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The Days Of The Super-Powered Chinese Economy Are Over
Authored by Michael Pettis, originally posted at Foreign Policy,
In the months leading up to last week's liquidity crunch, in which the cost of short-term loans in China spiked and roiled global markets, most financial institutions had been lowering their growth forecasts for China. In mid-June, the World Bank revised its 2013 Chinese growth forecast from 8.4 percent to 7.7 percent; HSBC, Credit Suisse, and Goldman Sachs, among others, have also downgraded their Chinese growth forecasts several times over the last two years, as quarterly data have kept revealing lower-than-expected economic growth and higher-than-expected credit growth. Many banks now estimate around 7 percent to be the new normal.
But the banks' numbers are likely still too high. China's economy is at a turning point in its transformation from one driven by export and investment to one driven more by domestic household spending. Growth predictions are underestimating the impact of this shift.
The recent liquidity crunch, and its cause, illustrates some of the difficulties China's economy will face in the future. Over the last two years, and especially in 2013, mainland corporations with offshore affiliates had been borrowing money abroad, faking trade invoices to import the money disguised as export revenues, and profitably relending it as Chinese yuan. As China receives more dollars from exports and foreign investment than it spends on imports and Chinese investment abroad, the People's Bank of China, the central bank, is forced to buy those excess dollars to maintain the value of the yuan. It does this by borrowing yuan in the domestic markets. But because its borrowing cost is greater than the return it receives when it invests those dollars in low-earning U.S. Treasury bonds, the central bank loses money as its reserves expand. Large companies bringing money into the mainland also force the central bank to expand the domestic money supply when it purchases the inflows, expanding the amount of credit in the system.
In May, however, the authorities began clamping down on the fake trade invoices, causing export revenues to decline. Foreign currency inflows into China dried up, as did the liquidity that had accommodated rapid credit growth. The combination of rapidly rising credit and slower growth in the money supply created enormous liquidity strains within the banking system. This is probably what caused last week's liquidity crunch and this week's market convulsions.
The surprising thing about this process has been the government's determination to see it through. Policymakers in Beijing have not backed down from the implications of rebalancing China's economy away from its addiction to investment and debt, even though economic growth is slowing and banks are pleading with the government to turn back on the liquidity spigots. Whereas the administration of President Xi Jinping's predecessor, Hu Jintao, never allowed growth to slow much before losing its nerve and increasing credit, Xi seems determined to stay the course.
There are two important lessons to be drawn from last week's panic.
First, the central bank and the leadership in Beijing seem determined to try to get their arms around credit expansion -- even if that means, as it absolutely must, that growth will suffer and the banks will come under pressure. The extent of the freezing of the money markets on June 20 surprised many, including probably the central bank itself, but there will likely be more disruption in the markets over the next few years as Beijing tries to control what has become a runaway process.
Second, reining in credit won't be easy: the financial system and a whole host of borrowers -- including real estate developers, capital-intensive manufacturers, and local and municipal governments -- are too addicted to rapid credit expansion. Attempts to constrain credit growth will create significant strains in the financial sector, as borrowers find it hard to roll over debt that they cannot otherwise repay. Constraining credit growth will also mean a significant reduction in economic activity over the next decade.
Last week is a reminder that Beijing is playing a difficult game. The rest of the world should try to understand the stakes, and accommodate China's transition to a more sustainable growth model. As policymakers in China continue to try to restructure the economy away from reliance on massive, debt-fueling investment projects that create little value for the economy, the United States, Europe, and Japan must implement policies that reduce trade pressures. Any additional adverse trade conditions will further jeopardize the stability of China's economy, especially as lower trade surpluses and decreased foreign investment slow money creation by China's central bank. A trade war would clearly be devastating for Beijing's attempt to rebalance its economy and have potentially critical implications for global markets.
Regardless of what happens next, the consensus expectations that China's economy will grow at roughly 7 percent over the next few years can be safely ignored. Growth driven by consumption, instead of trade and investment, is alone sufficient to grow China's GDP by 3 to 4 percent annually. But it is not clear that consumption can be sustained if investment growth levels are sharply reduced. If Beijing can successfully manage the employment consequences of decreased investment growth, perhaps it can keep consumption growing at current levels. But that's a tricky proposition.
It's likely that the days of the super-powered Chinese economy are over. Instead, Beijing must content itself with grinding its way through the debt that has accumulated over the past decade.
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Western sheep can't afford even their cheap feed. Pretty simple.
Off-topic thread hijack ... Totally Pathetic Dept
Al Jazeera reports Edward Snowden is negotiating to go back to the USA
According to his father Lonnie, there is an offer to Obama's gangster Eric Holder, that Snowden will go back to be on trial if he stays out of prison before the trial and does not have his freedom of speech banned during that period.
Father also claims son Snowden is being 'manipulated by Wikileaks'.
Sickening, either way ... whether Snowden really was a CIA shill from the beginning ... or is just a total idiot.
http://www.aljazeera.com/news/americas/2013/06/201362820448338306.html
He made the mistake of trusting the ultimate New World Order fascist Putin. Or we've all been had. Either way, fuck you NSA.
+ 2
And plus another one for buying gold!
What I want to know is how many MREs I can buy in camp. I'll share with you, DoChen, as I am a commie.
What's this about eating MREs --- are you saying that the body and blood of Ayn Rand are not good enough for you?
And here I was always thinking he was talking about eating Rand Paul. Thanks for clearing that up.
Threadjack jack: At 9:00 a.m. this morning Four Star General Carter Ham, head of AFRICOM while the Benghazi compound was under attack on 9/11/12 (so he knows exactly who gave the "stand down" order), testified before the House Oversight Committee in a "closed door" hearing. We are anxiously awaiting the hard-hitting expose on CNN......
P.S. Fuck you Valerie Jarrett and all your Muslim Brotherhood pals.
This government is so transparent that when it looks in the mirror, it sees nothing. Cue Vlad.
...it sees nothing. As in nussing. As in: I know nussing. Well guess what, Lucies? I was only following orders ain't gonna work this time.
Fuck you China.
Um...the camps are not for commies. Unless you're implying you'll be a Camp Guard?
Trusting the Guardian and WikiLeaks were both bad ideas.
fascist? Could be no one gets they high anywhere w/o a good deal of ego. NWO - the jury's still out. It's acknowledged he took on the oligarchs and look what became of his arch oligarch enemy Beresovski in London. It was in London, btw where Beresovski bragged that he would get rid of Putin. That doesn't seem very NWO friendly to me. Then we have Georgia and Syria on the world stage. Again not NWO friendly.
What if he just wants to make a bigger impact?
I bet the US agrees to no such thing, as a bunch of chickenshits would be expected to act.
he's done well. can he do better though? hmmm. http://www.youtube.com/watch?v=af9EHtQMMc4
Obomba has tried to declare that the NSA programs are legal. They aren't by any stretch:
http://www.nytimes.com/2013/06/28/opinion/the-criminal-nsa.html?pagewant...
So Snowden is being pursued for truth-telling about a crime in progress. What's next, 911 callers being prosecuted for reporting crimes in progress?
next up a huge book deal and a run for Congress!
I agree and disagree.
One would be amaed what 1.6 billion people are capable of when they set their collective minds to it.
And we will soon be asked to join the collective. Resistance is futile. Objection is irrelevant.
If this is the case, prepare for the future and learn Mandarin.
At a minimum, make sure your kids learn it before Spanish or French.
They will be worlds ahead of their peers.
The bright side is that they get free trampolines thanks to FoxCon.
Dude, you crack me up.
One of the funniest people on ZH.
I'm here all week. Hold on, there's someone at the do...
is it this guy? http://www.youtube.com/watch?v=BVE-7x9Usvw "thank, God. the police!"
Ich bin ein Sarah Conner.
I have often wondered what SciFi future awaits us. Mad Max? Threads/TheDayAfter? FreeJack? Terminator? 2001? (haha)
I have come to the conclusion that it is going to be Soylent Green mixed with Blade Runner.....an Elite, and those who service/work for the elite......and then the rest of us.
I'd like to suggest another SciFi story to be considered:
John Brunner, 'The Sheep Look Up'
Well, I was supposed to learn Japanese in the '80s, but that ended in Lost Decades, corruption, and Fukushima.
Since China already has corruption and pollution perfected, all that's left are the Lost Decades. Color me surprised.
The difference is that China used to be the center of the world.
All holes eventualy lead to China
All holes eventually lead to China
china was the center of the world the same way the world was the center of the universe
i wouldnt even be part of a collective with a group of people here at ZH who i like ......no fucking way am i going along
I just sent in my second ZH guest post, called 'Preserving Values in a Time of Evil'.
I hope the Tylers like it. It has a bit to do with this topic.
i never get to do a guest post. http://www.youtube.com/watch?v=CWN1xWdKbHY
Yep, let me know when the Chinese become as stupid as Americans. Never going to happen.
Given the level of corruption, they won't put thier minds to it because too many will be scamming it.
I guess I missed the story on what happened to the trillions in cash reserves they had not that long ago,
Are they relevant?
Just breaking, a big explosion happened in Port Said, Egypt during big protests... then a gun battle kicked off...
It's happening NOW.
They at least have the option of trading growth for price stability. We have no growth to trade.
More,similar Pettis here>>> http://globaleconomicanalysis.blogspot.com/2013/06/michael-pettis-on-chi...
I was just this minute reading it at Mish's, though he posted it Thursday.
I lived in China for 10 years. The people are taught from infancy that they are intellectually superior to others, that China was the most advanced nation in the world throughout all of human history and that their government is infalliable. Where have we heard this story before?--Nazi Germany, Imperial Japan, Peronist Argentina...while I hope their mythology doesn't lead to the same end...I think it will.
Israel. The Jews are superior to the Chinese.
how many Jews are in China ?
There's a saying....'the loudest duck gets shot'.
Kind of says it all. Their version of 'the squeaky wheel gets the grease'.
Their widespread penchant for openly and shamelessly crapping on the sidewalks and roadsides tends to, in my mind anyway, belie such self-important and chauvinistic beliefs.
Make me laugh.
ROR!
Now, Chinese citizenism is first and all a state of mind and very possibly, backed up by a specific genetics configuration.
Chinese citizenism citizens exist in most groups. In US, there are a lot of Chinese citizenism citizens bidding their time to take control.
Just like the Syrian rebels are Chinese citizenism citizen material, covering an ethnical laundering under humanitarian guise of Tyrannosaurus arm squirrel, Syria might be one day overtaken by Syrian Chinese citizenism citizen material.
If this day comes, in the few following decades, one will notice a dramatical increase in terms of excremental waste along the roadside to Damascus.
What you mean?
Whazat smell.
I had one of those on our floor in college way back in the day... on and on about how great China was blah blah then he started going on about China sending men to the moon like it was some big deal... I told him the Chinese astronauts should take trash bags with them so they could clean up all the crap the US left behind... that was the end of that conversation
Lots of people around the world (including the West) are brought up thinking they're better than others. More righteous. More deserving. More entitled to the best things in life. Really, who in the majority are going to tell their kids are useless and will never amount to anything... unless they're dead beat parents, but for the most part those, whether it be your parents or school, raising and teaching you will imply that the way you are learning is the right and superior way of doing things.
To say only one particular country's people teach their children to think that way and that they will become blood thirsty tyrants is ridiculous.
I don't think you need to drown your child's mind with brainless and thoughtless statism for them to be something more than the rest of the sheep.
Which country(ies) does the following question apply to?
All children are taught to pledge allegiance to the Flag, and the Government debt for which it stands.
The yuan will devalue as a result of this crisis, and then the West will throw up trade barriers. Welcome to the 1930s, 4 years late.
China has vast foreign currency holdings.
Some will argue that paper is worthless, and I agree. (excluding historic documentation)
When do Chinas' foreign reserves become "worthless"?
almost a textbook daily bearish engulfing candle on the eurusd today. Needed to close below 1.3004 on the futures contract for Sept but it was just above.
Thanks for the heads up FreeMktFisherMN
I'll remember that when I short eur/aud. ;-)
crude oil posted a weekly bearish engulfing candle recently, too. So I'd say this all portends another liquidation event on the horizon. Although I will say while the moves are bigger the longer term the timeframe of chart these types of candles occur on, they also can take awhile.
For instance, the ES just posted a weekly bearish engulfing candle, too, and that is hugely bearish, but it also did May 2012 back at 1180 I believe. But now that there are two bearish engulfing candles consecutively within about a year, it seems more and more gravity should take down the ES. These types of candles are very reliable since I've gotten into trading and have used them.
silver (and I assume gold) had a daily bullish engulfing candle. But as I said, while this portends a nice move upwards beyond today's close of 19.63, there was a bearish engulfing on the 60 min. chart which occurred with that takedown after the COMEX pit session Thurs. So perhaps one more jerk downward. I'm going to be cautious, and for now expect more continuation upwards due to today's strong move in PMs, but am wary of that bearish engulfing candle, too, on the hourly.
Back on June 14 on the 5 hr chart (investing.com has this but not sure if a lot of traders use the 5 hr chart) there was a bullish engulfing that peaked at about 22.30 for silver, so at least technically I see some nice upward pulling candles that portend a rocket upwards. I still am wary of yet another down move perhaps, though, maybe TPTB trying to fake people out on this huge run up before heading down again before the big rally.
The USD index however did post a weekly bullish engulfing candle looking at investing.com's candlestick chart. This was from the FOMC week I believe. So in back of mind I'm telling myself don't rule out a big liquidation on the horizon just from a techincal analysis standpoint, although PMs along with the USD went up today, so perhaps that was significant.
Perhaps they try to juice the USD with a big rally before they double down on QEternity in their mission to keep rates low, and then the PMs rocket upwards.
China has diversified its vast foreign currency holdings into yen, euros and commodities, all depreciating. In order to maintain value versus the U.S. dollar, it would have needed to maintain dollar reserves relative to the growing money supply.
The U.S. also had massive currency reserves in 1929 as a result of the undervalued U.S. dollar during the 1920s. Didn't save the country from a deflationary depression that lead to a 75% devaulation in the U.S. dollar.
The US$ was devalued against a Gold standard, all of the mistakes of that era are being revisited now by the Dogfuckers of the Fed. The earlier depression 1920 ish was over and done with quickly because the Govt did nothing. Everything about the 1929 fiasco was the same as now. Save the Banks.
regards
The Great Depression was an Inflationary event as are all depressions.
When the underlying national economies fall off the table.
Mostly becuase of cheap Chinese crap displacing domestic goods, and therefore, domestic jobs.
the high growth numbers from china were always a charade - they measure gdp differently so of course the numbers could be higher than western numbers, which are themselves lies upon falsehoods....
what few understand is the extent to which the west controls chinese industry....this is the reason why the chinese have been western export slaves....the new government seems somewhat determined to break western hegemony...there is tremendous concentrated wealth in china....china's success in breaking free of wall street will make it a real power with which to contend....
their vast dollar holdings are the tip of the iceberg....
Right! China is going to grind through debt when they can grind through banksters instead. Give me a break.
Chinese government declared war on bankers. If our government did it, we would cheer like crazy. Remember what Paul Volcker did?
I can't believe I'd live to see the day that the Russian and the Chinese have higher moral authorities than the free west.
We are becoming Sodom and Gomorrah.
Let them eat rice....oh wait.
Son of a bitch, Goldman. Really?
You've been my best indicator for the last six weeks. You said S&P 1750 by EOY. I went short. You said buy Japan. I went short. I did the exact opposite of what you said & I made money. Now what the fuck am I supposed to do now that you downgraded China? Go long? No fucking way man. Goddamnit Goldman, you were my secret golden nugget. Fuck TA, I didn't need charts & shit. All I needed was your recommendation, and that Goldman Sachs moral compass that came in my box of Cookie Crisp Cereal. At first I thought it was broken, but I quickly realized that it always points straight to hell.
But now you go and fucking ruin it for me. I can't go long on that shit. Are you nuts? There's gotta be at least one economy left outside of Antarctica that you wanna pump & dump. Give me the buy signal again so I can short a bitch.
China will be the worlds dominant economy as it has been thousands of years. Only a communist trial like this one great leader's can change that.
The present Chinese economy is similar to the Roaring 20's US economy. Very little physical regulation and money everywhere. The Chinese will falter, no doubt, but the recovery will be long and impressive. Go there, see it, the scale of everything required to modernise means that the commodity cycle is taking a breather. Expect some pumping of the economy when the new leadership gets their act together.
regards
It's really funny that US would have the face to talking about China's debt.
I beg Americans need to realise their days are numbered just like their rotten flag which is also made in China.
Pathetic.
America's numbered days will still be numerous even when your great-grandchildren are ready to pass away... don't hold your breath waiting for it, you may turn blue.
The article is summed up well at the very end. The whole credit/debt/export game was unsustainable, so now they need to shift to a consumption based economy, but how you do that when all the jobs are drying up because they were export based jobs is anyone's guess.
All of the predictions of future growth are based on changes in the way things used to be. Unfortunately, the way things used to be will have very little bearing on the new paradigm, so how do we put a numberr to it? It will take China decades to transform itself, and I doubt there will be much growth as it kicks its heroin addiction, because nobody else is growing either. This is not a healthy environment to suffer growing pains.
Not to be critical, because you can't cover everything in one article, but this blessed "transformation" to a consumer based economy has brought China to the edge of domestic revolt. The government is corrupt, their society is corrupt, and there are no jobs. They are in for a long, hard, decade of internal strife.
"Over the last two years, and especially in 2013, mainland corporations with offshore affiliates had been borrowing money abroad, faking trade invoices to import the money disguised as export revenues, and profitably relending it as Chinese yuan. As China receives more dollars from exports and foreign investment than it spends on imports and Chinese investment abroad, the People's Bank of China, the central bank, is forced to buy those excess dollars to maintain the value of the yuan. It does this by borrowing yuan in the domestic markets. But because its borrowing cost is greater than the return it receives when it invests those dollars in low-earning U.S. Treasury bonds, the central bank loses money as its reserves expand."
And so the reason we borrow money from China is....? And the real question is, who exactly is this "we" in my question.
Pagoda of cards ...
How long could China keep producing / consuming over 50% of the World's cement ?
It's like producing / consuming CDOs in the financial crisis ... that ended well.
The great dream of selling American baubles to Chinese consumers is alive and ... well, maybe not well, but it's alive.
"Xi traces China's emerging world view" by Anand V [6/25/13]
http://www.atimes.com/atimes/China/CHIN-01-250613.html
Note: in 2012 China had $200 bln. in trade with the African Continent. Today, yes in 2013... five[5] of the top-ten[10] leading emerging [markets] economies hail from Africa!
Ps. and while your there www.atimes.com/ why not give a friendly 'roving-eye' to Pepe Escobar