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Guest Post: China's Broken Growth Model

Tyler Durden's picture





 

Submitted by Zarathustra of Also Sprach Analyst blog,

Even now, after the Chinese economy has consistently disappointed everyone, we still get the impression from market participants that it will all be fine in the end, because the Chinese government know what they are doing, and all they need is to let the floodgate of money open. Whenever a bad data point comes out, the market interprets that as more easing ahead, and it will most certainly save the economy.

If only running the Chinese economy is that easy.

People in Asia seemed to have mostly underestimated the severity and the length of the Euro Crisis, and thus the impact on Asia, including China. China’s this year’s trade growth target is 10% compared with last year. We only have 3 months left for the year, so it is fair to say that this target is not achievable this year, even though trade growth with other Asian countries remain relatively robust.

By itself, the poor trade performance only reflects the rebalancing of the economy, both for China itself and for the global economy as a whole. Trade deficit in the US is now lower than before the financial crisis, and Euro area current account is in high surplus than it was, driven by the collapse of imports of peripheral countries. On top of this structural shift to rebalance, cyclically as the global economy slows, global trade collapses with the economy. Although some measures to support export have been announced, it will be ludicrous to suggest that these measures can boost external demand. So it makes sense that China’s growth cannot be driven by trade.

As part of the rebalancing of the economy, the burden of driving growth now lies on domestic demand of course. And within domestic demand, much has been talked about the rebalancing from investment to consumption. Very few people actually argue that there is no need to rebalance, and the government has been talking about rebalancing for a long time, so they are hopefully taking this seriously. The key point of debate has never been whether China should rebalance, but how this rebalancing can carry out.

To rebalance the economy so that the contribution to the GDP from consumption increases and the contribution to the GDP from investment decreases, growth of consumption has to be faster than growth of investment (which should be self-evident). For a long time, most have argued that consumption growth will pick-up strongly while investment growth will be stable or slowing very slightly. However, measures of consumption like retail sales hardly grew faster than fixed asset investment, and it is now clear that once investment growth slows, once the real estate market cools, consumption growth slows with it.

So it is clear, consumption is not so much of a growth driver (yet). To put the goal of rebalancing aside for the sake of generating GDP growth, there is only one thing left, which is investment.

However, China is already having a little problem of over-investment. At China’s income level, China probably should not be able to afford that many subways, that many airports, etc. On top of that, with slowing exports and sluggish domestic consumption, fixed asset investment in manufacturing are one of the biggest drag of investment growth. That makes very good sense, of course, because investment into new productive capacity is burning money if a company has reasonable confidence that the demand for their products does not exist, which is more or less what the situation looks like right now. Not to mention the fact that corporate sector is now highly leveraged, both in terms of bank loans and perhaps in terms of the explosive growth of shadow banking system. That means that corporate sector needs to deleverage.

That leaves the government the only sector of the economy to be the driver of growth, and investment is probably the only thing that the government actually has control. So it is not surprising at all that when all the private sector economists call for stimulus from Beijing, they are basically referring to investment, like infrastructure, etc. While on the monetary side, faith on PBOC’s ability to ease monetary condition remains extremely high (we beg to differ).

Every growth engine of the Chinese economy is failing, and there is only one thing which can sustain these failing engines for longer, which is government stimulus, and whether the government is actually willing to deploy massive stimulus that is questionable.

Markets are all addicted to governments’ and central banks’ stimulus, as if they can solve all the problems. In China’s case (and perhaps in many other cases as well), it sounds as it were the only hope.

And this is not particularly confidence-inspiring if government is the only hope.

 


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Mon, 10/01/2012 - 17:33 | Link to Comment moskov
moskov's picture

I think the biggest prioty for any western economists should really pay more attention on their own failing economies first. It's almost laughable to think a bunch of the ready-to-die are willing to spend their last minute of breath to concern other's error and miscalculation in their own lives.

Mon, 10/01/2012 - 17:35 | Link to Comment A Lunatic
A Lunatic's picture

I'm not an alcoholic, I mean shit, look at that poor bastard over there in the gutter.............

Mon, 10/01/2012 - 18:01 | Link to Comment magpie
magpie's picture

It would be an awesome system inside the EU: "Hey Italians, look over there !" Too bad, the Greeks would have a problem to find an even worse economy.

(of course i know that these things are done already by shoring up massive envy and distrust, where else would the bailouts come from)

Mon, 10/01/2012 - 18:40 | Link to Comment asteroids
asteroids's picture

That poor bastard in the gutter is every customer China has, Europe, North America, Middle East, etc. Those customers are all broke. Therefore nothing China does will work. If China was smart, they would find a way of helping their poor customers and help rebuild their markets/economies. The US and Europe are too interested in saving their zombie banks to be of any use.

Mon, 10/01/2012 - 19:03 | Link to Comment Schmuck Raker
Schmuck Raker's picture

And yet you're willing to comment on those economists rather than your own?

That's more than 'almost' laughable.

Mon, 10/01/2012 - 17:34 | Link to Comment Encroaching Darkness
Encroaching Darkness's picture

the CON in confidence has never been so evident.... got gold?

Mon, 10/01/2012 - 17:36 | Link to Comment Rainman
Rainman's picture

Mention China and economy and my mind turns to Larry Lang, who called it a year ago.

EVERY PROVINCE IN CHINA IS GREECE "

 

http://www.mining.com/every-province-in-china-is-greece-larry-lang/

Mon, 10/01/2012 - 17:45 | Link to Comment zorba THE GREEK
zorba THE GREEK's picture

Centrally planned governments fail. Free markets are the answer.

Intervention in free markets always cause more problems than they solve.

Mon, 10/01/2012 - 19:16 | Link to Comment Seer
Seer's picture

BIG = FAIL!  And that goes for BIG FREE MARKETS as well.

But... if "free markets" are the ANSWER, what is the question? (if it approximates perpetual growth on a finite planet, well, BZZT! FAIL!)

Mon, 10/01/2012 - 17:45 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Ghost cities in China, ghost racetracks in Greece, Ghost growth in America....I guess Halloween is right on time.

Mon, 10/01/2012 - 17:56 | Link to Comment Peter Pan
Peter Pan's picture

.

Mon, 10/01/2012 - 17:58 | Link to Comment Peter Pan
Peter Pan's picture

China rebalancing will be faced with one major problem unless I am mistaken. The Chinese market will not provide the manufacturers with the higher margins afforded to them by export sales. With already skinny margins and propped up enterprises how do they expect this policy to succeed?

Mon, 10/01/2012 - 19:19 | Link to Comment Seer
Seer's picture

Very good point.  And the troubles are compounded when you consider that China is heavily dependent on importing natural resources (oil/coal being key).  China will be hit even harder when export countries start funneling more of their resources inward.

Mon, 10/01/2012 - 18:01 | Link to Comment billsykes
billsykes's picture

Long run the bet is on china, they make stuff- simple.  As the US is QEing into infinity, the impending doom for both countries is certainly less for china.

WHY?

In the 30's America's population was still agrarian based, as is china's now- how much debt is the avg. Chinese farmer in? how many visa/MC, student loans, mortgage (death pledge)cell phone bills, and taxes do they have to pay every month? none.

China will get thru it better than the usa, because of this and direct foreign investment in real assets overseas.

I have never seen any stats showing how much china owns, invests in assets and countries, especially in Africa- my gut is that it would throw a guy like chanos for a loop. 

 

 

 

 

 

Mon, 10/01/2012 - 18:13 | Link to Comment reader2010
reader2010's picture

Let them eat other people's kids exactly as what they did back in early 60s.

Tue, 10/02/2012 - 01:45 | Link to Comment vato poco
vato poco's picture

That inconvenient fact is considered rayciss nowdays. As is the fact that during the worst of the Great Leap Forward famines, Provincial Governors posted regulations forbidding the comfort/feeding of the masses of starving children lining the roads in the countryside. Odd they don't teach that in the schools, ain't it?

Mon, 10/01/2012 - 19:05 | Link to Comment jonjon831983
jonjon831983's picture

Ya... maybe, depends on a lot of things if that strat is successful.

 

Productive capacity is a 2 way street and if your customers aren't buying you aren't going anywhere.

 

Not only that - mfg is fickle nowadays and rising input costs and transport costs will drive production to cheaper more local to market places.

Mon, 10/01/2012 - 19:40 | Link to Comment Seer
Seer's picture

China relies on ever-increasing imports.  Their population has been geared to expect growth; the US population KNOWS that the US is contracting.  Though no country is sustainable in the face of growth, the US at least has a pretty full compliment of resources, resources that could last a LOT longer with reduced consumption.  China would fly apart if they tried imposing contraction now.  And, there's the little issue of who has the bigger guns and is lurking in areas where China is getting the bulk of its resources: hint: look up "AFRICOM."

Mon, 10/01/2012 - 21:21 | Link to Comment Shelby Moore III
Shelby Moore III's picture

"Making stuff" is a huge liability as we are exiting the Industrial Age and entering the Knowledge Age, see these links for explanation:

http://www.mpettis.com/2012/09/23/can-china-increase-export-competitiveness/#comment-16736

http://www.mpettis.com/2012/09/16/by-2015-hard-commodity-prices-will-have-collapsed/#comment-16753

My various comments on both of those above linked blog pages, explain in detail that China is in a very bad predicament.

Those who see China as a basket of massive opportunity due to 30% of the population still surviving on $2 per day, have not analyzed the true situation in China. Read the above two blogs to educate yourself.

Mon, 10/01/2012 - 18:02 | Link to Comment partimer1
partimer1's picture

Lend the money to US so that US can buy their shit from them. Perfect model, works all the time.

Mon, 10/01/2012 - 18:03 | Link to Comment disabledvet
disabledvet's picture

China has a long and storied history of creating massive amounts of inflation when it looks like the regime is on it's last legs. This regime is clearly on it's last legs.

Mon, 10/01/2012 - 18:05 | Link to Comment whoknoz
whoknoz's picture

for Peter Pan, silence is golden...

Mon, 10/01/2012 - 18:23 | Link to Comment apberusdisvet
apberusdisvet's picture

I remember my uncles who served in Korea telling me how the Chinese would send 10,000 troops in a wave against an allied position.  They didn't care how many were killed as long as a few got through.  With a mindset like this, it's certainly not a given that China is done; perhaps medium rare, but not done.  This country's elites will do whatever it takes to maintain control.

Tue, 10/02/2012 - 16:30 | Link to Comment Abbie Normal
Abbie Normal's picture

According to my grandfather who was there, those human waves mostly consisted of former Nationalist soldiers left behind when that regime retreated to Taiwan.  What better way to get rid of your former enemy's army?

Mon, 10/01/2012 - 18:30 | Link to Comment russwinter
russwinter's picture

Capital flight and Chinese wealthy leaving the country and putting their money into the ratlines is a big part of the equation.

http://www.wallstreetexaminer.com/blogs/winter/?p=5202

Mon, 10/01/2012 - 19:09 | Link to Comment jonjon831983
jonjon831983's picture

Old theme I guess, with a bit more detail.

 

Coincidentally, my co-worker today mentioned a couple friends in China are moving to Vancouver, BC. Two students buying a house...  (Added note under co-worker's breath: they're rich) so most likely in million dollar range.

 

 

Mon, 10/01/2012 - 21:12 | Link to Comment Seer
Seer's picture

It's probably at least 2 to 1 going the other way as the not-quite-so-rich (enough to obtain escape velocity) recall their kids back to China.

http://www.marketwatch.com/story/high-priced-vancouver-losing-residents-...

What folks like these totally miss is momentum.  Things have slowed and, all it takes is a little bit more to push the pendulum the other way.  Canadians, I've found, are very good at denial.

That which cannot continue won't.

Mon, 10/01/2012 - 22:08 | Link to Comment jonjon831983
jonjon831983's picture

Hmm interesting find - though I don`t see how it relates to Chinese moving to Vancouver (just that they invest in the properties).  It does say though young people are moving from Vancouver to Alberta for OilSands jobs.

Mon, 10/01/2012 - 18:33 | Link to Comment proLiberty
proLiberty's picture

Investors are now looking to make more money via the 'political means' than the 'economic means'.  For example, how much of GE's profits come by crony compliance and lobbying compared to inventing new and useful things?  

 

Mon, 10/01/2012 - 21:17 | Link to Comment Seer
Seer's picture

"inventing new and useful things"

Like what?

That's R&D money.

I've got pretty good exposure to business cycles and know that when things contract you work hard to hang on to your core product line business, R&D takes a back seat.

The fact that so many just aren't willing to accept (though inside business knows) is that there just pain isn't a growth market out there, for existing products, let alone new, untested ones.  "Consumers" are out of gas... you cannot force them to buy what they cannot afford (exception will be food, which is why I got in to this area).

Tue, 10/02/2012 - 02:37 | Link to Comment verum quod lies
verum quod lies's picture

Good point; even that great "technology" company Apple spends almost nothing on R&D (i.e., relatively speaking). Check their financials out, it truely is amazing. I guess wage and environmental arbitarge beats thinking and inventing any day these days, and Apple does a beter job than most. I imagine someone like Henry Ford's of the America gone by (e.g., where real wages increased) would have a few things to say about it if he were alive.

 

Mon, 10/01/2012 - 18:57 | Link to Comment Chippewa Partners
Chippewa Partners's picture

Tom Lee at JP Morgan said today on CNBS that China will carry the day.   Carry on.

Mon, 10/01/2012 - 21:18 | Link to Comment Seer
Seer's picture

Did he say which day?  I'm wanting to circle it on my calendar...

Mon, 10/01/2012 - 18:57 | Link to Comment Schmuck Raker
Schmuck Raker's picture

Tax cuts for the bottom third of society. They do pay taxes in China, don't they?

Mon, 10/01/2012 - 21:22 | Link to Comment Seer
Mon, 10/01/2012 - 19:25 | Link to Comment soopy
soopy's picture

Smashed plates are reserved for Greeks.

Mon, 10/01/2012 - 21:21 | Link to Comment zippy_uk
zippy_uk's picture

You western dogs screw our economy cause you no buy our stuff.
We work extra hard to make extra cheap, yet you no buy
You not get you no need job any more cause we make so cheap,
Jus borro money to buy, we lend you
JUS MAKE SURE YOU PAY BACK

Mon, 10/01/2012 - 23:30 | Link to Comment robertocarlos
robertocarlos's picture

That was a dinner plate and now it's a sharp knife. And someone will get cut.

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