markets are doomed, and on a long-term basis (months to years) very shortable right now, IMHO, simply because they are trading very near the top of their long-term trading range.
Now we are just waiting for the other shoe to drop in the real estate markets. The question is not IF that will happen, it is WHEN. I suspect that will be the beginning of the end of China’s economic rise for many decades. While they founder, they will have to do some serious re-engineering of their entire economy, and replace an unsustainable juggernaut with a sustainable model that is in synch with global growth rates and demand. Obviously, double-digit growth is completely unsustainable, even if you believe that actual growth is only a fraction of the perennially overly-rosy statistics reported by the Chinese government.
China can forestall this in various ways, for example they could increase minimum wage to stimulate consumption. They talk a lot about increasing internal consumption, but unfortunately never really do anything significant about that except to say that it is their goal. The problem is that in order to increase internal consumption, capital must be re-directed away from the big boys’ vacuum cleaners, and that’s just not gonna happen. IMHO. There is just far too much institutionalized corruption that is not going to go away, even if there were a significant desire to make it go away (which there isn’t). The consequences of these economic policies and lack of action to materially increase domestic consumption, combined with rampant unemployment and other stresses, will eventually cost the CCP its job, and the Chinese government will then undergo a complete overhaul in the coming decades. Most likely, this will be quite violent; the CCP has shown again and again that it is inflexible and ruthless when it comes to anything that even sounds like a threat to their complete, unquestioned dominance.
You might be interested in a guy named Gordon Chang, who is a Forbes economist who has specialized on the Chinese economy for many years. He is the author of the book The Coming Collapse of China. He also asserts many of these notions and I think he is right on. For example, see China: Economic Juggernaut or Overinflated Bubble?, and Chang's interview with Aaron Task:
Is China an unstoppable economic juggernaut or an overinflated bubble ready to burst?
That question is one of the most important long-term macro issues facing policymakers, politicians and pundits - as well as anyone else who cares about the global economy.
Right now, China is BOTH an economic juggernaut and a bubble, says Gordon Chang, a Forbes columnist, who sees two major problems with China:
Overstimulated: At $1.1 trillion, China’s 2009 stimulus amounted to about 24% of GDP, far in excess on that basis vs. President Obama’s $787 billion program, which was about 5.5% of U.S. GDP. Such huge government expenditures "created enormous imbalances and dislocations," Chang says. While the Shanghai Composite has descended after its 2009 stimulus-fueled rocket-ride, China’s real estate market has not, he notes.
Locked at the Hip: China’s economy cannot "decouple" from the West, particularly the U.S., Chang says. As discussed here, China runs a net trade deficit with the world, ex-America, and its $145 billion trade surplus with the U.S. is greater than the U.S. deficit with the next seven-largest trading partners combined.
"The Coming Collapse of China" lays out the case for China’s demise. In 2001, Chang predicted this would happen in about 10 years, but so far I think the ignition point is still years away. Mostly that’s because in 2001, the Chinese government did not have the resources to significantly forestall its demise but, since then, it acquired those resources and put them to use in propping things up and trying to keep things afloat, e.g. through gigantic stimulus packages that just fueled investments and speculations in the stock, bond, commodity, and real estate markets. That’s the only reason that post-bubble implosion, the Shanghai composite temporarily rallied through the upper boundary of the typical post-bubble implosion trading range (again, that range being -55% to -85%). The November 2008 Chinese stimulus package was about 4 trillion RMB, which is about 3 times the size of the US stimulus package, after adjusting for the size of the respective economies.
That huge stimulus package combined with free money policies and the government’s intentional efforts to promote huge loans, resulted in the Shanghai Composite moving from 1747 (-70% off the peak of the bubble) to over 3400 in 8 months (-43% off the peak of the bubble). That 3400 reading was therefore a stimulus-driven anomaly that caused an artificial violation of the post-bubble implosion trading range, which will be -55% to -85% (or more). That overshoot beyond the -55% line lasted 11 months. The index dropped below the -55% line in May of this year, and has remained there ever since. It has tested the -55% line three times, and each time was turned away. This also prevented the index from collapsing down to reach its bottom, which I predict will be 900 to 1000. I can’t say WHEN this low will be reached; I can only say that it WILL be reached, some time in the next 20 years or so. Anyhow, here’s some info on Gordon Chang and his book:
http://www.gordonchang.com/collapse.htm
Chang has long produced incisive (but definitely not mainstream) insights into Chinese society, economics, and politics. One example is below, and I think this societal shift will eventually synergize with the major economic changes developing in China. The government has pulled out most of the stops to prevent this, believing that it CAN be prevented; I think it cannot. The only possible resolution that I can see is a drastic reworking of Chinese politics and economy, and you can bet the CCP won’t just lie down and submit:
The [Chinese Communist] party, after Tiananmen, had no real choice but to permit the Chinese people to continue to remake their nation, and the most far-reaching change was the undoing of Mao Zedong’s extreme social engineering. Mao had consolidated the power of the Communist party by dividing up the Chinese people into small units and isolating each of those units from others. In the countryside, he created self-contained communes. In the city, he built state-owned enterprises. Separated from one another, the Chinese people had no real way to challenge Mao’s one-party state.
Now, however, the Chinese people are building businesses and organizations that span the country, and they are getting in touch with each other as China modernizes. And today on the internet and in other forums, the Chinese are having national conversations. As a result, citizens with common grievances are beginning to act in unison, and this poses a challenge of the first order to the regime. China at this moment may be changing faster than any other nation. And it is not the party that is leading change; it is the Chinese people demanding it.
The Communist party has slowly evolved since Tiananmen, but the society it leads is remaking itself at great speed. The consequence of this dynamic is uncontrollable change, and uncontrollable change means that one day China will be free. (The Most Important Legacy of Tiananmen, National Review Online, Gordon Chang)
Pic credit: Zero Hedge
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Another self inflated article. Of course, the Chinese are doing nothing to increase their consumption. Because this would come at the expense of the West consumption.
The West is where everything is consumed. The West is defined by its consumption. And only a fouled propagandist could believe that people in the West want competition when it comes to consumption.
More consumption in China will mean less consumption in the West. And less consumption in the West will mean serious domestic unrest.
Because what will be consumed in China will not be produced in the West.
If consumption is removed from the West, what is left?
The very idea that the Chinese (or CCP) do not want to consume because the products will not be Chinese is raw stupidity.
China is cautious about consumption because the West does not want others to consume. The call for consumption is a booby trap.
That is the only cause. And you can change all the governments in China, you wont change the fact that their consumption will come at the expense of ours. And this is not wanted.
Once again, an article that doesnt speak about others but ourselves.
We dont want the Chinese to consume. CCP is perceived as the threat that could get the Chinese to consume. As soon as CCP is down, we are going to be free from the threat of having such a major contender when it comes to consumption.
All it takes is a bit of sincerity.
I agree with the author but her arguments aren't terribly compelling. If you're going to write for ZH, I recommend more supporting evidence as opposed to opinions and "made up" rules about trading ranges.
I keep hearing those that say China has us in the palm of their hands, that they can "dump" treasuries and the dollar. Can anyone explain how that could actually be true?
1. If they "dumped" wouldn't they commit price suicide by driving down the market?
2. Isn't the US an absolutely huge consumer of Chinese goods NOT to be replaced anytime soon by other countries and Chinese domestic growth?
Who is really screwed here? The US being dependent on Chinese sourced dollar investment in treasuries? Or China, with the US already received cheap goods in exchange for a hundreds of billions of IOUs? Like they say, borrow a few million and you are a debtor, borrow a few hundred billion and you are a partner!
The only countries that could abandon the USA are those countries who are not economically tied and dependent on the US economy. Can anyone name a couple significant countries that fit this profile?
What does the US have that China wants? FRNs?
China has a real manufacturing industry and a large, growing base of domestic consumers. They'll suffer pain when their bubble deflates, but they have a real foundation to build upon, unlike the US.
We're freakin' doomed.
Maybe someday the American people will be free as well.
Look for much less freedom in this world, not more.
That has certainly been the trend for the last 100+ years.
Tyranny: the Ultimate Bubble
Re the massive Chinese stimulus package: if you were sitting on a whole pile of soon to worthless foreign bonds (issued by your largest 'client') and couldnt sell them, how would you try to get some final value out of your position?
Just musing that if you were caught in that kind of catch 22, would you really want to be the only kid at the party trying to be responsible.
What I found more interesting was the comment of somebody who lived here and posted it on ZH comments.
He told about the countryside being full of high class buildings that are all empty.
I keep on being very fascinated by it.
Good to see articles reading between the lines of the 'miracle'.
I will tell you the difference between the rich mainlanders you see shopping here in Hong Kong and what you see when you take the train to Shenzen just across the border would startle you.
There is a sliver of super wealthy running around with LV bags and IPhones and the rest live very humble lives. No way this will supplant the consumer driven Western markets any time soon.
williambanzai7: Terry (author of article) has spent a lot of time traveling around in China and has told me essentially the same thing.
Why would anyone flag this as junk? I wish I could give this reply a thumbs up.
Most of Banzai's comments are junk, consisting of little more than a link to his blog. I agree this particular comment seems well intentioned enough.
"What China is NOT doing is developing a consumer-based economy that can buy its own products (I mean, products that are largely controlled by Western companies, but manufactured in China, so these are in many cases not "Chinese" products at all)." I stopped reading after this...
Zeilschip - Do yourself a favour and increase your attention span....
Re Banzai's comment on HK/Shenzen - it's no different in any "ex" communist bloc country. 1%, if that, lord it over the remaining 99...
The CCP will go down when the Mandate of Heavan fails ...
However, the US is currently supporting the CCP and its crony capitalism.
American jobs are lost overseas but Apple et al is profiting handsomely along with the puppeteers in Shanghai. The migrant factory working is doing better but is still being ridden like a mule.
When the CCP is forced to confront the lack of external demand ( tariffs, US default, devaluation etc.), only then will they really try and change but by then change will signal their own defeat.