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Guest Post: The IMF On China's Over-Investment

Tyler Durden's picture





 

Authored by Michael Pettis, originally posted at China Financial Markets,

The IMF’s Il Houng Lee, Murtaza Syed, and Liu Xueyan have published a very interesting and widely noticed study called “Is China Over-Investing and Does it Matter?” In it they argue that there is strong evidence that China is overinvesting significantly. According to the abstract:

Now close to 50 percent of GDP, this paper assesses the appropriateness of China’s current investment levels. It finds that China’s capital-to-output ratio is within the range of other emerging markets, but its economic growth rates stand out, partly due to a surge in investment over the last decade. Moreover, its investment is significantly higher than suggested by cross-country panel estimation.

 

This deviation has been accumulating over the last decade, and at nearly 10 percent of GDP is now larger and more persistent than experienced by other Asian economies leading up to the Asian crisis. However, because its investment is predominantly financed by domestic savings, a crisis appears unlikely when assessed against dependency on external funding. But this does not mean that the cost is absent. Rather, it is distributed to other sectors of the economy through a hidden transfer of resources, estimated at an average of 4 percent of GDP per year.

The article is well worth reading because it makes a very strong case, perhaps a little late, for what many of us have been arguing for the past seven or eight years. China’s investment rate is so high, we have argued, that even ignoring the tremendous evidence of misallocated investment, unless we can confidently propose that Beijing has uncovered a secret formula that allows it (and the tens of thousands of minor government officials and SOE heads who can unleash investment without much oversight) to identify high quality investment in a way that no other country in history has been able, there is likely to be a systematic tendency to wasted investment.

Interestingly enough, while two of the authors of the study work for the IMF, Liu Xueyan, the third, is a Senior Fellow in the Institute of Economic Research at the National Development and Reform Commission (NDRC) of China. I don’t know how much we should read into this, but it is worth noting that both the World Bank report in March and this IMF study have involved input from important mainland think tanks.

This is noteworthy because both the World Bank report and this study have come out very strongly in the direction that the China “skeptics” have been arguing for many years. They identify the urgent need for adjustment and suggest – very delicately – how difficult it will be. I assume that this is all part of the tough debate that is taking place within policy-making circles over the need to implement the very difficult political reforms that will be a necessary part of the economic rebalancing, and I guess the reformers are eager to recruit the World Bank and the IMF to their points of view.

How much overinvestment?

One of the implications of the study is that households and SMEs have been forced to subsidize growth at a cost to them of well over 4% of GDP annually. My own back-of-the-envelope calculations suggest that the cost to households is actually 5-8% of GDP – perhaps because I also include the implicit subsidy to recapitalize the banks in the form of the excess spread between the lending and deposit rates – but certainly I agree with the IMF study that this has been a massive transfer to subsidize growth.

This subsidy also explains most of the collapse in the household share of GDP over the past twelve years. With household income only 50% of GDP, a transfer every year of 4% of GDP requires ferocious growth in household income for it just to keep pace with GDP, something it has never done until, possibly, this year.

The size of the transfer makes it very clear that without eliminating this subsidy – which basically means abandoning the growth model – it will be almost impossible to get the household and consumption shares of GDP to rise if China still hopes to maintain high GDP growth. The transfer of wealth from the household sector to maintain high levels of investment is simply too great, and this will be made all the more clear as the growth impact per unit of investment declines.

Another implication of the IMF study is that to get into line with other equivalent countries at this stage of its economic takeoff, China would have to reduce the investment share of GDP by at least ten percentage points and perhaps as much as twenty. Aside from pointing out that the sectors of the economy that have benefitted from such extraordinarily high investments are unlikely to celebrate such a finding, I have three comments. First, after many years in which China has invested far more than other countries at its stage of development, one could presumably argue that in order to get back to the “correct” ratio, investment should be lower than the peer group, not equal to the peer group. In that case investment has to drop by a lot more than ten percentage points.

After all if China’s deviation from the experience of other countries is meaningful, then after a few years of substantial deviation, it cannot be enough for China simply to return to the mean. It must come in lower than the mean for a few years so that on average the deviation is eliminated.

Second, even if China had kept investment at the “correct” level, as measured by the peer group, this would not imply that China has not overinvested. I haven’t been able to dig deeply into the comparison countries, but the study does list them, and a very quick glance suggests that many of these countries, after years of very high investment, themselves experienced deep crises or “lost decades”.

This implies to me that these countries themselves overinvested, and so even if Chinese investment levels were not much higher than that of the peer group (and it was mainly in the past decade that Chinese investment rose to much higher levels than that of the peer group, and not in the 1990s, exactly as we have been suggesting using more qualitative measures), this could nonetheless be worrying. China would still have a difficult adjustment for the same reasons that many if not most of the peer group countries also had difficult adjustments.

The average number driven by the peer group sample, in other words, is not in itself an “optimal” level of investment. It might already be too high. That Chinese investment levels have been so much higher than theirs is all the more worrying.

How much would growth have to slow?

My third point is more technical. If Chinese investment levels are much higher than optimal (assuming the peer group average is indeed optimal), of course the best solution for China is immediately to reduce investment until it reaches the right level. The longer investment rates are too high, the greater the impact of losses that have eventually to be amortized, and the worse off China is likely to be.

But it will be very hard for China to bring investment down as a share of GDP by ten full percentage points very quickly. Let us assume instead that China has five years to bring investment levels down to the “correct” level, and let us assume further that the “correct” level is indeed ten percentage points below where it is today. Both assumptions are, I think, dangerous because I am not convinced that an investment level of 40% of GDP is the “correct” level for China going forward (I think it must be much lower) and I don’t think China has five years to make the necessary adjustment without running a serious risk of a financial crisis.

But let us ignore both objections and give China five years to bring investment down to 40% of GDP from its current level of 50%. Chinese investment must grow at a much lower rate than GDP for this to happen. How much lower? The arithmetic is simple. It depends on what we assume GDP growth will be over the next five years, but investment has to grow by roughly 4.5 percentage points or more below the GDP growth rate for this condition to be met.

If Chinese GDP grows at 7%, in other words, Chinese investment must grow at 2.3%.  If China grows at 5%, investment must grow at 0.4%. And if China grows at 3%, which is much closer to my ten-year view, investment growth must actually contract by 1.5%. Only in this way will investment drop by ten percentage points as a share of GDP in the next five years.

The conclusion should be obvious, but to many analysts, especially on the sell side, it probably needs nonetheless to be spelled out. Any meaningful rebalancing in China’s extraordinary rate of overinvestment is only consistent with a very sharp reduction in the growth rate of investment, and perhaps even a contraction in investment growth.

In fact I think over the next few years China will indeed undergo a sharp contraction in investment growth, but my point here is simply to suggest that even under the most optimistic of scenarios it will be very hard to keep investment growth high. Either Beijing moves quickly to bring investment growth down sharply, or overinvestment will contribute to further financial fragility leading, ultimately, to the point where credit cannot expand quickly enough and investment will collapse anyway.

This is just arithmetic. The extent of Chinese overinvestment – even if we assume that it has not already caused significant fragility in the banking system and enormous hidden losses yet to be amortized – requires a very sharp contraction just to get back to a “normal” which, in the past, was anyway associated with difficult economic adjustments. It is hard to imagine how such a sharp contraction in investment will itself not lead to a sharp drop in GDP growth, and the IMF paper recognizes this:

To the extent that elevated levels of investment during the post-crisis period in China were somehow abnormal and necessitated by the sharp external slowdown, the challenge now is how to return to a more “normal” level of investment without compromising growth and macroeconomic stability.

 


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Sat, 12/29/2012 - 13:57 | Link to Comment williambanzai7
williambanzai7's picture

I can make a strong case that the IMF is one big over investment.

Sat, 12/29/2012 - 14:07 | Link to Comment Yes_Questions
Yes_Questions's picture

 

 

Oh, now you're being too kind.

Sat, 12/29/2012 - 14:17 | Link to Comment williambanzai7
williambanzai7's picture

I'm in a cheerful mood.

However, I will say this about China. Every dollar overinvested in a high speed railroad, hydro-electric dam, airport, shopping mall, port, etc, is a dollar better spent than every dollar overinvested in aircraft carriers, drones and foreign adventures, not that that won't happen eventually.

Of course, the IMF would rather see that money overinvested in Europe.

Sat, 12/29/2012 - 14:24 | Link to Comment willwork4food
willwork4food's picture

China also has free education for those who prove themselves at the lower levels.

Let alone all those hot Asian ladies.

Sat, 12/29/2012 - 21:05 | Link to Comment mkkby
mkkby's picture

Vacant cites vs. another mountain of weapns... Do I really have to pick which one is more wasteful?

Sat, 12/29/2012 - 21:18 | Link to Comment willwork4food
willwork4food's picture

Why would you even compare the two? A vacant city has unlimited potential for growth and change. Weapons only have one potential which is killing.

Sat, 12/29/2012 - 21:51 | Link to Comment Tommy Gunner
Tommy Gunner's picture

Have you confused China with Thailand? 

Sun, 12/30/2012 - 16:00 | Link to Comment laozi
laozi's picture

Indeed. Only a fraction of the Chinese girls are hot. Shop at home boy.

Sat, 12/29/2012 - 14:37 | Link to Comment Buckaroo Banzai
Buckaroo Banzai's picture

A friend of mine who knew someone who worked many years ago for the company that made Hostess cupcakes told me a funny (and disturbing) story about how they made that product. Turns out, the devils food cupcake is a great way to dispose of rancid fats, because if you use enough cocoa, it masks the taste of the spoiled fat. Since rancid fat is a costless waste product, suddenly flour is the most expensive variable cost. So they would use just barely enough flour to make the cupcake batter rise when baked.

That's the Chinese economy in a nutshell-- composed mostly of communism, with just barely enough capitalism added to make the economy function.

The sad truth is, the US economy has now been transformed to pretty much the exact same model, thanks mainly to Bill Clinton, who got in bed with the Chinese in the first place, and to Bush 2 and Obama, who did nothing to reverse the course.

Sat, 12/29/2012 - 15:00 | Link to Comment Peter Pan
Peter Pan's picture

I guess there will always be pink slime in our food and in our politics.

Sat, 12/29/2012 - 17:27 | Link to Comment Manthong
Manthong's picture

rancid fat..

OK.. but when you are a fat little kid whose whole life revolves around an RC cola, a Hostess Cupcake and the latest issue of Sargent Fury and His Howling Commandos, what difference does that make?    :- D

Oh my… I let slip how dated and out of touch I am.. I meant to say it does not matter when you are an anorexic little kid on Ritalin and your whole life revolves around a Red Bull, a Hostess Cupcake and the latest rev of Call of Duty.  

Sun, 12/30/2012 - 10:27 | Link to Comment Motorhead
Motorhead's picture

Ever see some of the stuff they eat over there in Asia? I'll take a double helping of pink slime.  But then again, maybe that's why they are so slim and trim.

Sat, 12/29/2012 - 15:17 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

@ wb7

+ 1

Overinvestment almost always means malinvesment.  Malinvestment is BAD for an economy, it leads to resources being used poorly, waste.  The empty cities of China represent tremendous LOSS OF WEALTH.

I do take your point re some malinvestments are worse than others (ports vs. foreign adventures).  Wars are about the worst there is.

On the other hand, aircraft carriers (an example, not building an agenda here) help to keep the sea-lanes open, something that bearing importers way down south want, open sea-lanes.

Sat, 12/29/2012 - 16:06 | Link to Comment Never One Roach
Never One Roach's picture

In many cities, 60-70% of the apartments sit vacant...too expensive for 99% of the population.

Sat, 12/29/2012 - 21:16 | Link to Comment willwork4food
willwork4food's picture

As long as they are maintained they will wait for the middle class to catch up. Unlike foreclosed homes in America, where they are mostly left to rot for months.

Sun, 12/30/2012 - 16:06 | Link to Comment laozi
laozi's picture

Sorry but I will need a source for that statement. I do not believe it.

Sat, 12/29/2012 - 16:05 | Link to Comment savagegoose
savagegoose's picture

hey they have an endless supply of USD to spend over investing.  gotta waste it some where, may as well be  mag levs, and empty towns , as fed treasury notes

Sat, 12/29/2012 - 18:16 | Link to Comment Stuck on Zero
Stuck on Zero's picture

WilliamBanzai7 you are right.  The US not only over invests in aircraft carriers, drones and foreign adventures but also in Federal employees, DEA, Homeland Security, welfare, unemployment compensation, SNAP, Medicare, and banksters. 

 

Sat, 12/29/2012 - 14:15 | Link to Comment chubbar
chubbar's picture

OT

On Sunday December 17, 2012, 2 days after the CT shooting, a man went to a restaurant in San Antonio to kill his X-girlfriend. After he shot her, most of the people in the restaurant fled next door to a theater. The gunman followed them and entered the theater so he could shoot more people. He started shooting and people in the theater started running and screaming. It’s like the Aurora, CO theater story plus a restaurant!

Now aren’t you wondering why this isn’t a lead story in the national media along with the school shooting?

There was an off duty county deputy at the theater. SHE pulled out her gun and shot the man 4 times before he had a chance to kill anyone. So since this story makes the point that the best thing to stop a bad person with a gun is a good person with a gun, the media is treating it like it never happened.

Only the local media covered it. The city is giving her a medal next week. Just thought you’d like to know.

On December 17, 2012, recent breakup set off a shooting spree that ended with the suspect wounding a man at the Santikos Mayan Palace 14 movie theater Sunday night before being shot by an off-duty deputy, authorities said. Police are shown questioning men outside the theater Sunday night.. Jesus Manuel Garcia, 19, an employee at a nearby China Garden restaurant, apparently became upset Sunday night after his girlfriend broke up with him.

Read more: http://www.mysanantonio.com/news/local_news/article/Two-wounded-in-theater-shooting-4122668.php#ixzz2GOP72zBX

Sat, 12/29/2012 - 15:06 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

A Big Plus One!  If it does not fit the narrative, the MSM media will not run the story, thanks for bringing this to our attention.

Sat, 12/29/2012 - 15:56 | Link to Comment Schmuck Raker
Schmuck Raker's picture

Well done, Chubbar. Thank you.

Sat, 12/29/2012 - 21:22 | Link to Comment willwork4food
willwork4food's picture

Damn. Good catch Chubber.

Sat, 12/29/2012 - 21:56 | Link to Comment Tommy Gunner
Tommy Gunner's picture

I would suggest that Bernanke print some cash to buy handguns for every person over the age of 16 in america.  Of course each recipient should take a hand gun safety course.  

When a person turns 21, provided they have not committed a crime (involving a gun), they should then be given an extra weapon that should be automatic.  But prior to receiving that they should receive some sort of SWAT training on usage.

Basically America should be a modern day Sparta - every citizen should be a trained warrior.

This will make America great again.

 

Sat, 12/29/2012 - 14:42 | Link to Comment FL_Conservative
FL_Conservative's picture

Let's get thta right once and for all: governments don't "invest", they SPEND, since they lack the discipline necessary to properly understand ROIC and allocation of capital.  Everything they SPEND on is driven by their desire to placate constituents and maintain their power base.

Sat, 12/29/2012 - 15:18 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

That is almost always true, good observation.

Sat, 12/29/2012 - 15:30 | Link to Comment Yes_Questions
Yes_Questions's picture

 

 

governments don't "invest"

 

Except when they do.  Think of a nuclear arsenal and 11 carrier groups used to enforce a petrodollar regime on less well invested nations. 

Sat, 12/29/2012 - 16:30 | Link to Comment FL_Conservative
FL_Conservative's picture

That would be the part where they "placate constituents and maintain their power base".  It's not investment because they could care less if they spend effectively to achieve their desired results.

Sat, 12/29/2012 - 18:56 | Link to Comment ball-and-chain
ball-and-chain's picture

The great China myth.

Poinsoned dog food.  Contaminated milk.  Contaminated dry wall.  Cardboard rice.

And this is the new model.

Fascism.

http://www.angrysinner.blogspot.kr/2012/12/yesterday-i-walked-ten-miles_29.html

Sat, 12/29/2012 - 14:03 | Link to Comment reader2010
reader2010's picture

Why ask such a stupid question? Don't they know it's the sure way to get rich quick for those party bosses?

Sat, 12/29/2012 - 14:04 | Link to Comment Silver Bug
Silver Bug's picture

China's next over investment? Gold and Silver. Get ready for much much higher prices.

 

http://ericsprott.blogspot.ca/

 

 

Sat, 12/29/2012 - 14:11 | Link to Comment Pharming
Pharming's picture

Hasn't China already been buying tons and tons of gold???  Along with India?  Brazil, hell even Iraq?  I'm sure sooner or later China will get tired of the powers that be manipulating their Gold's value...

Sat, 12/29/2012 - 16:48 | Link to Comment Muppet Pimp
Muppet Pimp's picture

Sometimes it is neccesary to add '    ' to nouns. 

Sat, 12/29/2012 - 21:12 | Link to Comment auric1234
auric1234's picture

She's already working to put an end to that. Read up on PAGE (Pan Asian Gold Exchange).

 

Sat, 12/29/2012 - 14:36 | Link to Comment chubbar
chubbar's picture

Another OT: Fascinating read about 20 cases of investigative journalism that was buried by the MSM and our Gov't. Here's but one account.

http://www.wanttoknow.info/massmedia

"John Kelly is first author with Phillip Wearne of Tainting Evidence: Inside the Scandals at the FBI Crime Lab, which was nominated for a Pulitzer Prize. It is the first, and to date, the only, contemporaneous critical account of the FBI to be published by a mainstream publisher. He is also an independent investigative producer. He is the former editor and senior writer for the National Reporter, a publication specializing in reporting on the CIA.

According to the Central Intelligence Agency itself, as reported by the House Intelligence Committee, "The Clandestine Service of the CIA is the only part of the Intelligence Community, indeed of government, where hundreds of employees on a daily basis are directed to break extremely serious laws in countries around the world. A safe estimate is that several hundred times every day (easily 100,000 times a year), officers engage in highly illegal activities." (pp. 115, 116)

The national security of the United States requires that more than 100,000 extremely serious crimes be committed every year. The [House Intelligence] Committee expressed no legal or ethical concerns about these crimes. The committee indicated that it did not matter that laws were broken because they were laws of other countries. The CIA [is] committing crimes against humanity with de facto impunity and Congressional sanctioning. (pp. 116, 117)

Government documents, including CIA reports, show that the CIA's crimes include terrorism, assassination, torture, and systematic violations of human rights. The documents show that these crimes are part and parcel of deliberate CIA policy. The report notes that CIA personnel are "directed" to commit crimes. (p. 117)

CIA documents show that the CIA created, trained, and armed death squads in Guatemala as part of its coup and destabilization of the democratically elected government in 1954. In Honduras, the CIA's own inspector general reported that paid CIA assets at the highest level created and ran a death squad which, according to the Honduran government, murdered at least 184 people. The House Intelligence Committee's only concern regarding these brutal CIA informants and other CIA offenders was that they might be arrested and prosecuted. The committee did not advise the CIA to cease or limit its lawlessness. The Senate Intelligence Committee proposed a bill that would immunize CIA offenders who violate treaties and international agreements while following orders. The bill passed both houses of Congress and was signed into law by President Bill Clinton on December 27, 2000. (pp. 117-118)

[This law] means that the Constitution does not apply to the CIA or any US intelligence personnel. Why? Because the constitution provides that all treaties are the supreme law of the land. Not just law, but the supreme law – no exceptions. There was not a peep from the mass media about any of this even though such a story would not have affected corporate sponsorship or profits. (pp. 119)

The intelligence committees recommended that the "aggressive recruitment" of "terrorist informants who have human rights violations in their background" be "one of the highest priorities." Within months of instituting the guidelines, incoming CIA director George Tenet assured Congress that not a single unsavory applicant had been rejected. (pp. 120, 121)

Former ambassador Robert White wrote that Manuel Noriega of Panama, Colonel Julio Alpirez of Guatemala, General Gustavo Alvarez Martinez of Honduras, Colonel Nicolas Carranza of El Salvador, and Emmanuel Constant of Haiti, all major human rights abusers, were CIA informants who "enjoyed profitable contractual arrangements with the CIA not because they were particularly important sources of information, but because they served as paid agents of influence who promoted actions or policies favored by the CIA in that country." (p. 122)

Former CIA General Counsel Sporkin revealed that the CIA, not the president, creates findings to fit preordained covert operations and sends the findings to the president for his signature. (p. 126, 127)

There is next to no meaningful coverage ever of the CIA in the mainstream media, let alone analysis. The few exceptions prove the rule. In 1984, I was involved in one such exception. ABC hired me to help produce a story about an investment firm in Hawaii that was heavily involved with the CIA. I had earlier provided the same story to BBC's Newsnight, which aired it. The story was fully documented, and nobody, including the CIA, was able to disprove the charges. Part of the report charged that the CIA had plotted to assassinate an American, Ron Rewald, the president of [the investment firm]. The ABC report provoked a brutal response from the CIA. The CIA demanded a full retraction without providing any counterproof other than their denial. (pp. 130, 131)

At the center of the uproar was Scott Barnes who said on camera that the CIA had asked him to kill Rewald. After the show aired, CIA officials met with ABC News executive David Burke. They presented no evidence to counter the charges made in the program. Nonetheless, Burke was sufficiently impressed "by the vigor with which they made their case" to order an on-air "clarification" in which Peter Jennings acknowledged the CIA's position but stood by the story. But that was not good enough. [CIA Director William] Casey called ABC Chairman Leonard H. Goldenson. The call led to three meetings between ABC officials and Stanley Sporkin, CIA general counsel. On November 21, 1984, despite all the documented evidence presented in the program, Peter Jennings reported that ABC could no longer substantiate the charges, and that "We have no reason to doubt the CIA's denial." He presented no evidence supporting the CIA's position. (pp. 131, 132)

That same day, the CIA filed a formal complaint with the FCC, written by Sporkin and signed by [CIA Director] Casey, charging that ABC had "deliberately distorted" the news. Casey asked that ABC be stripped of its TV and radio licenses. This was the first time in the history of the country that a government agency had formally attacked the press. Yet, there was no uproar. (p. 132)

During this time, Capital Cities Communications was maneuvering to buy ABC. [CIA Director] Casey was one of the founders of Cap Cities. Cap Cities bought ABC for $3.5 billion, which was called a "bargain rate" by the trade media. Besides Casey, two other founders of Cap Cities had extensive ties to the intelligence community. Within months, the entire investigative unit [of ABC] was dispersed, and the commentator on the Rewald program was assigned to covering beauty pageants. Needless to say, my contract was not renewed. (pp. 132, 122)

For Mr. Kelly's book Tainting Evidence: Inside the Scandals at the FBI Crime Lab,see amazon.com.

 

"

Sat, 12/29/2012 - 14:06 | Link to Comment Bad Attitude
Bad Attitude's picture

Obama can help fix the Chinese economy, too. He knows how to stop private investment. He knows how to choke off GDP growth. He's an expert in public mal-investment. And, he's even got a fucking Nobel prize to prove how smart he is.

 

Sat, 12/29/2012 - 14:11 | Link to Comment Salon
Salon's picture

Price signals from efficient markets generate the best ideas about where to allocate capital.

A bunch of guys around a table spending OPM or freshly printed clownbux?

Not so much.

China is not the miracle command economy our fascist leaders aspire to.

It is an economy headed for a correction. Inefficient capital allocation is always punished eventually.

Sat, 12/29/2012 - 14:15 | Link to Comment bank guy in Brussels
bank guy in Brussels's picture

China and America are maybe both playing different versions of the same game

Over-spending to the degree that there is high risk of economic destruction, but intentionally taking the risk for the goals of the elites in both countries

For the US, it is to keep the financial-bankster Ponzi game alive a little longer, and also to continually fund the drone-murdering high-tech military machine ... which the US elites may well use in their final roll of the dice

For the Chinese, they likely felt the need to grow as quickly as possible for a few decades, to give them a fighting chance of winning the game when the US plays those last big cards

The economic train wreck from excessive debt in China, is a justifiable risk to them while they leapfrog ahead every year in technology transfer, Asian-Eastern economic and political dominance, and the gathering of resources, including gold, to survive the US debacle - i.e., the final US military exploits when the US treasury market collapses and the US money-Ponzi scheme finally runs out.

In both countries, common Americans and common Chinese may suffer great economic reversals in the decade ahead ... but the elites of both countries are making the gamble they feel they must make. Excessive debt was just a tool so they could play the hand with the most cards

My guess is the USA breaks up into pieces, and a lot of Chinese have misery but China wins

Sat, 12/29/2012 - 14:17 | Link to Comment Pharming
Pharming's picture

Can't say I like that sound of "USA breaks up into pieces".  That cracking sound is God awful.

Sat, 12/29/2012 - 20:00 | Link to Comment itstippy
itstippy's picture

Thoughtful post, Brussels Banker Dude.  +1.

In a world of dwindling natural resources and increasing demand (think oil), China would be wise to grow their infrastucture like crazy right now while energy & materials are still relatively "cheap".

The Western world is already developed, with lots of infrastructure built during the "very cheap" natural resources era.  Here in the U.S. we have so many existing roads, bridges, railroads, buildings, etc. that we can't even keep up with the maintenance on them.

Perpetual growth on a finite planet is impossible.  Eventually the sovereign nations that achieve sustainable economies will "win".  Until that point, though, they must grab everything they can and build durable, longterm useful infrastructure. 

Whether market economy or centrally planned economy, great mistakes and misallocations will be made.   

Sat, 12/29/2012 - 21:17 | Link to Comment mkkby
mkkby's picture

Nobody can stop growing or it's game over (i.e. Greece, Spain, Italy, etc).  The US and China both know this and the waste MUST INCREASE  every year.  As soon as growth stops and reverses for any reason it becomes a negative feedback loop.

That is why every US prez since Reagan has increased spending every year.  They know the final outcome.  They only want to make sure it happens after they're gone. 

I hope everyone heard Ron Paul say the politics is only about who looks good and who gets the blame.  That last sentence is our lesson of a lifetime.  Every kid should hear that once a week.

Sat, 12/29/2012 - 14:39 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

China importing coal is madness.....................

 

 

The IEA coal market report audio……..18 december

http://www.iea.org/multimedia/audio/name,34476,en.html

[View in an external player]

What I talked about showing up in UK energy balance sheets – the european dash for gas is over.
European coal burn will do the heavy lifting in the electricity sector - but of course, if europe does not build more coal plants electricity consumption will decline.

The rise of gas in America will merely displace coal for export.

But for how long is the great question.

 

 

 PS - the IEA does not make creditable predictions.

They believe for example that renewables will displace coal………….in Europe !!!

So if you follow their logic we will be breaking rocks post 2013…….

So Europe does the hot air wind thingy and India & China sucks in all the coal..............

Really !!!

The oil price is screaming that this cannot continue.

i.e. The transport of finished goods from Asia to Europe.

 

 

Sat, 12/29/2012 - 14:19 | Link to Comment eclectic syncretist
eclectic syncretist's picture

They'd rather "invest" in gold than holding bonds?  I guess the IMF must think my strategy is pretty stupid too.

Sat, 12/29/2012 - 14:20 | Link to Comment 1eyedman
1eyedman's picture

i always get a nice chuckle when they use the word 'investment' in these articles.  the connotation is that there will be some 'return'.   malinvested capital into redundant low quality structures produces negative 'returns'....but it keeps the cheeple busy!

Sat, 12/29/2012 - 14:20 | Link to Comment I am Jobe
I am Jobe's picture

Hundreds Of American Shopping Malls Should Be Demolishe

Read more: http://www.theatlanticcities.com/jobs-and-economy/2012/12/death-american...

Sat, 12/29/2012 - 16:24 | Link to Comment Never One Roach
Never One Roach's picture

Hundreds Of American  Suburbs Should Be Demolished

 

 

http://www.theatlantic.com/magazine/archive/2008/03/the-next-slum/306653/

 

Is your suburb the next slum?

http://realestate.msn.com/article.aspx?cp-documentid=21179977

Sat, 12/29/2012 - 14:28 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

MASSIVE SPIKE IN UK COAL CONSUMPTION NOW.

“with
several nat gas power stations being run at very minimal (or zero)
levels as a result.”

 

 

The very informative UK energy trend publication just out (December)

http://www.decc.gov.uk/assets/decc/11/stats/publications/energy-trends/7343-energy-trends-december-2012.pdf

The switch to (imported) coal is dramatic in the UK (no more dash for gas)

“Total demand for coal in the third quarter of 2012, at
13.4 million tonnes, was 35.6 per cent higher than in
the third quarter of 2011. Consumption by electricity
generators was up by 49.6 per cent to 11.2 million
tonnes, reflecting the switch from gas to coal for
electricity generation.
Electricity generators accounted for 83.3 per cent of
total coal use in the third quarter of 2012; compared
with 75.5 per cent a year earlier.
Sales to industrial users increased by 4.2 per cent in
quarter 3 2012 while sales to final consumers (as
measured by disposals to final consumers) were
down by 4.5 per cent.
Coal consumption by generators over the three
quarters of 2012 is already at 93 per cent of the level seen in 2011?

 

Section 4 Gas

Overall UK gas demand fell by 18.0 per cent to around 133 TWh, the lowest third quarter
demand since the third quarter of 1995, largely driven by a fall in gas demand for electricity
generation. (Chart 4.6)

Total indigenous UK production of natural gas in Q3
2012 was 11.3 per cent lower than in the same
quarter a year earlier. At 92 TWh, this was the lowest
third quarter production since the third quarter of
1992. Part of the reason for this was the significant
amount of planned maintenance work that took place
at the St Fergus associated gas terminal in
September this year.
In general terms UKCS production is continuing to
decline year on year, and over the last ten years
UKCS production has decreased by around 8 per cent
on average per annum.

Section 5 electricity

In 2012 Q3, total electricity generated fell 2.8 per cent
from 83.3 TWh in 2011 Q3 to 81.0 TWh, and the lowest
level since prior to 1998 Q1.
In 2012 Q3, coal fired generation rose by 49.9 per cent
from 19.1 TWh to 28.7 TWh, its highest third quarter
level for at least 14 years, due to low gas generation.
In 2012 Q3, gas fired generation fell 40.9 per cent from
38.6 TWh to 22.8 TWh due to high gas prices, with
several stations being run at very minimal (or zero)
levels as a result.”

Dork – please remember our wonderful (Irish) ESB has a brand spanking new gas plant in the UK
One problem ………No gas

Coal (imports) is doing the heavy lifting as the UK gave up its Nuclear build post big bang.

2. Coal
Total demand for coal in the third quarter of 2012, at
13.4 million tonnes, was 35.6 per cent higher than in
the third quarter of 2011. Consumption by electricity
generators was up by 49.6 per cent to 11.2 million
tonnes, reflecting the switch from gas to coal for
electricity generation.
Electricity generators accounted for 83.3 per cent of
total coal use in the third quarter of 2012; compared
with 75.5 per cent a year earlier.
Sales to industrial users increased by 4.2 per cent in
quarter 3 2012 while sales to final consumers (as
measured by disposals to final consumers) were
down by 4.5 per cent.
Coal consumption by generators over the three
quarters of 2012 is already at 93 per cent of the level
seen in 2011.Solid Fuels and Derived Gases

Coal consumption by generators over the three
quarters of 2012 is already at 93 per cent of the level
seen in 2011?

 

 

Sat, 12/29/2012 - 14:39 | Link to Comment Jason T
Jason T's picture

China's growth is all growth in productivity..which is the result of their "investment" spending.

US decline will soon be a decline in productivyt..which is the result of piss poor resource allocation.. 

Sat, 12/29/2012 - 14:48 | Link to Comment Salon
Salon's picture

I can throw huge amounts of capital into ghost city construction and hidden subsidies and look like I have great productivity growth too.

For a while

Sat, 12/29/2012 - 21:01 | Link to Comment laomei
laomei's picture

The vast majority of cases where units are vacant are due to investment purchases with no intent to actually live in the units.  Policies put in place to stop it resulted in a lack of motivation to sell them as it would dump some nasty tax burden on them even if they took a loss.

 

Meanwhile, those so-called ghost stations are filling up, and highways opened up just a few years ago are already starting to reach capacity.  Relocation projects are also working on increasing efficiency and better access to resources.  Absolutely amazing what's been going on in the countryside.... which, of course, is no-where that the US reporters will dare to go.  Yap to a taxi driver on the way from the hotel, sit down in stabucks and write some "news".  That's pretty much par for the course, assuming the reporter is even in China that is.

Sat, 12/29/2012 - 23:21 | Link to Comment Schmuck Raker
Schmuck Raker's picture

"Absolutely amazing what's been going on in the countryside...."

Please enlighten us.

Sun, 12/30/2012 - 00:18 | Link to Comment laomei
laomei's picture

Massive amounts of reorganization going on as well as development.  5 years ago it was dirt roads and *maybe* gravel.  Now being replaced with pavement and elevated highways.  The old stick and mud farmhouses are being torn down and replaced with multi-story dwellings with a rental or storage space down below.   Most of this is entirely new construction and generally anyone who can build it themselves or strike a deal with a developer is doing it.  Communities are tearing down the old scattered housing to free up open land with the housing being more concentrated with better quality of living, better access to utilities and more opportunities for the land itself.  In 2 years I have seen a community be torn down, rebuilt in nice modern houses and the land converted to a combination fish-farm/recreation area.  Far less work, far more revenue per capita.

There were areas that were previously only accessible via motorcycle that now feature elevated highways.  

At the same time, of course, foreigners are crying about the old shitty buildings being torn down, forgetting that when they were build a few hundred years ago, they tore down a building previously to upgrade. 

 

In the end, this debt does not matter.  It's not going to go to waste as it's essentially public infrastructure which will serve the people regardless and will most likely be taken over by the central government in the end.  It's not foreign debt, it's domestic debt that China owes to itself.  Developers that experienced the boom and made mad money will suffer, but that cash is already spent.  Rich investors who needed a place to dump their cash will suffer, but that cash is already spent.

This is like the paradox of a family friend who got an inside tip about development, swapped their large plot of land for a smaller chunk of some land in the targetted area.  No cost to them, they got a very nice house, a renter in the shop downstairs and enough cash to start a movie theatre.  They don't care, they escaped the farming life and are secure.  The migrant workers who build all this, they too escape the farming life and send their cash home which lifts their own family out of poverty.  Even with the possibility of economic chaos, they are still far better off than they would have been previously.  

 

Flood-prone areas are being relocated as well.  This, this is stuff that really matters.  Fiat debt is fictional anyways.  The only thing that matters is what you do with it in the meantime.  Pissing it away on imaginary "financial products" accomplishes nothing.  Infrastructure may be a gamble, but it will pay off pretty much always until you reach a point of redundancy and development for the sake of finding a money sink.  Still a shitload more to do before it gets to that point here.  This ain't Japan and there is still tons to do to increase efficiency and productivity.

Sun, 12/30/2012 - 10:24 | Link to Comment Schmuck Raker
Schmuck Raker's picture

Interesting. I appreciate the reply.

I don't agree that the debt doesn't matter. Time will prove, or disprove, that theory.

Sat, 12/29/2012 - 14:51 | Link to Comment Atomizer
Atomizer's picture

IMF Extends Zero Interest Rates on Poorer-country Loans

Look sweetheart, that lovely bird is ZIRPING a pretty song.

 

Christine Lagarde announces, we’re offering $10,000 gift cards towards new IMF membership enrollment. Gift cards can only be used towards IMF debt repayment programs. Offer expires on 31/12/2012.

Sat, 12/29/2012 - 14:55 | Link to Comment q99x2
q99x2's picture

I hope China gets the oil in the South China Sea first and then ditch the Rothschilds. I think with some basic raw materials from Africa and the Mid East and they won't need the West's debt funded consumerism. And, likewise the people of the West do not need what China has. Only the greedy banksters from the West want to control the East. And the middle men that have no other purpose than to steal from the poor and gouge the Western governments even they need China less and less.

A machine shop in the US sounds like a good idea to me at this time. Maybe a few contracts from a larger corporation to get started. And should supply chains get disrupted, then there you have it--success in the worst of times.

Sat, 12/29/2012 - 15:28 | Link to Comment Crassus
Crassus's picture

The IMF is most concerned over China's investment in Africa.

Sat, 12/29/2012 - 16:21 | Link to Comment Atomizer
Atomizer's picture

See below. It’s much larger in the grand scheme of perpetual illusions and fears of upcoming terrorism scare tactics.

Sat, 12/29/2012 - 21:03 | Link to Comment laomei
laomei's picture

Because China's committing the sin of not exploiting the place while giving no actual benefit.  China's been doing great work in Africa and it's pissing off the west because they missed the boat.

Sat, 12/29/2012 - 15:12 | Link to Comment Bansters-in-my-...
Bansters-in-my- feces's picture

Why should anyone care what the IMF says.
They are all corrupt banker scum.

And why does the IMF care what China is up to? Period.

Fuck you's all International bankers.

And does China care what the IMF thinks or says....?

Sat, 12/29/2012 - 15:23 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

The IEA finally fully recognized the tectonic shift in global oil market consumption in their dec oil market report.

 

 

A MARKET IN TRANSITION 

On the surface, the oil market appears calm. With so much in the world seemingly on the brink, crude

price trends look as close to a flat EKG as they have in months. Prices have been easing, but gently,

within a relatively narrow band, in stark contrast with the wild roller coaster ride of earlier this year. On

closer examination, market fundamentals tell another story.

Recent data have helped to show two key areas of almost violent structural change in sharp relief. The

first has to do with an apparent acceleration in the eastward shift of global oil demand growth. Latest

data show European oil demand underwent the steepest contraction y?o?y in 3Q12 since the 2008?2009

financial crisis, even as Asian oil demand remained remarkably robust.

 

 

While there clearly are similarities between Europe’s situation now and then, the differences are even

more striking. The last time European oil demand nosedived as it did this summer, international oil prices

had been in freefall. Not only are crude prices holding up, but European consumer prices hovered near

record highs this summer, buoyed in part by a weakening currency. This was likely part of the reason for

the dip in demand.

Three years ago, Europe was broadly in sync with Asia and the rest of the world. Today, there is a clear

contrast not only in oil demand trends, but also in economic growth between Europe and Asia. North

America falls somewhere in the middle. Everywhere, uncertainty prevails. China is sending out mixed

economic signals. Meanwhile, whether the recent plunge in European oil demand is part of a trend or

just a one?off is unclear. Early data show demand bouncing back in October, but may be revised..................

 

http://omrpublic.iea.org/omrarchive/12dec12full.pdf

 

 

Sat, 12/29/2012 - 15:27 | Link to Comment onebir
onebir's picture

Doh!

Sat, 12/29/2012 - 15:37 | Link to Comment BrigstockBoy
BrigstockBoy's picture

IMF = International Machiavellian Fraud

Sat, 12/29/2012 - 15:52 | Link to Comment Elmer Fudd
Elmer Fudd's picture

ROI means nothing to them, why do we even bother.  Its all owned by the govt, any they can do whatever they want, everyone is just a leaseholder.

Sat, 12/29/2012 - 18:22 | Link to Comment Schmuck Raker
Schmuck Raker's picture

I always look forward to reading Prof. Pettis' articles.

The comments section accompanying his posts (at his site) are also very much worthwhile.

 

More Pettis:

"...portions of a email from Michael Pettis at China Financial Markets on the unsustainable nature of China's growth, Ponzi schemes in wealth management programs, and the implications of China's rebalancing efforts."

Read more at http://globaleconomicanalysis.blogspot.com/2012/12/michael-pettis-on-china-reforms-ponzi.html#9lFc3GtX6QIqUCdx.99

 

Sat, 12/29/2012 - 18:20 | Link to Comment unemployed
unemployed's picture

In the long view,  capital was misappropriated forever,  when the capitalist salt was added,  recaptures of investments were measured in months.

At the same time they can toss money and energy down ratholes,   there should be millions of Chinese who could offer excellent investment opportunities.

Real world markets should be seen in the light of Discovery Channels  gold miners Africa where the competitors are Chinese.

Sun, 12/30/2012 - 16:08 | Link to Comment suckerfishzilla
suckerfishzilla's picture

Over investment equates to pending losses and is a by product of chewing up and spitting out the US economy. 

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