This page has been archived and commenting is disabled.

Is China's Economy Really Imploding?

rcwhalen's picture




 

The consensus view of China is that the country is imploding due to the collapse of the export sector.  This view is widely held and considered almost obvious by experts ranging from Jim Chanos to Marc Faber to just about every private equity investor I know.  And all of the arguments make sense.  But they may also be dead wrong. 

I come to the subject of China having read East Asian history at Villanova University in the 1980s under the wonderful lecturer Cornelius Kiley.  Later I worked with many Asian firms as a consultant and then as a researcher covering the semiconductor capital equipment space with Fred Ramberg and Ry Ward.  This last experience was most revealing because of the intense competition between China, Taiwan, Japan, Korea and the other nations of the region in terms of manufacture of silicon based components and finished electronics.

The China meltdown scenario is based on the idea that China’s economic activity is entirely based upon export sectors and that domestic demand is not sufficient to support the country.  But as my friend and colleague at Tangent Jim Rickards noted recently, if the economy slows the Chinese government will just build a few more cities. Or to put it another way, the Chinese could flush most of the banking sector and just start more banks.   After decades of socialist construction, what we think of as market mechanisms are still primitive and tightly controlled political constructs.  

When my friend Leland Miller started the China Beige Book (“CBB”) earlier this year, I was fascinated by his reporting that said that the non-export sector is actually stronger in China than most western observers believe.  CBB reports in the upcoming Q3 2012 analysis:

“China’s economy is not just manufacturing, and there has been a general over-reaction to that sector’s problems. While CBB Q3 results confirm manufacturing weakness, our survey extends to retail, services, property, and other sectors. Most other sectors show more resilience and greater confidence than manufacturing.”

What is more interesting is that CBB reports a decline in the demand for credit in China, this even in the face of a loser monetary posture by the central bank.  There may be a finite limit to China’s ability to absorb the disastrous decline in exports, but perhaps the west is over-estimating the importance of such a shock, both in political and economic terms.  

Having worked in a number of “emerging markets,” the western fixation with government economic data in China and other nations always astonishes me.  Jeffrey Sachs scandalized the Chinese government years ago by suggesting that the data was “too good to be true,” and indeed it was. Or as CBB put it in their Q2 report: “Astonishingly, virtually all economic analysis of China—even by the most high-­profile China experts, macro-­ economists, investment Banks and hedge fund managers—still relies on this sorely limited set of state-­sanctioned figures.”

So is China really imploding?  My sense is that the reality is a lot more complicated than western audiences believe.  Jim Rickards, who travels to Asia regularly, told me today that the CBB report which says that more credit may have lowered interest rates without increasing loan uptake “is completely consistent with the information I received in Hong Kong.”  

Rickards adds: “This is why we should expect a decline in the reserve ratio and an increase in the loan to deposit ratio because those are both more powerful ways of stimulating lending than lowering rates.  China cannot do QE because there's nothing to buy. Lowering rates does not work because of the asset-liability mismatch. So the only way to ‘ease’  in China is to increase leverage. That works.”

So when you hear western experts wringing their hands over the impending collapse of China’s export driven model, it is useful to remember that this economic model is merely the latest experiment by China’s leaders in imitating western paradigms for growth.  This experiment is conducted under the tight control of China’s communist party.

Just look at the news reports today about China deploying an aging aircraft carrier purchased from the Ukraine.  China has neither the aircraft nor the trained cadres to actually operate an aircraft carrier at sea, but the desire to emulate the military capabilities of the US and other western nations makes such an expensive endeavor worthwhile.  

The fact of having an aircraft carrier is not so much a statement of military might as of geopolitical pretensions as well as internal political need.  It is that political prism, ironically, which we also should use to assess economic data coming from China.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 09/26/2012 - 18:13 | 2833839 ekm
ekm's picture

Mr Whalen

The consensus view is that just will do stimulus and never implode.

A minority thinks that China will implode. If this were not true, all foreigners would have left China already.

Wed, 09/26/2012 - 17:15 | 2833631 steelhead23
steelhead23's picture

Uh.. Mr. RC - Isn't it non-trivial that increasing leverage in the West led inexorably to the debt monster that is now busily devouring those economies?  If so, why do you believe that increasing leverage is just the medicine the Chinese now need?

Wed, 09/26/2012 - 16:25 | 2833412 honestann
honestann's picture

I have a semi-relevant comment.  I've written a few messages here in ZH to try to explain why a society in which costs are very low is very healthy - including its economy.  Unfortunately, most westerners can't get their heads around this concept, which is understandable since they never lived in such a place to sample the real-world dynamics.  In such a society, large quantities of [not even close to rich] individuals can bootstrap a productive life and start new businesses much more easily.  When the basics cost little, even poor folks can get by, be easily helped by family, friends and others a bit further up the wealth ladder, and not impose a huge drag on everyone (as in welfare states).

Well, China had such a society, and this largely explains how China was able to pull off the so-called "Chinese miracle".  Today, however, wages have risen considerably, baseline expenses in most regions have risen dramatically, and the tolerance for marginal living conditions has fallen considerably.

My point is, China has spent most of the advantages of its former "low cost society".  Which means, those advantages cannot be spent again.  In fact, once a country wastes the advantages of a "low cost society", there is no easy way to recapture the enormous advantages and efficiencies of "low cost society".

So China will now gradually lose its reputation for being "the place to manufacture", as well as "the place to invest".  While this won't happen overnight, my point is, "it is all downhill from here".  Oh sure, they'll now waste lots of money and attention trying to convince everyone they're still "the country".  Hopefully not by actually playing any military cards, because that would become horrendous for them and many others.  But they'll certainly play military bluster cards and military threat cards, as well as all sorts of typical government BS cards.  The world has seen this many times, though apparently only a few people on this planet bother to notice how amazingly repititious predator-DBA-government behavior is.

China played the size card.  China should have played the efficiency card.  Oh well.  China can still gradually morph into a good place and good neighbor if they want to.  However, that's not the usual pattern, so don't bet on it.

Thu, 09/27/2012 - 10:30 | 2835318 Signs of the end
Signs of the end's picture

Well I must say that you have a much better handle of how societies rise and fall than the author of this dumbass article. Jim Rickards is also an intelligence operative that goes around spreading disinformation. China can in no way absorb domestically all of its manufacturing output, not by a long shot. The same is even more true of India. Out of all the BRICS nations, China may be best positioned to survive the coming crash but only if it does not embark on any more dumbass projects building ghost cities as this lunatic suggests. However as the export engine of China crashes like its high speed trains, look for a second Chinese revolution that will make Mao's revolution look like a Sunday picnic!

Wed, 09/26/2012 - 18:58 | 2833926 falak pema
falak pema's picture

USing the Ricardo principle of comparative advantge of low cost* was the whole plan of the NWO oligarchy that outsourced to China; the Nike-Wal MArt model, now the Apple-Foxconn model + Wal Mart.

The whole strategy of outsourcing production to low cost centers was the motor to generating 30% returns for the 1% over last two decades; and it worked on the supply side, but not on the demand side totally fueled on debt. Debt that was supposed to be held in new gold : "the reserve fiat"; tied into the real golden threads of surrogate OIL-Usd hegemony and Chindia production all for the US consumer! 

A "can't lose perpetual machine construct." Provided the US controlled th 3 silken threads of :  Oligarchy design and market monopoly, financial power house and reserve currency monopoly, and MIC/OIL pipeline monopoly. 

The 3 Ms  like the 3Ls of Conrad Hilton type mantra! 

* the issue is cost/productvity balance for an acceptable level of value added quality. 

Only problem : human greed and debt frenzy.

But forgetting that for a moment, the Oligarchy has the possibility of subcontracting out to a New hungry labour market the production module, as each old production unit; aka Chindia today; gets non competitive. It was the NWO strategy.

The problem today is not Chindia going rogue on US hegemony; the problem in the runaway rot from within. 

All Empires collapse from within, then collapse from without. The USA is now fragile, very fragile, like Pax Britannica in 1900.

You are spot on about the situation in China, but it is not the key domino today. It still needs 10 years to become one. And if the US replaces them with a new labour surrogate and somehow maintains their Empire, China will be in trouble.

We will then see if the Chinese model has resilience per se; as we are seeing the US model in decay. The idea of a local dynamic market in SE Asia needs for China to be on friendly terms with Japan and neighbours; not in expansionist war! 

That would be a recipe for disaster; like USA today. 

Wed, 09/26/2012 - 17:07 | 2833558 Slightly Insane
Slightly Insane's picture

Ms Honestann,  your insight into the behavior of the Chinese people is welcome and insightful.  Thank you for your comments.  The United States was in a similar position through the 50's and 60's, but it turned in the 70's.  I am not sure when the folks I will refer to here as the Communists began to employ their "gumming up the works" here in the States.  They were the ones who pushed for "welfare", "unemployment insurance", OSHA, the EPA, and a whole host of other costs that would burden industrious people (and honest people) who did not need their costs added onto their overhead.  (It was always done under the premise that everyone would benefit, but such is not the case).  Then there were the people who gravitated to the government teat, not understanding that they undermined the productivity of the producers.  Now I come to understand that the Feds in control of the new Affordable Care Act (we always name things 180 degrees from what they really represent), are looking for methods to "ration" the benefits delivered in the system to move the parasites to the grave.  Indeed we have come full circle (well we may not yet be the full 360 degrees, but we are close in terms of years).  The lawyers here (another type of parasite, which at one time was an honorable profession) have raised the cost of "everything related to business", and we have another class referred to as "insurance" (which includes workman's compensation, general liability, and a whole host of otherwise parasitic costs) which bleeds profit from every pore of the host.  I am a small business guy, who gets to deal with it all.  I have often thought it may be time to go Galt, (a reference to Atlas Shrugged - Ayn Rand), however, I have one left in college (in an engineering pursuit), and since I am funding his education on my money saved for old age, it may still be a couple years more before I move to the sidelines and cherry pick the jobs that I'll work on.  In the end, I hope common sense returns to the U.S., but more then half the population is brain dead, and are parasitic.  I expect that there will be some traumatic changes to the behavior of those in that class of people. 

The Chinese may have the better advantage yet as they have not left their "industrious nature", "are not in debt", and have had recent tastes of prosperity (deserved).  Those in China may indeed experience what the U.S. experienced in the "Depression", however, they are in a better position with regard to "people have not yet forgot what it is like to spend as little as possible while stockpiling those things which will allow them to climb back out from a very slow economy.  Those in the U.S. have forgotten what "austerity" is like, and what it means to have an "unemployable position". 

Wed, 09/26/2012 - 19:09 | 2833974 honestann
honestann's picture

Just make sure you don't wait too long and get yourself or your assets trapped in predator-gone-wild-town.  I finally went "totally Galt" 3 years ago when I permanently left the USSA.  But I've been "mostly Galt" for essentially my entire life, living frugal, avoiding banks, saving only in real physical assets (mostly gold), and avoiding almost everything "official" or "formalized" or "regulated".

Maybe I was a LITTLE bit earlier than I had to be.  On the other hand, life has been better out here in the extreme boonies in elsewhere-land than it was in depressing and nerve-jarring USSA.  I only wish all good folks knew how much better their lives could be if they got out of dodge.

OTOH, it is very important to move to one of the "right places", which means a lot of things, but includes "somewhere you feel good".  Some research will help.  Then personal exploration will help even more --- but whatever you do, don't live as a tourist and expect to figure anything out.

Thu, 09/27/2012 - 22:34 | 2837482 ltsgt1
ltsgt1's picture

Ms. Honestann,

I have been thinking about getting out too. Do you mind sharing where is your end of the rainbow?

Fri, 09/28/2012 - 19:49 | 2840453 honestann
honestann's picture

Actually, I can do better than that.  I spent years exploring the world for places that are better alternatives than the USSA, and moved to one of them 3 years ago.  Rather than tell you which one I chose, which I avoid doing on general principles, here is a ZH post where I described some of the good places I found.

In that post, I limited myself to generic considerations that apply to everyone.  I did not discuss personal considerations that apply only to me.  For example, I prefer low humidity, oceanfront or ocean views, warm water to swim and snorkel, diverse and "wild and crazy" geology (desert, mountains, islands, etc), reasonably warm weather, southern hemisphere, plenty of "extreme boonies", and several more.  Not that I managed to combine every desired feature in my final choice of course, but these and other characteristics were on my "want list".

Here is a link to a couple posts.  Hope they help.

 - http://www.zerohedge.com/contributed/2012-09-22/takers-and-payers#comment-2822679

 - http://www.zerohedge.com/news/2012-09-26/quote-day-iran-us-eu#comment-2833876 

Wed, 09/26/2012 - 16:40 | 2833485 ImfallibleK
ImfallibleK's picture

Great post. Thank you. 

Me love you long time.

 

Wed, 09/26/2012 - 16:18 | 2833397 Inspector Bird
Inspector Bird's picture

Sooo...China is one big cargo cult, testing out 'paradigms' they see in the West to determine which will bring the riches?

Those 'paradigms' are costly to test, aren't they?  Aren't they inefficient?  Aren't some of the malinvestment at their worst?  That aircraft carrier is just a show and it may lead to more investment of similar nature - when they learn how to use it properly, right?  Or they may run out of money first.  Unlikely, but even if they choose to invest all their money in their military, then people will starve...etc, etc.

 

I'm hard pressed to see how your facts supports your claim.  You need economic freedom to grow properly, not a state saying "ok, build another town so it falls apart, that will keep workers happy."

 

Wed, 09/26/2012 - 16:17 | 2833391 billwilson
billwilson's picture

Huh?????

The China meltdown scenario is based on the idea that China’s economic activity is entirely based upon export sectors and that domestic demand is not sufficient to support the country.

 

No! It is based on the fact that the investment component of GDP is in excess of 50%, which is totally off the scale, especially for an economy as big as China's. It is unsustainable.

 

Yes for a while you can keep building empty cities and excess capacity ... but the day you stop, and one day you have to stop ... the whole fucking thing comes tumbling down, because there is no real economy that actually makes a profit on anything.

Wed, 09/26/2012 - 16:28 | 2833436 kaiserhoff
kaiserhoff's picture

Not my area at all.  Hell, I don't even trade Forex, but I think you're right.

I have noticed for some time that the margins on all that "export miracle" are razor thin, and that  every trade had to be run through Hong Kong "fixers" who understand both Western business law and the current political powder kegs in China.  Not anything to encourage investment or confidence.

Wed, 09/26/2012 - 15:51 | 2833256 SmittyinLA
SmittyinLA's picture

the china economic potential is huge, visualize a rowboat with 1.2 billion oarsmen all tied to a bunch of communist anchors attached with twine that's stretching thin, they haven't even begun to unleash their economic potential, look at the old soviet union's economies and what happened after they cut their twine (they grew in proportion to their economic freedom). 

Wed, 09/26/2012 - 15:49 | 2833236 Notarocketscientist
Notarocketscientist's picture

You are a total fucking idiot.  I spend half my time in China - last weekend outside of Shanghai I visited one of these ghost towns.  400 villas - TWO of them had tenants.  The rest were falling to pieces.

Using your stunned logic china may as well build a subway from Beijing to New York.  Actually that would make more sense than building millions of homes when there is no demand and NO RETURN on them!!!!

And to top it off you should advocate building the subway using millions of men with shovels.  Imagine what that would do for the GDP numbers!

Again - you are a total fucking idiot who hasn't a fucking clue what you are talking about.

 

Oooh - you worked for a company consulting in China ----- ooooh big expert.  Big fucking jerk off is more like it

Wed, 09/26/2012 - 16:42 | 2833495 ImfallibleK
ImfallibleK's picture

It's so nice being able to unload in total anonymity, isn't it?

God bless the internet and nerd rage.  

Wed, 09/26/2012 - 16:19 | 2833399 billwilson
billwilson's picture

EXACTLY!!!!

Wed, 09/26/2012 - 15:46 | 2833222 billsykes
billsykes's picture

So if you are on the side that says imploding, then what you are saying is that the second biggest economy in the world is going to bump down 10 spots?

As much as I hate to be on the losing side, its a fact that all economies, especially growing ones have ups and downs. but in the long run, they are going to be the biggest economy in the world, like it or not.

At least they are building infrastructure, not like the leaders here that want to see USA burn in hell and are doing everything in their power to bankrupt the American people.

China is like lets build a bridge or a dam or a city, America is like lets print money to give to banks for free so they can stuff it in their pockets and not lend. It's been 5 yrs hows that working?

 

 

 

Wed, 09/26/2012 - 15:34 | 2833156 Theosebes Goodfellow
Theosebes Goodfellow's picture

~"So is China really imploding?  My sense is that the reality is a lot more complicated than western audiences believe."~

More complicated? There are a couple of facts that are ever-present in my mind when I think of China.

1.) The first is that China has a migrant population that exceeds the entire American population. That's over 300 million people constantly on the move.

2.) China has, in living memory, faced starvation. This weighs greatly in all that they do. They know what that monster looks like. It's a fundamental difference in how they view what factors are most important in society. We westerners complain about civil rights in China. To the Chinese, social harmony is more important that individual rights. Losing social harmony means people starve.

3.) Although the Chinese government knows we've screwed the pooch on the USD, and are actively buying gold for the day they have to actually float the ruan on its own merits, doing so will absolutely and completely kill their export trade.

4.) Regardless of what anyone else says, the Chinese are not prepared to survive on internal trade alone without going to a) an unregulated currency that is b) backed by gold.

So in a sense, they too are screwed. If China is not imploding, why are they turning back foreign shipments of iron ore and other such items?

Lastly, with an unbalanced birth rate because of their one-child policy and selective abortion, China has all the things it needs plus a driving reason to engage in war, though not just yet. The question then becomes, if not now, when?

Wed, 09/26/2012 - 14:32 | 2832958 FishHockers
FishHockers's picture

RCW

 

 

Being originaly from King of Prussia, partying on the main line. Now is SW Fl. I always like what you have to say, just not sure what this article is trying to say.

Wed, 09/26/2012 - 16:04 | 2833320 RockyRacoon
RockyRacoon's picture

Wondering the same thing myself.  The article has an other-worldly air about it.  If I didn't have the respect I have for him I'd say he's talking some book here.  Just the strangest generalizations and ephemeral observations.   Maybe he was just a bit off his meds that day.

Wed, 09/26/2012 - 14:26 | 2832938 beatus12
beatus12's picture

China is a complete fabricated lie.

50 - 80 million manufacturing jobs

will head to new continents alone

in the next five years because

of increased labour costs. As

well many Japanese firms are

relocating to Phillipine, Thailand

etc., because of younger

work forces demographics.

China's 15 is up, get over it.

 

 

Wed, 09/26/2012 - 19:07 | 2833972 Umh
Umh's picture

Yes I am  smart ass but where are these new continents?

Wed, 09/26/2012 - 13:38 | 2832752 Itinerant
Itinerant's picture

loser monetary posture

 

That is the question, is the monetary posture a loser or looser

Wed, 09/26/2012 - 12:18 | 2832424 GFORCE
GFORCE's picture

If China takes a hard landing, they can still burn through their surplus reserves and then create a military the American way- by racking up trillions in debt.

Wed, 09/26/2012 - 12:44 | 2832397 OneTinSoldier66
OneTinSoldier66's picture

"Or to put it another way, the Chinese could flush most of the banking sector and just start more banks."

 

Those are just words. It might be interesting to see China actually "flush most of the banking sector and just start more banks".

 

I've seen Chris Whalen on CNBC(like a year ago, before I stopped watching TV altogether) and he seems like a very intelligent guy. At the very least I could tell he is very knowledgable about the workings of the Financial Industry(if you can consider such a thing to be an 'industry'). However, how about I write an article and make a statement like the following...

 

"The U.S. could flush it's banking sector and just start a new one based upon Gold."

 

Anyone ever hear the following phrase? Easier said than done.

 

Then what do I know? Perhaps in China when it comes to flushing the banking sector and starting a new one, perhaps it's as easy as... "so it shall be written, so it shall be done."

 

I guess I write this post because the more time that goes by during this financial crises, it seems I see more statments that I find incredulous by people that I consider(ed?) to be intelligent.

Wed, 09/26/2012 - 14:33 | 2832967 Jack Sheet
Jack Sheet's picture

As a related phenomenon, Jim Rickards is becoming insufferably glib.

Wed, 09/26/2012 - 12:40 | 2832299 steve from virginia
steve from virginia's picture

 

All else being equal, the Chinese are overdue for an ordinary, garden-variety business cycle contraction driven by inventory excess.

 

All else is not equal. China leverages forex capital flows to enable it to afford overseas fuel supplies. If there are no dollars/euros/yen there is no gasoline or thermal coal. Its own currency doesn't trade freely and no sign that it will do so during the reign of mortal man.

 

With capital flows diminishing from Europe and Japan, that leaves the US as China's the sole remaining capital provider, as American lending shrinks the growth in China also shrinks which in turn diverts more flight capital away from China, lending shrinks further and growth in China shrinks further in a vicious cycle. Add to this the flight of hard currency out of China in the pockets/luggage of top Chinese crooks/business-political leaders. Just as Europe is struggling with a capital shortage and flight, so is China and for the same reason

 

Meanwhile, China's black market currency exchange seems to have broken down ... fewer in China are able to retire property loans carrying 120% interest. China has run out of fools to pay ever higher prices for empty uglybuildings. This is another vicious cycle building as the funds to roll over loan shark lending vanish leaving speculators to kill themselves or join their betters fleeing to Vancouver.

 

Another related problem is the effect of China output shrinkage on commodity prices. The Fed can extend credit by way of QE but Bernanke cannot buy millions of gallons of diesel fuel per day, his office is too small to contain it all. With China not buying petroleum, the price declines to below production cost. This in turn leads to shortages which in turn have knock-on effects on dependent businesses. Failure pushes fuel prices lower still, shortages are amplified in yet ANOTHER vicious cycle.

 

Add to this, a government in a state of uncertainty, civil disturbances around the country, an unwinding real estate market, potential wars over resources in the seas to the east, unrest among its colonies/trading partners .... China is experiencing some real headwinds right now.

 

Next step for China is for that country to start selling JGBs and USTs to raise hard currency, to meet redemption demands, buy fuel and simply raise cash ... to pay off its banksters. As forex reserves start to diminish there will be more speculative attacks on RMB/USD peg.

 

China IS too big to fail, bail or jail.

Wed, 09/26/2012 - 17:04 | 2833581 ekm
ekm's picture

Correct

Wed, 09/26/2012 - 13:04 | 2832292 hannah
hannah's picture

i am not chinese but i work in a wonton factory....

 

china will implode because it abused credit. they never did that before in their history. china can not maintain its economy for the same reasons as the west. china cant feed itself without imports. it imports iron ore and coking coal for steel. it imports energy......china is not an island any longer.

 

it will collapse but if you want to invest in it go right ahead.....buy some stock from a paper shell company or maybe some gold plated tungsten bars.

Wed, 09/26/2012 - 11:51 | 2832278 q99x2
q99x2's picture

Nations that still have nukes have the ability to go Venezuela on patents and copyrights illegally obtained/created by the globalists. China will do this as its need to export decreases. If anything can be learned by Western Globalism is that their parasitic weight can crush every nation and people that they get a foothold in financially. They must learn the meaning of "Confucious was a bulldozer."

Wed, 09/26/2012 - 12:37 | 2832523 Bubble
Bubble's picture

Yeah, until now copyrights in China have been sacred.

Wed, 09/26/2012 - 11:45 | 2832245 Zero-risk bias
Zero-risk bias's picture

As I hear China has got a substancial middleclass, evidently this can be corroberated by the growth in overseas shopping trips, and tourism. I think it's quite difficult to sustain without sustaining wage growth when manufacturing is waning.

I guess, the initiative to udgrade it's IT services and outsourcing program is seen as the panacea to protect the internal economy from catching the contagious economic leprocy.

The Ministry of Commerce crafted an initiative dubbed “1,000-100-10 project” aimed at accelerating the country’s information technology outsourcing (ITO) and business process outsourcing (BPO) services.
The main objectives of the Project are:
- To establish 10 cities as outsourcing bases;
- To promote the transfer of service outsourcing business of 100 world-famous multinational
companies to China; and
- To establish 1000 large/middle scale service-outsourcing enterprises able to compete in the international arena.

http://intechnochina.com/blog/archives/79

From a casual observer here, it seems there's a lot of the same probems. Wages are not increasing for the vast majority, real-estate units are not selling much,  people with jobs seem like they are twiddling their thumbs, playing games on their smart phones, waiting for something to do.

Wed, 09/26/2012 - 14:44 | 2832998 Joe Davola
Joe Davola's picture

Warcraft gold farming ain't what it used to be.

Wed, 09/26/2012 - 11:43 | 2832216 RagnarDanneskjold
RagnarDanneskjold's picture

China is not dependent on exports. The U.S. economy doesn't rely on subprime housing. The Australian economy doesn't rely on resource exports to China. Greece isn't that important to the European economy.

China's credit growth has stalled. There's another place that has stalled credit growth—the United States. In credit bubbles, there's a point reached where people don't want more credit. Furthermore, money is starting to move out of China and drain PBOC reserves. Changes this big don't happen smoothly, not when half or more of the global economy is near or already in recession.

The reason the economy is weak is because the new leadership wants to reform and the old leadership is just marking time. Unlike in the West, the old leaders don't jam through a bunch of policies at the end because the new guys are always their guys. The plan for next year is to reform the tax system while slashing taxes on the scale of Reagan's tax cuts. The incoming premier has discussed the desire to build a middle class, but they know it can't happen if they keep doing the same thing. So there's a few months here where things are slowing down and nothing much is happening from Beijing. After the changeover, there will be some policy changes. 

If things get messy and China has a depression, they'll take the bad assets from the banks just like they did at the end of the 1990s, but the difference this time is this will devalue the yuan. They'll devalue, inflation will kickstart the economy and they'll take off on the next growth phase. 

Wed, 09/26/2012 - 11:17 | 2832075 EuroInhabitant
EuroInhabitant's picture

And of course the Chinese government can "stimulate" infinitely, leverage can grow unlimited and there will always be enough space to build new cities and confidence that no one will find out it's all smoke and mirrors. No crisis. Does Keynesianism work after all?

Wed, 09/26/2012 - 16:03 | 2833310 honestann
honestann's picture

No.  Or more specifically, Keynsianism can "work" to move one or a few measures in a desired direction... with many other unavoidable disasterous consequences.  But when you have a mainstream media that only reports what the predators-that-be want reported, it is possible to continue such criminality until the entire economy is so utterly destroyed that eventually real, physical things start to collapse around everyone.  By then it is way, way, way, way, way too late.  Just ask the USSR.

Wed, 09/26/2012 - 10:40 | 2831900 aka Gil
aka Gil's picture

We are nearing the end of the "western paradigms for growth" road. Most of the hand-wringing of western analysts regarding China's economy is rightfully based on their fear that the game of huge profits made (not earned) from the exploitation of others may not extend indefinitely. China is not going away, they have been around for millennia in various incarnations and will probably outlast the western PTB. Thanks Chris, I always enjoy your offerings.

Wed, 09/26/2012 - 10:28 | 2831838 Hobbleknee
Hobbleknee's picture

China doesn't need to export to the world. They can start selling to themselves.

Wed, 09/26/2012 - 14:10 | 2832893 darteaus
darteaus's picture

The same way they've been promoting their Ghost Cities?

Wed, 09/26/2012 - 12:21 | 2832437 redd_green
redd_green's picture

They have been trying desperately to "sell to themselves".   Go to visit China, then think again.  They don't wanto to buy Made In Chinese goods, because they are junk.   The people with money, excess cash to buy goods, buy foreign made goods, even thought the import taxes are incredible.  

Wed, 09/26/2012 - 12:18 | 2832422 LawsofPhysics
LawsofPhysics's picture

Then why do they keep buying our soybeans?

Wed, 09/26/2012 - 19:02 | 2833957 Umh
Umh's picture

I'm guessing here but, because we subsidize them?

Wed, 09/26/2012 - 10:41 | 2831906 Schmuck Raker
Schmuck Raker's picture

True - " They can start selling to themselves."

The question is, "Will they start selling to themselves? Their personal savings rate is around 50%, IIRC.

Wed, 09/26/2012 - 15:56 | 2833273 RockyRacoon
RockyRacoon's picture

And that savings has to provide for retirement, health care, and the stuff that Americans don't seem to want to save for.   Their savings is not a negotiable instrument in the hands of a bunch of profligate "consumers".  The Chinese actually save for the reason that justifies savings in the first place.  It's not "extra money".

Wed, 09/26/2012 - 10:23 | 2831793 MFLTucson
MFLTucson's picture

Yes folks, read carefully.  The Chinese economy is imploding because the American economy has imploded, except Wally World being played on the world stage by the corrupt banking clowns!

Wed, 09/26/2012 - 10:52 | 2831961 _underscore
_underscore's picture

If you look, just simply look, at China, you'll see 100s of millions of people walking around their dozens of very large cities wearing/using/buying consumer stuff. How anyone can say China is a one trick pony & exports just to pay for a basic rice ration for everyone just isn't using their eyes, or commonsense.

Somehow, in this upside-down world, being a large (% - wise) exporter is seen as some weird type of 'weakness' - tell that to Germany please, before is destroys them. So, Eu & US stop importing plastic crap for a while - China has $2T+ in reserves to play with - and they seem to be playing warships, gold, foreign commodity/resource ownership & infrastructure quite nicely at the moment.  The big problem for the Chinese, as I see it, is being able to spend all that $ reserve money before it inflates itself to worthlessness.  As I write, gold is correcting ($20+ or so..) & I imagine commissars in the Chinese PM Direcotrate backing up the motorised rickshaw as we speak & toasting their good fortune with the finest (imported) Japanese sake to celebrate.

 

Wed, 09/26/2012 - 10:11 | 2831725 Bruce Krasting
Bruce Krasting's picture

China has been investing 50% of GDP in infrastructure for years. It has created domestic demand, but can it continue doing this?

We shall see. I say no. There is no country in the world doing 50% infrastructure spending.

As Chris says, the Chinese have built cities that no one lives in, they built an aircraft carrier, but have no planes.

That is a model for success? I wouldn't think so.

This is all a bit irrelevant at the moment. China will have brand new leadership in a month or so. Better to wait to see who is running the ship, and where they are headed before concluding that more of the same, means success.

Wed, 09/26/2012 - 17:31 | 2833700 disabledvet
disabledvet's picture

But Chris comes at this as a guy who took a class on "this shit...and shit. Bro." How dare you intercede on his behalf! I demand parlay....

Do NOT follow this link or you will be banned from the site!