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Rock, Chinese Economy, Hard Place
At this point, the Chinese bubble theory is well out there. With a number of high profile public acknowledgements of the liquidity driven bubble over the past 6 months, China is finally looking to take steps to prevent (or at least slow down) the massive publicly funded inflows into related financial markets. With the Shanghai Composite Index down about 22% in August, China is caught in a somewhat tricky situation as it attempts to slow the flood of money without plunging the economy into a further spiral.
Depending on the specific measures taken, we could see a controlled deleveraging or a clumsy, heavyhanded attempt to put the brakes on. The prospect of a highly leveraged Chinese economy facing a sudden liquidity shortage is terrifying for both economic and political reasons. With increasing unemployment for college graduates and a significant deterioration across other macro factors, the only real driver has been record lending by Chinese central banks. Despite all the cosmetic changes, China remains a centrally controlled economy and it is a very tough challenge to manage liquidity flows across the financial system without blowing up the current structure.
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It is a very tough challenge to manage liquidity flows across the financial system without blowing up the current structure.
This is exactly what every other central bank and national treasury is attempting with similar results. I still believe that there are growing problems with maintaining psi in the conduits of international finance and any engineer that specializes in high velocity pressurized pipelines and flow systems can tell you, this has a high probability of cascading into a partial or systemic disruption. The issue now dawning on the Chinese is if they attempt a fazed shutdown or risk a sudden calamity in dealing with this impending disaster. Welcome to the jungle.
http://en.wikipedia.org/wiki/Daniel_Bernoulli
He can make you fly. He can make you fall out of the sky. He can explain why your hardened arteries are increasing your blood pressure. But when he takes you into thermodynamics. Entropy gets us all. Gotta watch out for those phase changes. When the number of solid atoms doesn't match the number of liquid atoms because of fractional reserve pretense of creation. Even trying to balance it with derivitates to create a huge cloud of hot air gas to contain the solid atoms won't make it add up in the end.
How many ways can the inside of a system be arranged without an external observer being aware that the rearrangement has occurred. The answer is simple. Less than have occurred.
Eh!? In troll-speak please!
Or, at least fork over your brains so the zombies can have a Hawaiian luau.
Zooommm! That's the sound your comments made as they flew right over my head!
Hephasteus, a lover of history...specifically greek history. Have you studied Philosophy much? -Michael
Aircraft emphatically do not fly due to the Bernoulli effect. That's one of the more egregiously-widespread examples of simplistic high-school Mythbusters-style answers to physics and engineering questions.
Fluid dynamics fail in 3. 2. 1..
Question. If the "banks" (or branches of the Chinese goverment) have issued 1 Trillion in USD on credit ...assuming they do the same thing as the FED (when it all blows up) what will that do to their "HUGE" reserves? How long could they continue to issue phantom credit (which is plowed into savings and equities) on the back of a collapsing export economy? Don't their exports pay for all of that credit? What is the run rate on this current policy or asked another way how long can they keep this up?
china is growing. period.
China is growing helping zombie companies that have non-economic business models. The growth can last until China burns through its reserves bailing out bad loans to zombie companies by zombie banks. At that point China crumples, like the US in the 1873 long recession.
So who do you think will burn through their reserves first, the US or China?
The US has no reserves! Ha! Snap!... oh wait...
The set-up for china-anstalt-syndrome.
BY JORDAN CALINOFF | SEPTEMBER 3, 2009
foreignpolicy.com via SeekingAlpha Blog
In February, local Chinese Labor Ministry officials came to "help" with massive layoffs at an electronics factory in Guangdong province, China. The owner of the factory felt nervous having government officials there, but kept his mouth shut. Who was he to complain that the officials were breaking the law by interfering with the firings, he added. They were the law! And they ordered him to offer his workers what seemed like a pretty good deal: Accept the layoff and receive the legal severance package, or "resign" and get an even larger upfront payment.
"I would estimate around 70 percent of workers took the resignation deal. This is happening all over Guangdong," the factory owner said. "I help the Department of Labor, and they'll help me later on down the line."
Such open-secret programs, writ large, help China manipulate its unemployment rate, because workers who "resign" don't count toward that number. The government estimates that roughly 20 million migrant factory workers have lost their jobs since the downturn started. But, with "resignations" included, the number is likely closer to 40 million or 50 million, according to estimates made by Yiping Huang, chief Asia economist for Citigroup. That is the same size as Germany's entire work force. China similarly distorts everything from its GDP to retail sales figures to production activity. This sort of number-padding isn't just unethical, it's also dangerous: The push to develop rosy economic data could actually lead China's economy over the cliff.
Western media outlets often portray Chinese book-cooking as part and parcel of a monolithic central government and omnipotent Beijing bureaucrats. But the problem is manifold, a product of centralized government as well as decentralized officials.
Pressure to distort or fudge statistics likely comes from up high -- and it's intense. "China announces its annual objective of GDP growth rate each year. In Chinese culture, the government has to reach the objective; otherwise, they will 'lose face,'" said Gary Liu, deputy director of the China Europe International Business School's Lujiazui International Financial Research Center. "For instance, the government announced that it wanted to ensure a GDP growth rate of 8 percent in 2009, and it has become the priority for government officials to meet that objective."
But local and provincial governmental officials are the ones who actually fiddle with the numbers. They retain considerable autonomy and power, and have a self-interested reason to manipulate economic statistics. When they reach or exceed the central government's economic goals, they get rewarded with better jobs or more money. "The higher [their] GDP [figures], the higher the chance will be for local officials to get promoted," explained Liu.
Last October, Vice Premier Li Keqiang said in a speech after inspecting China's Statistics Bureau, "China's foundation for statistics is still very weak, and the quality of statistics is to be further improved" -- a brutally harsh assessment coming from a top state official.
Indeed, China has predicated its very claim of being the healthiest large economy in the world on faulty statistics. The government insists that even though China's all-important export sector has been devastated -- contracting about 25 percent in the past year -- a massive uptick in domestic consumption has kept factories producing and growth churning along. A close examination of retail sales and GDP growth, however, tells a different story. China's domestic retail sales have risen about 15 percent year on year, but that does not really translate into Chinese consumers purchasing 15 percent more televisions and T-shirts. The country tabulates sales when a factory ships units to a retailer, meaning China includes unused or warehoused inventory in its consumption data. There is ample evidence that state-owned enterprises buy goods from one another, simply shifting products back and forth, and that those transactions count as retail sales in national statistics.
China's retail statistics seem implausible for other reasons, too. They would imply an increase in salaries among Chinese people, allowing them to purchase that extra 15 percent. To be sure, the Statistics Bureau reported salaries had increased 12.9 percent in the first half of 2009. But Chinese netizens complained such numbers were hard to believe -- as did the bureau's chief.
A look at GDP growth also raises serious questions. China's economy grew at an annualized 6.1 percent rate in the first quarter, and 7.9 percent in the second. Yet electricity usage, a key indicator in industrial growth and a harder metric to manipulate, declined 2.2 percent in the first six months of the year. How could an economy largely dependent on manufacturing grow while its industrial sector shrank?
It couldn't; the numbers don't add up. China announced a $600 billion stimulus package (equal to about 14 percent of GDP) last fall. At that point, local governments started counting the dedicated stimulus funds in GDP statistics -- before finding projects to use the funds, and therefore far before the trillions of yuan started trickling into the economy. Local governments keen to raise their growth and production numbers said they spent stimulus money while still deciding on what to spend it, one economist explained. Thus, China's provincial GDP tabulations add up to far more than the countrywide estimate.
Alternative macroeconomic metrics, such as the purchasing managers' index (PMI), which measures output, offer a no more accurate reflection. One private brokerage house, CLSA, compiles its own PMI, suggesting a sharp contraction in industrial output between December 2008 and March 2009. Beijing's PMI data, on the other hand, indicated that industrial output was expanding during that period.
Unfortunately, such obfuscation means China's real economic health is difficult to assess. Most indicators that would help an intrepid economist correct the government numbers -- progress on infrastructure projects, end-user purchases, and the number of "resigned" workers -- are not public.
Still, it is possible to infer the severity of the gap between economic reality and China-on-paper by looking closely at monetary policy. China's state-owned banks dramatically increased lending in the first half of 2009 -- by 34.5 percent year on year, to more than $1 trillion. This move seems intended to keep growth artificially high until exports bounce back. Most analysts agree that it is leading to large bubbles in the stock, real estate, and commodity markets. And the Chinese government recently announced plans to raise capital requirements -- an apparent sign it sees the need to reign in the expansion.
For the long term, China is banking on its main export markets -- in the United States, Europe, and Japan -- recovering and starting to consume again. The hope is that in the meantime, rosy economic figures will placate the masses and stop unrest. But, if the rest of the world does not rebound, China risks the bursting of asset bubbles in property and stocks, declining domestic consumption, and rising unemployment.
That's when the Wile E. Coyote moment could happen. Once Chinese citizens no longer believe that the economy is doing well, social unrest and more widespread worker riots -- already increasing in scope and severity -- are likely. That's something that China will have a harder time hiding. And then we'll know whether China's statistical manipulation was a smart move or a disastrous mistake.
Damn, this scenario sounds bizarrely familiar . . .
Do a search and replace on China/Chinese with US/American and see what I mean.
Question: Why are Chinese line workers getting better deals for leaving their jobs than we are??
Could it be that--sad as it may be--their capacity to respond appropriately to their "totalitarian" government may be more of a threat than ours is in this putative "democracy"?
Interesting thought Bob... the responsiveness of the government in a democracy (and I use that word loosely) versus a totalitarian regime. China is portrayed as quite heavy handed with significant human rights abuses... so then why would their workers get better deals for leaving their jobs than ours are... why would the Chinese government even care... is it possible that the populous and the government are equally matched thereby creating a better balance than what we have currently in the United States.
And I will bet, that for every human rights abuse in China... I can find an equally egregious human rights abuse in the United States... it just depends on who is judging the abuse... and the United States has appointed itself the judge for far too long.
My 5 year old keeps asking why everything is "Made in China" and I have half a mind to tell him that "he" is in deep trouble because thats the myth we all have been living in since the great boom started alongwith the 401k programs in 1982. Manufcturing started moving out and manufacturing workers started moving to the housing industry. As housing dies off I wonder where those folks can move to? Maybe China since everything will be made there anyways ? I am hesitant to be short on China (sneer sneer) !!
Obviously you missed the period when everything was 'Made in Japan' ...
No myth, just cheap labour and heaps of capital. When your governments increase taxes plus the cost of unemployment insurance rises than follow the money, to eithe India and / or China.
Until such times as your politicians wake up to themselves nothing will change.
I stressed you policticians as they are clueless just as those that voted for them!
> Manufcturing started moving out and manufacturing workers started moving to the
> housing industry. As housing dies off I wonder where those folks can move to?
Why, Wall Street, of course. Can never have too many high-frequency traders.
After all, they add "liquidity," right?
The Shanghai market calls the tune
It’s not yet the end of China’s massive stimulusAgreed Anon, China is a world unto itself and I am keenly awaiting Oct 1 and a possible rejig.
Let us hope that Pettis's students have sufficient sway within the government to have some influence.
Why does CNBS and the mainstream economists view the Chinese economy in a Austrian way and then look strait at the US economy in a Keynesian way ?
No one wants to buy our debts anymore and now instead of cash for our tax refunds, we'll get US debt instead. Fabulous.
http://news.yahoo.com/s/ap/20090905/ap_on_go_pr_wh/us_obama_retirement_s...
That isn't going to go over so well, especially after public horror over the mess in CA.
but the spin from the administration's PR department is interesting (sort of flys in the face of trying to get the consumer to spend) it sounds to me like rock and a hard place
Obama to workers: We'll help you savehttp://money.cnn.com/2009/09/05/news/economy/Obama_retiremetn/?postversi...
Ok, so if this isn't going to be mandatory, why the fuck is there going to be government involvement? Let's break this down... I get my tax refund every year via check. With that check, I can do whatever I please, e.g. save it, spend it on hookers and cocaine, or purchase savings bonds...
Now, why the hell does there need to be a government program where they need to staff additional people to handle the paperwork of determining whether I want a savings bond instead of a check? Why do we need to add redundancy? If the system is already in place for me to buy savings bonds at my leisure, why do we need this?
And whoever thinks it's going to be mandatory doesn't get it... they desperately need us to consume... too bad we have to account for the decades of refusal to save... and when all that and all our savings are back where they should have been... when we "catch up" to where we should have been on retirement savings... then we'll start to consume a little more... maybe.
So, exactly where did you say the cocaine and hookers were located?
Buckhead, Atlanta.
I'm sure this wasn't what advocates of printing "US note" currency had in mind.
Maybe even a future plan to make them transferable? ;)
If the US experienced true capital flight, then the markets would melt down and it is doubtful that reflation would work.
As long as the authorities have room to reflate, then the long-term trend of indebtedness and financial excesses will continue to probe new heights.
Question: How will you recognize the capital flight?
http://1.bp.blogspot.com/_H2DePAZe2gA/SpTG9COOpZI/AAAAAAAAJpY/3XCjz0_nIl...
Follow up: Will its repercussions occur at a slow pace or instantaneously?
1. The Chinese are not stupid.
2. They are simply killing foreign money that's in the market. They are also not interested in unpegging the RMB. China is inflating RMB money supply so that the currency peg is kept and INCREASE foreign exchange reserves.
3. There is an underutilisation in China, not overcapacity.
Underutilization assumes that there is something needed. Currently there is nothing that is needed that can be brought to the marketplace, the exception of course being jobs. However you cannot simply create jobs for jobs sake otherwise we would have done that; we are trying with govt stimulus based jobs but obviously those expire when the money runs out.
As for China, the attitude towards consumption is very different from the West. There is a lot of talk about stimulating domestic consumption habits but I think that will by and large be a failure especially in the wake of a crisis. The factories that we deal with (I'm in a manf. business) are cutting costs on all fronts to keep business because they know that other factories are desperate for business, in two years we've seen 180 degree turnaround in business attitudes toward importing countries (this is my experience).
While the PRC may very well keep equities juiced like the US does I think what we'll see is a falling out/consolidation whereby the weak co's go under and wipe out shareholders and the viable co's absorb their clients and emerge in a better position to do business. The near term suggests that PRC will do everything it can to keep markets floating until Oct. but then what? Why stop there why not keep them floating until Dec. or next March? The idea is a little nuts and there isn't real demand, but plenty or goods, manpower and commodities on the supply side.
...still not seeing any commentators getting how commodities, equities, home prices could all implode at once. We're just like Japan 1990 or U.S. 1930 - squared, because Bernanke was determined not to repeat the mistakes of his predecessors in Japan and the U.S. by responding too little too late. We are in uncharted territory, with the fed manipulating markets from junk bonds to treasuries to stocks. The tighter you pull the rubber band, the harder it snaps when it breaks...
Can't believe there isn't an end game play. How it will unfold, and how implemented is the question.
The uncertainty is making wealth holders nuts; they're afraid of being gamed out of their estates as has been lately shown by the squid.
Slightly off topic, but recent headline on Bloomberg reads:
"Turkey May Avoid IMF Loan With 'Fiscal Discipline', Central Bank Chief Says". No alluding to exactly which turkey it was directing its good news to, but I think we could all make a pretty good guess.
Well, China is US fast-forward. us' joe six-p leveraged up to the ears between 2000 and 2007, now the chinese soe's, property developers and order-less export firms are surviving thanks to charity of their neighborhood BoC banker, not to forget the brokerages like Goldman Gao Hua advertising daily for new stock trading margins to new clients on the steets of Wuhan (anyone been there? Cornelius maybe?). So we expect massive delinquency when the massive liquidity pipes are turned down. Nonetheless expect 8% gdp growth for the next 35 months.