PRC Economy - New Reflections : Dec 15 2011

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subhamoy.das
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Re: PRC Economy - New Reflections : Dec 15 2011

Postby subhamoy.das » 26 Sep 2013 18:53

What I can gather is that consumable goods and services are highly subsidized by the Chinese Govt - cars, homes, HSR etc etc. This is the key. This makes every thing so affordable to average Chinese and hence China has 4X consumption of consumer durables than India. Now the affect of this is that the CHINSE govt is running a huge debt and this debt should ideally put pressure on the currency and stoke up inflation but that is not happening because the CHINA has a huge manufacturing based to meet the money supply. So basically the govt is both creating the demand and creating the supply and also has a huge forex to meet the import rising from this demand. This seems to be a win win for all! This model is not working in India because lack of supply and lack of forex to meet the demand and hence stoking inflation.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby ashi » 27 Sep 2013 10:10

Why China Will Disappoint the Pessimists Yet Again

By the end of this year, China’s gross domestic product will be roughly $9 trillion, making its economy comfortably more than half the size of the U.S., and half as big again as Japan. I recall once projecting that China might be as big as Japan by 2015. The country’s far ahead of that optimistic schedule.

China’s economy is already more than three times the size of France or the U.K., and half as big again as Brazil, Russia and India combined. Of the four BRIC countries, China is the only one to have exceeded my expectations. The other three have done less well than I’d hoped.

As I mentioned in a previous column, China is in effect creating another India every two years -- making a mockery of those who’ve argued that India’s democratic model is more likely to deliver long-term economic success. China is already more than four times bigger than its southern neighbor. India’s economy won’t rival China’s for a very long time, if ever.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Sri » 27 Sep 2013 11:38

heech wrote:More than 2/3rds of municipal revenues are coming from VAT / income taxes. So, not "the only way" to gain revenues. But yes, I agree that's an issue. (Just to be clear: it's land sales that are the issue, not the transaction taxes.)

I think a property tax would do a great job of realigning interests for all. But try convincing average Chinese more taxes are a desirable thing.


Heech Ji, covering expenses via consumption driven taxation rather than value driven may risk municipal's finances. How would someone make a budget or undertake a huge project? Is there a national policy for this?

We in India have a policy called JNURM. Basically Union government gives loans for capital expenses and state Governments guarantee interest payments (basically municipal corporation then sells shares of the enterprise to state in exchange for interest payment). Is there a structure like that? We have examples in India where Municipalities have become uber cash rich due to this scheme.

Is there any such arrangement in China. How do municipalities ensure long term maintenance of these massive investments (Public and private).

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby pankajs » 27 Sep 2013 11:42

I guess this has not been posted ...

China Running Out of Room to Restructure Economy
If we accept the argument that China must, and will, rebalance its economy by reducing its reliance on investment, what happens if it proves politically impossible to cut investment rates sharply? Gross domestic product growth rates would remain very high, but debt levels would also grow unsustainably. At some point, China will reach its debt capacity limits and no longer be able to fund investment.

At this point, the country would fall into the self-reinforcing process of chaotic adjustment that characterized the U.S. in the early 1930s or Brazil in the mid-1980s. As investment falls and GDP growth grinds to a halt, rising financial distress causes businesses to fire workers. Unemployment causes consumption growth to drop, and GDP growth falls even further, resulting in more distress.

This is the worst-case scenario of rebalancing. In the U.S., for example, between 1929 and 1933, real gross investment fell by 91 percent, real consumption dropped by 19 percent, and real GDP dropped by 30 percent. The result was catastrophic for the economy and for households. But the U.S. did rebalance: Investment dropped sharply, and even though consumption dropped, too, the consumption share of GDP rose sharply at the expense of the investment share.
Quick Reversal

A less damaging strategy would be for China to rebalance either by raising real interest rates sharply, forcing up the foreign-exchange value of the currency by 10 percent to 20 percent overnight and raising wages, or by lowering income and consumption taxes. This would fairly quickly reverse ongoing transfers of wealth from households to the state sector.

The advantages of this approach are straightforward. By adjusting very quickly, the Chinese government would immediately put a stop to the worsening of the domestic imbalances. It also would immediately eliminate the strong incentives within China to waste money on a stability-threatening scale by raising the cost of capital and forcing investors to generate real returns on their investment. This, of course, would also allow the government to finally get a grip on its ballooning debt.

But the disadvantages are straightforward, too. Eliminating the hidden subsidies abruptly would cause a large increase in financial distress as exporters struggle with a more expensive currency, borrowers are unable to service their debt, and employers, especially those in the labor-intensive sector, become suddenly uncompetitive. This would almost certainly lead to a surge in unemployment as exporters and borrowers are forced to close operations.

In the short term, under these conditions, we would probably see household income decline because the negative impact of rising unemployment would exceed the positive impact of reversing the wealth transfers. This would cause household consumption to decline, forcing the economy into a downward spiral. Needless to say, this would also result in difficult political conditions.

Policy makers might be tempted to eliminate the transfers slowly enough to give exporters, borrowers and employers time to adjust. But this strategy accomplishes its objectives too slowly, and it may already be too late to implement it.

Remember that the total value of these subsidies is enormous: Gradually removing them at a pace the Chinese economy can handle would result in worsening domestic imbalances for many years before there has been enough of an adjustment to reverse the imbalances. During this time, the impact of those distortions -- declining consumption relative to GDP, misallocated investment, and above all, rising debt -- would continue to grow.
Costly Adjustment

The more bad investment China accumulates, the more costly the eventual adjustment will be, and the more the adjustment process must be slowed. Gradual adjustment would increase the risk of China’s reaching debt capacity limits to a near-certainty.

A different way for China to cushion the blow would be to hire unemployed workers for various make-work programs, paying their salaries out of state resources. But if wage costs for unproductive workers are paid for in the form of a fiscal deficit, debt will continue to rise too quickly. If the costs are paid for in the form of direct or hidden taxes on the household sector, aggregate household consumption would remain unchanged as a share of GDP.

Only if wage costs for unproductive workers are paid for by the liquidation of state assets will there be a real increase in the household income and consumption shares of GDP. In fact, the most effective and efficient way to increase household wealth quickly as a share of GDP would be for China to directly transfer wealth from the state sector to the private sector by privatizing assets and using the proceeds directly or indirectly to boost household wealth.

This would necessarily come at the expense of the state sector. A contraction in the state share of GDP, however, is almost inevitable. The only question is whether it will occur in the form of an actual contraction in state assets or in the form of much slower growth in the state sector than in the overall economy. Contraction is far more efficient but also far more difficult to accomplish politically.

There are many ways in which state wealth can be transferred to the household sector. Farmers can be granted full title to their land. Migrants can be granted hukou residency, which, because it gives them legal status and rights to urban services, would act as a substantial one-time increase in their wealth. The government could strengthen the social safety net by transferring ownership of state-owned enterprises to the pension funds.
Monopoly Pricing

Other measures could directly or indirectly increase households’ perceptions of their own wealth. The government could eliminate or erode monopoly pricing power through greater competition, for instance. It could impose significant charges for environmental degradation (remember that a worsening environment imposes future health and production costs on households, which must respond by increasing their savings rate). It can increase the protection of property rights, or it can make it easier, quicker, and less costly to start a business.

State-owned enterprises can be sold either to foreigners or to citizens, with the proceeds being distributed directly or indirectly to households. The money, for instance, can be used to reduce future claims on household income. The most efficient way of doing this would be to use the proceeds to pay down corporate and state debt, thus allowing the central bank to raise interest rates sharply without causing a surge in financial distress.

For all of the efficiency in transferring wealth in this way, however, there is an enormous constraint on China’s ability to pull it off. Martin Luther King Jr. once described history as the story of the refusal of the privileged few to give up their privileges. Transferring assets from the state sector directly or indirectly will require the forgoing of important privileges. There is tremendous resistance to the loss of power and control this would impose on many important and powerful sectors and families within China.

Given this, the Chinese leadership might be tempted to take the easy way out, indirectly transferring wealth from the state to the private sector by absorbing private-sector debt. This is what Japan did as a fundamental part of its rebalancing after 1990, when government debt rose from about 20 percent of GDP to more than 200 percent now. The government effectively absorbed the bad loans in the banking sector. Government debt expanded rapidly, while private-sector debt contracted.

The great advantage of this form of rebalancing is that it is very easy to do politically. But as we saw in the case of Japan, after a decade or so, this strategy leaves the government struggling with too much debt. The debt burden itself becomes the biggest impediment to growth, because the direct or hidden taxes required to service it reduce consumption-driven growth, and the size of the debt limits policy choices for the government.

China has no choice but to follow one or more of these paths. If privatization isn’t an option, then a collapse of the economy caused by a rapid adjustment in interest rates and the currency might be. If that is ruled out, then perhaps the outcome will be a surge in government debt, and so on.

These are the economic constraints that limit the choices China can make. It doesn’t matter what anyone thinks the government will do or what anyone wants it to do; if the plan violates the economic constraints, it simply cannot be done.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Christopher Sidor » 27 Sep 2013 16:33

heech wrote:
Suraj wrote::eek: No wonder they build like there's no tomorrow - the only way to gain revenues is to build out more and gain transaction taxes! Doesn't it seem completely absurd to the average Chinese ? How do you intend the whole thing to be sustainable in the long term ? At some point - and I think it will be sooner rather than later - you'll need a property tax.

More than 2/3rds of municipal revenues are coming from VAT / income taxes. So, not "the only way" to gain revenues. But yes, I agree that's an issue. (Just to be clear: it's land sales that are the issue, not the transaction taxes.)

I think a property tax would do a great job of realigning interests for all. But try convincing average Chinese more taxes are a desirable thing.


That is true even in India, in UK and even in US. But even in India the annual property taxes are not enough or are not collected in many places. The local governments and municipalities have to take care of many things like Fire fighting, Policing, Water Supply and Sewage, Local Roads, Hospitals, Local Bus Transport, etc. Sometimes the local government and municipalities can outsource the water supply , sewage treatment, Local Bus transport to 3rd parties which then charge the consumers market rates for the services provided. But many other things just cannot be outsourced and has to be done by the local government or the municipality. In such conditions it makes sense for an annual property tax to be levied. Moreover such an annual tax also helps to keep the property prices in check. For example unoccupied houses and second houses can be taxed at a flat 10-15% of their market value every year.

In both of our countries, i.e. PRC and India, we have neglected putting the local government/municipality finances in the proper order and on sustainable basis. If the only source of higher revenue is via new land/property deals then it creates a very strong incentive to keep the property bubble afloat, despite the distortion that it creates in the wider economy.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 27 Sep 2013 23:25

The difference is that Chinese urban administration is far more efficiently managed, and far more effectively funded. That's why I ask 'where's the money coming from ?' We're talking about tens of billions in capital investment per midsized city plus annual investments in maintenance, upgradation and general services.

The 1997 data on the wiki I quoted earlier is much too dated to be of use today. I'd be interested in a more contemporary breakdown of revenues available to Chinese cities.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Waylan » 29 Sep 2013 03:29

Google Chen Yuan. You will have all the answers.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Abhijeet » 29 Sep 2013 23:29

Deleted to avoid Suraj's clumsy attempt at censorship. Oceania has always been at war with Eurasia.
Last edited by Abhijeet on 30 Sep 2013 10:40, edited 4 times in total.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby svinayak » 30 Sep 2013 06:09

Abhijeet wrote:
My guess is that there will be a change in China from authoritarianism to democracy in the not too distant future. It's likely to be a small event on the scale of the South Korea or Taiwan transitions, and that Chinese will look back at this time as a necessary evil rather than some Orwellian catastrophe.

It is not that easy. There is lot of support from outside to change things. Check this link

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Hitesh » 30 Sep 2013 10:19

Suraj,

Are you engaging in chinese style censhorship where you go ahead and edit somebody's post because it does not conform with your idea of standards? I don't get the fact that you felt it was necessary to edit Abhijeet's post because it could be construed as the forum's opinion. Is BR really that insecure?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby pankajs » 30 Sep 2013 11:07

$3.9 Trillion Of Local Gov Debt In China . . . And Counting
Other estimates are even higher. “I personally feel that the scale of local debt has already broken beyond 20 trillion yuan,” says Liu Yuhui of the Chinese Academy of Social Sciences. The noted researcher believes there are 9.7 or 9.8 trillion yuan of bank loans and 13 to 14 trillion yuan of obligations to shadow vehicles. The high end of Liu’s range—23.8 trillion yuan or $3.9 trillion—is remarkably close to the June 2010 prediction of Victor Shih, then at Northwestern University. Shih, whose groundbreaking work last decade highlighted the debt load of local governments, then noted in the China Economic Quarterly that LGFVs would accumulate 24.1 trillion yuan by the end of 2012 if they borrowed to the limit of their credit lines.

Apparently, officials did just that, inking loan agreements for every fen they could get their hands on. Unfortunately, they have not used the proceeds wisely. A September 26 analysis from Macquarie Capital Securities shows that LGFVs are devoting a larger proportion of new borrowings to pay off old ones: 29% of funds raised through bonds this year went to discharge existing debt, up from 8% in 2009.

There are other warning signs. Nomura notes that LGFV profitability “fell sharply” in 2012 as did operating cash flows. Moreover, LGFVs had, in Macquarie’s words, a “staggeringly low” return on assets: just 1.3% in 2012.

No wonder localities have had to give these vehicles fiscal subsidies to permit them to pay back loans. Moreover, governments have also injected assets into them for the same purpose. Nomura, however, notes that many of the assets have been of an illiquid nature. Therefore, it looks like they will be of little use when most needed, in a crisis.

The Japanese financial services giant also believes 70% of these local government vehicles are at risk of default, but it notes that its analysis probably understates the severity of the situation because it sampled only the better LGFVs, those that had been strong enough to issue bonds.

Your ROA is 1.3%, more and more of your borrowing is to pay off old loans and 70% or more of the loans are at risk of default. That kind of borrowing and building can put any economy at risk.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 30 Sep 2013 11:47

Hitesh wrote:Suraj,
Are you engaging in chinese style censhorship where you go ahead and edit somebody's post because it does not conform with your idea of standards? I don't get the fact that you felt it was necessary to edit Abhijeet's post because it could be construed as the forum's opinion. Is BR really that insecure?

Censorship ? My idea of standards ? Did you read the original content of the post ? Abhijeet, or any poster for that matter, does not have the authority to speak for the forum at large. He's more than welcome to post in his personal capacity, without moralizing about 'BR wants this' or 'BR hopes for that', as if he's somehow no longer an Indian on BR, sitting in judgement of everyone else's opinion. This isn't the first time he's posted in this manner, and has had his posts reported for this previously. No action was taken, other than his post being edited.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby subhamoy.das » 13 Oct 2013 15:08

If the US fails to raise the debt line then what would be the impact of its creditor countries such as CHINA holding 1.3T of US assets. They must be nervous, no?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 14 Oct 2013 08:31

Well, it was destined to happen I guess.

I was expecting to easily get a high speed rail ticket from Nanjing to Shanghai this morning, traveling for work. No luck, have to wait at least two hours for a train with seats.. in any class. Just getting busier and busier. I'll have to order online in advance in the future.

Hope we get added trains soon.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Christopher Sidor » 15 Oct 2013 00:02

subhamoy.das wrote:If the US fails to raise the debt line then what would be the impact of its creditor countries such as CHINA holding 1.3T of US assets. They must be nervous, no?


What can PRC do? It is instructive to note that despite the threat of default looming, PRC has not gone ahead and reduced its holdings of USD.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 15 Oct 2013 00:10

I wonder what happened to the Chinese officials who threatened the 'nuclear option' of selling all their treasury holdings as a bargaining tactic when pressurized on currency devaluation. As they say, when you owe the bank $1K, they own you. When you owe them $1T, you own them...

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby TSJones » 15 Oct 2013 01:14

Such are the results of a export driven economy. Who else is going to buy their stuff? Now that their major customer has gone schizo? In the future I think China should demand gold only for their goods and services. :) That away they will be more secure in their financial dealings. :D Well, why not? So should Saudia Arabia and the US's dear friend Venzuela.

Please do not worry about the US. We're all about credit and bankruptcy. :(

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Christopher Sidor » 15 Oct 2013 15:34

heech wrote:Well, it was destined to happen I guess.

I was expecting to easily get a high speed rail ticket from Nanjing to Shanghai this morning, traveling for work. No luck, have to wait at least two hours for a train with seats.. in any class. Just getting busier and busier. I'll have to order online in advance in the future.

Hope we get added trains soon.

What is the current frequency of trains? How may compartments in a train and how many seats per compartment?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby vina » 16 Oct 2013 05:06

Suraj wrote:I wonder what happened to the Chinese officials who threatened the 'nuclear option' of selling all their treasury holdings as a bargaining tactic when pressurized on currency devaluation. As they say, when you owe the bank $1K, they own you. When you owe them $1T, you own them...


China Rails at US seeing it's own money at risk :lol: :lol: :lol:

China Rails at U.S., Seeing Its Own Money at Risk
By MARK LANDLER
WASHINGTON — China has become shrill in its criticism of the fiscal train wreck in the United States, arguing that the answer to a potential government default is to begin creating a “de-Americanized world.” Beijing’s alarm is understandable, given that it is the world’s largest investor in American public debt, with at least $1.3 trillion in holdings.

But China does not have many options beyond wringing its hands. Despite its efforts to steer its economy away from exports and toward domestic demand, China generates billions of dollars of excess cash that it needs to park somewhere. And for all the chaos in Washington, Treasury bonds remain a safer investment than most of the alternatives.

That dependence may help explain the stridency of a recent commentary published by the official Xinhua news agency. It called for the replacement of the dollar as the world’s reserve currency “so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”

“As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about,” the news agency said, “it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”

Chinese officials made similar noises five years ago, when the United States was being buffeted by a banking crisis. In March 2008, the leader of China’s central bank, Zhou Xiaochuan, proposed creating a new “supersovereign currency” that would diminish the importance of any individual national currency, not least the dollar.

But economists who follow China’s monetary policy say that while Beijing has somewhat diversified its foreign exchange reserves, it continues to rely heavily on Treasury bills and other American government-backed debt.

Part of the problem is the lack of easy alternatives: euro-denominated debt has been hurt by the European Union’s crisis, except in Germany. Analysts estimate that 60 percent of China’s $3.66 trillion in reserves are still in dollar-denominated debt, though the precise numbers are a secret.

In its commentary, Xinhua embellished its call for a new reserve currency with a scathing indictment of the United States’ broader role in the world, saying that the Obama administration claimed “the moral high ground” while covertly “torturing prisoners of war, slaying civilians in drone attacks and spying on world leaders.”

Edwin M. Truman, an economist and former Treasury Department official, said: “This is political blather. It is a politically defensive response to the choices China has made.”

That does not mean a brush with default will not have long-term damaging consequences for the United States. Even if China continues to buy Treasury bonds, economists said, it may opt for those with shorter maturities, which would drive up long-term interest rates in the United States, hurting home buyers and owners of small businesses.

The sour taste from the budget impasse will also motivate the Chinese to intensify their efforts to deepen their own debt markets. Already, China has negotiated swaps for its currency, the renminbi, with the European Central Bank and other institutions, a step toward making the currency convertible and, someday, a rival to the dollar and euro.

“This gives them a kick in the pants to do it,” said Kenneth S. Rogoff, professor of public policy and economics at Harvard and a former chief economist of the International Monetary Fund.

Any decline in the status of the dollar will be gradual, said Mr. Rogoff, who pointed to the erosion of the British pound sterling over several decades as a precedent. But, he said, “Memories are long: you do this once, you do this twice, and people start to think.”

President Obama appeared to have those long-term effects in mind when he was asked last week what message he had for big bondholders like the Chinese and Japanese. After saying that he had assured world leaders that the United States would continue to pay its bills, he noted that the specter of default, and the fact that the United States had flirted with it once before, could sow lasting doubts overseas.

“We saw what happened in 2011,” Mr. Obama said. “I think the assumption was that the Americans must have learned their lesson, that there would be budget conflicts, but nobody again would threaten the possibility that we would default. And when they hear members of the Senate and members of Congress saying maybe default wouldn’t be that bad, I’ll bet that makes them nervous. It makes me nervous.”

For all the anxiety, though, the prevailing belief overseas is that the United States will avert a default. At last weekend’s meetings of the World Bank and I.M.F. in Washington, Mr. Rogoff said, none of the visiting finance ministers expressed genuine fear that Congress and the White House would not find a way out.

The fiscal deadlock, he said, cast such a long shadow over the gathering that the ministers did not have to dwell on the financial and structural problems in their own economies.

China is a case in point. While the Chinese government has taken steps to shift its economy from a dependence on exports toward one fueled by domestic demand, the progress has been fitful. At the behest of its exporters, it continues to artificially depress its exchange rate, which it does by using its export earnings to buy dollars and other foreign currencies.

In the first quarter of this year, economists say, the Chinese government added more to its foreign exchange reserves than in all of 2012.

On one level, China’s $3.66 trillion hoard is a symbol of its financial might. But on another, it has tied Beijing’s hands. China’s central bank, the People’s Bank of China, cannot dump its Treasury bonds without driving down their value and incurring a painful loss on paper.

“This is certainly a wake-up call for them that holding U.S. government securities is not risk-free,” said Nicholas R. Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics. “What they should be doing is quit adding to their foreign reserves.”

This article has been revised to reflect the following correction:

Correction: October 15, 2013

An earlier version of this article misspelled the name of the president of China’s central bank. He is Zhou Xiaochuan, not Zhao.


Tea Party tells China to Butt Out.. polite term for F*** Off

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby heech » 19 Oct 2013 03:59

Christopher Sidor wrote:
heech wrote:Well, it was destined to happen I guess.

I was expecting to easily get a high speed rail ticket from Nanjing to Shanghai this morning, traveling for work. No luck, have to wait at least two hours for a train with seats.. in any class. Just getting busier and busier. I'll have to order online in advance in the future.

Hope we get added trains soon.

What is the current frequency of trains? How may compartments in a train and how many seats per compartment?

I'm looking this up as we speak. There are something like 40 trains running daily between Nanjing-South and Shanghai-HongQiao, but most of these are in the afternoon (when the trains that starter from northern China in the morning pass through). There are only 6 trains before noon... So I guess that right there is my mistake! Morning train, book early.

My experience there are 16 trains, mix of first/second class seats. Second class have roughly 18(?) rows, each with 5 seats. First class probably closer to 13-14 rows, each with 4 seats.

For my 310 km trip, I pay roughly $20 USD. The trip takes about 1 hr and 10 minutes (on the faster runs). There's a dining car selling microwave-heated box lunches. There's still a push cart selling snacks. And (this is kind of an odd one) there's a tray-carrying attendant selling Haagen-Daaz ice cream, the little round containers.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Austin » 30 Oct 2013 15:41

China: The Making Of 'Gutter Oil'

http://www.youtube.com/watch?v=zrv78nG9R04

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby svinayak » 08 Nov 2013 20:13

http://www.economicpopulist.org/content ... picks=true

America Needs More Than "Market Forces" To Have A Real Manufacturing Renaissance
Submitted by Ralph Gomory on October 30, 2013 - 6:22pm


To Compete With China It Takes More than Economics 101. Non-market forces must be considered for China is not playing by the same rulebook.

We have heard a great deal this year about manufacturing coming back to the United States. We hear about the diminishing wage gap in some Asian countries and the possibility of lower U.S. energy prices. In addition, a few small examples of goods currently made in China, but now being planned for U.S. manufacture, are pointed to as a harbinger of great things to come.

Yet these discussions, as well as the reports and studies they often cite, are almost always purely economic cost analyses. They estimate future wages here and abroad, worker productivity and transportation costs, and they conclude that the manufacturing differences between the United States and Asia are diminishing. They then extrapolate these trends far enough into the future that going to Asia seems no longer worth the trip.

Non-market factors are given at most a minimal mention in many arguments that favor reshoring, as it is called, of Chinese manufactured goods. But China's exchange rates, as we know, are set by its government, not by markets. The massive government subsidies of land, energy and technology, in addition to low- or no-cost loans, are barely mentioned. These are, however, the levers that have catapulted Chinese industries into global prominence in a very short span of years. And these government actions are not going away; if anything, they are increasing.

Americans are assured, based on flawed analysis, that when U.S. companies find it cheaper to make certain goods domestically, they will do so. What is overlooked in reaching that much-wished-for conclusion is that the Chinese, following the example of other Asian nations, simply do not allow important outcomes to be determined in that way.

China did not get to where it is today by allowing natural economic forces to decide the outcome. The reality is much closer to the exact opposite. An industry is targeted, and then the economic forces needed to obtain a dominant position -- including subsidies, special tax rates, exchange rates and technology agreements -- are put in place. This fundamental reality cannot be ignored.

One report I am particularly fond of, from the respected Boston Consulting Group, is powerfully titled "Made in America, Again." The cover is a pleasure for any patriot to see: It is simply a large red, white and blue American flag with small figures unrolling the red stripes, while others check the stripes' exact locations before fixing them into place. The cover graphically and dramatically suggests the glorious return of U.S. manufacturing.

However, what is inside the report is much less colorful but far more realistic. It concludes that if the United States maintains a "flexible" labor force and a good investment climate, it will become "increasingly attractive" for those who want to stop manufacturing goods in China that are consumed in the United States -- attractive, that is, for those who, for one reason or another, find other countries in Southeast Asia unattractive.

This is the feeble manufacturing renaissance promised in the report. To get to this rather wishy-washy conclusion, all sorts of leaps of faith are required both in this specific report and in many similar analyses. One must accept that there will be double-digit yearly increases in Chinese wages. One must accept that American workers will remain more productive than Chinese workers. One must be willing to equate U.S. subsidies -- few and far between and tiny as they are -- with those employed by the Chinese government. And one must believe that the relatively few small manufacturing plants planning to move back to the United States show that forces are in place to close a yearly manufacturing trade gap measured today in the hundreds of billions of dollars.

But most of all, despite the evidence of recent history, there is a tacit assumption that the Chinese government would simply stand by and let these happy outcomes happen. This is unlikely; the Chinese government does not share our pure and simple faith in the unguided operation of markets.

That China adheres to its system is not surprising; its system has been working for it. What is more surprising is that our faith in our own system is so ingrained that we continue to believe in its benign results even in the absence of the free markets and free trade conditions on which those conclusions are based.

A real manufacturing renaissance in America -- at least one based on reshoring from China -- is not something we can expect. Forecasts that reach that much-desired conclusion by simply extrapolating cost analyses into the future are not realistic. There is far too much that China and other countries can do to shape the outcome. We would do better to consider what we can realistically do in today's mercantilist world rather than continue to act as if we were living in a textbook world, a world shaped only by market forces.

*A version of this article was first published under a different title by the Metals Service Center Institute

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Yagnasri » 10 Nov 2013 00:33

Democrats in US are pressing for 10$ a hour as minimum wage. I wonder what kind of manifacturing will remain after such moves. Just like MANDRAGA of India

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Rishirishi » 11 Nov 2013 00:28

Narayana Rao wrote:Democrats in US are pressing for 10$ a hour as minimum wage. I wonder what kind of manifacturing will remain after such moves. Just like MANDRAGA of India


10 dollars per hours gives a yearly wage of under 20K per year. Earning so less is a disgrace. It means that people will not be able to afford a normal lifestyle. The minimum wage should no less then 15 dollars.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby alexis » 11 Nov 2013 09:51

^^

It may be a disgrace but even that is noncompetitive in Rupee or yuan terms...

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Neshant » 11 Nov 2013 14:08

The problem isn't the minimum wage. The problem is the printing of money needs to stop.

Printing money destroys the purchasing power and living standards of the poor & middle class. Its a means of transferring the market gambling losses of private banks represented by the Federal Reserve onto the backs of the middle class & poor.

The banks leveraged bets on real estate from 2001-2008 are underwater and they are insolvent. They want to pump prices of real estate up for this reason to square their losses. But by printing money, they are stealing the value of peoples' wages & savings.

The raising of the minimum wage is an attempt to create inflation to do the above.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Austin » 11 Nov 2013 16:27

Neshant wrote:Printing money destroys the purchasing power and living standards of the poor & middle class. Its a means of transferring the market gambling losses of private banks represented by the Federal Reserve onto the backs of the middle class & poor.

The banks leveraged bets on real estate from 2001-2008 are underwater and they are insolvent. They want to pump prices of real estate up for this reason to square their losses. But by printing money, they are stealing the value of peoples' wages & savings.

The raising of the minimum wage is an attempt to create inflation to do the above.


You mean the poor and middle class Americans or is Printing Money by Fed is also affecting people around the world ?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby panduranghari » 11 Nov 2013 19:42

Money printing is not the cause of the current system. Its the effect of the current system. No law can stop money printing. The nature has to take its course and let the system collapse under its own bloated weight.

I do not understand how China aims to control its restive population? When push comes to shove, will a soldier living 500 kms away from his family accept a devalued currency which buys nothing? I am assuming that many in Chinese army are not professional soldiers but have been drafted in because its guaranteed job.

Chinese soldiers divided loyalty

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby VikramS » 12 Nov 2013 09:17

Suraj:
The nuclear option has been neutered by the Fed. They are printing a Trillion an year, for the past few years. Will gladly print another Trillion to buy the Chinese holdings. The nuclear option turned out to be as useful as photochor's stolen designs.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 15 Nov 2013 22:46

VikramS: IMHO it never really existed. It was a threat to be used a couple of times to roil markets a bit, but each use lessens its effectiveness as a market mover.

Important news from PRC meanwhile:
China unveils boldest reforms in decades
Summary:
* Couples - urban and rural - permitted two children if they're both an only child. Previously only rural people had this ability, informally.
* Fuel and electricity prices decontrolled.
* Labor camp system abolished.
There might be more that I missed. No dates given for when these go into effect.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby chola » 19 Nov 2013 00:07

Yes, the Plenum. The US corporate landscape had followed and speculated about this geriatric show pretty intently for the past three weeks now. Both fascinating and scary at the same time.

If the PRC follows in the path of Taiwan and South Korea and opens up as it progresses to a free market then the MNCs will have a slam-dunk (in US parlance) on their hands.

From where I sit, you could have seen the wheels turning five years ago from producing and exporting from China to producing and selling in China. It's like a drumbeat on Wall Street and you can almost see the Anglo-American corporate Man O' Wars filing up into a battle line for this brave new (free?) market.

My God, I hope the old PLA guard stay in power and fight tooth and nail to keep the PRC commie. The white man's enthusiasm for China will make it a Japan times 10 if the last communist roadblocks (one-child policy, no access to capital for private firms, delayed/deleted business intelligence because of censorship, etc. ) were swept away.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby DavidD » 20 Nov 2013 12:45

Rishirishi wrote:
Narayana Rao wrote:Democrats in US are pressing for 10$ a hour as minimum wage. I wonder what kind of manifacturing will remain after such moves. Just like MANDRAGA of India


10 dollars per hours gives a yearly wage of under 20K per year. Earning so less is a disgrace. It means that people will not be able to afford a normal lifestyle. The minimum wage should no less then 15 dollars.


If you want a normal lifestyle then you should get a normal job. Minimum wage is for the very lowest types of jobs, and even at 20k per year you can live a comfortable life. When my parents and I came to the U.S., we lived on much less than 20K per year. Sure it'd be tougher with inflation (we came to the U.S. in the late 90's), but it was ~15K for a family of 3, and we had savings at the end of each month. When you're making that little money, you don't have to worry about taxes, so it comes out to about $1200 a month of net income. We shared a 3 BR apartment with a Chinese couple in an average American city in a fairly run-down but still relatively safe area right next to the University where my father was getting his degree, and rent + utilities came out to be about $500 a month. My dad drove a $600 car, we ate PB&J sandwiches with milk in the morning and dinners were pretty plain but nutritious. We rented videos from blockbuster on weekends for entertainment, and we spent most of the rest of our time studying or surfing the net on our $500 computer on 56K modem with free Netzero internet.

It was a plain life, no doubt, but it was comfortable. We had all the basic necessities and with money to spare.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby member_20292 » 20 Nov 2013 13:51

chola wrote:Yes, the Plenum. The US corporate landscape had followed and speculated about this geriatric show pretty intently for the past three weeks now. Both fascinating and scary at the same time.

If the PRC follows in the path of Taiwan and South Korea and opens up as it progresses to a free market then the MNCs will have a slam-dunk (in US parlance) on their hands.

From where I sit, you could have seen the wheels turning five years ago from producing and exporting from China to producing and selling in China. It's like a drumbeat on Wall Street and you can almost see the Anglo-American corporate Man O' Wars filing up into a battle line for this brave new (free?) market.

My God, I hope the old PLA guard stay in power and fight tooth and nail to keep the PRC commie. The white man's enthusiasm for China will make it a Japan times 10 if the last communist roadblocks (one-child policy, no access to capital for private firms, delayed/deleted business intelligence because of censorship, etc. ) were swept away.


1. you're a consultant at one of the larger firms, na?

2. This enthu that the white man has for the yellows, does not seem to extend to the brown man too much (sorry for sounding racist). Is it because of the familiar stories of bad infra, bad regulations, unfriendly work environment for exports etc. ?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby chola » 22 Nov 2013 06:13

mahadevbhu wrote:
1. you're a consultant at one of the larger firms, na?



Yes, we consult some of the largest and most profitable firms on earth. I was a young pup when I first posted on BR a decade ago. Now I am an old dog.

2. This enthu that the white man has for the yellows, does not seem to extend to the brown man too much (sorry for sounding racist). Is it because of the familiar stories of bad infra, bad regulations, unfriendly work environment for exports etc. ?



It would extend to the brown man if we actually buy as much from the Fortune 500 as the chinis. Desis outnumber chinkis (not being racist, just a term) on Wall Street by at least 4 to 1. So there is no lack of us pushing India Shining. But in the end, it comes down to the market. They will not enthuse over a perpetually "potential" market that, for example, still buys only 5000 LandRovers and Jaguars a year to China's 100,000. And JLR is owned by Indians.

But less politically correct, we might want to consider the fact that East Asians worship the gora with even greater gusto than desis. Add to that, the slim, sloe-eyed East Asian lady is a honorary gori in the eyes of the white man. I have never gotten into a fight with a chinaman over my Chinese-American wife whom I dated since college. But I did with many a white punk who for some reason felt that we shouldn't be together. Maybe it wasn't race, who knows. She was a swimmer and volleyball player in college and wore a lot of bare back, bare midriff tops and short shorts so that could have been it too.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby member_20292 » 22 Nov 2013 12:51

chola wrote:
It would extend to the brown man if we actually buy as much from the Fortune 500 as the chinis. Desis outnumber *deleted* (not being racist, just a term) on Wall Street by at least 4 to 1. So there is no lack of us pushing India Shining. But in the end, it comes down to the market. They will not enthuse over a perpetually "potential" market that, for example, still buys only 5000 LandRovers and Jaguars a year to China's 100,000. And JLR is owned by Indians.



Sirji, as a manufacturing country, I do not see the same amount of activity in India, as I see in China. In China, companies line the streets producing widgets for foreign firms.

India not so much.


So, it again boils down to the familiar lack of infrastructure , bijli paani and all that we do not have.

Thing is, poor people (like us) like remaining poor. We are happy and satisfied with our family lives and our children. As long as we have a place in life and society we are happy.

Maybe some of us should follow Wall St. and Gordon Gekko and say;


Greed is Good

:)

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby TSJones » 26 Nov 2013 17:37

PetroChina receives notice from US court:

http://finance.yahoo.com/news/chinas-pe ... 53896.html

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 16 Dec 2013 22:12

So much for the nuclear option and any other reserve currency today. Everyone still runs to US treasuries whenever there's volatility:
China, Russia flocked to treasurys during month of debt ceiling scare
Despite concerns that the rancorous debt-ceiling debate in October would dislodge the Treasury market as a haven for investors, foreign buyers continued to pile into the U.S. government debt market that month.

Foreign investors bought net of $194.90 billion securities in October, the most in five years, according to Treasury International Capital data released Monday. That number includes all categories of stocks and bonds, but $39.71 billion of that was just long-term Treasury securities.

The U.S. government was partly shutdown for half of October as lawmakers debated a spending bill. Congress was also unable to come to an agreement to raise the borrowing limit until just before the deadline, stoking fears about a U.S. default. As the debate raged, some market participants questioned whether the U.S. government debt market was losing its status as a haven for investors.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby TSJones » 17 Dec 2013 01:21

Suraj wrote:So much for the nuclear option and any other reserve currency today. Everyone still runs to US treasuries whenever there's volatility:
China, Russia flocked to treasurys during month of debt ceiling scare
Despite concerns that the rancorous debt-ceiling debate in October would dislodge the Treasury market as a haven for investors, foreign buyers continued to pile into the U.S. government debt market that month.

Foreign investors bought net of $194.90 billion securities in October, the most in five years, according to Treasury International Capital data released Monday. That number includes all categories of stocks and bonds, but $39.71 billion of that was just long-term Treasury securities.

The U.S. government was partly shutdown for half of October as lawmakers debated a spending bill. Congress was also unable to come to an agreement to raise the borrowing limit until just before the deadline, stoking fears about a U.S. default. As the debate raged, some market participants questioned whether the U.S. government debt market was losing its status as a haven for investors.


As awful as the US debt situation is, it is a still better option than others. I don't know what that says abiut the shape of the situation the rest of the world is in. I tremble to think about it.

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Austin » 17 Dec 2013 09:55

Suraj wrote:So much for the nuclear option and any other reserve currency today. Everyone still runs to US treasuries whenever there's volatility:
China, Russia flocked to treasurys during month of debt ceiling scare


Dont the chinese buy these treasury to make their export competitive by keeping yuan artificially low ?

Russia maintains a mix basket currency 47 percent of its international reserves in U.S. dollars, 41 percent in euros, nine percent in British pounds, two percent in the Japanese yen and one percent in Canadian dollars.

BTW didnt get what you mean by Nuclear option ?

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Re: PRC Economy - New Reflections : Dec 15 2011

Postby Suraj » 17 Dec 2013 13:48

The spike in purchases correlates with the market uncertainity associated with the debt ceiling and budget fight. At that time, the PRC establishment strenuously urged GOTUS to find a quick solution and stabilize the dollar. At the same time, they talked about the importance of alternate reserve currencies.

However, the reality of dramatically greater US treasury purchases during that time just shows that despite all this talk, the basic response to volatility remains to stock up on US treasuries, which means any move out of the USD due to such volatility will take longer, since the markets still view the US economy as strong enough to withstand the poor governance coming out of DC, and to shore up the US position as the biggest economy, as well as the backer of the primary reserve currency.

The 'nuclear option' was a statement by a PRC general to the effect that they'd use the threat of largescale sales of US treasuries to force action when necessary. Unfortunately for him, as the recent episode shows, when there's volatility, in reality they do the opposite of what they threaten.


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