Best of the Week
Most Popular
1.The Greatest Stock Market Crash Of Your Life Is Just Ahead… – Warns Harry Dent - GoldCore
2.Budget 2016: Borrowing, Lifetime ISA, House Prices, Economy, Syria, Brexit and Stocks - Nadeem_Walayat
3.Gold Price Intermediate Top - Clive_Maund
4.Brussels Terror Attacks, Death of the European Union, BrExit Wake up Call - Nadeem_Walayat
5.Stock Market Maybe This Time is Different? - Tony_Caldaro
6.UK House Asking Prices Break Above £300k! Housing Market Paralysis - Nadeem_Walayat
7.A Big Reason Why Silver Price Is Set To Soar - Hubert_Moolman
8.The Financial Crisis Has Just Begun; Is The American Dream Is Over? - Chris_Vermeulen
9.Gold Stocks Spring Rally - Zeal_LLC
10.GLX, GLDX, Baby Gold Bull Market Stillborn? - Rambus_Chartology
Last 7 days
Derivatives Crisis Of Banks…Worldwide - 3rd May 16
Bank of North Dakota Soars Despite Oil Bust: A Blueprint for California? - 3rd May 16
Stock Market Technical Analysis - 3rd May 16
Central Banks Need a Higher Gold Price : Hello GATA - 3rd May 16
A Currency War Battle That Europe and Japan Can’t Afford To Lose - 3rd May 16
When the Truth is Found to be Lies, Confidence in Currency Dies - 2nd May 16
How Brexit Could Help All of Europe - 2nd May 16
US House Prices Outpacing Official Inflation Rate, Household Income - 2nd May 16
USD Still Declining... - 2nd May 16
Gold & Silver Rally Huge as Central Bankers & Analysts Flub - 2nd May 16
Stock Market Bounce Day - 2nd May 16
Stock Market Uncertainty Following Two-Month Long Rally - Will It Continue? - 2nd May 16
Stock Market Correction Underway "Upside Objective Reached" - 2nd May 16
USD, Yen and an ‘Inflation Trade’ Update - 2nd May 16
Gold Commitments of Traders and More - 1st May 16
The Magic of Gold Ratio Charts - 1st May 16
Consensus Forming: China Heading Back Into Financial Crisis - 30th Apr 16
The Next Technical Price Targets for Gold & Silver - 30th Apr 16
Stock Market Downtrend Should be Underway - 30th Apr 16
Gold And Silver – A Clarion Alarm Call For All Paper Assets - 30th Apr 16
US Economic Statistics LIES, LIES AND OMG, MORE LIES - 30th Apr 16
Stock Market Strong Elliott Wave Relationship is Developing - 29th Apr 16
Fed's Kaplan: Brexit to Factor in US June Interest Rate Decision - 29th Apr 16
Silver Miners Strong in Grim Q4 - 29th Apr 16
Is Silver a better bet than Gold in the Near Future? - 29th Apr 16
How to Use the CoT Report in Gold Investing? - 29th Apr 16
Sri Lanka is Intriguing: Areas to Consider for Value Investing - 29th Apr 16
Gold “Chart of The Decade” – Maths Suggest $10,000 Per Ounce Says Rickards - 29th Apr 16
Are We or Are We Not in a New Gold Bull Market? - 29th Apr 16
Silver: The “Five Year Plan” and the Great Leap Forward - 28th Apr 16
Michael Hudson: The Wall Street Economy Has Taken Over The Economy and Is Draining It! - 28th Apr 16
AUD/USD - Trend Reversal or Just a Bigger Pullback? - 28th Apr 16
A Gold Revaluation Could Transform Your Financial Status - Overnight - 28th Apr 16
Monetary Policies Misunderstood - 28th Apr 16
Gold Bullion vs Gold Miners - 28th Apr 16
OECD Suggests BrExit Would Cut Net Migration by 1.2 Million by 2030 - 28th Apr 16
MP Naz Shah Punished for Tweets Made During Israel's Genocide of Gaza Palestinian People - 28th Apr 16
Global Recession in 2016 and Beyond - The Obvious Evidence - 27th Apr 16
Why Gold Bugs Need to Stop Listening to The Fear Mongers and Start Thinking for a Change - 27th Apr 16
BlackRock’s Fink: Fed to Raise Interest Rates by Quarter Point ‘at Best’ - 27th Apr 16
Gold More Productive Than Cash?! - 27th Apr 16
Donald Trump Will Fire Janet Yellen and Be Trapped - 27th Apr 16
Money Saving Gardening by Propagating Roses From Cuttings - Propagating Rose Plants Over 2.5 Years - 27th Apr 16
Facebook Censors Pro Trump and Negative Hillary News - 27th Apr 16
This is the Era of the Democrats and Your Taxes are Going Up - 27th Apr 16
Long Awaited Gold Price Breakout - 26th Apr 16
Crude Oil Price Double Top or Further Rally? - 26th Apr 16
Madness in the Crimex Gold and Silver Trading Pits - 26th Apr 16
Britain's Prospects: GBP and BREXIT - MAP Wave Analysis - 26th Apr 16
CRB, Gold, Oil, Cotton, Coffee - 7 Must See Commodities Charts - 26th Apr 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Catching a Falling Financial Knife

What If The China Bubble Bursts

Economics / China Economy Mar 03, 2011 - 11:42 AM GMT

By: Dian_L_Chu

Economics

Diamond Rated - Best Financial Markets Analysis ArticleRuss Winter writes: “If the situation does not improve, we’ll definitely want to quit (production).  The sun is setting on the Christmas product industry (in China) right now.”   — Owner of arts and craft factory in Shantou


Here is another in a series of at-the-brink, sun-is-setting articles in the China Daily and other Chinese publications. All the familiar hallmarks: rising labor costs, inputs goods inflation, transportation disruption and other Mad Max conditions. The lights could actually go out and factories could be permanently shuttered all over China’s export sector after the Chinese New Year [Labor Shortage as Migrants Quit City].

International Economy offered a publication from thirty “experts” on the question: “If the Chinese bubble bursts.” In most cases these were treated as possibilities not predictions. In my case, these are predictions. I offer some of their pertinent comments, as well as point out the weaker offerings.

First, it’s amazing to me how  important and indeed well-educated economists fail to understand the true nature of serial bubble economics. While often acknowledging the on-steroids nature of what transpires, they then seem to frequently fall back on standard economic cycle theory, including promoting the role of government to play traditional Keynesian interventions “to smooth over the abuses and massive imbalances.”

Their theories are widely accepted even though the evidence is accumulating that Government will be hapless once major fiscal crises erupt in certain “too-big-to-fail governments.”

Case in point: Writer Steve Hanke (page 25) points out China’s “problem” of 64 million empty housing units and admits that the property bubble is a whopper. Supplying the big number himself, he goes on with counterintuitive and non-factual comments that the excess is contained to four first-tier cities and involved only 3% of total floor space constructed in 2009.

Let’s see if I have this straight: 97% of the floor space that led to 64 million vacant units is outside those four large cities, but those other localities are not suffering bubbles?

According to Morgan Stanley, GMO calculations, the nationwide average of property value divided by disposable income per urban household was 8.2x at the end of 2009. It was 9 times that in Tokyo at the peak of their property bubble. Other measures, such as price to rent, demonstrate that Hanke’s comments are complete nonsense.



He goes on to state that their “government” is in a strong fiscal condition to absorb the hit banks will take (8% of total bank assets in his view), and that “banks won’t be allowed to go to the wall.” This is the same argument made globally. Hanke completely failed to mention that debt taken on by local and state government for bubble projects. Analysis by key omission: If this is a professor of economics at a major university, no wonder modern economics has become such a joke.

Sasha Gong (pg. 18) explains how land has been perceived in China, and controlled and owned by local government. Control over local government speculation has been meet with resistance. In 2009, land sales accounted for 1.6-1.9 trillion RMB, or more than half of their revenue.  A reduction of land sales would greatly hamper China’s “growth.”

Source: NBER

Bernard Connolly (pg. 14) says if there were a bailout financed monetarily, the RMB would be weakened sharply. This would trap the one-way traders betting on RMB appreciation. Chi Lo (pg. 22) mentioned that China has bars to capital flight. Administering this is quite another story.

An “anonymous senior Japanese official” (pg. 12) describes the local government’s role. So-called “loan platforms” were established as funding vehicles to obtain commercial loans. When Beijing mobilized a massive 4 trillion Yuan pump priming in 2008, it ordered local governments to bear one-third of the cost themselves, triggering a stampede. As of June 2010, there are 8,221 platforms and their outstanding loan balance was 7.7 trillion Yuan, of which 20% to 25% are deemed “problematic” by the China Banking Regulatory Commission.

The situation China faces was described well by Tadashi Nakamae (pg. 10), who suggests that a bubble in Chinese productive capacity is even more dangerous than its asset bubble. He defined the classic boom-bust process:  ”When capital investment is booming, say, when steel factories are being built, this itself creates extra demand for steel that cannot be sustained, especially once the factories become operational and become units of supply rather than demand.”

Source: Vitaliy Katsenelson

And now the kicker: “Expansion of investment is supported by exports. Once exports start deteriorating, economic growth halts.”

Nakamae then points out one of the policy responses by China to this mess: “China will be looking to scrap some of its excess capacity. They are unlikely to force domestic companies to make big sacrifices. Foreign companies on the other hand are easier targets.”

This Bloomberg article describes how QE2 in the US has fueled dead-end corporate investment outside the US, including China.

Nakamae nails it for the  banks: “The problem with regional governments using bank lending rather than tax revenues to finance public works projects is that those do not create a return on investment. Servicing the debt is all but impossible.”

Paul Alapat (pg. 16) suggested that ” the immediate impact of a collapse in economic activity in China is likely to be a jump in U.S. Treasury yields both due to repatriation of Chinese holdings and a rise in risk premia. Global supply chains, particularly those for electronics and a variety of consumer goods will be jeopardized.”

Hongyi Lai (pg. 17) suggests that under this scenario, “globally, as Chinese urban consumers tighten their belts, Chinese imports will shrink, especially commodities mostly related to construction such as iron and steel, timber, and certain energy inputs. Imports of non-essential consumer items such as personal luxury goods and high-end home appliances will decline. In addition, China’s purchase of overseas financial products and investments abroad may also decline”.

Analyst Maya Bhandari (pg. 10) chimes in by pointing out that China is nearly twice as powerful a global growth locomotive as the US. Unlike the other analysts, she states she sees “very little domestic demand growth” even now. Further, China has addressed overheating and inflation by top-down ordering of banks to cease lending. “This is symptomatic of a market economy operating under a communist political structure,” says Bhandari.

Gary Hufbauer (pg. 15) offers up the obvious, and what is essentially my conclusion: ” Manufacturing supply chains across Southeast Asia and commodity producers from Australia to Brazil would all take a drubbing.”


As a bust develops, many of these economists expect China to try and devalue the RMB to support their old mercantilist export model.  This would be met with fresh howls from the US, and might be easier said than done.

What China really needs is a large commodity and input goods price correction, and they needed it yesterday.  Without it, a RMB devaluation would be even more inflationary for China. Within China, there are those declaring the export, over-investment cycle is exhausted. Writing that China’s growth model has “exhausted its potential,” an influential former PBOC member warns the country faces a sudden economic slowdown. Yo Yongding lists rising social tensions, pollution, lack of social services and an over reliance on exports and investments as key threats.

Banning Garrett (pg. 21) writes a good, overall view of the impacts of a China Bust. The key takeaway is that almost the whole world is operating under the assumption that China’s model will continue indefinitely, and the shock effect won’t be pretty.

About The Author: Russ Winter has written a blog called Winter Watch for the last three years.  Russ also has a subscription service called Winter's Actionables. 

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at http://econforecast.blogspot.com/.

© 2011 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife