China's Broken Shock Absorber

Tyler Durden's picture

Authored by Daniel Cloud,

(A review of Mark DeWeaver’s Animal Spirits with Chinese Characteristics)

Analysts who’ve only started paying attention to the country in the last decade often seem convinced that China has no real business cycle, or a very mild one, that because its economy is centrally planned, it’s free from the fluctuations in investment that cause booms and recessions in countries that lack the scientific guidance of a Leninist single-party state. This convenient belief, however, is mostly an artifact of the period over which they’ve been observing its economy.

In what’s generally, since at least the 1950’s, been a short, very high-amplitude cycle with a roughly seven year period, the period between 1992 or 1993 and 2007 or 2008 is unique. It has a “soft landing” (or as DeWeaver calls it, a “long landing”) in its middle that was unlike any other slowdown China has experienced in its post-World-War II economic history.  The boom of the early 1990’s wasn’t followed by the usual bust. Instead, after a fairly mild slowdown, another boom period began towards the end of the decade, without the usual deep cyclical trough between expansions.

DeWeaver’s explanation of this anomaly suggests that it is unlikely to be repeated. We’re probably living, now, with a China that’s back to the sort of violent swings in economic activity, and repeated struggles with inflation, that have been characteristic of most of its recent history. To understand why, it’s necessary to understand his explanation of the nature of the cycle itself.

In the economy of a country whose political system is some form of liberalism, changes in the level of productive activity are a consequence of changes in the level of investment by private companies, which presumably reflect changing perceptions of risk, and of potential rewards. In the Chinese economy, however, which, as DeWeaver convincingly demonstrates, is still very much dominated by enterprises in which some part of the government has a controlling stake, soft budget constraints and the primarily political motivations of most participants mean that calculations about risk often play little role in economic decision-making. In the pure “prestige projects” he describes in such Kafkaesque detail, even the idea of a reward is conspicuously absent.

This state of affairs, DeWeaver tells us, is exacerbated by the Chinese style of economic planning, which emphasizes the achievement of quantitative targets for things like provincial GDP. In effect, the system is a series of tournaments, in which officials are repeatedly, throughout their careers, pitted against each other in a competition to see who can outperform the plan the most in each planning period. Along with this formal system of planning is an informal system of government by “the central legitimation of local elites”, in which decisions about how to meet the quantitative targets are left to provincial and lower-level authorities, though the supposedly uniform and transparent targets themselves come down from the top.

What must also always come down from the top, DeWeaver tells us, is any impulse at all to rein in or slow the pace of expansion. Since officials at all levels are competing with each other to outperform any target they’ve been given, their incentives are entirely in favor of investing as much as possible whether it makes any sense to do so or not. Not only is this their best path to promotion – something everyone, after so many rounds of this game, certainly knows, by now – but more building means more opportunities to line your own pockets, by using companies you or your relatives own as contractors.

The problem with the sort of frenzied construction of uneconomic steel mills and international airports and amusement parks and solar farms and palatial government buildings and so on that this impulse results in is that there really isn’t much about the process that would make it likely that the mix of goods and services the Chinese economy actually needed, to embark on the next stage of modernization, was the one that happened to be produced by it. What is far more likely to be produced is some other mix of goods, perhaps of acceptable quality, if quality was one of the explicit plan targets, but not really the right mix, because its composition is largely the result of short-term gaming of the planning system by the officials responsible for interpreting and implementing the plan, rather than any sort of general market equilibrium.

Consequently, booms, in China’s post-war economic history, have tended to end in shortages of key commodities, or bouts of severe inflation, as the inappropriate mix of goods produced resulted in excess demand for the under-produced ones. The central planners have had no choice, at this point, but to tighten policy in various drastic and clumsy ways, so these booms almost always ended in busts. (Though not in the middle and late 1990’s.) Since the incentives for investment DeWeaver describes are insensitive to risk, however, many projects get carried on despite these contractions in activity and demand, so cyclical troughs have tended to be marked by extreme gluts of particular goods, pig iron or rolled steel or windmill farms or office buildings, often the ones most emphasized by the planners in the previous period. (As China’s economic miracle unfolded in the ‘80’s and ‘90’s, the tendency towards gluts seemed to have permanently eclipsed the tendency towards shortages  - until, that is, towards the top of the last cycle in ’07 or ’08, suddenly everyone in the world began to talk about peak oil…)

Aside from really spectacular ones like the Great Leap Forward, few of these booms and busts have been heard of by many people outside of China. Certainly few in the West now remember the so-called Great Leap Outward of the late 1970’s, though that was the precursor of everything that’s happened since.  In that event, an economic expansion was prolonged slightly past the point when shortages would normally have forced its termination, by a policy of opening to the outside world, which allowed the import of scarce parts and supplies. Political sponsorship for the trade initiative came partly from the so-called “oil faction”, which had both hard currency, and a pressing need for outside help.

The problem with this strategy, then, was the country’s lack of foreign exchange, and its chronic trade deficit. But if it could follow the same path as its capitalist East Asian neighbors, and use its highly literate and very inexpensive workforce to become an export powerhouse, the imperfections in the mix of goods and services the planning process always resulted in could be redressed in world markets. Under-produced goods could be imported, prolonging booms, and during cyclical troughs, overproduced goods could be exported. Market prices would be supplied to the Chinese economy from outside, giving planners some rough idea of what a genuine equilibrium would actually look like, and the imperfections in their estimations could be dealt with through trade.

So that is what Deng Xiaoping and the rest of the people running things, after the Gang of Four were disposed of, decided to try to do. The move closer to an equilibrium mix of goods and services, and the ability to correct gluts and shortages by using world markets, greatly improved the efficiency with which scarce commodities were allocated, and laid the foundations for the economy’s boom years. (I suppose one could call this economic model “parasitic planning”, since it is central planning that relies on the existence of undistorted price information from the outside world for its viability, but it might make just as much sense to call it the “Japanese model”, given the level of planning MITI engaged in, back when its plans still mattered.) A certain amount of market liberalization, and the partial privatization of, first, agricultural, and then other kinds of land, added momentum to the long expansion.

Most Westerners seem to be under the impression that exports were the “engine of growth” for China’s economy, in this period, that it’s demand from the outside world that has fuelled the rapid growth of the last two decades. The truth is more complicated. China is a large country, with a large economy, and value added to exported goods has never been a large enough fraction of GDP to directly account for very much of its growth. The real role of the export sector seems to have been the more complex one described above – it served as a guide to relative equilibrium prices, and a source and sink for under-produced or over-produced commodities. This role is not too different from that played by the Japanese export sector, during that country’s postwar period of rapid economic growth.

In its early phases, DeWeaver tells us, there were some difficulties with the implementation of this strategy. Trying to build export industries without doing enough for domestic consumers led to renewed shortages and severe inflation in the late 1980’s, culminating in the demonstrations by workers and students in 1989, and their brutal suppression. But by the early 1990’s the plan was working. Exposure to the quality discipline of world markets, as well as the information about relative scarcities and marginal rates of substitution encoded in their prices, and the advanced technology of the capitalist world, along with some market liberalization in an economy that nevertheless remained dominated by the State, produced rapid gains in in productivity at the same time. Asset markets overheated in some parts of the decade, but goods markets never really got tight, and in the long slowdown, the almost infinite capacity of the foreign consumer to absorb Chinese goods meant that surplus production could be exported, rather than simply destroyed.

In effect, China now seemed to face infinitely elastic supply and demand curves for every tradable good, and didn’t need to be anywhere near general equilibrium, in isolation, to experience the very rapid growth its highly educated and very inexpensive labor force made possible. Under these fortuitous but inherently temporary circumstances, the remarkably long expansion that took place between the early ‘90’s and ’07 or ’08, with a “long landing” in the middle, was possible –  once.

Why only once? There are two practical problems with the strategy in the longer term.

The first is that you may well be building the wrong thing. Becoming a very specialized cog in the global manufacturing system, in this particular way, doesn’t quite seem to set you up for the transition to a knowledge society, perhaps because all you’ve had to do, to get to this point, is solve a bunch of engineering problems. You’ve got the external trappings of modernity – without a Parliament, or real laws, or a Newton, or independent universities, or genuine newspapers, or a working system for the protection of patents and other kinds of intellectual property, or any of the other vital organs of a real modern society… Because those things take a little longer to develop, and require a somewhat different political system. So there’s a transition needed, at this point, to another, rather dissimilar kind of society, and many new opportunities for failure, or very qualified success, along the way.

Unfortunately, the sort of planning process DeWeaver is describing isn’t likely to ever result in transition even to a consumer economy, let alone a knowledge society, partly because all the incentives are skewed in the other direction, towards investment, not consumption, or the nurturing of individual creativity, towards the more Stalinist or Maoist approach of trying to use the sheer quantity of investment to make up for its poor average quality. The whole mechanism is designed to extract the consumer’s surplus, and use it for the goals of the State. In fact, what a consumer-driven economy must do is just exactly what such an economy doesn’t do. It doesn’t produce the things it consumes, and it doesn’t consume the things it produces, because it produces some rather arbitrary mix of goods, an artifact of a politicized planning process that is nowhere near the market clearing basket of goods and services.

Perhaps more relevant to readers in the rest of the world, at the moment, however, is the other long-term problem with the strategy. Simply put, it’s that the price elasticity of demand and the price elasticity of supply for particular goods in the world economy aren’t ever actually infinite. Sooner or later, you will need so much oil, or copper, to continue growing at the same rate, or must export so many personal computers and televisions and phones and other useless little screens, that your own actions start to affect the prices of these commodities. You become so large, relative to the world, that it isn’t possible to analyze the world economy without taking your own actions into effect, any more - so the imbalances in your economy simply become imbalances in the economy of the world as a whole. The strategy of letting the outside world absorb your mistakes and correct your deficiencies can’t work any more, at that point, because there no longer is an actual “outside” world, there’s just the one globalized world you’re now the beating heart of.

In retrospect, there was at least one unmistakable sign, in the second half of the last decade, that we had already reached this point with China. (Besides the apparently geometric increase in the number of useless little screens per American consumer.) As the impact of the country’s expected growth trajectory on global demand and supply became clearer, the price of oil continued to move up and up and up from its low of only a decade earlier, well below twenty dollars, to a price much closer to a hundred and fifty dollars a barrel.  China’s absolute consumption of crude was still only half that of the United States, but with the Chinese economy growing so much more rapidly than any developed one, a very large fraction of the marginal addition to demand in each period was coming from it. There was no corresponding new source of supply. It was becoming obvious (to everyone but the people who make policy in developed countries, who seem to perceive only what organized interests encourage them to perceive) that things couldn’t go on like this indefinitely, that soon there wouldn’t be enough oil to go around.

In the end, it was the price mechanism that adjusted demand to supply, by triggering a financial crisis that reduced consumers’ incomes, in the developed world, to a level consistent with a more stable oil price. Now, four years later, the world economy seems to be able to grow at whatever pace would keep the price of Brent below $110 – but not any faster than that. Each successive bout of monetary stimulus has had to be abandoned once the price gets much over that point. With that price now creeping up over $113 dollars per barrel, again, the Fed is already beginning to make unnerving comments about ending its now supposedly “eternal” commitment to QE a bit early, say later this year. They may have to. If they just blindly persisted in the stimulus, as they’ve previously threatened to, they’d be likely to simply push the price of oil up to a new all-time high, which would both cause another recession, and make the nature of the underlying problem painfully obvious to the voter, so it seems quite likely they’ll flinch, again, this time, in the end, just as they did on the last two occasions.

The apparent inability of Western policymakers to even perceive the “super-spike” of oil prices in the summer of 2008, which immediately preceded and very probably precipitated the financial crisis in the United States later that year (by forcing low-income consumers to choose between buying gas and paying their mortgages) as an oil shock is somewhat bizarre, but the inappropriate nature of the policy response, which has mostly consisted of printing money, raises the suspicion that it reflects genuine confusion, and not the disingenuous refusal to engage with reality it looks like from the outside. Since the Fed never seems to have understood that an oil shock was the problem it encountered in 2008, in the first place, the thing that burst the housing bubble it had deliberately inflated, it may never have even occurred to them to worry about the growth of Chinese demand.

Oil prices have stayed rather high for most of the period since, rising every time more monetary stimulus is applied, and then falling a bit when the authorities back off. The tightness in supply that has caused these high prices seems to have come as such a surprise to the rest of the world that they still have trouble seeing it as real. But for those of us who were already familiar with China’s business cycle, and aware of the growing contribution of Chinese growth to growth in the world economy as a whole, it is more or less what we expected. At this point, it is perfectly natural for the saw-toothed pattern of the normal Chinese business cycle to begin to superimpose itself on the longer, slower cycles of the Greenspan-era, US dominated world economy, because much of the growth in the world economy is now coming from China. In this scenario, shortages of key commodities at the top of the cycle, and gluts of certain other commodities at its bottom (including, sadly, labor) are just exactly what you’d expect to see.

What is perhaps a bit more unexpected is the situation we’ve all seen in the last four years, when we’ve had both things – a glut of (rather artificially) cheap labor, and manufactured goods, and a simultaneous shortage of oil. It’s tempting to call this situation “stagflation”, but the official inflation rate, in the developed world, has remained fairly low.

Partly this is an artifact of the way inflation is measured – basically all of the “growth” that the US economy has had in the last four years is a product of the hedonic adjustment, an unsatisfactory solution to an impossible measurement problem, which shows the inherent limits of economic analysis in general. But the Yuan’s peg to the dollar means that the Fed is also, in effect, making monetary policy for China, since the Chinese authorities must mirror the Fed’s actions to avoid changing the price of a Yuan in dollar terms.  In China, the Fed’s policies have been much more inflationary. Wages and prices in the US are held down by competition from cheaper workers and lower-cost producers in China – but China itself has no such sink to dump its inflation on, so when Bernanke prints, to prop up the value of assets owned by rich consumers in the developed world, and finance the profligacy of the American State, it’s poor migrant workers in Wuhan who go without supper.

This inflationary impact has been exacerbated by the response of China’s own economic policy-makers to the crisis. By 2008, after a decade and a half of rapid and relatively smooth growth, the institutional memory of the old business cycle had apparently been largely lost, as a result of the natural human tendency to assume that any good thing that lasts longer than originally expected will, therefore, last forever. Consequently, the response to the oil price super-spike of 2008 was not to tighten policy, as it might have been in previous iterations of the cycle. This was China’s moment in the sun, and nothing so trivial as brute facts about the scarcity of particular physical things could be allowed to mar it.

Instead of tightening, the planners applied massive stimulus, mostly in the form of easier credit for whatever career-advancing (but quite probably uneconomic) projects local government officials wanted to start. The problem was apparently conceived of as one of managing another soft landing, and bringing forward the next leg of the long expansion. If many of the projects would have a very low return, in the end, well, the government could absorb any losses, and pass them on to taxpayers, or to depositors, once a long boom was again underway. (Like the US, China funds its bankers’ incompetence by encouraging them to collude in repressing returns to private savers.)

Unfortunately, there was no protracted boom this time. There was only a relatively short one, peaking in 2009, which rather swiftly resulted in increased inflation.  China’s exports were now so large, relative to the economies of its customers, that only increased, and increasingly distorting subsidies would produce any more growth on that front. The resource constraints epitomized by the global oil price (although other vital commodities – clean air, for example – were becoming scarce as well) couldn’t be made to go away just by printing money, as they could have been when the price elasticity of supply for the commodities China imports was effectively infinite, back in the ‘90’s.

As a result, this last cyclical upswing was unusually short – the authorities had to start tightening again after only a year or two of renewed expansion. That meant that the hope that the eventual losses resulting from the low-quality local-government projects undertaken as stimulus could easily be absorbed by the banks (or rather, their depositors) during another long boom was revealed as a forlorn one. Eager to get rid of these increasingly dangerous white elephants, the banks began securitizing the loans they’d made to these projects in the form of “wealth management products” that would allow individuals to take over the loans, and earn a higher interest rate than they could with a bank account.

Local government projects that were on the verge of default could simply sell more bonds to the trusts associated with these WMP’s. Of course, they would then have to sell even more bonds, at some later point, to some other WMP trust, to pay off the interest and principal on those bonds, but that was a problem for later…  In 2012, loans made by these sorts of trusts, according to UBS, made up almost half of all credit extended in China. Few people outside of the country seem to have quite focused on the inevitable compounding of loans to pay the interest of loans to pay the interest on loans to un-economic projects that this implies, but the problem, considered in terms of the share of the banking system that’s involved in it, is obviously much worse than the sub-prime problem ever was in the US. It has all of the features of a classic financial crisis, since the WMP’s, in the final analysis, are probably mostly just complex Ponzi schemes. While money was still flowing out of bank accounts and into WMP’s, the game could keep going, but now that almost half the bank accounts have been used up in this way, there’s nothing left in the cookie jar. A ponzi scheme always collapses once there’s no new money left to be sucked into it, and we seem to be close to that point, so the short-term outlook isn’t bright.

An anomalously long expansion, in the ‘90’s and the first three quarters of the next decade, was followed by an anomalously short one, because of an inappropriate policy response based on expectations built up during the long expansion. The new short cycle may still have another bounce left in it, if we’re lucky, but given the rate at which WMP loans are growing, a financial crisis or panic, somewhat analogous to the events in Japan at the beginning of the 1990’s, seems equally likely as an immediate outcome. Even if the authorities do find some way to print enough money to get out of this particular trap, though, from a longer-term perspective, the illusion of a smooth and uninterrupted growth trajectory is now over.

If the Chinese economy can continue growing rapidly at all, in the face of persistently high oil prices and the incompetence of the country’s policy makers, it will now once again begin to do so in a saw-toothed way, with each peak marked by a spike in world oil prices (which will eventually explore new highs) and each trough marked by more exported unemployment, as the country continues to try to dump its mistakes in management onto an already-crumpling world economy. The problem with Deng Xiaoping’s plan is that it has succeeded – not in permanently solving the Chinese economy’s problem with the wildness of its tutelary animal spirits, but in sharing that problem with the rest of us, so we can all have the pleasure of living with the colorful though inconvenient consequences of Maoist central planning.

The remarkable lack of interest in China’s business cycle, by analysts outside the country – many China “experts” seem locked into the role of permanent booster or apologist, or else of perennial Sinophobe, and miss such tiny nuances as the violent fluctuations that have typified the post-war history of the world’s second largest economy – make Deweaver’s book, and its explanation of the nature and causes of those cycles, a very useful one, perhaps the most useful book on the subject to come out since Gavin Peebles’ masterful Money in the PRC. The book’s only major defect – one it shares with many of the products of publishers like Palgrave – is its price, which puts it out of the reach of the casual reader. But if understanding the cycles and likely future of China’s economy is actually an urgent practical problem for you, it may be worth investing in a copy anyway.

The book is available from Amazon; the URL is

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ninja247's picture

Killer research

DoChenRollingBearing's picture

I am sending this article to an American friend who has been in China doing business for years.  He has been China-bullish in the past, I would like to hear what he says back.

We currently buy Chinese bearings from two of the best bearing manufacturers in China.  Many/most bearings out of China are NOT GOOD, they do not last.  Peruvians have known this for years (yet there IS a "precio-nada-mas" crowd there).  It has taken us a long time to find these two who make reliable pieces at good prices (Chinese bearings prices are VERY LOW vs. Japan and Korea).

TwoShortPlanks's picture

And what if it were Chinese owned businesses acting as proxies, which have been the recipients of all that leased physical Gold from the Central Banks, add that to their ceaseless purchasing of Gold from the Open Market with none of their own Gold leaving China…imagine that?!

Imagine if the US had little Gold left and CBs around the world had leased out 80% of their holdings merely to prop-up a dying dollar...only for that Gold to find its way into China.

What then of said Chinese Business Cycle?...who cares! Gold backed SDRs anyone?

The only thing holding the US menstrual cycle together right now (and that's all it really is), and after 5 years of non-stop bleeding as the system desperately tried to purge the rottenness, is uncle Ben plugging that disease ridden whore called the US economy, with paper. Meanwhile the US Government have returned to the street, and is using the MSM to Pimp the whore all over again, claiming she's clean, she's clean and look at all this energy (a papr thin scam aimed at Putins' Russia BTW)....The US economy is quite simply a Double Bagger, Europe is a Triple, but China is only a Single.

When Ben stops printing, the US economy's response will be to bleed as part of a rejuvenation cycle. Hope you got rain coats, it's gonna look a little bit like this when it does:

TwoShortPlanks's picture

Here's the real America, and England to a lesser extent, for that matter.

BattlegroundEurope2011's picture

You get what you pay for.  Thats business.

Going Loco's picture

"Now, four years later, the world economy seems to be able to grow at whatever pace would keep the price of Brent below $110 – but not any faster than that. Each successive bout of monetary stimulus has had to be abandoned once the price gets much over that point."

If that is true (FD: I think it is), and if we ever do start sliding down the right hand slope of Hubbert's bell curve (FD: I think we already have) then the world economy MUST shrink, not grow, until we find a substitute for oil (FD: I seriously doubt there will be one in my lifetime). Any policy which ignores this most fundamental of economic facts will fail.

As we slide down the right hand slope the tightening supply will increase the propensity for the P.O.O. to rise, so that any form of stimulus will work for shorter and shorter periods, and if the stimulators ever lose their grip in any of the cycles that mark our slide down the right hand slope the P.O.O. could hit $500 very quickly. It went from $20 to $100 quite fast; that's the same level of increase. If that happens it's anybody's guess whether we would get hyperinflation or hyperdeflation; obviously history suggests it's the former.

Go Tribe's picture

"In the Chinese economy, however, which, as DeWeaver convincingly demonstrates, is still very much dominated by enterprises in which some part of the government has a controlling stake, soft budget constraints and the primarily political motivations of most participants mean that calculations about risk often play little role in economic decision-making. In the pure “prestige projects” he describes in such Kafkaesque detail, even the idea of a reward is conspicuously absent."

Make that, In the AMERICAN economy....

Nice bit of distraction by the regime "thinkers". Let's all worry about China and the Super Bowl.

billwilson's picture

China is a mess. Simply put you can not grow so quickly without papering over a whole raft of problems. The NPL situation in China (and through WMPs) is massive and massively underestimated.

To make matters worse it is all but impossible to believe a single number coming out of China. Ever notice how they always seem to hit their GDP growth targets (or within .1% or so of 8%), while the Fed can't even get US growth within 1-2% (on 2%). Because they make up ALL THE NUMBERS.

bank guy in Brussels's picture

Fake statistics ... A Chinese official informally admitted that was another thing they learned to copy from the Americans ... and now they do it on a bigger scale

Superb article above ... ZH at its best

JOYFUL's picture

Superb article? Superficially, yes, but perhaps only because of the dearth of quality analysis available on the topic...

peel off the outer layer of apparent competence, and you will notice a soupcon of stale assumptions, garnished with a whole mess of (western)culture-centric maxims that serve only to show just how little capacity for self-reflection exists amongst the milling masses of "China experts" competing for our attention.

Sample this mouthful of mendacity...

You’ve got the external trappings of modernity – without a Parliament, or real laws, or a Newton, or independent universities, or genuine newspapers, or a working system for the protection of patents and other kinds of intellectual property, or any of the other vital organs of a real modern society… Because those things take a little longer to develop, and require a somewhat different political system

then overlay it onto the landscape with which it is supposed to contrast:

You’ve got the external trappings of modernity – without (an independent\Congress\Senate, or real laws-that are applied fairly and when warranted, and not ignored at will by a despot who rules by Ëxcecutive Order or a Newton[whatever???@?], or independent universities, that are, unlike Harvard, MIT, or the rest not simply breeding grounds for the next generation of bioweaponry, behavioural control or faux POTUS,  or genuine newspapers, rather than outlets for the latest PR release from tel aviv or it's DC satellite, or a working system for the protection of patents and other kinds of intellectual property, such that theft of PROMIS software and other private property by organs of the terorist STA|TE are not allowed to stand,  or any of the other vital organs of a real modern society, such as perhaps, functioning markets, workable debt loads or opportunity for small business to compete against monolithic state-capitalist centrally planned cronyist cartels....USA USA!!!!!

So really, what's to choose between the endless descriptions of "Leninist" state-capitalism the author applies to China, and those which are equally apt to use in defining the current system in place Stateside?

China has done nothing other than conform itself to the permutations of the long-plotted plan which has melded "COMMUNISM" and "CAPITALISM" into a worst of all worlds, top-down centrally directed totalitarian mega-state where all individual initiative, indeed individualism, shall be ruthlessly snuffed by those in control.

FreeMktFisherMN's picture

China is definitely a mess, but even though they do have tons of ghost cities/malinvestment, the bottom line is they do produce the things the world consumes, and they are acquiring more leverage over debtor nations as they forego consumption of their own productivity. Especially given their penchant for purchasing PMs with those USD. They and other emerging nations figure to start consuming and improving their living standards.They actually save. Obviously mercantilism is not sustainable, and their middle class still lacks efficacy given it is a corrupt govt and they seem more socially cohesive, but at the end of the day they save and produce. And it's not like their people are individually deciding to buy US debt; their govt mandates it/does it for them. Who knows what their govt's plans are, whether they include an Eastern coalition and new domination with Russia, or some other geopolitical thing, but the bottom line is it is sad that America is debtor to such a country that has its own messes and unsustainability that exemplifies why GDP does not measure the value of output-there is no way to measure total 'aggregate output' anyway in terms of true wealth created that was warranted, etc.


Americans-numbed by their lack of morals w/regards to living within one's own means w/help from the Fed and the US imperial global hegemon since Bretton Woods/WTO-basically are squandering the world's scarce savings on consumption. 


At some point in all this it will assert itself that CBs cannot print purchasing power/supply, and all these currency wars harm the middle class as things become more expensive and internal wealth is destroyed. Vendor financing doesn't work forever; ultimately a customer has to provide something of value. Maybe China simply sees the 'value' of the USD is in accumulating tons of it to have leverage and trade them at these JPM manipulated silver prices for Ag. 


francis_sawyer's picture

Super article?


Once again, it's a COMPLICATED way to explain a simple thing...

CHINA hosted the Olympics in 2008... Probably 9/10ths of all the 'decade long' activity was in the 'run up' to prepare so they could 'LOOK GOOD ON TV'...

It's not that the rest is horseshit, but authors, these days, seem to be paid by the word [or to come up with complex phenomenon that could largely be explained in one sentence]... You should go to work for the government... Obama has a staff full of PhD's who could write you a 1,000 page report on how to hammer a fucking nail [and then 'miss' when they try it in real life]...


China didn't just want to 'LOOK GOOD' for the Beijing Games... They wanted to look REAL GOOD... [As in, pack 30 years of GDP, since Tricky Dick, into a window of about 7 years in the run-up to the games]... But now the lights are off & Bob fucking Costas has left the building... THAT's your story...

Furthermore ~ they need to CHANGE the criteria for a PhD... Fuck dissertations ~ If you can't focus your whole point wthin a Twitter message, you fail...

Terminus C's picture

Yes, that is what the world needs, more superficiallity and less articulation...

francis_sawyer's picture

I'll take 'superficiality' [THAT GETS TO THE GODDAMNED POINT] any day of the week, over 'articulation' that goes round & round in circles & never arrives at any conclusions... I've detailed my objections below...


- China skipped a goddamned business cycle (of 7 years), between 1994 - 2008

- China got the OLYMPICS in July of 2001 & the Olympics were held in August of 2008

- 2008 - 2001 = 7

- 1994 + 7 = 2001

- 7 years of POTEMKIN VILLAGE BUILDING "down the drain"

Further analysis here:

That's as good as it gets...


But that's just me... Enjoy your tea in the Ivory Tower... [I'll be over in the grove harvesting more tea in case you run out before you've finished debating your subject]...

stormsailor's picture

yeah,  another article is talking about a 5% correction in the equities markets in the us.  what a joke.


every severe market sell off i've ever witnessed started as a disruption in the credit markets. 


sorry for the off topic post

Yen Cross's picture

 Ghost Cities and things that make you go HHmmm...  My Way News - Fireworks cause deadly highway collapse in China

  Don't light " Roman Candles" on Chinese overpasses.  Better yet, don't cross Chinese overpasses, as they are made of (ghost concrete"<>

The Miser's picture

Remember it is still a centralized, controlled economy. Historically, they all fail for one reason or another. Remember in the early 1980s, we had to be like Japan. Japan was doing so well back then.

Curiously_Crazy's picture

Remember it is still a centralized, controlled economy.

Sounds just like Amerika

Cabreado's picture

One might think there's too much volatility in China's economy, beholden to now chaos outside its walls, to recognize "cycles."

helping_friendly_book's picture

Iam a serial poster. Sorry but, I must:

Please look at this to explain why the people in North America are being abuse by the "chosen ones"

This news clip is from FOX news so I can say it is right wing.

if you watch the whole video you will be appalled by the truth.

I never thought I would ever claim a Fox news segment as the most honest reporting I have ever seen.

Bloomberg will not allow me to post this video.

the truth watch if you dare

It seems Bloomberg news hires disqus to censor their comment section.

Please feel free to go to any Bloomberg article and post this news report produced by FOX news.

I think disqus is paid by the piece, meaning they are paid a set amount for every censor of a comment.

I propose we break Bloomberg by posting this video, which is red pill stuff, on every article produced on

TPTB_r_TBTF's picture

So ...  do i understand your post correctly?  ZH could hire discus to prevent you from posting here?

Cheyenne's picture

Bloomberg's gun-grabbing debut flops upstate: "Bring it on."

H/t amicus Karl.

silverdragon's picture

One of the better articles on ZH ref China for a while!

Great to see the improved content.

The guy actually has a decent understanding of China.

francis_sawyer's picture

Meh ~ (see above comment)


Here ~ since this is GroundHog Day~SuperBowl Sunday weekend... francis_sawyer is ging to pleasure you all with an article which details how these fine traditions came to be...

"You see, it all started when Pop Warner was visiting the little town of Punxatawney, PA & decided to stop in to buy himself some life insurance from his old friend Ned Reyerson Sr....What happened then was..."


How about a nice GROUNDHOD DAY OPEN THREAD?... It could become an annual event here on ZH to celebrate the next round of QE to INFINITY...

francis_sawyer's picture

Was that you 'junking' there [and above] silverboy?... Do you need it spelled out?


In what’s generally, since at least the 1950’s, been a short, very high-amplitude cycle with a roughly seven year period, the period between 1992 or 1993 and 2007 or 2008 is unique.

Translation: Just as tech boom of the 90's finished, Beijing was awarded the OLYMPICS on July 13, 2001...

In the Chinese economy, however, which, as DeWeaver convincingly demonstrates, is still very much dominated by enterprises in which some part of the government has a controlling stake, soft budget constraints and the primarily political motivations of most participants mean that calculations about risk often play little role in economic decision-making.

Translation: When your main objective is to BUILD A POTEMKIN VILLAGE for the Olympics [the first time the Western world casts a meaningful eye on your country], not much expense is spared...

The problem with the sort of frenzied construction of uneconomic steel mills and international airports and amusement parks and solar farms and palatial government buildings and so on that this impulse results in is that there really isn’t much about the process that would make it likely that the mix of goods and services the Chinese economy actually needed, to embark on the next stage of modernization, was the one that happened to be produced by it.

Translation: Yeah ~ Just go ask ATHENS, GREECE how building all those stadiums & expecting a big tourist boom worked for them...

Aside from really spectacular ones like the Great Leap Forward, few of these booms and busts have been heard of by many people outside of China

Translation: Nobody really cares much about your shithole of a country except for the two weeks that the Olympics are there, [&/or if it doesn't have resources to plunder]...

In effect, China now seemed to face infinitely elastic supply and demand curves for every tradable good, and didn’t need to be anywhere near general equilibrium, in isolation, to experience the very rapid growth its highly educated and very inexpensive labor force made possible. Under these fortuitous but inherently temporary circumstances, the remarkably long expansion that took place between the early ‘90’s and ’07 or ’08, with a “long landing” in the middle, was possible –  once.

Why only once?

Translation: Because the Olympics are gone... [& now the author is busy on his dissertation on how 'What went wrong in Brazil' ~ which you'll read about in 2017 or 2018... It ought to be a real page turner]...

williambanzai7's picture

The secret of the Chinese economy is they are producing virtually everything the world economy demands and, here is the key, they have successfully inculcated their population to reflect the same patterns of consumption. This formula has created so much wealth that the economic tolerance for circus property investment is higher than anything we have ever seen. It also means whoever is producing for export has a built in domestic afterburner.

Moreover, what is being produced it not necessarily the whim of some nomenklatura numbskull in the old Soviet block. Many of the new generation of high level bureaucrats in China are educated overseas.

It is not easy to apply conventional knowledge to the China phenomena. But it is easy to make money writing books about it.

Seer's picture

Ever consider that modern China was more of a Western construct than a Chinese one?  That is, could this have really been the age-old dumping ground of US/Western "goods?"  Wait!  Am I getting things backward here?  Well, when one considers that the number one export of the US is USD (UST) and financials then I'd say that this notion still holds.

The communist leaders had no other direction to go.  The propaganda of the West was breaching their walls.  The lure of consumption dug in deep.  Rather than fight it, and lose, their leaders decided to ride the wave.  Who knows whether they had/have any greater strategic vision in the global chess game.

US gets China to become addicted to consumption just as the most important resource on the planet is nearing decline- fossil fuels.  With the world economy now firmly in the dumpster China has nowhere else to go but to push internal consumerism harder so that their people stay distracted.  It's not going to hold.  Internal conflict will distract their leadership so much so that external conflicts, such as dealing with US aggression over resources (in places like Mali) and in dealing with spats over devaluation of USD (USTs being trashed), are going to be of secondary importance.  US is then able to continue its web of military control over strategic resources.

Not unless China quickly ramps up a military force that could rival that of the US, which is very very remote, it is going to stall and retract back inside its borders.

TPTB_r_TBTF's picture



The goal of AFRICOM is to push China out of Africa or at least to irreparably cripple her independent access to those African resources.


China and Cold War II

francis_sawyer's picture

The GOAL of AFRICOM is to rape & pillage resources [for the private parties that get in on the gig] and turn a PROFIT for themselves & their cronies... All the rest of the things that happen as a consequence of that [including China ~ who have their own gangs of 'profiteering cronies' involved], are secondary...


But I doubt that will stop anybody from writing complex dissertations about what's going on...

lakecity55's picture

I think the goal of AFRICOM is to get it before the ChiComs do.

williambanzai7's picture

I have considered that it makes no sense trying to divine the ideology that led to what we are now seeing. It is truly an ideological mash-up rife with elite opportunism and the I'll get mine business ethic.

Meanwhile, we would be better served if our own brain trust would focus on the corrupt logjam creating our own problems.

francis_sawyer's picture

We would be "better off served" if our own BRAIN TRUST would toss themselves into a mosh pit of Razorback hogs... [& let the 'little people' go about working things out for themselves]...

helping_friendly_book's picture

Hey Billy,

I have been to the PRC, Chengdu, 3 times since 2007.

In 2007 they all rode scooters and bicycles. There were empty spaces infront of the complex where we stayed. We drove wasted thourh empty streets, running red lights to score the 3 a.m. street noodle. I thought they were crazy w/ no regard for the law.

Went back in 2009, after I married, to hang w/ the inlaws and there were cars everywhere, parking on the sidewalks, everyone had to have a car. The lot outside the housing complex was packed. The police passed new laws, with a very heavy hand, criminalizing DUI w/ an instant 6 month sentence if you blew over 0.08%. They also doubled the number of taxi licenses, in Chengdu, set up para-military checkpoints to stop the amatuer drunk drivers from killing pedestrians. We took taxis everywhere, at night, that trip. I noticed they where digging a subway and rode the brand new highspeed rail to Taoist Mountain in Sichuan. Nice ride for sure!

I returned, this trip, from Chengdu in January. Roads are gridlocked. Subway, to my disbelief, had two lines running. One East-West, the other North-South meeting in the city center. The city center I had visited my last two visits nearly empty was now packed with masses of people who had taken the new subway. 8 lines will be finished connecting the whole city by the time I return in 2014.

Only a fool would underestimate the PRC resolve and way. The Chinese build faster than we can think. I left with envy. I could take a cab across the length of a city of 11 million people, about 20 miles for about 10 rmb. When I returned to my mid-Atlantic city I paid $60 (380 rmb) for parking and to really burn me a $20 (130 rmb) cab ride that took about 15 minutes with the cab mutts hand out for a tip. No tipping in China....sweet!

The market in the neighborhood, between the first and second ring, was a 

Cornucopia so full of the freshest of produce, meats, fowl, live fish, live ells, sorghum liquor and spices, and fruit my eyes lay amazed. No guns. people are stern, close to the vest but, always polite and excellent host. There is something very wrong in this country. 
Seer's picture

Where did the money you spent come from?

One has to compare apples to apples.  The cost that a visitor/tourist sees appears different to the locals who live and earn a living in a particular place.  The fact that you can travel by air such great distances automatically places you in the upper echelon of the world's people as pertains to "wealth."

Do you believe that this level of growth can continue forever?

As far as abiding by traffic laws, at some point laws impede traffic flow.  Go to Manila and watch how fucked up things are.  But note this: if people there were orderly everything would back up and stop; as it is people there maximize travel (scary as it is); anarchy in living color. (the corrupt officials are another matter, though nowhere is exempt from this, not China, not the US, nowhere)

helping_friendly_book's picture

Listen my friend Seer. Anyone I ever met had my respect until they lost it.

I was in the PRC visiting family. I would suppose being a tourist or visitor would be a  vastly different and more costly experience than visiting relations. I am a stranger in that, and most other lands, but I was under the protection of my friends on my first visit and my family there after.

I have tried, with great difficulty, to extract the data I would need to perform the "apples to apples" analysis you mention. The people of the region I was served as guest kept their data close to their vest, just like here at home. Just because they are in-laws gives no further insight than I would get from my blood relations. I cannot recall a review of any of my blood relatives W-2 forms let alone any new relations getting used to my cracker self invading their space.

I don't have data on taxes, withholding, fees, interest rates etc. I do know I spent 2 weeks, the last trip, left with $600 and returned w/ $400. I still have the rmb and cash held over for my next trip.

Airfare is a different story. While we did take the most timely, and more expensive route, I wouldn't describe my station as "upper echelon".We flew coach, flew 22 hours, missed our flight in Beijing, drank biajiu, then slept in a booth in the Thai restaurant in the Beijing airport. Not exactly Rothschild standard. The airfare had doubled between 2007 and 1 and 1/2 year later. I did notice inflation in China as well in produce and consumable goods. I suppose the prices might have doubled there as well as they have here.

I have never inherited a nickel from anyone and started cleaning offices, after school, when I was 14 year old, worked baking bagels in HS, fitted pipe for ten year, then matriculated and received my B.S in University while studying Chemical Engineering. I don't recall ever receiving any monies to provide for my well being aside from a annual holiday gift of a few hundred bucks from Mom, student loans I will be paying at 3.5% for the rest of my life and, was blessed to receive grants from my state for recognition of my scholarly gifts. I have borrowed money at rates up to 15% interest, have never been in default of any loan except a mortgage payment arrangement I sealed with a lender and paid, in good faith, lasting about 6 months. 2006 was a very rough year. 

Now traffic, as you describe, is the norm in Chengdu as well as Manila. I haven't driven, yet, in China but, I am certain I am up to the task. I cannot understand how they manage to negotiate the chaos without destroying their cars? I saw one accident, dude in suit and nice shoes putting bumper to his car in his trunk; I suppose they pay attention and value their possessions or maybe they don't have insurance. I couldn't tell you. It is mayhem for sure. They were constructing a elevated road on the second ring and negotiating the people, construction, cars, de-watering, right next to the North, main, train station was a freak show. I feel lucky to have escaped unscathed.

You speak of wealth of which I know nothing. I do know about debt. I borrowed money; and am paying those debts, to struggle to maintain what I perceive to possess and to pay my fare to travel. 

I am so disillusioned with the lie I have been subjected to, for so many years; the American scam that is, I live to fly the hell out of this country to experience the peace I perceive in other places where respect and common decency still exist. 

I return to customs to be abused by the friendly airlines in the good ol' USA.

I make a habit to forgo showers for five days before I fly just so I can opt out of the scan for the frisk. I will wash up before I get on the international flight.  

Fuck you TSA!

williambanzai7's picture

I know what you mean, but they have now crossed the threshold of incredible progress into the realm of creating urban monstrosities.

I have watched the process of rapid modernization close up first in Central Europe and now China. The Chinese are mind boggling in terms of how quickly they have morphed themselves into trendy looking modern consumers. There are areas of HK that I don't even bother going to anymore because the prices are all geared towards mainlanders with fat wallets.

I have given up on trying to predict anything about China and instead just watch in wonderment and consternation.

helping_friendly_book's picture


I marvel when my father-in-law takes us to the local street, or alley, joint and we have 7 dishes and a couple of 1/2 liter beers, the chef and da banter since they have been tight for years and it is less than 10 bucks for four of us. That is living! 

Or, or, the all you can eat hot pot joint with all the wife's cousins and uncles.......or,....ooor, the really nice place around the corner that I didn't see until I was married. Pops says "yo" to the local party cheif in the neighborhood and we fight over the check!!!!!

The private room with the office workers raising hell, drinkin' baijiu.....listening to their rancor but, out of sight....yet I still turn my head in that direction even thopugh I know I can't see into the next room.

We were in the South West, Sichuan.........I was yearning to go"have a martini".....looking for a place and being so disappointed when I paid 50 rmb for a two count Grey goose......

A, totally, different experience w/ respect to the West!

I respected the fact they never consumed alcohol unless they were dining......hard for me since I'm Scot-Irish but, still, demands respect.

I can't imagine what the losers in this country will do when China takes over?

I'm don't mean that in any disingenuous way either.  Nor do I mean to piss anyone off. I just call it like I see it.

I see the future and it doesn't end with 'stein or Cohen.

GCT's picture

I do not see China taking over the world.  Tha same prediction was made about Japan.  Alot of what China produces is inferior to American made goods.  The Chinese are out to improve their quality of manufacturing and when Europe wanted China to bail them out the demand was access to technology to improve quality.  The Europeans refused and the bailout did not happen.

Having lived in the Far East for 7 years I often times laugh at the Western media talking about slave labor.  Although people working in abhorrent conditions does exist, most go to work in the same conditions as we do in America.  The American media portrays most countries from their point of view and if you are not making USA wages you must be a frigging slave.  What a joke being played on us.  Whats even funnier is people believe the bullshit spouted from the media.

It cost less and I mean alot less in some regions to live.  They go to work just like you and I do and make a decent living.  When the media started playing out the slave labor at Apple factories and Apple tried to impose western labor rules the workers balked and rioted. The Far East has a different work ethic to be honest. Most American would be in for some culture shock living in the Far East.  Housing is multi-generational and the elderly are not cast aside like we do in the USA.

I spent a year in Korea back in 1973 and they did not even have refrigerators or color TV.  Now they are the leaders in electrionics and kitchen appliances.  Most people lived in thatched roof housing with rice paper windows and doors.  Now they have all the modern amenities we have here.  I call it progress.

China or for that matter most countries in that part of the world know they could not defeat us militarily so they decided to try and beat us economically by attracting our manufacturing and selling produced items back to us.  Our trade deficts with these countries speak for themselves.  I do think as the countries progress their growth will slow down big time.  But as long as Americans want cheap stuff nothing will change for now.  China has one huge problem and that is their population and all of those mouths to feed and lack of fossil fuels. 

kareninca's picture

helping-friend, Do you really think the future belongs to a country where they abort their girl babies, and kill either directly or by neglect, quite a few of those who make it out of the womb?  Do you ever look at the sex-ratio statistics of your new paradise?  Do you think it's an accident that your wife married you, a Scots Irish guy, instead of a Chinese guy?

Google around and you can see photos of the state-forced late-term abortions their bureaucrats specialize in.

kareninca's picture


But I guess if you can get a good cheap meal, all is fine.


Handful of Dust's picture

Over 50% of the people in China live on less then USD$1.00 a day the BBC reported the other day. The real estate developers, bankers and local politicans grabbed all that stimulus $$$$$$ they could and serious corruption and inequality remains.


Hopefully this new leader keeps his promise to tackle the massive corruption there. We'll see. Many politicans make many promises...Glad it's not my job.


PS: We'll see how the Australian economy fares in all this considering its Boom and RE Bubble are largely a result of the massive demand from China.

Go Tribe's picture

Exactly. Forget about BUSINESS cycles. Most of the the "capitalists" in America have become little more than pampered, government-milked pansies who have lost their ability to discern COMPETITIVE cycles.

Can't wait for this company's IPO:


Apostate2's picture

Yes Mr Williambanzai7. But historical atavism dies hard. Land is the only true wealth in their/our eyes. Has thus ever been so. No inculcation necessary. Has been true for longer than you and I may wish to acknowledge in our postmodern consumption presentist facile economicism driven understanding leads us to believe. 

Seer's picture

I'm fascinated by how people can spend so much time and energy talking around the obvious.  This is another example of not seeing the forest through the trees.

There is nothing different happening with China that isn't already happening, or happened, elsewhere.  The only difference is, and the article does note this, is that China does a LOT of lurching.  Yeah, they're awkward teenagers.  BUT, they'll NEVER reach adulthood.  Reason being is that they missed the fossil fuel party.  The era of cheap energy is drawing to a close and they're now trying to party like it's 1964.

Yeah, I get it that their highly centralized govt (and economics "system") is fucked up: does anyone really need others to tell us what should be inherently obvious?  HOWEVER, all systems predicated on perpetual growth on a finite planet are STUPID and WILL FAIL.  This notion of scrutinizing China as though "we" are doing a much better job is nothing more than a distraction (the elites love this, as it takes attention away from them and their manipulating the markets).

Anyone who truly understands business should recognize how scary tough it is to grow at a 10% clip year in and year out (until the wall is hit).  This is exponential stuff that we're talking about, this is highly explosive stuff.  That "healthy" 10% clip doubles your output in just 7 years.  For China that would be a doubling of their consumption and production in just 7 years; and This would double yet again in just another 7 years.  Those who don't get this ought not be in charge of commenting on or advocating ANY growth.

Yen Cross's picture

Seer , I read your thread. Been there done that/ 


Seer's picture

And China is doing this while carrying 1.3 BILLION humans.

It's a PONZI.  Those writing this stuff are practicing suspension of disbelief.  Next to the Morgan/Prebon paper ( these folks look like plants/trolls at best, at worst they are utterly ignorant.

Aussiekiwi's picture

mmmm, 10% growth per year, causes a doubling every 7 years, thats what happens in realestate according to the experts and all the books, so growth levels similar to realestate, no worries there then, what could possibly go wrong.

Seer's picture

Yeah! LOL!

My own brother, who happened to dabble in a bit of real estate sales (commercial), told me way back when that housing prices don't go down.  All his higher-up "professional" buddies all programmed the same.  I didn't bother to tell him that I thought that property taxes also would come down: they have for me.  A far less "educated" person like myself manged to beat the house because I was WISE enough to understand what FUNDAMENTALS mean.  I am by no means "wealthy," but I'm happy to not be carrying a lot of debt (a mortgage, but it's minor and should one day the collector cease to come collecting then I'll have a bonus).

williambanzai7's picture

You are absolutely right, the notion that we are doing a much better job is a symptom of our state of denial.