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Is China's 'Black Box' Economy About To Come Apart?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
After 30 years of torrid expansion, perhaps the single most consequential factor in China’s economy is how much of it is a “black box”: a system with visible inputs and outputs whose internal workings are opaque.
There are number of reasons for this lack of transparency:
- Official statistics reflect what officials want to project, not the unfiltered data.
- Policy decisions are made behind closed doors by a handful of leaders.
- There is little institutional history of transparency.
- Many important statistics are self-reported and prone to distortion.
- Large sectors of the economy are informal and difficult if not impossible to measure accurately.
- Endemic corruption distorts critical economic yardsticks.
- There is little historical precedent to guide policy makers and individual investors.
None of these is unique to China, of course, with the possible exception of #7: few nations in history (if any) have experienced an equivalent boom in infrastructure, credit, housing and wealth in such a short span of time.
Saving Face By Editing Data
As anyone who has lived and worked in Asia can attest, public perception (i.e. "face") is of paramount concern. There is tremendous pressure to put a positive spin on everything in the public sphere. Negative publicity causes not just the individual to lose face, but his boss, agency, company and family may also be tarnished.
For this reason, reporting potentially negative numbers accurately may put careers and hopes for advancement at risk.
This accretion of fear of reprisal/disapproval builds as it moves up the pyramid of command. This process can lead to tragic absurdities being taken as truth. In one famous example in Mao-era China, officials ordered rice planted in thick abundance along a particular stretch of road, so that when Chairman Mao was driven along this roadway, he would see evidence of a spectacular rice harvest.
In reality, China was in the grip of a horrific famine resulting from disastrous state policies (The Great Leap Forward). But since everyone feared the consequences of telling Mao his policies were starving millions of Chinese people, the fields along the highway was planted to mask the unwelcome reality.
Even the most honest reports reflect the biases of those summarizing feedback for their superiors. As a result, when the feedback finally reaches the top leadership, it may be inaccurate or misleading in ways that are difficult to detect.
The Dangers Of Opaque Leadership Decisions
All leaders have their own biases and experiential limits, and left unchecked by accurate feedback and honest dissent, these have the potential to generate disastrous decisions.
Perhaps the top leadership in China is soliciting honest dissent, but without a vigorously free media and multiple unedited feedback loops, this is unlikely for systemic reasons.
Most people—leaders and followers alike—seek to confirm their own views (i.e. confirmation bias). A system in which key decisions are not aired publicly and the trustworthiness of the data being considered behind closed doors is also unknown is a system designed to reinforce confirmation bias and yes-men.
In this environment, destructive policies may be supported by the chain of command despite the consequences.
Lack Of Institutional History of Transparency
Institutions with a long history of independence and a policy of priding transparency have the potential to counter the tendency of hierarchies to encourage confirmation bias and fudged feedback.
But China’s tumultuous history in the 20th century—invasion, foreign occupation, civil war, revolution, mass famines, the Cultural Revolution’s mass disruptions and purges, the end of Mao’s Gang of Four and Deng Xiaoping’s “to get rich is glorious” reforms—has not been conducive to the establishment of independent institutions.
Developing the independence of institutions in the midst of such unprecedented political, social and economic turmoil is a long-term work in progress. Though no comparison is entirely analogous, we can look at the first equally tumultuous 30 years of the American Republic (1790 – 1820) and the French Republic (1789-1819) for historical examples of the difficulties in establishing enduringly independent institutions.
Self-Reported Statistics
Self-reported data plays a significant role in any economic snapshot that measures sentiment and expectations. But when it comes to income, outstanding loans and other data, there’s no substitute for accurate numbers.
As a general rule, the larger the informal cash economy and the greater the leeway and the incentives to under-report, the lower the quality of self-reported statistics.
Take income as an example. In the U.S., the vast majority of non-cash income is reported directly to the tax authorities: wages, 1099s, sales of securities, etc. The leeway to fudge income is low, which pushes the incentives to fudge onto the expense/deduction side of the ledger. For this reason, IRS income data is more trustworthy than self-reported measures of income and employment.
Consider this chart of household income in China. A survey of households found incomes were much higher than the officially collated numbers. In the case of the top earners, the difference was significant enough to skew a variety of key numbers such as household income as a percentage of GDP.
(Source)
The differences between official data and data collected by surveys is troubling for a number of reasons. Given the incentives to under-report (to avoid paying higher taxes), why should we trust the accuracy of self-reported income? Who’s to say that wealthy households don’t habitually under-report their true income even to surveys?
Given the ubiquity of the informal economy and shadow banking system in China, official data cannot accurately reflect peer-to-peer lending, private loans outstanding and many other data points that are critical to understanding income, risk and credit flows.
The Informal Economy & Shadow Banking
These discrepancies between actual debt and what’s reported could have monumental consequences should expansion turn to contraction and debts become uncollectible.
It’s been estimated that a third of all Chinese households engage in informal lending to friends and family, as well as to enterprises that pay high rates of interest due to the risky nature of their investments.
Interest can run as high as 34% -- loan-shark rates.
Even the slices of the credit/investment sector that are reported—for example, Wealth Management Products (WMPs)—are more Wild West than staid banking. WMPs are managed off-balance sheet and don’t require any reserves:
“Legally WMPs are not deposits. They are investment products that are managed ‘off-balance-sheet’ by banks, and there is little transparency about where the funds are going,” said Stephen Green, head of Greater China research at Standard Chartered in Hong Kong, in a note.
According to Green, the funds from different WMP products are often mixed and deployed to finance a broad pool of assets that more often than not fall into the sectors of the economy that regulators have attempted to fence off from normal bank lending (real estate, local government infrastructure, etc.), partly because these sectors are deemed to be particularly risky. In addition, the banks hold neither reserves of WMP deposits nor capital against the assets.
(Source)
In other words, transparency is low while risk is unknown but possibly high. This volatile mix of opacity and risk is the perfect recipe for cascading defaults and catastrophic losses.
Endemic Corruption Distorts Data
In China, as in many developing economies, problems such as permit applications, tax bills or development rights are solved by greasing the skids of officialdom. Just received a big tax bill? Maybe a friendly tax official can help reduce the tax in return for promises of favors and an envelope of cash.
While the central government is cracking down on highly visible corruption, the system of buying privileges with influence, favors and cash is too deeply entrenched to be eliminated in a few months or years by high-level policies.
As with all the factors listed here, the impact of corruption is difficult to assess -- and that’s what makes China’s economy such a black box: if what’s known is untrustworthy, and what’s not known is potentially destabilizing, then how reliable is any projection?
Few Historical Precedents to Guide Policy Makers and Individuals
In the U.S., analysts and policy makers can draw upon a long history of economic policies and debate their applicability to the present. Rising income disparity, for example, is often compared to the Gilded Age of the late 19th century. The financial crisis of 2008 is often viewed as an analog of the 1929 crash that triggered the Great Depression.
China’s recorded history stretches back thousands of years, but in terms of applicable financial and economic parallels to the current economy, there is no precedent. China’s leadership is truly in uncharted waters. This in itself heightens the risk of miscalculation and basing policies on faulty premises.
In Part 2: Why China Is Extremely Vulnerable Now, we zero in on China’s real estate bubble, and the outsized risks it poses to China’s economy -- and the world.
As the housing bubble bursts, alongside the trillions of losses already experienced in the Chinese stock market, the flood of capital from China into world assets is going to be substantially compromised. Asset prices are set at the margin: what the highest buyer is willing to pay. For many years now, the world has become accustomed to China's dependable willingness to pay well in excess of everyone else. When China is no longer the highest buyer, how far will prices need to fall in order to match the next highest buyer's ability to pay?
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
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Nope.
But you can't apply Betteridge's law of headlines to the following question:
HOW WILL CAPITALISM END?There is a widespread sense today that capitalism is in critical condition, more so than at any time since the end of the Second World War. [1] Looking back, the crash of 2008 was only the latest in a long sequence of political and economic disorders that began with the end of postwar prosperity in the mid-1970s. Successive crises have proved to be ever more severe, spreading more widely and rapidly through an increasingly interconnected global economy. Global inflation in the 1970s was followed by rising public debt in the 1980s, and fiscal consolidation in the 1990s was accompanied by a steep increase in private-sector indebtedness. [2] For four decades now, disequilibrium has more or less been the normal condition of the ‘advanced’ industrial world, at both the national and the global levels. In fact, with time, the crises of postwar OECD capitalism have become so pervasive that they have increasingly been perceived as more than just economic in nature, resulting in a rediscovery of the older notion of a capitalist society—of capitalism as a social order and way of life, vitally dependent on the uninterrupted progress of private capital accumulation.
Crisis symptoms are many, but prominent among them are three long-term trends in the trajectories of rich, highly industrialized—or better, increasingly deindustrialized—capitalist countries. The first is a persistent decline in the rate of economic growth, recently aggravated by the events of 2008 (Figure 1, below). The second, associated with the first, is an equally persistent rise in overall indebtedness in leading capitalist states, where governments, private households and non-financial as well as financial firms have, over forty years, continued to pile up financial obligations (for the US, see Figure 2, below). Third, economic inequality, of both income and wealth, has been on the ascent for several decades now (Figure 3, below), alongside rising debt and declining growth.
http://newleftreview.org/II/87/wolfgang-streeck-how-will-capitalism-end
where is this capitalism you're referring to?
kinda like when gandhi was asked what he thought of western civilization, he replied: i think it would be a good idea.
I could have told you that about china, oh wait. Seriously though, this post had some good insight.
China may have some rough periods
but.... I'm not betting against the PBOC and Politburo losing control, momentium, and therefore power LOL
relative to the US, China has barely scratched the surface of monetary policy
China does want the RMB to depreciate. China did tell their citizens to save in gold. JW called all this a while ago
disclaimer - he, like everyone else outside of Ben Bernarke and Mr. Yellen misses his specific timing calls. His dollar crisis last February failed to materialise.
Agree with this article and it's something I've argued here on ZH for a long time.
One important point missing IMHO is the total lack of innovation in China. The Chinese are copiers pur sang, and just like they copy DVD's Louis Vuiton bags and mass produce iPhones and iPads, they also copied their economic success from Japan, they also copied all it's mistakes.
Remember how Japan was "going to take over the world" in the '80's? Well, just look now at China and all the hype surrounding it's "miracle growth." Then look at Japan now... China = Japan 2.0 on steroids.I recently visited Zhengzhou in China, and the whole city is ONE GIANT construction site. Just like Japan: building bridges to nowhere, building airports, factories, roads and houses. But for whom?
The Chinese are hard workers, but they are also notorious gambles and it seems that they gambled wrong when they acquired trillions in FOREX reserves and bonds, and it seems they were wrong when they blew a giant housing bubble and it it seems they were wrong when they blew a giant stock bubble.
And with commodities and gold continuing to slide, I guess we can all anticipate how this bubble will end for China...
Wallerstein argued back in 1982 that capitalism is near its end.
"We have tried thus far to describe how capitalism has in fact operated as a historical system. Historical systems however are just that – historical. They come into existence and eventually go out of existence, the consequence of internal processes in which the exacerbation of the internal contradictions lead to a structural crisis. Structural crises are massive, not momentary. They take time to play themselves out. Historical capitalism entered into its structural crisis in the early twentieth century and will probably see its demise as a historical system sometime in the next century. What will follow is hazardous to predict.
We seem to be in the midst of a process of cascading bifurcations that may last some 50 more years. We can be sure some new historical order will emerge. We cannot be sure what that order will be. Concretely, we may symbolize the first bifurcation as the effect of the world revolution of 1968 which continued up to and including the so-called collapse of the communisms in 1989, the social bifurcation.
Three types of social formulae seem plausible in the light of the history of the world-system. One is a sort of neo-feudalism that would reproduce in a far more equilibrated form the developments of the time of troubles – a world of parcellized sovereignties, or considerably more autarkic regions, of local hierarchies. This might be made compatible with maintaining (but probably not furthering) the current relatively high level of technology. Endless accumulation of capital could no longer function as the mainspring of such a system, but it would certainly be an inegalitarian system. What would legitimate it? Perhaps a return to a belief in natural hierarchies. A second formula might be a sort of democratic fascism. Such a formula would involve a caste-like division of the world into two strata, the top one incorporating perhaps a fifth of the world’s population. Within this stratum, there could be a high degree of egalitarian distribution. On the basis of such a community of interests within such a large group, they might have the strength to keep the other 80 percent in the position of a totally disarmed working proletariat. Hitler’s new world order had such a vision in mind, but then it defined itself in terms of too narrow a top stratum. A third formula might be a still more radical worldwide highly decentralized, highly egalitarian world order. This seems the most utopian of the three but it is scarcely to be ruled out.
Are there still other possibilities? Of course there are. What is important to recognize is that all three historical options are really there, and the choice will depend on our collective world behavior over the next fifty years. Whichever option is chosen, it will not be the end of history, but in a real sense its beginning. The human social world is still very young in cosmological time. In 2050 or 2100, when we look back at capitalist civilization, what will we think?"
—Immanuel Wallerstein, Historical Capitalism with Capitalist Civilization,1983
Which of the 3 possibilities do you see most likely to play out? Why?
Yep.
I don't know ... and Jack Burton has alot of questions too;
https://www.youtube.com/watch?v=GcC9ldx9N9M
This is a good post/article, Tyler. I hope some people take the time to read it.
I'm not shilling for anyone.
Short/Sweet ,and to the point.
China is a mess, and the United States is even worse.
Why the down votes for telling the truth? I guess you are over the target Yen.
Fact is, China has massive reserves and boat loads of physical gold and the US has trillions in debt and most likely very little gold.
BoP your charts are so honest. That's all that matters.
You're wickedly brilliant with your figures, and unquestionable with your facts.
Communism is a tool for transferring property, make no mistake, when the China collapse finanly comes, the same folks that own all of Russia will also own all of China.
What does that mean? Seriously. Who do you think owns all of Russia? As more and more dirty deals of the 90's get undone, its more and more the case that Russians own Russia.
So, Russians are going to own All of China? According to you? I don't think so, but thanks for the trading advice.
Black boxes do not 'come apart' - they are used and discarded when they no longer serve a particular purpose.
The Chinese have been both administering states, buying and selling crap and gambling for four thousand years longer than most Western civilizations even existed. They have plenty more black boxes where this one came from. Only the West would view the current black box as some kind of static, forever and ever existential construct.
The old-time Chinese must be getting a good laugh out of all this hand-wringing in the West.
Downvote for 5000 year fallacy. China is 60 years old.
By your logic, Italy is a 3000 years old civilisation, therefore immune to mistakes because Italians have "genetic memories" of being Romans.
It's interesting that China is starting to take notice of Trump, in a negative way of course. It pretty much tells you everything you need to know about who benefits from our current China trade policy, and who does not.
All you need to know is what CNBC and Bloomberg experts tell you.
China is big.
Infinity is big.
Therefore China is infinity so the economy of China is infinite as well.
Would that be one of the smaller infinities (aleph 0) or would it be larger?
America was the rising industrial power house prior to the great depression, then came world war,
China was the rising industrial power house prior to the greatest depression the world has ever known, then came the last world war,
Still, with all the fraud and artificial central bank lending, which was created by the SQUID and JPM, BAC back in the '90's, the fucking idiots that have NEVER seen rates rise over 100 basis points are making calls.
You fucking rookies would shit down your spines if rates lifted 100 basis points.
YC, off topic but a while back (I think) you mentioned a version of linux that was working out well for you. I tried ubuntu and didn't like it. What are you running?
Glad to oblige> http://zorin-os.com/
Download> http://unetbootin.github.io/
Then use the tool to burn an ISO, USB drive.
I've since mastered other open source O/S. This is a great starting point.
H/T Ying Yang :-D
Thanks! I'll only say nice things about you from now on. It's fun to geek around again.
Make sure you change the BOOT order in your BIOS to external drive.(Windows-7)
If you're running Windows 8-8.1 you need to take some extra steps.
Google> how do i put linux on windows 8 laptop
Every system is slightly different. Basically MS(Micro Shit) put an blocker in the hard drive partician.
Got it. I already went through some intense uefi pain trying to find a usb drive that I could actually boot ubuntu from, and I set up a spearate partition. But I didn't like ubuntu at all. I'm running a three year old tosh portege and it's got an sd slot but won't boot from that sadly. As always, two steps backwards and three steps forwards.
Yes the UEFI, and one other change.
Windows 10 and Ubuntu 14-15 have bypassed these issues.
The clowns at OS Apple are retarded.
Open Source bitches.
Just shut the primary boot(security settingoff and click UEFI(off) in windows 8 BIOS interface.
Go into your BIOS F-11 10 12 holding your space bar.
Then scroll the BIOS to sys open... or sys off. Tap your space bar, and esc.
Very cool. I went back to W7 because W8 sucks ass and I'll wait until W10 has been around a couple of months before I go there. I just got zorin to boot off the flash drive and I'll play with it more later. Thanks again!!!
Linux is amazing. I love the terminal inputs.
Windows using (appdata) to have to adjust situations. lol
I love having Linux formats. G-Parted kicks ass. I can instantly format any disk or drive.
You can use it on Win8 I'll show you how. It's really simple.
You don't have to go back to Win 7. Just shut the security off in bios.
Then set the boot order to something other than your SSD, External drive something. Your BIOS will offer some selections.
Then boot from the usb stick. I'll teach you how to gain space on the usb stick later.
Hey Yen, didn't know you were into Linux. Powerful stuff. I'm running Chromium now on Linux Mint 17.2 because Firefox was amazingly slow and a CPU hog. I also love playing around in Terminal.
I also want to take a look at Mint. From the few times I played with linux before Firefox seemed pretty crappy for some reason so I'll definitely check out chromium.
Yen, you make a good point. There's actually a few Yutes in my office who still do not know how to make our fax machine work.
Short term memories for wahtever reason will not work to merikans advantage. The Chinese, in general, have a longer memory of events and know history a heck of alot better then merikans, but I'm not too sure about their younger mini-skirted, expensive hair styled generation. However, I am sure glad they all wear that drab mao grey anymore!
I wish more parents and people would take responsibility for theiroff-springactions.
You mean the typical parents / grandparents / generations before build something great and the next generation to take it over seem to invariably ignore all advice, never watched how it was operated, never gave one single care about its employees, people, and vendors, and then proceeded to run it into the ground?
I mean the generations that decided "flat screen TV's" were more important than throwing some baseballs and cutting some wood.
The problem is the culture that automation and bankster debtism has created. The system has destroyed the family so no one is there to teach the children and the state is no substitute for a 2 parent household. Problem is that most people ate now in the 3rd, 4th generation product of a system that does not work. The people in America are losing their freedoms because their knowledge level is too low to maintain freedom. The only way to correct now is for a crash then hard work regaining the true knowledge that was lost to 95% of Americans.
Getting a majority of downvotes for this comment is puzzling to me. It's almost as if some group is following YC comments just for the oppurtunity to downvote him or her no matter how cogent the comments are, especially on articles dealing with China.
I have been lurking on ZH for three years now and just recently decided to join in, so being able to see the votes is new to me. The few comments I have posted haven't got any downvotes (that I know of), so please somebody break the ice and downvote me. I shall wear it as a badge of honor.
I know three gals:
1) One is still traditional (Good wife material).
2) One is Americanized as fuck (not wife material at all).
3) One is between the two (wear a mini-short... and being cute but serious).
Some part of the youth is being turned decadent and useless like the Western youth, fortunately their are not a widespread majority yet.
How the Chinese gov will contain that, some rumor about teaching back traditional and Confucian values early at school...
Just to avoid a failed new generation like the Western one...
Just substitute USA for China in the leader for this article and the message reads the same. All seven points could apply equally.
The Chinese have pricked their own bubble in their overall economy as a deleberate choice (the new normal policy) to prevent what they saw happen to Japan and the US. They are trying to manage a deflating balloon, valiantly I might add. They are to be congratulated on that score. Too bad they let the stock market go nuts and crash. They just shot themselves in the foot with that one at the worst possible moment. Oh well.....
Where is TruthIsSunshine? I thought ZH was pro-China?
He's doing just fine.
This is one of the most China bashingest sites on the web.
You like fortune cookie!?
Drop an anchor.
China will win in the end. Because they understand the ultimate rules of the game. America? Dolts.
Not that China is any finer or less brutal.
They just have their pieces in the right places.
Keep voting for Democans and Republicrats.
Keep masturbating with false wisdom.
You will lose. Simply. Lose.
It's so easy to just lose.
Hard cold truth:
China is more threatened in the long term by modernism, decadence, Western NGOs, Pro-American teachers in universities, progressive retards, colored revolution agent than with the communist government itself...
Soooo complicated. Nah, ther'ye communists for Christsake. They think they can manage the stairway to hell just like the Maoists in DC.
survey time? i answer the same way when it comes to irs shit... im poor, i live under a bridge in a borrowed cardboard box. one day i dream of owning my own cardboard box and not having to rent one.