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Thread: China- Malinvestment, Bubbles and dodgy statistics.

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    Default China- Malinvestment, Bubbles and dodgy statistics.

    China is beginning to look somewhat less invincible thesedays:

    (1) The following clips remind me of Dublin:

    [ame="http://www.youtube.com/watch?v=ektMQGbW3wk"]YouTube- Chinese Economy 2009[/ame]

    [ame="http://www.youtube.com/watch?v=0h7V3Twb-Qk&feature=player_embedded"]YouTube- China's empty city - 10 Nov 09[/ame]

    (2) The banks are starting to look a bit more vulnerable too and are engaged in the same sort of off- balance shhet transactions that we are famous for .

    China Banks? Capital Likely More Strained, Fitch Says (Update2) - Bloomberg.com

    (3)To the bubbles and bad loans, add malinvestment and excess capacity in key sectors of the real economy:

    China Overcapacity Wreaks Global Harm, EU Group Says (Update1) - Bloomberg.com

    Key Quote :"China’s own economy is the main “victim” of excess capacity, the chamber said. Lower profits mean companies lack cash to invest in research and development and develop more valued-added goods, it said. Businesses are also forced to cut costs, contributing to slower wage growth and less consumption, the report added.

    (4) Domestic demand is not looking like it willtake up much of the slack:

    China Faces Difficulties in Maintaining Demand Growth (Update1) - Bloomberg.com


    (5) Add to all of the above the following key observations about how the actually report GDP

    China's Growth an Accounting Miracle - Minyanville.com

    Key Quotes: "Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public works spending. It is important to understand that the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers. Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed. In fact, the funds go out to the state-owned enterprises and provincial governments and may be held until actual projects are identified and undertaken."

    and:

    "...Ambitious planners count shipments [consumer products] as retail sales while end-use demand may be absent. In such cases, the “sales” are made to happen by virtually giving away the products that have already been produced and counted as GDP growth."

    If we put them all together- malinvestment, bubbles,bad loans,overcapacity, weak demand and questionable figures-the picture doesn't look all that healthy. Their tactic of postponing necessary corrections through the expansion of money can only serve to delay a necessary economic rebalancing, and Japan of the 90s is the classic example of what can happen with malinvestment and hidden debt. How long can the Chinese keep this up?
    If once the people become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.

    Thomas Jefferson

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    Politics.ie Member dunno's Avatar
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    Interesting, thanks.

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    Can Bubbles Also Be Made in China? - Tim Swanson - Mises Institute

    The scale of the overcapacity is mindboggling.

    "For example, at the end of last year, roughly 91 million square meters of apartment space lay empty throughout China. This figure does not include the 587 million square meters of apartment space that has been sold but left vacant over the past five years or the millions more that are built but left off the depressed market.[6] More specifically, since 2006, roughly 152 million square meters of commercial office space has been built in Beijing — more than all of the office space in Manhattan — yet 30 million square meters is still vacant.[7] And in Shanghai, the vacancy rate for commercial space is estimated to have hit 25% at the end of last year.[8]";

    "Regardless of the debate over identifying what the "proper" level should be, China makes a lot of steel. China has roughly 700 steel companies that produce at least 100 million more tons than the sum total of the United States. In fact, while steel producers in other countries like Germany and Japan have cut back 20–30% due to global stagnation, Chinese producers have turned the dial to the proverbial "eleven," increasing output by 1.2% in the first six months, and breaking the previous record, which was also held by China. Full smelting ahead![15]"
    If once the people become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.

    Thomas Jefferson

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    Bobert says China is fine.

    Cookie wrote a report a while back urging more investment in India because, while it wasn't seeing the same massive growth and had its own problems, was a much more stable economy... he got slagged for it... but was right it seems.

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    Quote Originally Posted by CookieMonster View Post
    Bobert says China is fine.

    Cookie wrote a report a while back urging more investment in India because, while it wasn't seeing the same massive growth and had its own problems, was a much more stable economy... he got slagged for it... but was right it seems.
    China may well be fine for some time as they didn't enter the crisis as highly leveraged and still has many more bullets to fire if it wants to. They could conceivably continue to throw more money at the problem and delay a reckoning with their real structural deficiencies, but the fruits of that sort of policy have been a lost decade for Japan and have put the US in a financial mess from which they will not recover without painful economic adjustments.
    The pressures in China are different too. The Party's major claim to legimitimacy is its delivery of rising living standards. It has delivered but as soon as it stops delivering, the trouble starts- even during the good times there were over 70,000 "mass incidents" per year. They will also remember that at the time of Tiananmen, there was widespread discontent over the state of the economy. In other words, the liklihood that the Chinese government will continue to stimulate its economy is high and if the way it does this is through more state directed lending, more inflation of the money supply, and more malinvestment,it will not be long be long before they face the consequences.

    I have yet to give India the attention it deserves so I can't really say an awful lot about it. I know one thing though- they love their gold. Can you direct me towards some good sources on India?
    If once the people become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.

    Thomas Jefferson

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    Good info seenitallb4. I saw a couple of months ago a program with a simular theme. Chinas banks being ordered to lend to anyone who asks aswell as other economic measures that seem more cosmetic than practicle.

    In the end though I suspect China is simply becoming a more highly geared economy like the US. They certainly have the money and lee way to use such gearing to get them out the other side of this financial slow down. What reports about potential economic trouble ahead always fail to factor in though is Chinas huge potential growth. So the prospective trouble China is courting is not being considered along side expanding Chinese economic performance, in terms of actual growth or lesser growth spread wider.

    I do not see serious economic hardship ahead for China. Their reserves are still absolutly huge compared to their expected economic outlay.

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    Politics.ie Member Al.'s Avatar
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    Have to laugh at the use of "malinvestment"...very Orwellian.
    In the end though I suspect China is simply becoming a more highly geared economy like the US
    They're nothing like the US. They've only prospered thanks to useful idiocy of the US in (increasingly one-sided) trading with them. Left to purely Maoist devices, they might have starved themselves into breakdown. But again, thanks to that selfsame useful idiocy, China has its claws in the resources of Africa and South America, turning them communist in the process too.

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    Politics.ie Member jcdf's Avatar
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    Interesting, only time will tell.
    Quote Originally Posted by Al. View Post
    Have to laugh at the use of "malinvestment"...very Orwellian.They're nothing like the US. They've only prospered thanks to useful idiocy of the US in (increasingly one-sided) trading with them. Left to purely Maoist devices, they might have starved themselves into breakdown. But again, thanks to that selfsame useful idiocy, China has its claws in the resources of Africa and South America, turning them communist in the process too.
    China is not really communist and I have not seen the emergence of any new communist states in Africa or South America. So I do not know where you are getting this from?
    Economic Left/Right: -0.50
    Social Libertarian/Authoritarian: -0.77

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    I was in Shanghai last year for business. After riding into town on a virtually empty maglev train, I saw several of completely empty skyscrapers.

    China has problems and their historical attitude to problems is to hide and ignore them until they become distructively large problems, and then find a scapegoat.

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    Interesting Thread

    About time somebody seriously looked at China - In the multipolar world that we now live in - there is no avoiding them as much as we would like to - witness their scuppering of the Copenhagen summit.

    The most important thing to keep in mind about the Middle Kingdom is that it never really changes from a political point of view- the "communist" regime that has been in power since 1949 is only the latest manifestation and successor to the Qin,Han,Tang,Song,Ming and Qing/Manchu dynasties and the methods of government are practically unchanged - its Confucianism pretty much the whole way - when Mao famously said - "political power comes out of the barrel of a gun" - he was only reiterating the modus operandi of successive Chinese states and kingdoms since 221 BC when the Qin Dynasty established the first unified Chinese state. Mao pretty much discarded about 90% of communist ideology where it didn't fit his needs or ideas - which is that the Chinese emperor is the law and everything emanates from the emperors court - there is no rule of law, there is no private property, there are no human rights - everything is in the gift of the emperor to be given and taken away at a whim - once you remember that this is the state of mind behind Chinas' current leadership and that most members of Chinese society buy into this state of mind with a healthy sideorder of nationalistic chauvinism and virulent xenophobia - you are well on your way to understanding the paradoxical and infuriatingly crazy way China operates today.

    It is also interesting how the West perceives and tries to interact with China has changed little over the centuries too. For the west - China has always been this El-Dorado of a massive market of over 1 billion people who must be hungry for western goods - ever since 1794 and Lord McCartney's embassy to Peking, and apart from a brief interlude of 1840 to 1940 when the Manchu dynasty was reaching end game and was weak and enfeebled and in awe of Western Firearms - western nations have been kowtowing in the imperial court for millennia now - all desperate to get a piece of the action and make a fortune selling to the Chinese consumer - apart from the Brits making a few quid out of the opium market to help their balance of payments to purchase tea - nobody has succeeded yet - The holy grail of the West making it big in China will on for another while yet.

    Currently - China has become the worlds workshop for the production of most of electronic goods, toys and other fabricated durables that are on sale in every retail outlet in the West and the developing world today. In most cases - it just supplies the labour for the production of such goods - tho it is moving fast up the subcontracting ladder and thru the likes of lenovo and is starting to move its own brand names centre stage. What it buys from the west and rest of the world is the technology that its own political system cant create or wont allow the creative freedom to create, and raw materials to produce the goods to sell back to the west and earn profits on the surplus and it has amassed a pretty tidy sum of dollars and euros in the process - which it has spent on military toys for the PLA and buying up raw materials and resources all around the developing world - particularly in Africa and South America who are easily seduced by a foreign power who, isn't white, pays cash up front and doesn't ask any morality questions - at such a rate that many African states will be wishing for the good ole days of Western Imperialism at the rate the Chinese are buying up land,minerals and bringing their own labour in aswell - apart from boosting the bank accounts of despotic and easily bribed African leaders - its really hard to see what is in it for the Africans - but hey what does a white european like myself know eh?

    the other main thing to remember when looking at stats and pieces like the OP supplied - is that the most important thing for the Chinese government is its own survival -everything else is subservient to this and if this means the establishment of a totalitarian police state where any type of social or political activity that has not been approved or promoted by the Imperial court in Bejing is closely monitored and normally ended with a bullet in the back of the head for which your family will be billed - so be it.

    So , if General De Gaulle once said of France " how do you unify and run a country that has 375 different cheeses" - how the hell do you control a country the size of China with over 40 different ethnic groups and over 100 different dialects and languages - with great difficulty - the overriding fear of the ruling elite is public disorder and riots getting out of control and chaos and anarchy taking over - the way all previous dynasties have fallen in China. So to counteract this, they rely on the overwhelming force of the police and the PLA enforcing the" laws" and wishes of the elites which can change from day to day - brilliant tactics for keeping everybody on their toes, constant brainwashing - now in the form of militant nationalism and ensuring that the masses have enough to eat and be amused and be ready for the 14 hour shift the next day.

    Thus - all economic statistics issued by China should be taken with a massive grain of salt - they cannot be stood over - they are normally out of date and made up (Imagine you are a provincial governor - if you have to make certain numbers to make the central authorities happy - well are you going to disappoint them and risk going the way of that last individual to be honest such things - well?) - imagine this replicated by millions of officials all over China and you start to get the picture of how totally untrustworthy the whole system is. Also the fact that the central government really hasn't a clue what is going on in most of the provinces and relies on them to collect taxes gives the local officials tremendous power to extort and make up their own laws on the ground - as long as they don't overstep the mark and piss off anybody in Bejing - they are free to do what they want - you will find that the vast vast majority of "private enterprise" in China has been set up by former or serving members of the security forces and their families and children - there is no such thing as private property - they do and die at the pleasure of the politburo -what was yours today might be gone tomorrow.

    Now look at the banking system - before the 2007 meltdown in Wall street and the whole credit game here in the West - for many it was only a matter of time of before the Chinese banking system finally collapsed in a sea of bad loans and that this would trigger a global collapse - it hasn't yet - purely because nobody has a clue of the state of the Chinese banking industry - its all state controlled and lids are kept firmly closed - and the trillions of foreign currency units are keeping it alive on the surface and putting off the day of reckoning - because you will only go bankrupt in China if the state turns against you. Guanxi or who you know - is the most important factor in whether you will succeed in anything in China - if you piss off the leadership by reaching too high or they need a sacrificial lamb to show that they are serious about "corruption" (excuse me while I roll around the floor laughing) - unless you have good Guanxi - you're history mate. I would say that there are trillions of un-performing loans in the Chinese banking system - mostly made to the PLA ( that state within a state), other state industries and other nepotic enterprises - they are never going to be called in - I mean , are you going to call time on crazy loans given for property development to the son of the head of the Shanghai secret police? - yeah right you are.

    As regards the SEZ (Special Economic Zones) on the coasts that generate most of Chinas foreign revenue and have generated employment for millions of erstewhile rioters and malcontents - the regimes plan is to expand and keep this gravy train going - no matter how it totally imbalances trade and starts to piss off foreign governments - they have no other choice - remember regime survival is all that counts for the geriatrics in the Bejing. The SEZ's are China's shopwindow to the world and outwardly are very swa^ky and cosmopolitian, and a massive source of revenue for both the state and personally for the leadership and their court. To keep this going, they are going around buying up resources like Australian mines, petroleum resources in Africa etc etc and they will build whatever energy generating suppliers they like and to hell with the environmental consequences - they will just make up a few more stats for the UN and the rest and lie like hell about changing things and that they will properly regulate the environment. Also they will keep the yuan way undervalued to keep their exports competitive as long as possible - double bad news for the rest of us as that makes their exports artificially cheap and our exports very expensive thus ruling out any chance that we might have of breaking into the "mythical" Chinese market - also keeps the majority of the Chinese relatively poor and restricted to buying on their home market - the elite have enough foreign currency for their shopping trips abroad. How long they will get away with this is a good question - because they are really going to piss off most of the known world apart Hugo Chavez and Robert Mugabe. I can see the West having to resort to protectionism and tariffs if the Chinese don't let the yuan float and reach a position equivalent to true strength of their economy - like everybody else.

    Sorry to be so negative on the whole China thing - I've been there a few times - an Irish company I worked for sold machinery to a US multinational operating in one of the SEZ's and I spent the guts of 4-5 years working with and against the Chinese state - we also looked at outsourcing production to China - but after spending 3 months there in 2005 - we decided against - partly for economic reasons - it was genuinely more expensive to get the kind of work we needed done,small orders/complicated and skilled work, in China, - partly for bureaucratic reasons - dealing with 10 different governments in one and having to rely on intermediaries who took pleasure at holding you up to get you to cough up more cash to get fasttracked to the next extortion roadblock - partly for moral reasons - I saw more than 10 riots and police crackdowns on people protesting for the right to have a day off and more human working conditions - all from my hotel room balcony in an industrial city of 3 million less than 2 hours from Shanghai, and lastly because we just got the feeling that we were not going to be entering a proper business relationship in a country where there is no law,no respect for intellectual property, no private property and for us white foreign devils - no rights at all.


    We were a small company - you need very deep pockets and no moral scruples whatsover to do business in China - big Multnationals can do business there - its not exactly the wild west - but it makes doing business in Russia seem like a pleasant walk down the Champs Elyesse.

    China will never be a democracy - sadly there is more chance we'll end up a totalitarian police state - but it will implode at some stage - and it will be violent - there are pressures coming from all sides - most particularly from the rest of the world that simply cannot afford to allow China having this easy ride economically.
    Last edited by Edo; 23rd December 2009 at 01:22 AM.

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