PRC Economy - New Reflections : Dec 15 2011

[wig]

Why China Will Have an Economic Crisis
http://business.time.com/2012/02/27/why ... ic-crisis/

China is indulging in all of the same excesses as Japan and Korea, and then some. The level of investment in China, at nearly 50% of GDP, is lofty even by Asian standards. The usual argument made in defense of such astronomical investment in fixed assets is that China is a large developing country that needs all of the buildings and roads it is constructing. Qu Hongbin, the very smart chief China economist at HSBC, made that very argument in a recent study:

excerpts

Why won’t China’s policymakers pursue more fundamental reform? They are afraid that growth might slip. Sure, the latest five-year plan targets 7% annual GDP growth, but it seems to me that every time growth drops under double digits, the leadership goes into panic mode and revs up the economy again. GDP surged 8.9% in the fourth quarter of 2011, but that’s not fast enough for China’s leaders. They’ve already started loosening credit again — slathering yet more debt onto the economy.

When I bring up these issues with China watchers, I’m usually scolded — Beijing’s policy mandarins have it all figured out, I’m informed. It is true that China’s policymakers have done a superior job managing the rapidly changing economy in recent years. But as any stock investor knows all too well, past performance does not ensure future performance. Back in the 1970s and ’80s, analysts in the West considered Japan’s bureaucrats near supermen as well. Now the stodgy Japanese bureaucracy is considered one of the main impediments to an economic revival. Chinese bureaucrats today suffer from the same problem that led Japanese bureaucrats astray — they believe the economy can be managed by fiat. The tools of classical economics — getting prices right — are secondary. Why guide an economy with abstract measures like interest rates when you can just tell the banks what to do

tharticle is well crafted and the reasoning, sound. worth reading in its entirety

[Hari Seldon]

China: Capital Account Liberalization and the Corporate Bond Market

The People’s Bank of China (PBoC) released a report (Chinese language) this week that focused on prospects for capital account liberalization. Opening up the capital account would be a major reform, perhaps the most significant in a more than a decade. It would give Chinese savers an escape hatch from financial repression and force the reform of the financial sector.

Which is precisely why the risk of loss of control over people's savings and thereby their lives is not to be taken lightly by the democratic CPC.

Given that China is in a relatively good position to move ahead with capital account liberalization, the report suggests a medium-term plan of action:

1 to 3 Years: Relax controls on investment directly related to trade and encourage Chinese enterprises to increase overseas foreign direct investment.

3 to 5 Years: Relax trade-related commercial credit controls and push forward renminbi internationalization.

5 to 10 Years: Strengthen financial sector development, open channels for credit to flow in and out of China, open in succession the property, stock, and bond markets, and move from quantity-based to price-based approaches to monetary management.

Quite do-able. PRC can very well pull it off. And unkil can do with competition.

[member_20036]

http://www.telegraph.co.uk/news/9095729 ... steam.html

China's high-speed rail project runs out of steam

China's high-speed rail project, the jewel of the country's transport policy and one of the most impressive feats of engineering in the world, has run out of money and will be scaled back dramatically this year.
Out of 23 current railway projects, some 70 per cent have been suspended, partly suspended, or delayed, according to the Chinese state media.
Meanwhile, an unnamed source told Dow Jones , the news agency, that only nine new railways would be commissioned this year, compared to 70 last year.
Having run up enormous debts, the Chinese Railways ministry is struggling to persuade banks to continue to finance its ambitions.
Ticket sales, meanwhile, have been slow on some lines as travellers baulk at the price.
"The ministry cannot bear so much debt. It has already taken 240 billion yuan (£24 billion) of loans and if it takes much more how can it pay the interest?" said Wang Mengshu, a member of the Chinese Academy of Engineering and senior consultant onthe high-speed rail project.
"It can make profits of about 70 billion yuan on freight, but it is making no money on passenger travel. The government should cancelsome of the debt, or invest some money itself rather than asking the banks to finance it," he added.
"A lot of projects are half-finished and while nine new lines have been approved this year, no one has started building them."
By the end of this year, China's high-speed network is likely to stretch to over 6,000 miles, transporting hundreds of millions of passengers in spacious long-nosed bullet trains. The 819-mile journey from Beijing to Shanghai, more than twice the distance from London to Edinburgh, now takes under five hours.
At the height of the high-speed boom, trains were being fitted with toilets that cost 1.2 million yuan (£120,000) a piece, and taps imported from Japan that cost 7,000 yuan, according to an investigation by Century Weekly magazine.
However, China's high-speed rail ambitions, which include tendering for the London to Birmingham high-speed link, took a blow last July when two trains collided, killing 40 and injuring almost 200 .
A few months before the crash, China's Railway minister, Liu Zhijun was removed from his post and now faces corruption charges. Zhang Shuguang, the deputy chief engineer,who is also under investigation, reportedly paid £540,000 for a housein Los Angeles while on a monthly salary of a few hundred pounds.
Questions were raised about how much of the £190 billion high-speed rail budget had been siphoned off, and whether it would have an impact on the safety of the network.
In the wake of the crash, the Ministryfound it increasingly expensive to borrow money, and no longer had access to the huge stimulus loans that were handed out in the wake ofthe financial crisis to keep the Chinese economy going.
"The Ministry's debts are now worth 60 per cent of its assets, and some analysts think they may rise to 70 per cent this year," reported the China Business Times.

[Vipul]

China's $22 trillion time-bomb.

[abhischekcc]

China driving off the cliff at full speed.

[amit]

China's $22 trillion time-bomb.

Wow! This is a great piece. Should be must read for everybody trying to understand what's happening in China.

[Austin]

Here is a link to Global Debt Clock which shows Public Debt of each country

http://www.economist.com/content/global_debt_clock

Chinas Public Debt is ~ 17.3 % of GDP
Indias Public Debt is ~ 54.6 % of GDP

[chola]

China's $22 trillion time-bomb.

Wow! This is a great piece. Should be must read for everybody trying to understand what's happening in China.

It is actually a poorly written piece. Compared to the plethora of pieces on the slowdown in dragonland that had come over the past three years.


Emotional writing like the following does nothing for its credibility.

"For years, a wispy, gossamer dream has been spun by economists working for Wall Street investment banks about how China has managed the impossible: high growth with a very low debt-to-GDP ratio.

The dream has been so aggressively sold that almost everybody believes it, including editors of this newspaper who have written glowingly about China's growth, how far ahead it is of India, how India should give up this race once and for all and so on."

Let's be perfectly honest here. There are far, far more doomsday articles on China from American academia and corporate research than there are articles in total on India, Mexico or Thailand.

"The Coming Collapse of China" by Gordon Chang was a popular refrain for years. It still is in many circles. But in the end, what drives investment by the MNC is sales and year after year those numbers explode.

The thing to remember about overcapacity is that it is a first world problem. The main problem with third world nations is they cannot raise enough capital to get things done. In Pandaland, we are looking at real infrastructure and hoping to find a dark cloud in them.

The "22 trillion debt bomb" is a number pulled out of thin air. It assumes that debt can't be paid back and that more debt must taken on for lowering growth. If you put any nation under such scenarios, you can get these numbers. It is disingenuous and does nothing to further understanding of the chini economy.

Let me tell you a story. I saw the seemingly intractable fiscal disaster in Chiniland a decade ago when I was cutting my teeth in the business and had made heavy bets against it. Who would not? All of its big four banks were basically insolvent and the SOEs were all money losing disaster. You can't short China directly but you could play the companies in Hong Kong that are dependent on it.

Suffice it to say, I lost. So even if the 22-trillion debt bomb were true, China is a communist state that can make its people eat losses. It happened when the chini banks were insolvent a decade and now those banks are flushed with cash today.

Chiniland if it stays communist will eventually collapse under its contradiction like the USSR. But we should do better research.

[VikramS]

chola:

Remember what the write in prospectus: "Past Results are no guarantee or indication of future prospects"?

I really appreciate the insight you have on how Western Multinationals are profiting from the Chinese markets.

In the same vein, I see you not responding with any details when specific questions are raised.

On this board, I have been cautioning that the prior rates of growths can not be sustained. So it does not come as any surprise when China officially lowers it growth targets going forward. The reasons should be obvious by now.

You mentioned that over capacity is a first world issue and not a third world issue where scarcity of capital is the dominating factor.

The problem is that for macro purposes China is not a third world country; they are the factory of the first world and intricately linked to the first world.

China does NOT suffer from shortage of capital; it in fact has cheap capital available for more than two decades with negative real interest rates.

Like a first world country, overcapacity WILL hurt the ROE and there are serious risks of bad debts. All that capacity is designed for the first world and when the first world is in trouble then how can the factories of the first world escape that?

Post 2008 China escaped its day of reckoning with the massive local stimulus, but that too is now coming to an end.

The biggest problem with the Chinese growth is the mismatch between what people can afford and what servicing the debt for the infrastructure will cost. Their idea of low cost housing is something which costs 21x annual income of the worker it is designed for.

The argument that all that infrastructure will now service the Chinese consumer is on a shaky ground. The top 20-30% is already spending as if there is no tomorrow. The rest have seen the value of their savings erode with negative real interest rates, and at the risk of their equity in homes being wiped out as the law of averages catches up. The days of a local government acquiring land for peanuts and then reselling at 100x the purchase cost to help finance the infrastructure are over. The wealth of the CPC officials is amazing, and that is not lost to the masses. They may have been overawed by the lights of Shangai, but the question everyone is asking is what is it in for me?

China is unique that it income wise it is still not a first world country, but in terms of the debt burden it is competing with the first world. Because of the state controlled capitalism, the transmission mechanisms of the debt burden is going to be very different from the West. With so much government control it is very easy to paper over the issues for a long time to come; however they will show up in one form of another.

From your perspective servicing the Chinese consumer, I do not think there is going to be a dramatic change, the middle class will continue to grow and the urge to splurge will not die. But from a macro perspective, we are entering a new age.

BTW, regarding capital: it will seek the best risk adjusted return. For the past twenty-thirty years, the PRC has offered a one stop shop, with a single window clearance of investment. When things become so easy, the due diligence takes a back seat. Contrast that with India where no one knows who is going to be in power in a few years, who needs to be bribed, and whether there is any real recourse if the laws are broken. Reduce the regulatory and government risk in investing in India, and the same capital will start seeking her shores.


Austin:
Those debt stats are bogus. Most of the debt in China is held at local level governments not at the central level. That huge investment in the infrastructure has to be financed somehow...

[Theo_Fidel]

Austin: Those debt stats are bogus. Most of the debt in China is held at local level governments not at the central level. That huge investment in the infrastructure has to be financed somehow...

Yes. And another wrinkle is that it is held in special investment trusts/enterprises whose sole purpose is to conceal the amount of debt being racked up. History shows us that when these things are not officially sanctioned, the end implosion always reveals the debt much much larger than estimated. Since it is Panda official policy to hide the debt somehow the final number will probably shock everyone.

[wong]

Remember what the write in prospectus: "Past Results are no guarantee or indication of future prospects"?

True, but China's 30+ year track record would easily put it in the top 0.1%.

If this were investment management, China would be like a James Simons or a Bill Gross (if not a Buffett, Soros or a Li Ka-shing) and way better than "lightweights" like Steve Cohen, Bill Miller, Louis Bacon & Peter Lynch.

Also, please clarify, is China the factory of the first world or $22 Trillion in Debt ?? Are local governments re-selling land at 100x profit to fund infrastructure or using $22 Trillion in Debt to fund infrastructure.

Some internal consistency would make your arguments easier to follow. I liked how your slipped in an "India Will" at the end of your arguments. It's almost pathological.

[VikramS]

wong:

Yes we all know,

• Chinese system of state controlled capitalism is the best that was ever invented,
• and the best(est) that will ever be invented,
• and that even though the premier in waiting says GDP figures should not be the focus, China's GDP will grow the fastest in the world, and it will always be better than anything else in the world
• and that capital will always be safer in China (even though the rich Chinese are looking to buy homes, and have anchor babies in the West)
• and that the housing the Chinese workers will now drive the next wave of GDP growth since it is only in China that workers can afford homes 21x their annual income
• and that (as Zlin put it), "China construction best in the world" even though tens of thousands of school children died during that unfortunate earthquake
• and that capital when not seek other places in the world even if they offer the same low risk return which China offered, because capital loves China and hates everything else
• and there is no corruption in China (even if the 70 richest party members add more to their wealth in one year than the combined net worth of all US Legislature, the US Executive, the US Supreme Court Justice)
• and that there will never be a social problem in China (even though we execute 5000 people every year)
• and the Chinese old will not complain when the rich poor divide is widening and their savings wasted away with negative real interest rates
• and the Chinese have absolutely nothing to hide (even though they spend so much in controlling information, managing the internet and what not)

Did I miss anything??

Oh yes

• and the typical Chinese is Chuck Norris, Jet Li, Jackie Chan, Rajnikanth etc. all combined into one.

BTW, I did not comment on that article on rediff; my response was to Chola's post about how when things looked glum ten years ago, they turned out to be OK. Nor did I say that India will get more capital UNLESS things change. The money to build that infrastructure is debt financed; whether it is the local government itself takes the debt or finances the debt of the developer who pays 50x-100x than the purchase price of the land or the some other entity comes in, the money does not come out of empty air.

Unfortunately, unlike the rest of the Chinese who are more awesome than Chuck Norris, Jet Li, etc. combined, you some how miss out on the details; perhaps the effect of living in the US, where the lack of the awesome pure Chinese air is missing.

Now, if you do not have anything to add keep your schlong zipped.

Remember what the write in prospectus: "Past Results are no guarantee or indication of future prospects"?

True, but China's 30+ year track record would easily put it in the top 0.1%.

If this were investment management, China would be like a James Simons or a Bill Gross (if not a Buffett, Soros or a Li Ka-shing) and way better than "lightweights" like Steve Cohen, Bill Miller, Louis Bacon & Peter Lynch.

Also, please clarify, is China the factory of the first world or $22 Trillion in Debt ?? Are local governments re-selling land at 100x profit to fund infrastructure or using $22 Trillion in Debt to fund infrastructure.

Some internal consistency would make your arguments easier to follow. I liked how your slipped in an "India Will" at the end of your arguments. It's almost pathological.

[chola]

chola:

Remember what the write in prospectus: "Past Results are no guarantee or indication of future prospects"?

A quaint but ultimately meaningless cliche. Everyone knows that there is no 100% prediction based on the past.

But you cannot make any kind of forward projection without reference to past. Every piece of information you put into your formula is in the past. That includes what you think is current. Because we are not clairvoyant we need to use what we know has happened already.

I really appreciate the insight you have on how Western Multinationals are profiting from the Chinese markets.

In the same vein, I see you not responding with any details when specific questions are raised.

I respond with probably more detail than anyone here. In fact, I do far better than the rediff article with the western sales figures I post. A detailed report can run tens of thousands of dollars. Market research and projection can cost upwards of a million with thousands of man-hours. So I really do not know what you expect in a forum.

On this board, I have been cautioning that the prior rates of growths can not be sustained.

You and about 50,000 economists in the past 20 years. If the MNCs had listened to them 20 years ago then the VWs and Apples would not be raking in the sales today.

You mentioned that over capacity is a first world issue and not a third world issue where scarcity of capital is the dominating factor.

The problem is that for macro purposes China is not a third world country; they are the factory of the first world and intricately linked to the first world.

Being part of the supply chain of the first world does not make you first world. Mexico was part of that supply chain for even longer than China. It did not make Mexico first world and it has horrendous problems with infrastructure and most of it is capital related. Even South Korea and Taiwan were not first world for the longest of time when they entered as part of the supply chain.

China can grow its infrastructure for decades and it would still not come anywhere near what they have in the US and Japan. For all the talk about the chini railways, they have barely 1/3 the miles of track of the US with four times as many people.

The ability to raise capital and build infrastructure is what separates the wealthy nations from the poor. If you can build it in the third world, you do it. Because most of the time poor nations cannot raise capital.

China does NOT suffer from shortage of capital; it in fact has cheap capital available for more than two decades with negative real interest rates.

Which makes the debt problem moot. It is funny money that the chini government prints, makes available and owes to itself.

Like a first world country, overcapacity WILL hurt the ROE and there are serious risks of bad debts. All that capacity is designed for the first world and when the first world is in trouble then how can the factories of the first world escape that?

Capacity is designed for people not first or third world. It is the concentration of capacity (really you mean infrastructure) that separates third and first world. Third world people make do with far less infrastructure and have far less capacity to build things. Pandaland has far more people than capacity. Now, is there overcapacity in certain sectors? Absolutely but in the business world overcapacity is a transient figure in an immature economy like China. Its own population can still grow into that capacity. The auto industry is a perfect example.

As far as the rate of return and bad debt, it is pretty much meaningless to a communist nation playing around with its own funny money and which can make its people eat losses.

It's funny how people talk about bad debt without understanding what it really means. Debt is simply credit that needs to be repaid. Credit is often never repaid and it leads to great and tremendous things. For example, the Marshall Plan which rebuilt Europe and the massive loans to Japan that made it into the world's second economy for decades were debt that the US simply forgave. It is the same the US did for itself in the post War era with the GI Bill and massive infrastructure building that criss-crossed the nation with highways. That, my friend, is free credit and they created wealth for both the happy recipients and the US (at least until the Japanese destroyed the US car industry.)

Debt to foreign entities is credit that usually needs to be repaid. Greece needs to pay Germany. California doesn't really need to prepay Washington. GM doesn't really need to repay Washington either. Obviously if a government gives out loans that can't be repaid and then prints more money to make up for it, it can lead to inflation. That's how Zimbabwe ends up with a hundred billion dollar bill that can buy maybe an apple.

The chinis are on the opposite end of that spectrum. Not only can its currency build highways and high speed rail with abandon but it is considered undervalued. Given the chance, the US, Japan and Europe would want it raised by upwards of 40%.

So the debt issue is meaningless to the PRC. It owes money to itself and it can print money without really much inflation. It has massive leeway in the value of it currency. And I have not even mention the three trillion in foreign currency yet that would cover what little external debt it has about several thousands times over.

To top it all off, the chini government can make its people eat losses. Debt is only a problem if you are forced to repay it. Or on a humanitarian level, you feel the need to repay it. Panda owes money to itself. It can print what it wants. And it if feels like it (say, to tamper down any spark of inflation), it can simply not pay and make its population eat the losses.

This was exactly what happened when its banks were technically insolvent a decade ago. A magic wand was waved, people suffered without recourse and now the banks are flushed with cash to lend out again.

[Hari Seldon]

^^^ chola nails it right there.

PRC is unlike anything the world has seen before or will see again. It is an unstoppable juggernaut. And mates hard muscle with everything it does. After all, if you shjoot all the creditors, won't the debt problem disappear?

This is indeed the Chinese century. Sure I want India to do well and all but let's face it, we're not in China's league nor, with UPA3 and UPA4 and our real growth rates converging to the nehruvian average as inflation soars, are we likely to be in our lifetimes.

[VikramS]

chola:
1. I did not predict anything in the past; only this time, after the European debt crisis started. I started in finance in 2007 so knew little before that. What I was referring to has been validated as the official growth targets have been lowered.

2. The CPC's ability to let the poor eat their loses is diminishing. Maslov is in action and alive in the PRC.

3. How can you be so sure of the foreign debt numbers when you yourself admit there is very little transparency?

4. =>There is also the question of absolute magnitude of losses. Size matters.
=>A decade ago, PRC economy was less about a 30-40% of its current size
=>They did not have the stimulus of this magnitude ever (no country ever has)
=>It is not the SIZE of the debt that is the big issue; it is the QUALITY of the debt.

5. You have been ducking the question of ASEAN/Japanese imports/exports and how much was for re-export and how much for local consumption. That iPhone value add article did shed a light on what those numbers meant; what I had been saying about the absurdly low value add by the Chinese factories was validated.

6. You know enough to pretend that inflation is not an issue. Where did you learn that "It can print money without any inflation"? It has had negative real interest rates for a generation.

7. PRC a decade ago is very different from PRC now, in terms of size, the structure of its population, the division of wealth (the rich-poor divide), and also the amount of debt in the system, and the amount of information which flows through the system.

8. The world which the PRC exports to, too is a very different place. The 2000s were the decade of cheap credit driven growth in the First World. The PRC can not export its way out of trouble this time unlike the past. Bad debts become irrelevant when there is a lot of growth; it is when growth suffers that the debt starts becoming an issue.

9. Foreign exchange is not a magic wand. It is another asset class, like your land or your minerals. It is capital that has to be deployed in low returning asset. What it does provide is LIQUIDITY (or the illusion of) in a country where capital controls are in place. If there were no capital controls that liquidity will be much less meaningful.

10. If you read my post, I clearly mentioned that the transmission mechanism is the key and how it will manifest itself is going to be different from the west. Typically it manifests itself by slow down in capital spending; that is already happening as the HSR projects get starved of capital. The argument about the infrastructure being designed for the masses falls flat because of the mismatch between the incomes and the money spent. There is an element of truth in the cliche about getting old before getting rich.

11. A lot of information you get on BR is typically what you pay thousands of dollars for... The world, including the economy, runs in cycles. Nothing as they say is permanent.

12. My basic thesis that it will be incredibly hard for the prior growth rates to be sustained is being officially validated. From an investment point of view it implies a harder time for materials and commodities as that massive construction binge slows down. The Middle Class in China, which you cater to, will continue to shine as the sheer number and urge to splurge is immense.

13. I did not quite follow your argument about China/Mexico etc, First World/Third World etc. Since clearly China does not face a shortage of capital, it is not facing the typical third world problem of lack of capital. However like the third world it faces the issue of a highly skewed income distribution with a mismatch between what is being spent and what people can afford. That is where the issue of bad debt and lower investment spending starts becoming relevant.

14. Your example of Marshall plan or the US rebuilding debt to Japan are bogus. Those investments were made to further US strategic interests, very much like how the US funds the TSPA.

15. I agree with you that internal debt is much easier to handle than external. However if the repercussions were so benign, why so much heart burn about the US debt? Internal debt is easier to handle because you can very easily buy time unlike external debt. Buying time allows you to review your spending without sending a shock through the system.

16. Hari Seldon ji: Shooting the debt holder is going to be much harder than before. The last time all you had to do was say, hold on, and exports to the First World bailed Chinese banks out. This time not only is the first world in no position to bail out China, the ownership of debt includes people (entities) who matter.

The power structure has changed, and there is an immense moneyed class in the PRC. All the people over whom chola is salivating over are unlikely to allow themselves to be shot. The unmoneyed class is also getting sick of the financial repression (negative real rates).

A debt crisis is a crisis of confidence. If people are not sure whether the money will be paid back, they are going to be more reluctant to lend. In the case of PRC since the debt is not being held directly by the government the situation becomes very tricky in terms of confidence. That wild-west gung-ho spending at the local level hits a wall.

It is not surprising that the rhetoric is now focused on increasing wages, increasing domestic consumption etc., and GDP growth is being de-emphasised.

[Theo_Fidel]

The thing to remember is that none of these China boosters saw the 2008 collapse coming. While the drone on BR was that housing price was unsustainable and debt levels in the world were crazy and unsustainable. Based on this, several of us including myself, did not buy that big new fancy house and conserved cash, liquidated stock and mostly came through the crash unscathed.

We are not in the business of shorting companies or even day trading based on sentiment and manipulated data. We are in the business of capital preservation and not leveraging. To our mind China is leveraged like crazy and the gearing increases every year. Sure the claim is the population is massive and people will fill the production capacity. But this was the exact comment made about the USA remember. The USA now has a younger, and faster growing population than Panda. Yet when it hit the debt wall the wall did not give way. So now there are entire condo type cities built in Florida and Nevada and California sitting empty and being demolished as people can not afford them. Is there a population for it, absolutely. Just that they are all renting as they can not afford these things.

Instead of building $20,000 apartments, Panda is busy building $300,000 apartments. This gives it’s GDP a nice boost and makes it look all muscles. The question is where is the earning capacity going to come from to support this extravaganza. This is the question the USA failed on with abandoned cities and developments and $500,000 houses now disintegrating into the earth. To my mind the frantic resort to debt stimulus is a warning sign that what worked previously is no longer working. The market is no longer able to support the China model. The domestic consumer market is not able to support it. So only debt now supports it. In the normal course the collapse would have come after the 2008 implosion. China could then have cleaned up, right sized, learnt a lesson and moved to a more realistic sustainable pattern. It did not because the insane CPC is in charge. So the credit taps continue to open wider every year. More cars are bought and apartments built the people can not afford. One of the oddest experiences is to discuss salary levels in India and China and discover that despite the supposed 4 times greater GDP salary levels remain roughly matched. So for all its GDP the people earn very little. The real difference maybe that the middle class in China is 3 to 4 times the size of India’s 300 million strong middle class. This would explain the 5 times India car market and the 6 time India refrigerator market. They don’t earn more, and don’t really appear to be making a transition to the next level. They are still solely competing on wage arbitration. So why is Panda building for a Nevada style society rather than an Asian style society.

The key thing about a modern capitalistic market is price discovery. Without price discovery there is no way for an efficient market system to function. Distortions will keep building up that will destroy the system. This is the true lesson of history. Over 2000 years. China’s 30 years is not even a blink of an eye. To think it is exempt is ridiculous.

It will hit the wall like everyone else and its governance system will collapse. The CPC will be history too in our lifetimes. This I can guarantee.

[VikramS]

chola:

To do everyone a favor, it would be wonderful if you do a serious study or provide pointers on how the Chinese finance system works.

How are the factories financed?
How is the transportation infrastructure financed? Ports, HSRs
How is urban development financed?

How is the housing and apartment financed?

Who are the entities who own the debt?
How are those entities financed?
Who are the owners of these entities and what is the ownership structure (i.e how much state/quasi state participation)
How much is the private ownership of debt?

What is the role of private financing?
How much capital is put in by Western Multinationals?
How much capital is put in by expat Chinese?
How much capital is put in by Asian Multinationals (Japan/Korea)?


Right now the discussion is along the lines of "this time is different" and "this is unique" versus, "the laws of arithmetic and economics eventually catch up"

================================================
Interesting article on a CS report on commodity cycle and China
http://www.zerohedge.com/news/china-and ... uper-cycle

What is not over and what may accelerate in the next few years?

1) Urbanization has another leg to go.

The industrialization model in China is changing. Over the past two decades, industrialization and modernization has been done through funneling rural labor to the coastal areas and export industries. In the next two decades, we believe industrialization and modernization will take place locally, at the village level. That would create new needs for commodities.

2) Policy housing construction will likely accelerate.

The central government realizes that high housing prices have become a source of social instability, so it is committed to provide subsidized housing to its citizens, with a target of building 36 million units during the 12th five-year plan (2011-2015). Progress was disappointing last year, as local governments have neither the money nor the incentive to deliver. We think policy housing construction is likely to accelerate over the next two years, though it is not clear who will pay the bill at this moment.

The stock market is pricing it. While the SPX is (was) near its 2011 highs, the XME has lagged severely (metals/mining) while the consumer discretionary is at a new high (XLY).


==========================

And yes credit matters

http://investinginchinesestocks.blogspo ... ghway.html
http://www.wantchinatimes.com/news-subc ... 7&cid=1201

The National Development and Reform Commission under the State Council, or cabinet, has issued an instruction to give priority only to the most urgent freeway systems as the average debt ratio at most provincial freeway companies has surged to 70%.

The debt ratio is now even more risky than the 58% debt ratio incurred by the country's high-speed rail system, whose expansion speed has already been reduced significantly.

======================
The CPC heads recognize the challenges.
http://www.wantchinatimes.com/news-subc ... 0305000095

Transforming the model of development and economic restructuring are the most pressing tasks facing the Chinese government, the country's premier, Wen Jiabao, said in a government work report on Monday.

These measures are "key to solving the problems of imbalanced, uncoordinated, and unsustainable development" in China, said Wen in the report, delivered at the annual session of the National People's Congress.

"This is both a long-term task and our most pressing task at present," said the premier.

The Chinese government has cut its GDP growth target to 7.5% for 2012, marking the first time Beijing has lowered its economic growth target after keeping it close to 8% for seven consecutive years.

Discussing the change, Wen said that the GDP prediction had been changed to "guide people in all sectors to focus their work on accelerating the transformation of the pattern of economic development and making economic development more sustainable and efficient."

===================================

http://investinginchinesestocks.blogspo ... igion.html

Interesting read about the local loan shark type lending going bust....

[Theo_Fidel]

I don't always read Stratfor but this was an interesting take.

http://www.stratfor.com/weekly/state-wo ... 1d704589b1

The key for China is maintaining interior stability. If this portion of Han China destabilizes, control of the buffers becomes impossible. Maintaining interior stability requires the transfer of resources, which in turn requires the continued robust growth of the Chinese coastal economy to generate the capital to transfer inland. Should exports stop flowing out and raw materials in, incomes in the interior would quickly fall to politically explosive levels. (China today is far from revolution, but social tensions are increasing, and China must use its security apparatus and the People's Liberation Army to control these tensions.

Maintaining those flows is a considerable challenge. The very model of employment and market share over profitability misallocates scores of resources and breaks the normally self-regulating link between supply and demand. One of the more disruptive results is inflation, which alternatively raises the costs of subsidizing the interior while eroding China's competitiveness with other low-cost global exporters.

For the Chinese, this represents a strategic challenge, a challenge that can only be countered by increasing the profitability on Chinese economic activity. This is nearly impossible for low value-added producers. The solution is to begin manufacturing higher value-added products (fewer shoes, more cars), but this necessitates a different sort of work force, one with years more education and training than the average Chinese coastal inhabitant, much less someone from the interior. It also requires direct competition with the well-established economies of Japan, Germany and the United States. This is the strategic battleground that China must attack if it is to maintain its stability.

[Hari Seldon]

I fully intend to sing Jai-China bhajans right till the day the PRC model sputters (or perhaps not stop even then, like our CPI(Morons) have done w.r.t. USSR). Its called playing safe. Can always say I told you so if PRC doesn't implode and wouldn't mind admitting I'm oh-so-wrong should it crumble. Only.

[VikramS]

BTW, I do not believe that PRC/CPC will implode or anything like that.

It is just that those years of double digit GDP and up, up and away are over.

My perspective is primarily investment driven (US markets). Focus in China is shifting from the infrastructure to consumer and the equity market is also reflecting that.

Incidentally, that Ordos article above suggests that lenders tend to commit suicide in China rather than the borrower. A strange world it truly is. Does that have a lesson at the sovereign level also?

=======
China vs India perspective
http://blog.chinatells.com/2012/03/5271

[amit]

I don't always read Stratfor but this was an interesting take.

http://www.stratfor.com/weekly/state-wo ... 1d704589b1

Theo,

Good fine. IMO this para is the key and something Chola should take into account when doing his analysis:

For the Chinese, this represents a strategic challenge, a challenge that can only be countered by increasing the profitability on Chinese economic activity. This is nearly impossible for low value-added producers. The solution is to begin manufacturing higher value-added products (fewer shoes, more cars), but this necessitates a different sort of work force, one with years more education and training than the average Chinese coastal inhabitant, much less someone from the interior. It also requires direct competition with the well-established economies of Japan, Germany and the United States. This is the strategic battleground that China must attack if it is to maintain its stability.

One should remember the iPhone value add report we discussed a while ago. Despite being assembled in China, the Chinese labor value add is $2 while that of S Korea is $5.

[amit]

I fully intend to sing Jai-China bhajans right till the day the PRC model sputters (or perhaps not stop even then, like our CPI(Morons) have done w.r.t. USSR). Its called playing safe. Can always say I told you so if PRC doesn't implode and wouldn't mind admitting I'm oh-so-wrong should it crumble. Only.

[chola]

^^^ chola nails it right there.

PRC is unlike anything the world has seen before or will see again. It is an unstoppable juggernaut. And mates hard muscle with everything it does. After all, if you shjoot all the creditors, won't the debt problem disappear?

A juggernaut when it comes to the consumer markets that the MNCs are attacking. Whether it is a China "Century" is a rather moot point. The second that the chini car market passed the US to become the world's largest, it created a change in the world's automotive landscape. In the global steel making industry, the sea change was decade before that and the heavy industrial equipment industry before even that.

The creditor is the chini government itself and the chini depositors in the banks.

This is indeed the Chinese century. Sure I want India to do well and all but let's face it, we're not in China's league nor, with UPA3 and UPA4 and our real growth rates converging to the nehruvian average as inflation soars, are we likely to be in our lifetimes.

In the end, the only numbers that are important are sales figures. When MNCs sell 5, 10, 20 times more cars and everything else in chiniland than India then we are not in the same league. In the board rooms, we are not on the same planet. And believe me, there are many of us who do bring up India (desis outnumber the chinis 10 to 1 in the corporate world as analysts and as CEOs and managers.)

But the numbers simply don't warrant the comparison. Their middle class is real. It actually buys stuff from the West.

India is always a potential story. Pandaland is simply sales.

[member_21708]

China gambles on Cambodia's shrinking forests

Two-thirds of China's cities fail on air standards

[chola]

The thing to remember is that none of these China boosters saw the 2008 collapse coming. While the drone on BR was that housing price was unsustainable and debt levels in the world were crazy and unsustainable. Based on this, several of us including myself, did not buy that big new fancy house and conserved cash, liquidated stock and mostly came through the crash unscathed.

No one saw the 2008 collapse coming. What is the point? Who are the China "boosters" here? All we know from 2008 is that India, Brazil, Russia and China did far better than the West and Japan. And from the BRICs, Panda did far better than anyone else in improving its position vis-a-vis the West. The consumer markets in China began overtaking those of the US across the board in this time period.

We are not in the business of shorting companies or even day trading based on sentiment and manipulated data. We are in the business of capital preservation and not leveraging. To our mind China is leveraged like crazy and the gearing increases every year.

Who trades according to manipulated data? China is leveraged like crazy to whom? This is the kind of emotional jingoistic responses we always get that sheds no light on understanding the PRC economy.

Theoji, no one trades according to manipulated data. Unless they are in the business of losing money. That is why we depend on sales figures from MNCs. As I said time and again, the Fortune 500 do not depend on government data. The chini government lies. But it lies in a way that Indians cannot accept because of jingoistic attitude. It lies to the smaller side not the larger. That is why their markets are so much larger across the board.

As far as China being leveraged, there is no foreign bank or government with any substantial stake in that leveraging so we don't know. We do know they can paid for whatever external debt they have many times over with their 3T forex pile.

Now if you feel they are leveraged then you can play that investment strategy. It should be easy money shorting the MNCs, all of which are becoming heavily dependent on the chini market -- VW, Caterpillar, GM, YUM, Tio Rinto to name but a few. Good luck, sir.

Sure the claim is the population is massive and people will fill the production capacity. But this was the exact comment made about the USA remember. The USA now has a younger, and faster growing population than Panda. Yet when it hit the debt wall the wall did not give way. So now there are entire condo type cities built in Florida and Nevada and California sitting empty and being demolished as people can not afford them. Is there a population for it, absolutely. Just that they are all renting as they can not afford these things.

I have no idea where you are going with this. The US is most highly developed nation in the world. Chiniland is third world with millions who still live in caves. I have no doubt that like in India or anywhere else in the world an empty building in chiniland will be squatted.

Instead of building $20,000 apartments, Panda is busy building $300,000 apartments.

It is far more likely apartments built with $5000 that sellers are listing for $300,000.

China could then have cleaned up, right sized, learnt a lesson and moved to a more realistic sustainable pattern. It did not because the insane CPC is in charge. So the credit taps continue to open wider every year. More cars are bought and apartments built the people can not afford.

According to Western firms selling in China, credit buying even for cars, is extremely low. In fact, 10% of chinis use car loans. About 1/7th of that in India.

http://www.bloomberg.com/news/2010-04-2 ... -cash.html

One of the oddest experiences is to discuss salary levels in India and China and discover that despite the supposed 4 times greater GDP salary levels remain roughly matched.

Salary levels in what industry and according to whom? Is this hearsay from your experience only? In the corporate world, the average Indian have a salary level about 1/6 to 1/3 that of china's depending on methodology and targeted industry. For example, those in the BPO and offshoring industries catering to western firms have much higher salaries than the average chini while those in farming lower. BPO workers as a percentage are much smaller part of the working pool.

So for all its GDP the people earn very little. The real difference maybe that the middle class in China is 3 to 4 times the size of India’s 300 million strong middle class. This would explain the 5 times India car market and the 6 time India refrigerator market.

If India's middle class is 300 million and china's is 3 or 4 times that then its practically the whole chini population. China is not a middle class nation. Even then it doesn't match up with sales of Western products (using MNC sales we can even out the disparities between Indian and Chinese government data collection.) In terms of Western sales, the disparity is often 15/1 or 20/1.

Suffice it to say that India overstates its middle class and China consistently understates it to cheat at trade regimes like the WTO. Lying about being wealthier gains you nothing at the top level while crying poverty gets you concessions. Chinis are far more hard-edged about real benefits. We are more happy to jingo.

They don’t earn more, and don’t really appear to be making a transition to the next level. They are still solely competing on wage arbitration. So why is Panda building for a Nevada style society rather than an Asian style society.

What is Asian? The part of China that works is following the same pattern as Japan, South Korea and Taiwan. The part that doesn't work follows that of the USSR. The question really is whether the first overwhelms the second or the second strangles the first.

It will hit the wall like everyone else and its governance system will collapse. The CPC will be history too in our lifetimes. This I can guarantee.

I agree. The problem is if the CPC goes, we could very well get a giant sized South Korea, Taiwan or Hong Kong that we will never catch up with. It would mean the part of China that followed Japan, South Korea and Taiwan has won out over that which followed the USSR.

I much rather have the Soviet latter for dragon than the East Asian former.

[chola]

chola:

To do everyone a favor, it would be wonderful if you do a serious study or provide pointers on how the Chinese finance system works.

How are the factories financed?
How is the transportation infrastructure financed? Ports, HSRs
How is urban development financed?

How is the housing and apartment financed?

Who are the entities who own the debt?
How are those entities financed?
Who are the owners of these entities and what is the ownership structure (i.e how much state/quasi state participation)
How much is the private ownership of debt?

What is the role of private financing?
How much capital is put in by Western Multinationals?
How much capital is put in by expat Chinese?
How much capital is put in by Asian Multinationals (Japan/Korea)?


Right now the discussion is along the lines of "this time is different" and "this is unique" versus, "the laws of arithmetic and economics eventually catch up"
.

That is a pretty big request, sir! But let's not forget that the PRC is communist. So the short answer is "Government Owned" for all of the above save for the foreign investment.

Remember, I am no chiniland expert. I am a market analyst with foreign/emerging markets as a specialty in the American corporate world. The PRC just so happens to be on another planet when compared to other foreign markets. Perhaps that does make me the chini expert! I guess I am, at least in BR. I have a chinese-american wife to improve my street creds.

As far as foreign investment, it is mostly FDI, non-liquid brick constructions on the ground, unlike the liquid FII that sustains India.

Yearly FDI in chiniland is around $100 billion. As far as breakdown? I heard figures of up to 60% from Overseas Chinese. The vast majority of it is from East Asia. Even MNCs depend on East Asian firms like Foxxconn to subcontract.

Now where are we going with this?

[wong]

chola, I think this part is a bit of an exaggeration (NASA stats??).

desis outnumber the chinis 10 to 1 in the corporate world as analysts and as CEOs and managers.

I only say that because it will be news to the founders of YouTube, Nvidia, Vera Wang, Yahoo, Computer Associates, etc. Or the second biggest landowner in the state of Colorado, Lou Pai.

That list is strictly US. I'm not even counting the Chinese diaspora in Indonesia, Singapore or the rest of Southeast Asia.

[Theo_Fidel]

Chola one humble request onlee.

This is a thread for China analysis. Lets not bring India comparison into it yet again. plenty of other treads for that.
-----------------------------------------

Vikram,

That is the exact point I'm making that the China Middle class is expanding sideways not vertically. There is a 10 million of very very wealthy at the top. 800-1,000 Million lower middle class and a 300 million destitute class at the bottom.

What Stratfor points out is that the interior is structurally uncompetitive, due to climate/terrain/ethnic composition/religion/language. So all this fancy schamncy stuff on the interior is funded by the profits generated at the coasts. When the coasts run out of money the whole thing implodes, rinse repeat.

[anishns]

chola, I think this part is a bit of an exaggeration (NASA stats??).
I only say that because it will be news to the founders of YouTube, Nvidia, Vera Wang, Yahoo, Computer Associates, etc. Or the second biggest landowner in the state of Colorado, Lou Pai.

Jen-Hsun Huang - Nvidia - Chen was born in Taipei, Taiwan. When he was fifteen years old, he and his family emigrated to the United States.
Jerry Yang - Yahoo - Born in Taipei, Taiwan on November 6, 1968, Yang moved to San Jose, California at the age of ten
Steven Shih "Steve" Chen - Youtube - Chen was born in Taipei, Taiwan. When he was fifteen years old, he and his family emigrated to the United States.
Vera Wang - Vera Ellen Wang was born and raised in New York City and is of Chinese descent.
Charles Wang - Computer Associates - He was born in Shanghai, and moved to Queens, NY, when he was eight years old
Lou Lung Pai - Pai was born in Nanjing, China and came to the United States at the age of two.

Again these are only the US. I have no idea what your diaspora is upto in Indonesia/Singapore etc.

[VikramS]

chola:

Regarding the debt issue. I want to get a better handle of the transmission mechanism of NPAs in the Chinese economy.

It is easy to say the government owns everything. However clearly there are enough powerful people who also control the government. In a way, the PRC has become the government of the rich, by the rich, but for the poor (at least on the surface). The old rules are unlikely to apply anymore. That clean slate created by the GLF and the CR, is no longer clean.

You of all people should know that better since you are in direct touch with the success of consumer MNCs. That should also give you some more idea about how and where the money flows in China.
Whose interests are likely to be protected?
Who will be left holding the bag and how will that mechanism operate?
How are attitudes towards credit changing and how is the saving vs borrowing equation holding up?
How are the people outside the top 300 million be bought into the higher income fold?

Financial markets have been predicting the slowdown in construction/infrastructure. And if the consumer discretionary sector is an indication a big upsurge in consumer spending (I do not think that is based on OECD economies). The CPC is pumping for consumer spending and wealth harmonization. IMHO, those are much tougher goals to achieve then building stuff with no constraints.

BTW, the largest auto market story was driven by the big stimulus, and has probably reversed. It is also interesting to note that home ownership rates in China are now in the 60s, very similar to the US. Also keep in mind that the other BRICs survived the meltdown without a China style stimulus; shows how joint at the hip they are to the OECD.

The local level lending markets are in under a spotlight right now..
http://investinginchinesestocks.blogspo ... owing.html

We live in interesting times for sure. I do hope that the CPC/PRC is able to manage things without them resorting to external adventurism.

[wong]

And this refutes the use of unrealistic NASA stats how (10 to 1)?? Many Chinese-Americans are from Taiwan, myself included. Notice how I stuck to those with founder rights, not the hired help.

chola, I think this part is a bit of an exaggeration (NASA stats??).
I only say that because it will be news to the founders of YouTube, Nvidia, Vera Wang, Yahoo, Computer Associates, etc. Or the second biggest landowner in the state of Colorado, Lou Pai.

Jen-Hsun Huang - Nvidia - Chen was born in Taipei, Taiwan. When he was fifteen years old, he and his family emigrated to the United States.
Jerry Yang - Yahoo - Born in Taipei, Taiwan on November 6, 1968, Yang moved to San Jose, California at the age of ten
Steven Shih "Steve" Chen - Youtube - Chen was born in Taipei, Taiwan. When he was fifteen years old, he and his family emigrated to the United States.
Vera Wang - Vera Ellen Wang was born and raised in New York City and is of Chinese descent.
Charles Wang - Computer Associates - He was born in Shanghai, and moved to Queens, NY, when he was eight years old
Lou Lung Pai - Pai was born in Nanjing, China and came to the United States at the age of two.

Again these are only the US. I have no idea what your diaspora is upto in Indonesia/Singapore etc.

[sanjaykumar]

That is a telling post anishns. The response was even more revealing.

[VikramS]

I have been trying to read up more on the challenges faced by the PRC and found some interesting stuff.

This article talks about the entrenched moneyed class and how it can limit needed change.
http://www.mpettis.com/2012/02/22/when- ... al-crisis/

This article offers some insight into the “Chongqing” model versus the “Guangdong” model. It has a link to the economist which I will not link to as a matter of principle.
http://chinanalyst.com/archives/629


This article talks about how the forex reserves are not a panacea when it comes to recapitalization of Chinese banks and how what worked in early 2000s is unlikely to work as well (or without stoking inflation).

http://www.google.com/url?sa=t&rct=j&q= ... PQigF7Hyug

==========


One big take away for me is that regardless of what happens, China's role in the global economic regime is set for a major change. To make the society more just wages at the low level will have to go up. For the past 30 years China has exported deflation. It will now start exporting inflation.


=========

Meanwhile, if you are one the unfortunate ...
http://health.yahoo.net/news/s/afp/deat ... s-in-china

[chola]

chola, I think this part is a bit of an exaggeration (NASA stats??).

desis outnumber the chinis 10 to 1 in the corporate world as analysts and as CEOs and managers.

I only say that because it will be news to the founders of YouTube, Nvidia, Vera Wang, Yahoo, Computer Associates, etc. Or the second biggest landowner in the state of Colorado, Lou Pai.

That list is strictly US. I'm not even counting the Chinese diaspora in Indonesia, Singapore or the rest of Southeast Asia.

If you look at any MNC corporate boardroom and its strategy divisions and the contractors that they hire (the corporate world is heavily dependent on contractors), you will see far more Indians than Chinese. In fact, even in the Asian arms of MNCs where their main focus is China we have many more Indians than Chinese! In my group, we have exactly zero Chinese, three Indians and a dozen gora.

There isn't much numbers available for the analyst level breaking down ethnicity but the massive prevalence of Indian contractors (Wipro, Tata, Infosys) in the Fortune 500 compared anything that the Chinese have means that Indians are far more integrated into the MNCs.

At the highest levels, there is no comparison.

http://www.time.com/time/magazine/artic ... 41,00.html

Among the C-suite executives in the 2009 FORTUNE 500 were two mainland Chinese, two North American Chinese and 13 Indians, according to a study by two professors from Wharton and China Europe International Business School.

Even when compared to Americans and other Westerners.

In a study of S&P 500 companies, Egon Zehnder found more Indian CEOs than any other nationality except American.

The NASA numbers is an online phenomenon and you can choose any number of online foolishness to make fun of. But the CEO figures are real and reported in the Wall Street Journal, Financial Times, Time magazine, Newsweek and practically every publication you can think of. Indian CEOs are head of non-Indian companies. The Chinese/Taiwanese ones you posted are founders of those companies.

CEOs are at the top of the pyramid. In order for so many Indians at the top, the base has to be immensely huge and it is.

[chola]

chola:

Regarding the debt issue. I want to get a better handle of the transmission mechanism of NPAs in the Chinese economy.

It does what all communist nations do. Non-performing assets are eaten by the state and ultimately eaten by the people the state rules. How do you think communist nations work?

One thing that communist nations don't worry about is NPA. Things are built, they are expected to give a return.

It is easy to say the government owns everything. However clearly there are enough powerful people who also control the government. In a way, the PRC has become the government of the rich, by the rich, but for the poor (at least on the surface). The old rules are unlikely to apply anymore. That clean slate created by the GLF and the CR, is no longer clean.

Sir, you are making all sorts of disjointed observations which as they say have nothing to do with anything. All governments in all countries have powerful people.

What old rules are unlikely to apply any more? Do you even know what they are? No "old" rules had applied to China since Deng come to power in chiniland in the 1970s.

Communist nations should not consume as free market ones. But China's consumer markets are the largest in the world. When all four of a nation's largest banks holding nearly all of your nation's deposits are insolvent, it should collapse. But China didn't and in fact ends up more money to stimulate itself through a global recession.

By all rights, the PRC should be as poor as North Korea -- which it was during Mao's time. It isn't because, as I explained earlier, a part of the chini economy has imported the practices of the greater China/Far East community. That is the part that grows. That is the part that is efficient.

Clean slate by the Great Leap Forward and Cultural Revolution? How are those clean? Those events probably stalled the chinis 20 years a piece. Chini per capita income is where Japan's or Hong Kong was 40 years ago.

China has constantly changed over the years. They have never followed any rules. All rules are new year by year which is why you have such anomaly. It is a tug of war between the communist part and the East Asian part.

The CPC is pumping for consumer spending and wealth harmonization. IMHO, those are much tougher goals to achieve then building stuff with no constraints.

The consumer markets are already there. If you are a MNC, the sale figures alone tell you that consumption in China is through the roof.

And growing those markets is easier in China than anywhere else in the world. Do you know why?

The chini operate on pure cash today. They buy cars and even homes on mainly cash and heavy down payments. In every other country of this magnitude consumption is driven by credit (less so in the Far East).

The fastest way to increase consumption is credit. If you increase car loans in chiniland to US levels, you can see up to a three or four fold increase in sales.

BTW, the largest auto market story was driven by the big stimulus, and has probably reversed.

Both Germany and the US had massive stimulus in the auto industry (Cash for Clunkers).

We live in interesting times for sure. I do hope that the CPC/PRC is able to manage things without them resorting to external adventurism.

Actually, a nice war would be a way to slow down their economy. I doubt it will happen on the Indian border. It most likely would occur in the South China Seas or the Taiwanese Strait. In ether places, it is in for a nice beating from the US and its allies.

Yes, I would surely enjoy a Sino war. It would probably blow up the expansion plans of a lot of MNCs though. But I doubt the chini would do it because unlike the USSR the PRC is an economic power but a military midget. Something like 80% of its air force is still Mig-19 and Mig-21 (true, we have a lot of those too but we do not face the US, Japan, South Korea and Taiwan.)

[VikramS]

chola:

There is a disconnect is between what you are focussing on and what I am looking at. There is more to China than the consumer market, at least from the point of view of someone trying to understand the impact of the Chinese economy on the Global economy, and more importantly asset prices.

Perhaps you do not understand what "transmission mechanism" means. It means "how" or in "using what path" will the NPA losses be amortized, HOW will that affect China's economy, and to WHAT degree. We have seen some signs (highway/railway projects being stalled), or suicides among private lenders (animal spirits seem to be draining). A better understanding of that will lead to earlier recognition of new trends.

What powerful people do is defend their own interests. Unlike in the past, in 2012 the link between power and money in the PRC is very strong; much stronger than it has ever been in the history of the PRC. In a lot of ways, China is becoming like the US where the interests of the elite take precedence over everything else as they exercise immense control over the economic, political and social order, apart of course on foreign policy. This is a huge departure from the near homogeneous state they started off three decades ago.

The world has changed in the past four years, and the choices to be made are not going to be as easy. There will be multiple stake-holders pressing for their interests. Many of these stakeholders will have financial interests, including interests in NPAs. Till 2008 the rising tide was lifting all boats, so while there were winners and losers within the PRC/CPC, there was still plenty to go round. Now the definition of "right" decision itself becomes ambiguous, and the stakes become bigger.

And it is not just me that is saying this, the Chinese leaders themselves, and long time China observers are also saying the same. My inference was not based on detailed analysis of these, but the more I read, the more I find that a similar line of reasoning.

BTW, I feel that the US and China are joint at the hip and any talk of war in the S. China Sea is bogus. They have divided the world into a G2 and that is the way it is going to be. The Chinese are not stupid to pick up a fight unlike the Americans who have gone bankrupt playing the global cop. The Chinese have not gotten into a shooting match for almost three decades now. Their focus now is on the Western flank and their activities in PoK are ample proof as is their reluctance to allow the West a greater grip on the Middle East.

[VikramS]

chola:
Here is something which should be right up your alley.

Could you shed some light on the income patterns of the different economic classes of the Chinese people. It is interesting to learn that financing does not pay a big part in the car market and I am curious to learn more about the source of the wealth.

We do know that the wage levels in the low-skill manufacturing domain is comparable to those found in similar ventures in India.
What are the wage levels of typical white collar workers and how do they compare with in India and the US? If they are substantially higher than those in India, how are they sustained? Is the productivity so dramatically higher? Or is there a two class system where the sweat of the labor class helps fund the wealth of the white-collar class?

What percentage of car buyers are first time buyers and do they treat it as an investment to be held for many years? Do people upgrade their cars every few years (those who can)?

What role does the steep appreciation of real estate assets have in funding consumer spending?

What are the attitudes towards traditional store of wealth like precious metals?

=========

http://www.bloomberg.com/news/2012-03-0 ... raden.html

Some interesting observations.
=>Gambling in Macau is seen as a conduit to convert Yuan to Foreign Currency.
=>Gold imports from Hong Kong have tripled.

[Hitesh]

Chola,

if what you are saying and your assertions are taken at face value, then how do you explain that Soviet Union fell apart? After all, SU could make the people eat the losses and yet they couldn't when the people started rebelling against those kind of losses. What makes you so sure that China won't follow in the footstep of SU? After all SU survived on bare momentum for 40 years after the 40s ended. China perhaps is just cruising on momentum right now but when the momentum runs out, China could end up like Greece or SU.

[Hari Seldon]

Much as I admire sri chola's perspective, sri vikamS's queries do strike a chord.

So for instance, how to reconcile a few (seemingly) opposing factoids - (i) PRC superstate can make mango people eat losses at will implying people's trust in bank savings in the PRC must be low and dipping, and (ii) there's great consumption boom with 100s of millions buying costly cars and costlier homes on a cash down payment basis, (iii) PRC's 4 super banks, which are larger than the ASEAN's banks put together, have already been recapitalized at least once with the people's savings.

Now if the PRC state stole people's money to save its banks, how come the same people in their 100s of millions still have ample cash lying around to consume on a scale that puts the G7 to shame?

Which then brings up the query sri vikramS raises - what are the the earnings sources and wage levels really for the middle class there including especially the white collareds that is enabling such a quaintly earthshaking consumption story to take shape? After tall, consumption figs don't lie and the bank recapitalizations are also presumably based on facts, so...

Of course, none of this takes away from my jai-china mantra-japams....I continue to maintain that like the Fed, the PRC too has discovered the secrets of the perpetual motion machine (or in this case, the perpetual create-money-from-nothing-indefinitely machine). They're now unstoppable, seriously, and will eventually end up buying all the for-sale resources from the world over.

[chola]

Chola,

if what you are saying and your assertions are taken at face value, then how do you explain that Soviet Union fell apart?

It is easy to explain why the USSR fell apart. It was communist and inefficient.

After all, SU could make the people eat the losses and yet they couldn't when the people started rebelling against those kind of losses. What makes you so sure that China won't follow in the footstep of SU?

I am sure China will fall apart if it stays communist. By all rights, even if it doesn't fall apart, it should be as poor as North Korea.

But it isn't. That's where the anomaly comes in.

I expected them to collapse a decade ago when their banks were insolvent and they were laying off millions from state factories during restructuring. It was easy to explain theoretically but rarely pulled off in real life. If you have a closed system you can simply print money to pay off debt. And if why you to limit inflation you can simply not pay. In most nations, the currency becomes worthless after repeated bouts of inflation and defaulted debt.

What had kept this communist nation from imploding like the USSR was the infusion of FDI and practices from the Overseas Chinese and the rest of East Asia. The USSR never had that. At the height of its power, the citizens of the USSR waited in lines for a loaf of bread or a bar of soap. Chiniland on the other had floods not only its own market but the rest of the world with consumer goods.

Read my previous posts. There is no special case for the growth in China. The part of it that works is following the exact same formula as Japan, South Korea and Taiwan. The part that doesn't work is the one that is still communist.

If communism wins out, China will collapse like the USSR. If the East Asian part prevails, we will see a Taiwan on a massive scale. It's a coin toss I guess. But every year that passes without the communists retaking the nation, the odds grow that panda will end up like the rest of East Asia.