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Is China's Economy Really Imploding?
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.
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Chinese infrastructure investing post 2008 was a huge factor in keeping the economy humming. There is no reason that China cannot continue infrastructure investment to offset declines in export. The problem is the diminishing to neglible returns from these investments.
China's huge surplus of unaffordable housing is one example of malinvestments used to keep the economy growing. There is no reason why the Chinese economy will implode, but at some point in the near future these investments will no longer be financially feasable and growth will drop down to a more manageable 3-5% range. Don't hold your breath for the Chinese consumer. How much stuff can one put in a 40 sq meter apartment? The relative affluence of coastal cites and the Guangdong Province present a false view of China. There are huge number of people living in poverty in the interior.
There actually are a handful of planes, but they are still not ready for showtime yet. The carrier has been assigned to PLAN directly and not to a specific fleet. It's a training carrier. Carrier deck training has been going on since 2008 actually, using a deck mock-up. Nothing crazy really... gotta walk before you run.
Seriously, if it had been the other way around and China announced the planes first, you'd all bitch about how it's planes without a carrier. No shit, you come out with the carrier first so planes can be tweaked to proper spec... or else it's just a disaster. This isn't some brainless throwing around of money. China is also laying down another pair of domestic carriers in Shanghai. Should be ready in 2016 and 2018.
"China is also laying down another pair of domestic carriers in Shanghai. Should be ready in 2016 and 2018."
Langley
Lexigton
Sratoga
It's funny watching the Chinese on the world stage; a very unnatural act for them.
a lot like romey when he is on a stage offshore
I thought there was talk last day or two that the leadership changeover may be postponed.
I'll try to find the link...[EDIT: Only found this:]
So, wages matter? Who would have guessed it? Unfortunately, the ultimate dream of the "elites" behind the IMF, the U.N. and TPTB in general is to have the entire planet working for chinese wages. - FAIL.
So, wages matter? Who would have guessed it? Unfortunately, the ultimate dream of the "elites" behind the IMF, the U.N. and TPTB in general is to have the entire planet working for chinese wages. - FAIL.
The amount people can charge for their labor, in a market economy, reflects the balance between supply and demand... like any other economic transaction.
This is why we have a spectrum of charges between manual laborers, who earn a pittance, and brain surgeons, who earn rather more.
Even the Chinese no longer earn 'Chinese wages' - compare what they're earning now with what they were earning just 5 years ago.
The key is productivity - if a worker cannot produce value in excess of what s/he demands in return, than the result is either unemployment or his employer's bankruptcy. Of course, if one of the reasons s/he cannot produce sufficient value is because his/her government is tripling the cost of hiring him/her with regulation and taxes, maybe s/he and her coworker should stop voting for the same free-lunch charlatans who have made it impossible to hire them without going bankrupt.
Not happy with your income? Re-skill. The world doesn't owe you a living, and there's no reason why I should hire you to produce something for me at twice the price a Chinese person is willing to do so.
Of course, on the monetary front, workers in the US are at a disadvantage because demand for the USD as reserve currency prices them out of the global market. You CANNOT have the reserve currency without a commensurate trade deficit.
They also have the disadvantage of living in a country that wastes a phenomenal amount of wealth on 'defense'. Maybe they should stop voting for neo-cons like Bush, Obama, Romney, etc, etc.
The sheeple will work for less than Chinese wages producing what TPTB want. The sheeple just need to be shot a few times, then they will become docile.
"hina has been investing 50% of GDP in infrastructure for years. It has created domestic demand, but can it continue doing this?"
"Investing in"....."diverting excess capacity to". It's all good. They can always plow the excess capacity into another empty city. What could go wrong?
Riiiigggghhht. And once the elites get their way and everyone on the planet is working for chinese wages and is a good little producer. Answer this one question; whoe will the earth be selling to? Mars?
Please, wake the fuck up.
It is enough, if the elites have their toys and luxuries.
All a sheeple needs is a handfull to eat and a cardboard box. The sheeple will produce what the elite want. That is enough for the inhabitants of this planet. No need to contact the Martians...
Well, they can build all the cities they want but if people cannot afford to live in them then what is the use? The problem of China is that -as a communist country- they don't have a middle class that is big enough and rich enough. Doesn't matter because soon the western world also won't have a middle class that is big enough and rich enough.
You also need to feed those people. Should I be asking for gold in exchange for the soybeans I sell to Asia/China? This person is delusional.
just a question.
the articles keep saying that China economy is not so dependant on exports.
my question is: is China economy dependant on what?
my opinion is that the economic growth in China is mostly related to their export, without that China would be much different today
"my question is: is China economy dependant on what?"
Illegal campaign contributions.
File under SFOBV
Without exports, there are very few jobs. Without jobs, there are no wages. Without wages, there IS no internal consumption. HP found out about the consequences of offshoring its business and eliminating their US employees, resulting in firing many of their best customers - their own employee base - in the process.
Because it was ran by a woman.
Yes, I run my company by producing goods for my own employees to buy... so the more I pay them, the richer I get, because they can afford to buy more of my products!
All the other costs (like power, taxes, raw materials, alimony) magically pay themselves. And, of course, the increased wage bill isn't reflected in the price of the finished goods because... well, just because. So we're not selling fewer items to other customers because of higher prices.
OR... wages are a cost to a business like any other. So if you pay your workers more than your competitors, then you have to charge higher prices than them... and ultimately you go out of business.
Which makes more sense to you, Mr Briggs?
Instead of building more deserted cities, why don't they build fighter planes and their own aircraft carriers?
Clearly, China is heavily depedant on exports. There's no way internal demand is going to pick up the slack for lost exports. At least not anytime soon.
They are building aircraft carriers...
you dont build an aircraft carrieri in a day
OK, maybe six days - and they can rest on the seventh. If they want to.
http://www.youtube.com/watch?v=uPSxt5A23MI
Record for a Liberty ship in WWII was 4 days and 15 hours:
http://en.wikipedia.org/wiki/SS_Robert_E._Peary
That said, there were several shipyard workers lost as a result of being welded into Liberty ships under construction during the war. Trying to picture the Chinese carrier after a 7 day construction, and all I'm getting is workers rivited through the head and a festive red ship. About the same combat capability as a Liberty ship, though. So its all good.
why is this news..they lie just like russia..
.. and everyone else...
Sorry Whalen... I'm a fan of yours usually. But this article said absolutely nothing. It wasn't just light on facts, it was light on opinions. What the f*ck did you just say here? That because their economy is a managed political construct that perhaps we shouldn't be analyzing their economy based on economics?
Meh.
american guru opinion of other nations is tainted with vision thru tinted lenses.
Its always judged according to US criteria, US perspective.
If you look at it from the Chinese perspective you get a different impression.
But that means understanding the Chinese perspective warts and all, and keeping in mind the world interactive thread; warts and all.
In the current context the whole situation is in tumultuous disarray with "shadow banking" casting a long shadow on ALL the numbers.
We will have to wait for the dust to settle. Both in first world as in Bric nations!
Same was written of Japan in 1986 but I guess THIS time it really IS different.
My money is on a second Cultural Revolution. As the export economy collapses with no hope for revival and the skilled workers start agitating......they get sent off to subsistance farm/starve in the countryside.
Not that they've ever burned the seed corn and slaughtered anyone with an education to ensure the Party's survival before....
you may be underestimating the resilience of the intra asian market..;there are some big economies out there with a greater growth rate than first world; aka Indonesia, India, Korea etc. + Japan/China.