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The Chinese Black Swan
Party rulers in China are trapped in a position that chess players deeply fear — zugzwang — where any move made puts you at disadvantage. In China, the potential cost of both action and inaction is economic collapse.
China is slowly starting to face the consequences of its actions — loans grew over 30% a year over the last few years — and inflation is rising fast. Inflation in developed countries is unpleasant, but it is tolerable. For a developing country — and China, despite its size, is still a developing country — it can be catastrophic. In developed countries, we spend two or three times less on food as a percentage of our income as do people in developing countries. Therefore, though food inflation is unpleasant, we have a much greater tolerance (margin of safety) for it. While food inflation the US can mean fewer trips to restaurants or no summer vacation, food inflation in China leads to hunger.
The Chinese government is desperately trying to put the brakes on the economy. It is shutting off lending to land developers and has raised bank reserve requirements five times this year. However, its success on the inflation front will likely lead to a slowdown of the economy and high unemployment. Ironically, those were the issues party planners tried to cure when they stimulated the hell out of the economy over the last few years.
China bulls are arguing that the almighty Chinese government will be able to soft-land the economy. Unlikely, I’d say. Forced lending was at the core of Chinese economic growth. Simply put, there is too much debt to go bad. According to Ernst and Young, one-third of the $700 billion in loans taken out by local governments may face repayment problems. The People’s Bank of China estimates that Chinese banks’ exposure to local government loans is 14 trillion yuan ($2.2 trillion), according to the June 17 South China Morning Post. Once lending is cut off, property prices will stop appreciating (and likely collapse — that is what usually happens in a Ponzi scheme). Also, the overcapacity in the industrial sector and commercial real estate will come to the surface. And suddenly everyone will discover that the venerable emperor has no clothes.
I often hear the argument that China will not have a real estate crisis of US proportions because home and condo owners have to put 30-40% down when they buy. So where do people get the money to buy a house that costs, on average, 8 times their annual income (a figure several times higher than in the US)? Some of it comes from savings, and some comes from borrowing from relatives.
Let’s pause for a second. In the 1990s, the Chinese banking system basically collapsed. To revive it, the Chinese government took bad loans from banks’ balance sheets and put them into off-balance-sheet vehicles (Enron would be proud of that financial ingenuity). Banks started to function as though nothing had happened. To finance the off-balance-sheet assets, the government set deposit interest rates at very low levels: 1% or so. In a country with a very high savings rate and 5% inflation, this resulted in a 4% annual loss of purchasing power.
Chinese consumers were punished severely over the last 10 years for the banking crisis of the late ’90s. And they’ll be punished even more soon. Keeping money in the bank didn’t make that much sense, and investment alternatives were limited. However, they could invest in an asset that supposedly never declines in price – a house or condo. So they did. As China slams the brakes on the economy and as housing prices fall, the banks will lose plenty of money. But more importantly, it is the people who bought tremendously overpriced houses, and their relatives who lent them money, who will lose. The wealth and hard work of more than one generation will be lost, and this kind of pain leads to political unrest. That is the Chinese Black Swan!
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email, click here or read his articles here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy Katsenelson’s Active Value Investing (Wiley, 2007) book.
Copyright Vitaliy N. Katsenelson 2011. This article may be republished only in its entirety and without modifications.
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In US there is overcapacity, slack demand and many people are unemployed. There are collecting UI, food stamps, early Soc Sec etc.....govt could have taken money printed for bank bailouts (a lot more than just TARP) and QE and instead spent on building up date internet connection, improve energy systems, rail, roads, free schooling in trades, semi skill jobs and tech college degrees etc...but instead we spent it on banks, UI, food stamps.
china spent the money they are printing on building more houses than they need, roads, high speed rail.
Who made the better choice? China spends 60 percent of GDP on construction. US spends 4 percent.
From Liverpool to Detroit to slums of Rio or Cairo, joblessness leads to most common cultural ills or revolution.
Incans were known to build two roads to same place just to keep people busy.
People can beaid to do nothing, UI and financial elite parasites, or people can be paid to do something that is not in demand, or they can be fully employed doing things that are helpful,wanted by society.
Govts are printing money, why not demand goods and services for it, as China does?
Or, even better, why not demand goods and services that benefit businesses and markets and private enterprise, like safe streets and fraud free markets, efficient transportation and data systems ( telecom monopolies are not innovating, they have pure profit internet connections that are slow but hugely profitable while even small town govt can build out new systems and kick their arises in prices and speed), scientific and technical research in the areas that private businesses have little market incentives (natural, unpatentable health options, real basic science research little material science etc, sponsoring contests/prizes,) etc....
IDK if China's path the best but their bad local loans are simply a different form of our money printing, used for more good their our money printing that mostly goes to elite bankers or to people who would rather have a middle class job, but instead get scrape by on UI and food stamps but China's money printing used for less good, empty houses, than it could be.
I am more worried about the dollar black swan, euro black swan and yen black swan.
too much fortune telling and apocalypse.
Just ask yourselves how does China manage with "only" 2 or 3 % annual growth ?
That puts them way ahead of us.
Happy Halloween 'PBoC' ... My garden has a big { PUMPKIN} loaded with melamine, waiting for you this "FALL".
China and all countries of the world will suffer, one way or another. The US is collapsing, little by little, and the US has been the support of the world for decades. Without it, the rest of the world will go down with it...unfortunately, and China is no exemption.
You grossly overestimate the importance of the US consumer. Buncha fuckin losers. Soon they'll be the prevalent buyers of the world's malt liquor, and menthol smokes, but nothing much else. Maybe they'll start buying all these shitty e-bikes China makes. Anyway, the world will survive without the american consumer. Good riddance.
How do you apply capitalist accounting rules on a 5000 year old culture known historically for diluting their money and living within their own culture and customs no matter whether it is marco polo or timmie gatener.
We re-arranged the Japanese banking system to our own preferences under ragged reagan and the poor bastards still have not recovered. Oh , yeah----the famous stock and real estate bubbles took the fall but it was the new rigid and 'infallible' banking structure imposed by the west that was too rigid to bend to normal boom/bust dynamics that truly at the base of the problem. WE know this problem-----we have been managed for decades by the same.
Now, WE(successful, sophisticated, and corrupt as we are) are telling the Chinese 'how to' do it when they have their own way----we're going to lose this pissing contest. The chinese have all of our production facilities, much of our capital has been given to them(try to get it back against their military----both sides lose all on that brainstorm) should they choose to keep it, and they have the sympathy of most of the world on their side after e 500 years of colonial domination.
I don't have a horse here, guys, all I am trying to say is that this ain't exactly what it looks like.
thanks for the space to express my frustration ZH
You are right. You don't change them, you make a system to take advantage of their beliefs and practices, and use it against them. The design, rigidity etc., was by design, and the end result, looked for ahead of implementation.
Of course there are specific situations, circumstance, loyalties, complications, outside and inside events, but the design is for the "house" to always "Win" just like in Vegas. It may take some time, you may have to be ground down, but the international bankers always win. IMF, World Bank, BIS, and all the other spin-offs.
China' crunch is most likely happening, y'know commies and all that (info is sparse). but nothing stops the fear trade, we await China banks insolvency. Meantime Obama is insane if he allows a debt ceiling increase, the USD will be sold and China takes some more 'rice' inflation.
As far as China bashing, please! It's like this, you have a major fraud based planning economy that has embraced massive credit expansion + housing bubble + inflation + over investment + overcapacity = A complete FUBAR.
Add also the riduclues EUR buying, and EZ debt binge.
The old Chinese: The HK Chinese would be turning in their graves at the new 'gen' debt/con-job (high-rise buildings that will never be built and/or built and sit there). I have so much respect for the old money of China (HK), they ensured HK didn't go into a fiscal meltdown in the early 90's.
China is toast, lock in 2yrs of pain. Then maybe they will come back the powerhouse...maybe
Thank you! I'm soooo sick of China bashers! Most, have never been here, or even have the foggiest notion of what this place is like. I live in Chongqing. I've been in China now for 4 yrs. Japan before it for 8. I can tell you absolutely, in no uncertain terms, this place will not self destruct in our lifetimes. Sure, someday its bound to happen, say 400-500 yrs. but I'm guessing none of us will bear witness to its demise. americans (I'm one,by the way) are too childish. We've had our time in the sun, and pissed it away on trinkets and McMansions. Truth be known, Americans deserve everything bad coming down the pike. These people deserve their time in the sun now. These people suffer, save, work hard, are far sharper than the average Joe 6-pack, and DON'T live beyond their means. I'd say they are far superior to Americans. It's not the end of the world... just the end of your's! Hahaha!
Even black swans swim in water. They won't be able to Photoshop away the drought even if they're pretty good at wiping envirodisasters, poisonings and uprisings off the visual map. Soon it will be time for Chairman Mao to set a new world record for river swimming. http://www.nytimes.com/imagepages/2006/05/13/arts/13cens_ready.html
Why would an 'American' who's lived in China for the last 4 years and Japan for the last 8, have a NZ email address?
Shh, you'll blow his cover working for the Chinese government.
His gooogle translate is on the fritz.
Well, looks like someone gets it at least... dox'd ya out of boredom, but happy to see that you check out. hit me up if you wanna chat. QQ 394025436
Hey Laomei. I've actually gotten a QQ adress, but I'm totally unable to use it, as I can't read, Hahaha! Poor illiterate me! Here's my email- skotowms@yahoo.co.nz
anyone that wants to take a shit in my email... go ahead :)
Tsukato -I would tell you to fuck off if you were not suffering a severe case of Stockholm Syndrome.
Yikes! Why the animosity? I'm just tellin y'all like it is. As someone stated earlier, Shanghai, Beijing, Shenzhen, Hongzhou, etc. are bumming with the drop in realestate resale, but this is having no effect elsewhere. I'm not joking when I say that the growth in this country is the most amazing thing I've ever seen. Tons of new people every day buying new A6Ls, and tons new apartments and villas being built all the time. Its just amazing. I know it must suck to be you fucknuts stuck in the good ol' US, but cest la vie. Thats life isn't it? Somebodys gotta win, and most've gotta lose. So you idiots keep up with the angry China bashing. Buy yer gold, and farms, and stock up supplies. Haha! You alls gonna survive and fight the power ;) Again- haha!
in no uncertain terms do you reveal truth to be known
Really Moron? Pull yer head outa yer ass, and get out and see shit before you write an opinion on a site like this. You don't have a fuckin clue, and quite honestly, I doubt you've ever even left your hometown. Go back to the Alex Jones site and chat away bozo.
i just condensed your angry, butt-hurt red troll drivel...they were your only accurate statements.
your new found 'happiness' shines through. and most of all remember...you're not important.
you make absolutely no difference. it's like you don't exist.
Yeh..of course China will have a credit crunch and subsequent inflation, but Obama is President.
Confucius say, "He who will not economize will have to agonize."
There are socio-economic truths that have been proven throughout history. We are about to be reminded of them, albeit with 50% of the US population receiving some form of Gov't assistance. Are they going to let go easily? Will Obama and his minions of soft "thinkers" let go easily?
Wallyworld = Outlook bleak, who's going to make the shit people buy, or will we stop buying china shit and produce our own, who's going to make paper for all the IOU"s and the fake dollars...........the world is spinning someone hit the "easy button".
The chinese thought they could defy the laws of economic growth. There is a limit to rate of growth. To try to overstep that limit is why they are in the position they are in today.
USA haters blinded by their rage do not see that the USA has China by the short hairs. China can completely collapse and we will make it out ok.
China, you deserve it for unfairly pegging your currency.
Bulll****!
The crash will be the gray/black money being sucked out of everything, mainly property. China's liquidity crunch will be brutal.
Black Swan? Yeah it will catch the butnut China bulls in EZ and US with their di*ks hanging out.
"That is the Chinese Black Swan!" Let's work on this one. A black swan by definition is a totally unexpected, nearly undefinable event that appears seemingly from no where to cause unanticipated consequences. You claim to have outlined in some detail a black swan. Your analysis might be correct. Or not. In either case, it's not a black swan.
sunny
Sorry Sunny, but I know the 9/11/01 situation is sometimes out of place.
On the other hand I believe it is so important to our survival that sometimes I can't help myself. Like this time when I read new material that I read before, but with further backup. I hope the facts are correct, but I had no way of checking them.
sunny - you sound like Mr Micrometer. By definition .....where?
New Information
The Explosions in the World Trade Center Buildings, started, before the planes HIT, according to U.S. Geological Data.
We still have our own problems, that will NOT go away, about our supposed "best friend and Middle East Ally", ISRAEL, who did plan and execute 9/11/01, murdered 3,000 Americans, and we are still paying for it.
Here is some new material on the 9/11/01 attacks, that many may have not seen or heard about, that is truly incriminating for Israel. After all Israel controlled ALL WORLD TRADE CENTER Buildings as well as access to them:
From: Jim Fetzer
Questions about 9/11 Jim FetzerAs a former Marine Corps officer (1962-66), who spent his 35-year career offering courses in logic, critical thinking, and scientific reasoning to college students, it troubles me when my government appears to be lying to the American people. On this 4th of July, therefore, I want to share with you some of the questions that have arisen in my mind about the events of 9/11, which have been used to justify wars in Iraq and Afghanistan at enormous cost in lives lost and resources expended. I don’t claim to have all of the answers, but here are some of my questions—seven for the 4th of July!
(1) The early explosions
In their study, “Seismic Proof: 9/11 was an inside job”, Gordon Ross and Craig Furlong (one an engineer, one a numerical analyst) present evidence that there were enormous explosions in the subbasements of both of the Twin Towers prior to the impacts of any planes on those buildings. They used extremely reliable data from a geological laboratory run by Columbia University and radar and FAA data to come to the conclusion that those explosions occurred 14 and 17 seconds before those planes hit the towers:
My first question, therefore, is how were those 19 Islamic terrorists able to arrange these explosions, which drained the water from sprinkler systems that would have otherwise extinguished the rather modest office fires that remained after the jet fuel was consumed in those spectacular fireballs? I have given this a lot of thought and I can’t figure out how they did that.
The Chinese build houses to keep their masses
busy .
The west has been building cars to keep their masses busy since Henry Ford made it possible for all his employees to afford one.
My point is if living is to build and then destroy and build again all for the sake of keeping busy then we are f..ked or always have been but more so now that we are covering this planet in such a mass density that she is ready to kick are asses.
This will all end some day and not necesarily for the group.
Their economy is Kabuki theatre, just Chinese style, and to think that one country's economy will not be disemboweled is to grossly underestimate the forces seeking a single monetary system.
I'm still stuck in the rural city of Taian and have been to a number cities since 92. The constant building of eventual empty structures can only go on so long. It is just the Chinese version of kicking the can down the road.
totally correct. and it will prove once and for all Keynes was wrong. You cannot run an economy by paying someone to dig a hole and paying someone else to fill it in. The Austrians are correct on this point. Non productive efforts take away productive potential from better uses.
Is their goose cooked?
Will it taste like Peking duck?
We can only hope it leads to civil unrest and an end to the PLA and Communist Crony Capitalism - especially their torrid affair with the U.S. Political and Corporate crony capitalist klepto-oligarchs who have sold out their populace as well.
Only problem with civil unrest, nukes-nukes everywhere...
Another socialist, centrally planned economy collapsing because an elitist group can only bugger the money supply, and steal the public's wealth through state sponsored lending, and distort the real demand and supply aspects of human needs and wants through crony legislation?
Kind of sounds like the Satanic Tribe, Wall St. and big government is doing, doesn't it!?! Change the names and locations, but the game is the same!
Kind of sounds like the Satanic Tribe, Wall St. and big government is doing, doesn't it!?! Change the names and locations, but the game is the same!
Agreed
a black swan event is an event you can't foresee......
wow - Commie-lovers trolling..... picked up (only) 2 junks last night? the dude below got 3 - I'm jealous. Well, I concede his a more direct slander on Chicom's. ha!
exactly! that's why when China collapses into itself like a black hole (which it will), it's only a black hole, not a swan - because you heard it here first
More treasuries for sale!
The news last week showed peasants arguing with each other over green peppers that have shot up 300% in price....the peasants said most of the food---rice, etc,-- has risen to unaffordable levels while at the same time they are being displaced by wealthy RE developers.
Looks like bankers and RE developers got most of the $800 Billion Bailout (surprise, surprise, surprise!!!) while farmers and the average person has been left out....a scene repeated in many Western countries also looks like.
At the same time you see literally millions of empty houses and apartments there all bought on speculation. Many people bought five or six condos on spec...sounds familiar to las Vegas.
I hope they work it out....there are over 1.3 Billion people there and they are not as tolerant (Sheeples) as in the West.
Black swans eat red herrings!
I place the argument that there is little comparative leverage in the Chinese housing market. There will definitely be those who are highly leveraged, and they will fall, but the most vulnerable segments of the population (purchasers < 2000) who are older generally have full equity in their property. These people don't care if prices tumble.
I think the real Chinese black swan is the migrant workers in the cities. There are a whole lot of them and they're not going to like being jobless in a real recession combined with hunger and knowledge of their family back home going hungry. The party may try to force them out, which would make matters worse.
The migrant workers won't become unemployed. They will return to their villages and go back to farming. They will make a lot less, but they won't starve.
See my reply to Freddie above.
"the most vulnerable segments of the population (purchasers < 2000) who are older generally have full equity in their property"
I'd be interested to know what evidence you can provide to back up this claim....
I speak of what I know of the people, from my family over there, and from my own experience in the property market there. But I can lay a few points on the matter.
- The older chinese people are savers, plain and simple. Savers don't tend to like leverage. They tend to have 100% equity in their property because they purchased their homes in the 90s.
- The speculators are already rich. Fortunes will be lost by some, but they won't be a risk to the society.
- The population grows fairly slowly, so there really isn't much demand for new homes.
So let me put you in, say, my mother-in law's position: You purchased your home in 1992 for a company subsidized price of $5000. It was paid off in 1997. Your home is now worth $800,000. Do you really care if it drops to $500,000 or even say $30,000?