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The REAL Reason China’s Economy Is Crashing
We noted in 2009, in a piece titled “China 2009 = America 2001 = Rome 11 BC“:
One of the top experts on China’s economy – [economics professor] Michael Pettis – has a very long but interesting essay arguing that China is blowing a giant credit bubble to avoid the global downturn.
Pettis documents reports and statistics from modern China, of course. But he ends with a must-read comparison to ancient Rome:
Let me post here a portion of Chapter 15 from Will Durant’s History of Roman Civilization and of Christianity from their beginnings to AD 325
The famous “panic” of A.D. 33 illustrates the development and complex interdependence of banks and commerce in the Empire. Augustus had coined and spent money lavishly, on the theory that its increased circulation, low interest rates, and rising prices would stimulate business. They did; but as the process could not go on forever, a reaction set in as early as 10 B.C., when this flush minting ceased. Tiberius rebounded to the opposite theory that the most economical economy is the best. He severely limited the governmental expenditures, sharply restricted new issues of currency, and hoarded 2,700,000,000 sesterces in the Treasury.
The resulting dearth of circulating medium was made worse by the drain of money eastward in exchange for luxuries. Prices fell, interest rates rose, creditors foreclosed on debtors, debtors sued usurers, and money-lending almost ceased. The Senate tried to check the export of capital by requiring a high percentage of every senator’s fortune to be invested in Italian land; senators thereupon called in loans and foreclosed mortgages to raise cash, and the crisis rose. When the senator Publius Spinther notified the bank of Balbus and Ollius that he must withdraw 30,000,000 sesterces to comply with the new law, the firm announced its bankruptcy.
At the same time the failure of an Alexandrian firm, Seuthes and Son due to their loss of three ships laden with costly spices and the collapse of the great dyeing concern of Malchus at Tyre, led to rumors that the Roman banking house of Maximus and Vibo would be broken by their extensive loans to these firms. When its depositors began a “run” on this bank it shut its doors, and later on that day a larger bank, of the Brothers Pettius, also suspended payment. Almost simultaneously came news that great banking establishments had failed in Lyons, Carthage, Corinth, and Byzantium. One after another the banks of Rome closed. Money could be borrowed only at rates far above the legal limit. Tiberius finally met the crisis by suspending the land-investment act and distributing 100,000,000 sesterces to the banks, to be lent without interest for three years on the security of realty. Private lenders were thereby constrained to lower their interest rates, money came out of hiding, and confidence slowly re-turned.
Except for the exotic names … and the spice-bearing ships, this story has a remarkably contemporary ring to it, as do nearly all historical accounts of financial crisis, by the way. This story is not totally relevant to China today except to the extent that it indicates how difficult it is for banking systems flush with cash to avoid speculative lending, and how the very fact of their speculative lending then creates the conditions that can bring the whole thing crashing down. Hyman Minsky told us all about this kind of thing. There has never been a political or economic system in history that has been able to avoid the consequences of excessive liquidity within the banking system. Even the Romans learned this, and they learned it the hard way, as we always do.
America’s easy credit bubble started in 2001. Rome’s prior to 10 BC. We know the results of both.
Is China now blowing a huge credit bubble which will lead to a giant crash down the line?
Pettis thinks so …
Last week, economics professor Steve Keen explained:
[During the 2008 crash] private debt [in China] was effectively constant at 100% of GDP.
All that changed after the financial crisis. In just 6 years, private debt grew by over 80% of GDP—and that’s using official figures as submitted to the Bank of International Settlements (see Figure 2) when there’s every reason to expect that this particular figure is likely to understate the actual level.
Figure 2: Private debt in China exploded as it sidestepped the Global Financial Crisis
Why does the level of private debt in China matter? If you believe conventional economics and finance theory, it doesn’t—which is why I find myself having to repeat the (expletive deleted) obvious so often that it does. [Background.]
***
From 2009 on, growth in private credit went into hyperdrive as a deliberate government policy to boost the economy.
Figure 3: China avoided the Global Financial Crisis by boosting credit growth
***
In 2010, the increase in private debt in China was equivalent to 35% of GDP. That dwarfs the rate of growth of credit in both Japan and the USA prior to their crises: Japan topped out at just over 25% per year, and the USA reached a “mere” 15% of GDP per year—see Figure 4.
Figure 4: China’s credit bubble is the biggest ever
As I have argued for a decade now, crises begin when the rate of growth of credit slows down in heavily indebted countries. China was not heavily indebted in 2008, which is why it could take the credit growth path out of the Global Financial Crisis. But now it is more heavily indebted than America was when its crisis began—even relying on official statistics which undoubtedly understate the real situation—and the momentum of debt may well carry it past the peak level reached by Japan after its Bubble Economy collapsed in the early 1990s (see Figure 5).
Figure 5: China is on course to reach Japan’s Private Debt to GDP peak
***
So China is having its first fully-fledged capitalist crisis. To date its response to it has been to try to sustain the unsustainable: to transfer the bubble from housing to the stockmarket, and to keep the stockmarket rising like some production target for wheat from the bad old days before the fall of the Gang of Four. It can’t be done. At some point, the Chinese government is going to have to make the transition from generating a credit bubble to trying to contain its aftermath.
And economics professor Michael Hudson notes:
Most of the Chinese stocks went down because small Chinese investors were borrowing from, let’s say, the equivalent of payday loan lenders to buy stocks. There was a lot of small speculation in Chinese stocks pushing it up.
***
In China, it’s largely small borrowers who borrowed from intermediate lenders, that have borrowed from the big banks. So a lot of individuals in China that tried to get rich fast by riding the stock market all of a sudden find out that they have a lot of debt to intermediate, you know, non-bank lenders, insiders, people who banks will lend to. It’s like the British banks lending to real estate speculators to lend out to homebuyers. So this is essentially the attempt to get rich by riding the stock market in China went way overboard. Chinese stocks are still above what they were at the beginning of the year. This is not a crisis. This is not very much. It’s just that the artificial increase in the market has now ended some of the artificial push-up. And it’s still artificial, and it will still go down some more.
For confirmation that individual Chinese investors borrowed too much to buy stocks – leading to a bubble which inevitably had to burst – see this, this, this and this.
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History never completely repeats, but it oh so does rhyme ..
USG = Rome
Read Rulers of Evil by F. Tupper Saussy ..
(and included is a plethora about China)
censoring the comments again?
Hypocrites!
Our economy is like a fucking black hole sucking in everything so there will be plenty of distortions depending on proximity to our hole so to speak.
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Good read George.
So did Nixon and Kissinger 'engage' with China to help Goldman Sachs blow the greatest credit bubble of all time once they severed the link between US$ and gold? Was that cagey Kissinger that far sighted? He was cagey enough to convince the Saudis to only trade oil for US$ even though there was nothing behind it except the 'night stick' to beat money out of the American population to honor the unpayable debt. Questions swirling around in my brain today....
China , India and most of the BRICS countries, get rid of the US dollars and all the dangerous currencies of their most indebted borrowers, buying big firms with their reserve US dollars . Thus, Chinese insurer Anbang bought the Waldorf Astoria Hotel in New York, an office Tower in Manhattan etc ... Office towers in London and is now buying a bank in Portugal . Chinese banks and investment societies are involved in most of the important firms all over the world, controlling even inner airports in Europe.
Remember when the Japanese did that (maybe you are not old enough)? They eventually sold it all back at a loss.
Best article yet GW! You site mostly other peoples work without using your own blog, except from the china 2009=america 2001= rome link, and you write very little in between.
If i didnt know any better i'd say that was plagurism!!!
Oh and shitgum says hi!
If you cite your sources it is not plagiarism.
Credit at the casino is not for the benefit of customers. Credit is to extract more from the casino customers. Margin credit is bait to entice customers to borrow, expecting to win more.
All sheeple want to believe their masters' systems benefit them. Trust and its resulting hope are opiates. The Chinese are being instructed that there is no free lunch, nor get rich working scheme, nor anything by government, nor bankers which is not exploitative.
Nietzsche expanded: Everything the government says is a lie; everything the government has; it has stolen; every system the government operates is a fraud.
what you say here, it strikes beyond the term
"government" and hits the eye of the mind itself.
can we see any of that?
.
this is related.
.
"It's all about perspective - the long view. The realization that we are simply here, without purpose or mission; that we must devise them for ourselves, knowing that fulfillment has no external justification. That we simply must say 'yes' to life, that blink of light between two eternal nights." pat c.
bm, so simple a truth,
that most simply cannot handle...
and we continue to fight "wars" among outselves,
when "borders" are fictious,
it's them vs us.
captivated in a system of fraud...
there are no exits
the matrix
GW...muchas gracias for putting together another fine article separating the wheat from the chaff. Am enjoying all the links!
Keep up the fine work!
there has never been a more abused word than
"economy". just hearing the sound of it results/causes
a certain global aphasia in nearly ever english speaking
person. yes, it is sickening and exhausting.
I thin I'm tulning Japanese I lealy thin so...
Interesting perspective in the other article. China may not value its stock market like we do, and may be able to much easier give it the middle finger while it burns. Couple that with the possibility of the Premier as the scapegoat and they may just let it go. And then they would become more capitalist than the US. Odd times we live in.
Couple that with the possibility of the Premier as the scapegoat and they may just let it go. And then they would become more capitalist than the US. Odd times we live in.
KC
They're just holding all of the cards we gave them over the past 25 years!
Try fighting a war when better than 85% of your technical workforce make the computer chips and material components that not only go into your computers but also the cockpit of your airplanes and "yes" drones?...
Can't wait for the talking heads of the 2016 election, i.e. Trump and everyone else regradless of party affiliation is ready to jump the fuck all over China and have absolutely no right to do so based on what I said in the previous sentence!
Odd times indeed!
one would think that in a communist state, you'd have more regulatory compliance costs, but in fact if you want to set up shop doing something over there, its cheaper with far less regulations to adhere to.
(and before some idiot bashes regulation bashing, I'm talking about stupid stuff like we'll make you replace all of the pipes in the place if they arent up to the new code that we set above what all of the old stuff was built with, just so you have to spend the money and "stimulate the economy" - not stuff like dont dump millions of gallons of orange metal wastewater into a major river.)
http://i.imgur.com/ZWcqfMn.jpg
.
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With China holding Trillions in US paper and in a tight situation food supply wise for next 36 months at a minimum, Martians are not necessary to step up. China will.
"China will", rediscover opium...
A disaster of historic proportions. It has happened many, many times and each time the people doing it thought they were smart enough to beat reality. America has their own insane plan, but of course, it will be different this time......
Good article.
There has never been a political or economic system in history that has been able to avoid the consequences of excessive liquidity within the banking system
Very true, I blame the usurers.
The people borrowing the money are blameless.
Do you blame the person who lies or the person who believes the lies? Each is responsible for their own actions but only one intentionally tried to hurt the other.
This is not even taking into consideration the decades of lies and propaganda plus dumbing down of the population in order to make the lies the basis of truth for the average bear.
Take a baby elephant and chain it to a wooden peg that has been driven into the ground. It quickly learns that it is not strong enough to pull free. Years later the elephant is a full sized adult and still not able to pull free. Why? It clearly has the strength and weight necessary. Because it believes a lie that was true all of its life.
I blame all the sociopathic mutherfuckers who think they are smarter than everyone else and think they are entitled to run a country and tell the rest of us, the producers and workers, how fucking blessed we are to have them fuck us, at gun point.
So now we know how the "recovery" after 2008 occurred. China took on a lot of debt. Unless we can find another pigeon, game over.
Come on, Martians, step up.
IMF - SDR.
"Unless we can find another pigeon, game over. Come on, Martians, step up."
We still have Central banks that can take on more debt. There still is [sheeple] confidence in currencies.
When there is only one resturant in town, no matter how bad the food is, there will be customers. There will be more bailout and more devalution, but the end isn't here yet.
Me to only child, "You are my favorite."
Only child to me, "I'm your only."
Me to only child, "You are my least favorite."
There may be "customers", but the population of the town will start to leave.
Myanamar. (Burma)
The next pigeon.
(That was the plan at least...)