PRC Economy and Industry: News and Discussions

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somnath
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Re: PRC Economy and Industry: News and Discussions

Postby somnath » 06 Jul 2011 08:06

VikramS wrote:somnath:

It does not work like that normally, but it did work like that during the crisis.

Couldnt have been, regulatorily and practically! It was [art of the reason for the crisis!

wong wrote:Moody's Analytics is advocating a simple portfolio approach for the bank's entire book. Makes sense to me, but it will probably never happen. Such transparency hurts profits/fees and more importantly salaries

ACtually doesnt make sense...first up, loans can also be on the trading book - but its not vanila...Typicaly, corss border loans that have credit protection and/or RFx positions embedded would be taken on the trading book for ease of operations..

More importantly, the demarcations between trading book and banking book ensures the right risk treatment for the assets...A local onshore loan book has an extensive system of monitoring, repayment, collections and acturial estimates of losses on the basis of which provisoining is done...There is little merit in trying to MTM those assets, given that they are meant to be held to maturity...Additionally, if assets are going to be MTM-ed en masse, ideally, the liability that is funding these assets should also be MTM-ed, just to be facetious!

The enire regulatory attempt has been to actually separate out the "trading" books completely, and preferably even outside the bank..Now the latter isnt possible practically, but the former is something that is well underway..

As for Jim Rogers, he is a clown....

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Re: PRC Economy and Industry: News and Discussions

Postby wong » 06 Jul 2011 08:27

ACtually doesnt make sense...first up, loans can also be on the trading book - but its not vanila...Typicaly, corss border loans that have credit protection and/or RFx positions embedded would be taken on the trading book for ease of operations..


I actually have never seen this done. The business relationship is on the commercial side. Ease of operation isn't even a consideration because it's not complicated from an operational stand point. That's just backoffice stuff.

The current risk management practice is broken. Anything is better than the current hodgepodge of risk ratings, regulatory ratings, mark to market and mark to model and provisioning guestimates.

Rogers may be a clown or not, but he definitely makes money and that's what matters in this business.

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Re: PRC Economy and Industry: News and Discussions

Postby somnath » 06 Jul 2011 09:05

wong wrote:Ease of operation isn't even a consideration because it's not complicated from an operational stand point. That's just backoffice stuff.

Its not "backoffice", most often its regulatory impertives...Company in India raising INR funding offshore - the best vehicle to do it would be via Mauritius - typically the funding will have a CCS embedded in it, and possibly a CDS protection on the other side as well...So the offshore bank's lending, CCS and CDS on the same "loan", even if its a commercial loan is routed through the trading book...not least because sell downs can be enabled more easily then..

wong wrote:Rogers may be a clown or not, but he definitely makes money and that's what matters in this business

From his talking appointments, not his investments! :)

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Re: PRC Economy and Industry: News and Discussions

Postby ashi » 06 Jul 2011 09:28

One of the readers' comment in the article posted by Wong:

Posted by john_ccy | 06/16/11 02:56 AM EDT
The other thing I think Roubini misses, even if his data points were correct (which they don't seem to be here), is that any infrastructure projects must be built to accommodate conditions 50 years down the road as well and not just for today. I think the US Interstate system would never have been built if it were based solely on usage patterns and densities from the 1950s. How many four land highways started off with two or three cars going in each direction that are now bumper to bumper (even in non-rush-hour sometimes) barely 50-60 years later?

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Re: PRC Economy and Industry: News and Discussions

Postby RamaT » 06 Jul 2011 09:45

I note that you jumped on two small points at the bottom of my post, from your Chinese perspective you agree that those issues I listed are very real and troublesome? (The first step is admitting you have a problem.)

wong wrote:RamaT wrote:
"On top of all this, are two major structural problems.. the communist system and the transition from a manufacturing to a balanced economy, i.e. the middle income trap."

Two comments as a Chinese person visiting here:

1. China isn't really communist. One party rule? Yes. Communist? No. They practice a really ruthless and brutal form of capitalism in the private sector. If you ask any Chinese-American doing business in China, they will tell you they have trouble keeping up with capitalism in China. Did you know half of the world's richest women are now in China and all are self-made? This is pure capitalism and entrepreneurship.


They call themselves the Communist party of China, so I used that as an expedient. Whether they venerate Marx's word or not.. I don't care. They are a controlling and power hungry force which brutally controls their own people, close enough.

wong wrote:2. If you consider other East Asian places like Taiwan, Korea, Singapore, Hong Kong & Macao as having escaped the middle income trap, then odds are China will escape it too. China is following a nearly identical development path as its smaller East Asian neighbors before it. It's a formula with a proven track record. From Confucianism to the high savings rate, China has much more in common with a Korea and Taiwan than a Mexico or Argentina.


There's a maxim in the technology field, 'Scalability is a feature, you don't get it for free.' The difference between all those countries and China is the scale.. the little guys were able to ride the external demand to escape velocity(local consumption) to keep the economic wheel turning. The Chinese are treating GDP as a shooting target, while in reality it's a pyramid with different types of economic activity supporting the whole. What replaces the massive construction and manufacturing when demand shifts?

Additionally, to move to the next step in productivity freedom is required, of thought and expression and a knowledgeable workforce that can think critically. Currently there are 7 million people graduating college per year in China, they are not finding jobs and are starting to see the reality of the situation. If you're the CPC how do you keep them from controlling their own destiny?

You can fool some of the people all of the time and all of the people some of the time, but not all of the people all of the time. How does the CPC survive the loss of 'The mandate of heaven'?

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Re: PRC Economy and Industry: News and Discussions

Postby VikramS » 06 Jul 2011 09:59

somnath:
somnath wrote:
Vikrams wrote:It does not work like that normally, but it did work like that during the crisis.

Couldnt have been, regulatorily and practically! It was [art of the reason for the crisis!

Can we let it rest please? I respect your knowledge while being cautious of your ability to apply it out of context; there may be certain areas where your well might be running dry. No long arguments here please.

http://www.amvona.com/latest-news/inves ... nting.html

One of the most flagrant forms of abuse of US accounting rules was the implementation of FAS 157 and 115 discussed over two years ago by Zero Hedge here. The rules, which were implemented in advance of the end of Mark To Market back in 2009 to prevent fair value from creeping into bank asset valuations, segregated bank assets into three categories: trading, available-for-sale and held-to-maturity (also known as banking). The chief distinction was that while "trading" assets could be, well, traded, on an ad hoc basis, they would also need to be marked-to-market, and as a result suffer valuation shortfalls which would possibly lead to bank undercapitalization when markets swooned. The held-to-maturity assets, on the other hand, were encased in a shell of impenetrable valuation, traditionally held on the bank books at par, as the assumption is that all would be money good at maturity. The one caveat is that banks could not trade out of these assets without a solid reason to justify shifting underlying assets from one class to another. Not surprisingly, in the volatile days of 2009 and 2010, most banks moved their asset holdings to the banking category leaving trading books empty. And while the FASB recently pushed to reinforce mark to market, that failed. Yet what seems to be happening is that banks are now voluntarily going back to Mark-to-Market in order to take advantage of what even they are obviously perceiving as ludicrous valuations for toxic assets. As the FT reports, Citi shifted $12.7 billion in bad assets from its banking book to its trading book, supposedly so it can be shielded from onerous Basel III capitalization requirements (minimum 7% equity buffer on banking book assets), but really so it can take advantage of an environment in which bidders for Maiden Lane II assets (primarily AIG itself indirectly through banks) are scrambling to bid on last pockets of remaining yield. What this means is that pretty soon all bank assets will be moved back to Mark To Market, leading in much more incremental volatility as these will be reflexive of market momentum and vol. But that is at least a few weeks away. And by then it will be some other CFO's problem.


These games are still going on with Greek Debt. It also happened during the crisis.

This problem is made all the worse by the change in the accounting rules. To hide assets from mark-to-market meant shifting them between the trading book and the “bank book”. Once in the “bank book”, PIIGS bonds have to be held to maturity. If they are sold, by switching them back to the trading book, it will lead to a lot of messy disclosures. That would lead to public, affirmative acknowledgments of just what the liquidity-starved banks are actually in possession of. Considering the amount of potential losses from PIIGS debt, from the perspective of the banking system this is something to be avoided at all costs.
So negative US treasury bill rates are a perfectly acceptable, indirect alternative to full disclosure.


Read more: http://www.businessinsider.com/negative ... z1RIXupfZO
Last edited by VikramS on 06 Jul 2011 10:18, edited 1 time in total.

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Re: PRC Economy and Industry: News and Discussions

Postby Theo_Fidel » 06 Jul 2011 10:00

Personally my criticism has never been on the roads, airports and other infrastructure being built. I make an exception for the debt laden HSR just because of how spectacularly uneconomic the planning there is.

- First the Chinese economy is structurally addicted to this investment as a major portion of its growth. Recent estimates put it at 60% or so of GDP and over 80% of fresh growth.
- It is not easy for them to stop as they have a GDP target to get to, these empty cities are not the problem, they are a symptom of what is going on. They have been pointed out and yet there are ever more every year. They can't stop.
- If they stopped all building tomorrow their GDP growth would drop to 4% or so. This is the real number that they are trying to hide.
- Now should an economy growing at 4% splurge Trillions of $ in fresh lending? I thought not.
- Without the frantic investment rate that needs to get more intense every year, there would be no China miracle. Essentially a Ponzi scheme with the people money.
- The Chinese debt situation is so opaque no one knows how much debt there is. Esp. private sector debt in the housing boom. It was the private sector debt defaults that destroyed EU/US.

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Re: PRC Economy and Industry: News and Discussions

Postby chola » 06 Jul 2011 10:01

I'm going to go contrarian because of what I saw in the Far East -- Singapore, Hong Kong, Guangzhou (Southern China) and Macau -- five years ago. What I thought would happen, pretty much did happen since.

RamaT wrote:So I've been following the Chinese attempt to digest this loan/unsustainable building/fake GDP mess for the last year.

The way I see it below.. comments around where my understanding is wrong are appreciated.

1. Unsustainable Building - Chinese bankers have been lending to create construction of highways/bridges/factories/office buildings when there is not enough demand to sustain the current pace. This is leading to empty cities(Ordos) and malls(Great Mall of China) and railroads(HSR) that serve no purpose than to employ those building them.


It's an one-party communist state that is more concerned with employment than profit. As such these kinds of imbalances has to have an affect on Chinese growth. There is a reason why China is many multiples poorer than Japan, South Korea, Taiwan, etc.

People like to say China is poor because of size not political system but who is to say that democracy can only work up to a certain size? Why is the US with 300 million people and a democracy so much wealthier than the USSR which was the same size?

That said, I see no reason why an population of 1.3 billion would not eventually make use of all that infrastructure. If the government is willing to pay for it, people will use it.


2. Bad loans - Because of #1, the loans handed out are not able to be repaid because the underlying assets aren't generating income. The assets are sitting around mothballed or as 'bank accounts' for wealthy families.


In the end, everything will be paid for by the government. It is a communist one-party state. They will simply print money. (This will inflate the yuan but an inflated yuan will make their exports cheaper.)

3. Fake GDP - Due to #2 every year more loans have to be given out to keep the workers who finished the previous projects employed and for that years GDP to be 'sustained'. The profits from the past can't sustain future growth as there are no profits and the companies doing the building have no client base other than the local governments/banks.


We see fake GDP as a problem. The chinis might not. All those empty buildings and cities are real. They are being built and people are being employed. Eventually, they will come into use. China is an overcrowded nation. There is no way buildings can stay empty. Now, if they really do stay empty then the Chinese are wealthier than we ever imagined since they can pooh poohed all those brand new buildings.

Fake GDP becomes real when things are built and people are paid. Whatever building standing will eventually be used and whatever money paid during construction will eventually be spent.



Those are the problems.. they have resulted in:

A. Inflation - Due to increasing resource consumption for the construction side of the economy commodities are expensive and are getting more so. This is affecting the buying power of the workers as their wages are not keeping pace with the increased cost for basic goods and housing. The government's response to increase wages is causing problems in the manufacturing sector and making them less cost competitive so jobs are starting to leave for other countries/regions.


Commodities are global so their prices would be the same where ever you go. Chinese demand for commodities had inflated prices for everyone. What the Chinese gain is infrastructure which would give them the advantage over other regions that hadn't the chance to build the roads and rails and electric grid which subtract costs outside of wages.

Now if Chinese wages has gained so much that it is making them uncompetitive then they have in a sense won already. The US could have mandated low wages so all jobs stay inside the nation. They don't want to. The idea is to move up the food change. Chinese wages would not have gone up unless there was a shortage of workers in relation to jobs. Remember commodities is no more expensive in China than it is for anyone else in the world. In fact, it might be cheaper since the Chinis can arm-twist pariah nations like Iran, Sudan, Burma, etc. into providing them with energy and minerals below costs since they are embargoed by the West.


B. Inefficiency - I mean this in the economic sense, as in the inefficient allocation of capital. The Chinese packaged up the last bath of bad loans into long term government bonds and they may be able(probably will be able) to do so again but the costs are higher this time around. Of the 1.6 Trillion outstanding, the estimates are from 20% - 50%. 20 is definitely too low, and 50 might be a bit low or a bit high, let's assume 40%. That's $640 billion that will be packaged into this long term paper, easily handled by their (current)growth trajectory and the fact that the economic system is rigged so that banks can use the spread in (non-construction and performing)loans vs. deposits to cover it over a long enough period.


China is communist. It is and has always been inefficient like every other communist nation before it. It is surprising to me how it had continue going year after year.

Bad loans for a one-party state is not like it is for a democratic free market. In the end, everything is owed to itself. China doesn't have any external loans that I know of. They have $3 trillion in forex to pay any external loans off anyways.

Now what can a one-party state do when it is owed trillions in delinquent loans to itself? Write it off or print money or a mixture of both. They've done this before when their banks were insolvent in the 1990s. Or what banks in the natural free market world would be insolvent. But the PRC government basically waved a magic wand and said the four big national banks no longer had any bad loans. And suddenly they didn't.


C. (Un)Employment - Construction workers have no sustainable profession without continuing loans to feed bad projects.
There are farmers still leaving the countryside looking for work.
Manufacturing is turning away due to inflationary pressure, causing more unemployment.
The kids from the last generation who's families sent them to college can't get work because there aren't enough knowledge jobs(due to low internal consumption).



Employment is a problem with every government. But somehow I don't think it is quite as severe for an one-party dictatorship that can print money, crack down any workers riot with extreme brutality and build infrastructure without worrying about profit. See below.

D. Infrastructure - Everything has a limit, even a good thing. Infrastructure was a problem but the utility of every new highway/bridge/railway/building has less value when the existing assets aren't even utilized. If every family can have an apartment and you build a 1million more then what purpose will that serve?

The one thing the Chinese have gotten from all this, is infrastructure, in many cases world class. And the question is, will it matter in time to have enough of an economic impact, before the other problems derail them?


Infrastructure is a near non-perishable. They have long shelf-lives. Especially in an overcrowded country like China. I find it impossible to believe that roads, bridges and homes can stay empty among that teeming stinking mass of humanity. I also find it hard to believe that every chinaman has a home and more road and rail than he or she can possibly use.

You could build for a hundred years in China (or India) and you cannot outstrip the population for too long. I don't know how those empty cities stay empty in a country like China unless they are not connected to roads yet or if the government is restricting access. Look



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

On top of all this, are two major structural problems.. the communist system and the transition from a manufacturing to a balanced economy, i.e. the middle income trap.

IMO, the Chinese are in for a period of 'low' growth 4% - 6% over the next decade. This is below the level they need to keep people employed and pay for their past mistakes. If this was a democratic stable nation this wouldn't be much of a problem.. see Japan, US, etc. But the fact that this is a repressive regime with significant pent up internal destabilizing forces and the CPC will look to distract the populace from their immediate problems.


Eventually all of the deficits of communism will catch up with China and it will be overthrown violently and be replaced with democracy. Any chance of a revolution in China and the US will be in to the hilt. It will be a historic game changer.

But then we will see a democratic China or multiple democratic Chinas fully backed by the US. That I fear more than a communist China.

If the Chinese mainland becomes democratic India might never catch simply because every market in North America and Europe will be open to "free China(s)." It would be 10 Japans eating up resources and markets everywhere. And because they are now democracies, there will be no push back from the West.

Nope, I hope for China to remain communist for as long as possible. I actually see low growth being a non-problem for a government that cows and massacres its population. Their economy contracted in the 1950's and '60s and millions starved and yet there was no revolution.

I'd like to see 50 more years of communism in China with slow growth not enough to bring down the CCP but a long and drawn out commie stagnation like North Korea. Having been to and having relatives who live in Singapore and Hong Kong, I really don't want to see 1.3 billion free chinamen. They will eat up the planet alive.

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Re: PRC Economy and Industry: News and Discussions

Postby VikramS » 06 Jul 2011 10:09

ashi wrote:One of the readers' comment in the article posted by Wong:

Posted by john_ccy | 06/16/11 02:56 AM EDT
The other thing I think Roubini misses, even if his data points were correct (which they don't seem to be here), is that any infrastructure projects must be built to accommodate conditions 50 years down the road as well and not just for today. I think the US Interstate system would never have been built if it were based solely on usage patterns and densities from the 1950s. How many four land highways started off with two or three cars going in each direction that are now bumper to bumper (even in non-rush-hour sometimes) barely 50-60 years later?


The problem is the cost of the projects and the ROI. China has gone on a construction binge unparalleled in the history of mankind. Not only is the economic viability of many of those projects questionable, the quality of construction also comes down when there is a mad rush. Checks and balances are the first casualty of any situation like this and it is an engineering reality, that quality comes down. Even in the premier projects like the HSR, engineering and construction issues are forcing lower then spec speeds.

Further the capital to finance this comes out of the same pot. The same money could have been invested in activities which are more valuable, than being "show-pieces". Right now a vast majority of Chinese people can not afford either the millions of homes or the tickets to the HSR being put up. When allocation of capital is guided by meeting pre-defined targets and "looking good", it is unlikely to translate into efficient utilization. It will eventually lead to bad loans and an weaker banking system. It can be papered over for so long but eventually it will catch up. It always does.


chola: Cities and trains can remain empty when no one can afford them. It is like India building a million BMWs when most of the population will be struggling to buy a Nano. The imbalance between what is needed and what gets built is the focus here. ROI issues will eventually catch up, and the society will pay as a whole. In the meantime a lot of CCP officials and businessmen will become very rich while the masses can just watch them.

Theo_Fidel

Re: PRC Economy and Industry: News and Discussions

Postby Theo_Fidel » 06 Jul 2011 10:14

chola wrote: Fake GDP becomes real when things are built and people are paid. Whatever building standing will eventually be used and whatever money paid during construction will eventually be spent.


I invite you to visit Las Vegas Nevada. There fake GDP put up roads, airports, houses, hotels and casino's by the thousand. Yet there they stand, devastated in value, when someone came to ask for their money back.

It took 8 years for US to crash and burn. Panda still has some ways to go. They are committed however, no turning back possible any more till the end implosion.

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Re: PRC Economy and Industry: News and Discussions

Postby vina » 06 Jul 2011 10:54

Theo_Fidel wrote:I invite you to visit Las Vegas Nevada. There fake GDP put up roads, airports, houses, hotels and casino's by the thousand. Yet there they stand, devastated in value, when someone came to ask for their money back.

It took 8 years for US to crash and burn. Panda still has some ways to go. They are committed however, no turning back possible any more till the end implosion.


See, that is the strength of a US style market economy. The system cleans and renews itself periodically. What is unsustainable in the long run (dot com bubble, housing bubble etc) will correct itself. In a command, okay a quasi comamnd economy like the Chinese, there is no self correcting mechanism. The bad bets will get doubled multiple times and can continue until the entire edifice collapses. The Chinese economy doesnt have the market economy like pressure cooker release valve/weight. There it either contains the pressure or gets blown up.

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Re: PRC Economy and Industry: News and Discussions

Postby amit » 06 Jul 2011 11:32

This idea that infra like roads, cities and buildings are almost imperishable and can last for 50-60 years at one level is correct. Nevertheless in the current context this is a misleading assumption.

When you have empty roads and buildings you don't have maintenance (who will pay for that?) and without maintenance such infra will deteriorate within 5 years in the harsh climate of China, especially in the northern parts of the country. And if the govt or anyone else pays for the maintenance it is essentially sending good dollars chasing after bad ones.

And the central question remains about RoI. If, according to so many of the reports posted here, most of these empty buildings have been purchased by people with their own money as a form of investment/speculation, then I'm afraid that's a sure disaster.

Somnath made the comparison with all the undersea bandwith that was build during the dotcom bubble. That capacity led to the communications and outsourcing boom of the early 2000s. However, you got to remember that that infra was built at a fraction of the cost of what China is spending and yet despite that most of the telcos which built them went under and the capacity was picked up by others at firesales at a fraction of their cost - which in turn resulted in a dramatic reduction in cost of intercontinental phone calls, the base on which the entire outsourcing boom rests on.

In China who is going to buy all these infra at fire sales? Who is going to get, say a million people to shift to a city like Ordos, unless of course the PLA forcibly does so? And if they do get to Ordos, what are they going to do? Where would the jobs be?

Around the world cities and towns have grown organically. You can't build a city/township in the middle of nowhere and then move people there and then finally build a self sustaining eco system. It doesn't work that way.

However, Chola has a point, eventually all those apartments and building would be filled up. But the question is, how long will it take and will the new residents be able to pay off the money that it cost to build them? One needs to remember that time is not in China's side. It can't afford to go through say five years of relatively low growth in order to allow the economy to settle down. And even at its current trajectory it will grow old before it grows really rich.

Finally the point remains about feeding the monster of over capacity that drives the building frenzy. What will happen to all that steel making, cement making and construction capacity built up over the past two decades? Apart from construction to a certain extent, there is no market overseas that the Chinese can tap.

It's a pretty messy problem and it would be interesting to see how it is tackled.

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Re: PRC Economy and Industry: News and Discussions

Postby somnath » 06 Jul 2011 12:09

VikramS wrote:Can we let it rest please? I respect your knowledge while being cautious of your ability to apply it out of context; there may be certain areas where your well might be running dry. No long arguments here please.

http://www.amvona.com/latest-news/inves ... nting.html

Sorry, this is all a bit of smoke and mirror media stuff...There are no free lunches in these things - the P&L impact on MTM movements in trading assets can kill a bank (just ask Bear Stearns), as much as capital charges can kill profitability...So banks dont do it for fun - Citi's decision could well have backfired big time if MTMs fell...If it were so easy regulatorily (in terms of accounting and banking regs) , bank would simply flip around assets between banking and trading books to max profits..In reality, regulators take very very dim view of such stuff...BTW, 12 billion dollars is a very small fraction of Citi's assets pre-crisis, and a slightly bigger fraction of their suspected "stressed" assets...

In any case, I think its quite irrelevant to this discussion...

amit wrote:It's a pretty messy problem and it would be interesting to see how it is tackled.

As the Chinese say, the best benediction is to say "may you live in interesting times"! :)

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Re: PRC Economy and Industry: News and Discussions

Postby Theo_Fidel » 06 Jul 2011 12:48

WRT the ghost cities let us remember why they are empty. Most Chinese already have a house, with a tree or two, a small street, 2 doors from the grocer and they like it there, at least socially. Moving them to high rise apartment blocks will shred their social structure. Instead of dealing with the complication of rebuilding from within they simply rebuild on the other side of the river. They have taken the easy way out because they do not have to invest in their people.

Let us remember that back when all those Soviet apartment blocks and East German redevelopments gleamed too.

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Re: PRC Economy and Industry: News and Discussions

Postby Singha » 06 Jul 2011 13:03

Around the world cities and towns have grown organically. You can't build a city/township in the middle of nowhere and then move people there and then finally build a self sustaining eco system. It doesn't work that way.

the USSR did built cities in the middle of nowhere like siberia or CAR republics and sent millions of white russians to settle there. usually these were heavy industry and defence oriented plants. their descendents live on in all the CAR states.
but atleast these had a purpose and a anchor industry or two where everyone worked.

the ghost cities near the metro areas will likely get occupied at some point. the prospects for places like ordos are bizarre unless they have a secret plan to start massive state financed industry there.

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Re: PRC Economy and Industry: News and Discussions

Postby amit » 06 Jul 2011 13:32

Singha wrote:the USSR did built cities in the middle of nowhere like siberia or CAR republics and sent millions of white russians to settle there. usually these were heavy industry and defence oriented plants. their descendents live on in all the CAR states.
but atleast these had a purpose and a anchor industry or two where everyone worked.

the ghost cities near the metro areas will likely get occupied at some point. the prospects for places like ordos are bizarre unless they have a secret plan to start massive state financed industry there.


You are right about USSR and much of the erstwhile Communist bloc. However, the big difference between that and the Chinese case is the sheer scale of what they are doing and the timeline. What the USSR did over a couple of decades, China is cramming into one decade and at a much more ginormous scale. Will it work? Let's see but don't be hopeful.

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Re: PRC Economy and Industry: News and Discussions

Postby VikramS » 06 Jul 2011 14:20

somnath:

This is OT. You have a very strong sense of conviction in what you know. Even with presented with evidence you are convinced that it is media smoke and mirrors. FT is one of the most prestigious financial publications out there. Dont you think they know something or two?

The article is just an example of the reverse of what pretty much happened en-masse, as the highlighted portion clearly states.

Not surprisingly, in the volatile days of 2009 and 2010, most banks moved their asset holdings to the banking category leaving trading books empty.


Do you ever wonder that there might be things which perhaps you are not privy to? Or that all rules can be bent when it is a matter of survivial? Or that there might be others on the board who may have been sitting at the table when these things happened .... :wink:

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Re: PRC Economy and Industry: News and Discussions

Postby somnath » 06 Jul 2011 14:42

VikramS wrote:Do you ever wonder that there might be things which perhaps you are not privy to? Or that all rules can be bent when it is a matter of survivial? Or that there might be others on the board who may have been sitting at the table when these things happened

I dont know about 99.99% of things going around..Among them is also facts like which "table" you might have been sitting on during the crisis..From the table I work on, I do have a few things to do about stuff like trading books and banking books...

But I do know that what you are alluding to, ie, flipping assets between various books were done with gay abandon during the crisis, is just not true...In fact, if anything, the crisis was exacerbated because banks were NOT able to do that, fast enough, or in meaningful enough sums...

That Citi flip happened recently - look at the context of the article..It references a piece of "action" that happened recently, and then extrapolates that statement to 2 years back!

Forget the legal regulatory minutiae - apply common sense..During the crisis, what was the one big issue facing the banks? MTMs on assets held in their trading portfolio...What could have "saved" them? Simple, if they could transfer those assets to their banking portfolio and treat them as "hold to maturity" commercial loans, thereby saving them P&L losses on MTM...All of them tried in various ways to do it, but to conclude that the "trading books were empty" makes travesty of the capital that had to be injected into these banks...

If anything, post crisis, regulators have gotten a bit more liberal about that, simply to help banks recover some of the money (and repay the state funding)...In the long run, they want banks to separate out trading altogether, and generally tighten up on capital norms...

All this would be OT, so I would stop here...Is there a banking thread?

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Re: PRC Economy and Industry: News and Discussions

Postby gakakkad » 06 Jul 2011 15:37

somnath wrote:
RamaY wrote:This infra and industry is like a short-term treasure (30-40 years). If the commoners of china can use it before it deteriorates, it is a better investment than the near-zero yield bonds (taking inflation into consideration).

somehwat correct...People have short memories - 12 years back, they said all the tech infra companies (bandwidth, routers et al) built useless phantom capacities in the aftermath of the tech crash...But, it is the same capacities that triggered the new boom in tech, including India's services boom, as well as richer connectivity devices..A lot of it was because of cheap bandwidth available as companies went bankrupt...

Chinses infra can play a similar role...The question is whether the Chinese system has the in-built mechanism (bankruptcies, capital norms etc) to be able to do it...


Somnath Sir there is a difference between routers/modem over capacity and entire empty cities. I mean 1 city might cost several Billions to build. Lets say the production capacity of Belkin exceeds the demand by 20 % . How much would it cost them at the most ? Lot of components between communication devices of different type are common. They can always de assemble the extra wifi hubs and use the components for something else. We must also note that in case of electronics industry production cost is considerably lower than selling price. So cisco did not go bust after the dot-com bubble bust. Look at chinese on the other hand . They have build dozens of cities at a place where no one would want to live. Disassembling these is no where near as easy as dissembling a cisco wifi router and reusing it for some other purpose.

What extent can built in mechanisms support like bankruptcy laws solve the problem ? We are talking of something considerably bigger than the sup-prime mortgage crisis . I mean entire cities for god sake. In US there were 9 million fore closures . Total loss of 450 million dollars to bank. In case of China even in established populated cities the real estate prices are rising . Average Chinese cannot afford decent housing. So even in established reals cities there is a real estate bubble similar to the US brewing . And add to this dozens of GHOST cities. You get something a lot more massive than the American crisis .

"Water water everywhere ,not a drop to drink" ST Coleridge

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Re: PRC Economy and Industry: News and Discussions

Postby gakakkad » 06 Jul 2011 15:41

Theo_Fidel wrote:
chola wrote: Fake GDP becomes real when things are built and people are paid. Whatever building standing will eventually be used and whatever money paid during construction will eventually be spent.


I invite you to visit Las Vegas Nevada. There fake GDP put up roads, airports, houses, hotels and casino's by the thousand. Yet there they stand, devastated in value, when someone came to ask for their money back.

It took 8 years for US to crash and burn. Panda still has some ways to go. They are committed however, no turning back possible any more till the end implosion.



Las Vegas is a perfect example. My relative bought 4 houses for 800k each 12 years ago out of speculation and "sound financial advice" .Today the combined worth of these 4 is not 800K . Add to this the projected water crisis in the city. No one wants to buy there anymore. In case of the chinese no one is buying them presently leave alone the future.
Last edited by gakakkad on 06 Jul 2011 15:49, edited 1 time in total.

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Re: PRC Economy and Industry: News and Discussions

Postby wong » 06 Jul 2011 15:48

Chongqing-Duisburg rail route brings China products to heart of Europe
http://www.theaustralian.com.au/business/breaking-news/chongqing-duisburg-rail-route-brings-china-products-to-heart-of-europe/story-e6frg90f-1226086996585

With the inaugural voyage came a blunt warning to British business from the former European Trade Commissioner, Lord Mandelson: act now, or miss the opportunity of a lifetime. "The emergence of Chongqing as the industrial and financial nexus of western China - and even central Asia - creates very significant demand for Britain's service sector," he told The Times during a visit to Chongqing with members of the Institute for Public Policy Research.

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Re: PRC Economy and Industry: News and Discussions

Postby somnath » 06 Jul 2011 17:38

gakakkad wrote:Somnath Sir there is a difference between routers/modem over capacity and entire empty cities

Please, no sir, please (the hair's still only partially grizzled, not fully white :wink: )..

As to the point, I agree substantially...the infotech overcapacity isnt the same as real estate overcapacity...Talking of RE though, another relevant example is SEA crisis, circa 1998...To some extent (not all), the crisis was again driven by massive over-building in RE...Then the crisis hit, a bunch of companies went bankrupt, Thailand and M'sia had moratoriums..But in 5 years time, all that "spare capacity" was taken up..

Infrastructure is a bit like that - typically, you build it for the next 50 years, so on year 1 it all seems a colossal waste...

China, in 25 years time, is going to be a 1.4 billion strong population, at least upper middle income country...It will have massive demand for every urban facet of life...Will they need these "phantom" cities then? Maybe, maybe not...But the possibility cannot be ignored...

The bigger issue is actually managing the transition...the US has fantastic systems to manage bankruptcies, enabling new enterprise etc...In china, all that is missing..And it is doubtful if the state can pull off something like that, especially in a totalitarian environment...Thats why I said, they are living in interesting times!

As an afterthought, the only city India "built" (instead of just organic mushrooming) post independence is Chandigarh..China has built dozens..Time will tell which model of urbanisation works out! As of now, the Chinese have far better cities, though arguably we have better banks! :)

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Re: PRC Economy and Industry: News and Discussions

Postby zlin » 07 Jul 2011 06:49

Chinese firm to construct pylon of new Yamuna bridge

NEW DELHI: The Delhi government's showpiece project promises to capture both eyeballs and footfalls. At a height of 154m, the main pylon of the much-delayed Signature Bridge at Wazirabad will be twice the height of the Qutub Minar and could be one of the city's biggest tourist attractions when it is completed almost two-and half-years down the line. All this, thanks to China, whose firms stepped up the challenge, when Indian companies expressed their inability to construct the main pylon of the bridge.

A Chinese company, Jiangsu Zhongtai Steel Structure Co Ltd, a sub-contractor of Bridge Contractor Gammon-Constutora-Tensacciai JV, has been given the task of fabricating the 15,000 tonne steel pylon and deck girders. The pylon will be brought to India in pieces and the firm will also be responsible for assembling and erecting the pylon and deck at site.

Special grade steel, also sourced from China, will be used to construct the pylon. "In India, we normally get grade S250 steel but this project requires S355 and S460 grade steel which is of European standards. The structure requires steel plates that are 150mm thick while, normally, we use upto 80mm steel plates in India," explained the official. The Delhi Tourism and Transportation Development Corporation (DTTDC) says fabrication and erection of the pylon and deck girders will be completed within the next 18 months.

"Once the Chinese firm completes about 2,000 tonnes of fabrication, they will start shipping it to India and the assembly process will begin,'' said officials.

"The main pillar will have 18 cables on the western side and four back-stay cables on the eastern side. A beacon will be placed at the top of the pylon and will be visible to 50 per cent of Delhites at night,'' said BB Wadhwa, executive engineer, DTTDC.

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Re: PRC Economy and Industry: News and Discussions

Postby anishns » 07 Jul 2011 07:29

^^^

Thank you Tarrel than mountain fliend :mrgreen:

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Re: PRC Economy and Industry: News and Discussions

Postby Singha » 07 Jul 2011 07:44

fiendship between china and india will soon be higher than himalayas. :mrgreen:

jokes apart - this is one serious area where PRC Is raping the old industrial suppliers like soko, japan, germany , france, italy ... imagine if PRC were not there, the consulting would go to a japanese or german or korean co, who would inevitably source the needed special materials from their own food chain.

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Re: PRC Economy and Industry: News and Discussions

Postby RamaY » 07 Jul 2011 07:54

somnath wrote:As an afterthought, the only city India "built" (instead of just organic mushrooming) post independence is Chandigarh..China has built dozens..Time will tell which model of urbanisation works out! As of now, the Chinese have far better cities, though arguably we have better banks! :)


I am sure the story is same in other cities.

In Hyderabad alone a whole new section of the city (at least 5x5 KM area) has been built in last 5 years. It is called Hi-tech city and it's surroundings. My guestimate is that this area will eventually (by 2013-14) will have more than 250,000 apartments or high-end houses and added employment of at least 3-400,000 high-paying (>$5000/yr) jobs.

India added at least 25-50 such cities in past 10 years alone. That too without forced evacuations and govt funded projects.

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Re: PRC Economy and Industry: News and Discussions

Postby Singha » 07 Jul 2011 08:05

DLF area and adjoining "south city" in gurgaon, NOIDA, Rohini in north delhi, HUDA sectors in gurgaon, several large planned BDA Layouts in BLR (HSR, HBR, HRBR) among others to my knowledge have come up in last few yrs. Bhubaneswar was always a planned city I think. every large city in India would have new planned "Sectors" being added on a continuing basis and sold as plots after infra is provided by municipality.

in all these cases farmers either sold the land to pvt parties like DLF or the govt acquired it at some rate, but I believe in all such cases villages that were engulfed by new developments were left in place and the people there urbanized and took up business and service. BLR has lots of such engulfed villages like adugodi, western part of indiranagar, ORR has bellandur, DB halli, KB Halli, Marat halli and many more....we didnt bulldoze the villages and chase out the occupants to compensatory highrise flats 30km away. delhi also has many "urban villages" the most famous being mehrauli but others like ber sarai and jia sarai (next to iit delhi) exist too. there is also another village on south of the ring road @ south extt area (dont know its name). old delhi area is also a collection of mohallah type villages if you look at it one way. noida has villages near the place where the yamuna road goes inland and moves toward atta market. there's also dadri gaon enroute to NEEPZ which is probably full urbanized now.

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Re: PRC Economy and Industry: News and Discussions

Postby RamaY » 07 Jul 2011 08:30

There was a news item the other day that ~70+ percentage of 850,000 odd jobs added in 2010-11 was in IT and ITES sector.

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Re: PRC Economy and Industry: News and Discussions

Postby chola » 07 Jul 2011 08:41

Theo_Fidel wrote:
chola wrote: Fake GDP becomes real when things are built and people are paid. Whatever building standing will eventually be used and whatever money paid during construction will eventually be spent.


It took 8 years for US to crash and burn. Panda still has some ways to go. They are committed however, no turning back possible any more till the end implosion.


The US crashed and burned in 8 years? If you are talking about a recession or even a depression, the US gets those pretty regularly over its 200 years history. It grew bigger and better after each one. No economy grows forever in a straight line. But the good ones do grow in a relentlessly upward slope.

Now if you are talking the current crisis, the terminology "crash and burn" is pretty subjective. The vast majority of the world still rather live in the US even after the crash of 2008. Because along the way to creating this "crash" the US economy had piled up a per capita income of $48K.

It's like when people "pity" the Japanese for falling into a 10 year recession starting in 2000. Well, it was still the world's second wealthiest nation during those 10 years. It's all relative. I would give anything for India to reach the point of the US or Japan and take its lumps in the same way.

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Re: PRC Economy and Industry: News and Discussions

Postby Prem » 07 Jul 2011 09:00

China to Open New Shale Areas to Tap Reserves Exceeding U.S.
http://www.bloomberg.com/news/2011-07-0 ... -u-s-.html

What they’re doing now is trying to assess the reserves underground and see how feasible it is to extract them,” Adam Wang, a global gas markets researcher at Cambridge Energy Research Associates, said in a June 29 interview in Beijing. “I don’t think China will be able to massively start producing shale gas until after 2020.” Chinese shale may hold 1,275 trillion cubic feet of gas, or 12 times the country’s conventional natural gas deposits, the U.S. Energy Information Administration said in April. China’s “technically recoverable” reserves are almost 50 percent more than the 862 trillion cubic feet held by the U.S., the EIA said.
The two countries account for 32 percent of the world’s recoverable shale reserves of 6,622 trillion cubic feet, according to EIA data. Annual shale-gas output in China may reach 20 billion cubic meters (706 billion cubic feet) by 2020, Pan Jiping, a researcher at the land ministry, said in a June 30 interview in Beijing. That’s less than 15 percent of U.S. production in 2010, EIA data show. China currently doesn’t produce any shale gas.

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Re: PRC Economy and Industry: News and Discussions

Postby chola » 07 Jul 2011 09:16

VikramS wrote:
The problem is the cost of the projects and the ROI. China has gone on a construction binge unparalleled in the history of mankind. Not only is the economic viability of many of those projects questionable, the quality of construction also comes down when there is a mad rush. Checks and balances are the first casualty of any situation like this and it is an engineering reality, that quality comes down. Even in the premier projects like the HSR, engineering and construction issues are forcing lower then spec speeds.


No it's just a construction binge unparallelled in the Third World. It is nothing special compared to what had happened in the US, Western Europe and Japan.

The West and Japan are modernized to a point where 95%(!!!!) of their population is urbanized. Barely 5% feeds the rest on farms.

China is a peasant nation where 80% are still rural and dirt poor. This is a nation that actually does need infrastructure. I wish that India sees things in the same vein sometimes.


Further the capital to finance this comes out of the same pot. The same money could have been invested in activities which are more valuable, than being "show-pieces". Right now a vast majority of Chinese people can not afford either the millions of homes or the tickets to the HSR being put up. When allocation of capital is guided by meeting pre-defined targets and "looking good", it is unlikely to translate into efficient utilization. It will eventually lead to bad loans and an weaker banking system. It can be papered over for so long but eventually it will catch up. It always does.


Infrastructure investment is perhaps the best "bad" investment you can possibly make. Far better than investing in the military or in financial devices. Whether it is homes or HSR that people can't afford, an one-party state like China can make it affordable overnight by subsidizing them.


chola: Cities and trains can remain empty when no one can afford them. It is like India building a million BMWs when most of the population will be struggling to buy a Nano. The imbalance between what is needed and what gets built is the focus here. ROI issues will eventually catch up, and the society will pay as a whole. In the meantime a lot of CCP officials and businessmen will become very rich while the masses can just watch them.


Again, affordability in a communist state is a moot point. The state makes things affordable if and when it feels a need to. It's like waving a magic wand to them. It can subsidize every home and trains are pretty much subsidized everywhere around the world. A million BMWs when subsidized by the state will not remain empty either. Also, think about this, China might be building for the future as well as the present because those other 80% will want to be urbanized in the coming decades.

Read Raghav Bahl's thoughts on China's infrastructure spending.
http://nextbigfuture.com/2010/10/escape ... nding.html

China today is investing nearly half its GDP, something that is simply unprecedented. Over 200 years of economic experience tells us that hyper-investment creates a bubble and ends in a dreadful collapse. But China has consistently defied all such prophesies of doom.

The time has come to acknowledge a truth: either conventional economic theory will have to be rewritten, or China will eventually collapse. The two cannot coexist.

I would venture a 50 per cent wager on China actually trumping conventional theory. Why do I say that? Because by investing on a scale hitherto unknown and untested, China may have defined a new "escape velocity" of capital spending. By putting so much capital, not in factories, but in infrastructure, China may have escaped the "gravitational pull of low thresholds."

Big factories create waste, while big infrastructure, especially life-enhancing social assets, empowers people. The sheer scale of your activities could end up swelling the tide in which everybody and everything rises together; a new model of "tidal wave investing" could buoy the whole ocean to a much higher watermark.

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Re: PRC Economy and Industry: News and Discussions

Postby chola » 07 Jul 2011 09:30

vina wrote:See, that is the strength of a US style market economy. The system cleans and renews itself periodically. What is unsustainable in the long run (dot com bubble, housing bubble etc) will correct itself. In a command, okay a quasi comamnd economy like the Chinese, there is no self correcting mechanism. The bad bets will get doubled multiple times and can continue until the entire edifice collapses. The Chinese economy doesnt have the market economy like pressure cooker release valve/weight. There it either contains the pressure or gets blown up.


I totally agree with this. The US (and Japan and Western Europe) can and have self-corrected repeatedly over the decades if not centuries.

A communist state like China will eventually fall under the weight of its contradictions especially in the way that it crushes private enterprises. There is not one private Chinese firm of good standing. Not one brand name that elicit recognition unlike a Tata or Wipro.

But again, I hope that communism in China doesn't fold too quickly and bring American help and largess for a new democracy. I don't want a Hong Kong writ large or 10 Japans. I want a slow decline where the communists can cling to power for decades by repressing an increasing surly population. Like North Korea.

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Re: PRC Economy and Industry: News and Discussions

Postby chola » 07 Jul 2011 10:15

amit wrote:This idea that infra like roads, cities and buildings are almost imperishable and can last for 50-60 years at one level is correct. Nevertheless in the current context this is a misleading assumption.

When you have empty roads and buildings you don't have maintenance (who will pay for that?) and without maintenance such infra will deteriorate within 5 years in the harsh climate of China, especially in the northern parts of the country. And if the govt or anyone else pays for the maintenance it is essentially sending good dollars chasing after bad ones.


Again, I can't possibly imagine homes and roads remaining empty for long in an overcrowded country where the vast number of Chinese are peasants and desperately poor.

In a wealthy nation like the US then yes infrastructure can go unused because the housing stock is massive compared to the amount of people. But in China? I seriously doubt it. At the very least, there will be squatters.



In China who is going to buy all these infra at fire sales? Who is going to get, say a million people to shift to a city like Ordos, unless of course the PLA forcibly does so? And if they do get to Ordos, what are they going to do? Where would the jobs be?


In a single party state who else but the government? The people in a communist state always pay the price.

However, Chola has a point, eventually all those apartments and building would be filled up. But the question is, how long will it take and will the new residents be able to pay off the money that it cost to build them?


Who owes what money to whom? In the end, all that money is owed to Chinese banks who are in turn the government. Some wealthy Chinese individuals might be wiped out but in the end, this is a desperately poor nation where the vast majority are peasants who never invested in a home and who by the way might benefit from government subsidies or straight forward nationalization of homes.


One needs to remember that time is not in China's side. It can't afford to go through say five years of relatively low growth in order to allow the economy to settle down. And even at its current trajectory it will grow old before it grows really rich.


China is the one country where growing old before it grows rich really wouldn't be a problem. It is a problem in democracies with humane values where the old are supported with (increasing crippling) welfare and social security programs. In China, the old simply die in poverty. The state doesn't care. It won't be saddled with a burden born of compassion and humanity because it has neither.



It's a pretty messy problem and it would be interesting to see how it is tackled.


It would be messy if China were a free market system with rule of law. It is hardly messy in a one-party dictatorship who basically owes money to itself and at any rate has a $3T kitty to draw from.

Infrastructure is one thing that I see China doing right for the long run. In fact, it would make me very happy if the chinis actually see this overbuilding of infrastructure as a problem.

Why? Because it would mean they will stop building capacity for the vast majority of their population who are waiting to be urbanize in the coming decades. It will be far harder for them to build on the same massive scale once they achieve any kind of democracy. It will also be far more expensive to build in the future as well irregardless of their people gaining any measure of freedom.

Now, what they are doing wrong in the long run is not their overbuilding of homes, roads, rails, etc. it is their non-building of institutions which results in the lack of rules of law and hostility for the private businessman. No rule of law destroys innovation since no one respects copyright. Private business are not protected and no financing is available since state banks lend solely to state corporations. This situation aborts uncounted numbers of possible competitors for the West as well as India Inc. Most of all, it crushes the human spirit which makes West's (and India's) business world hums with world famous firms and brands.

This I hope China can continue for a few decades until the CCP is inevitably overthrown. But I don't want the democratic Chinese to be left with a massive advantage of infrastructure ready made and ramrodded through by the communists when their nation was less free. Democratic or not, India is competing with China as a civilization not as an ideology. It would be much better if China stuck with communism as long as possible.

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Re: PRC Economy and Industry: News and Discussions

Postby Singha » 07 Jul 2011 10:22

ruthless and brilliant exposition, Chola. I agree with most of it sir.

nobody does the jungle capitalism model as well as PRC.

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Re: PRC Economy and Industry: News and Discussions

Postby somnath » 07 Jul 2011 10:50

While I am fundamentally quite sanguine about the infra overbuilding in China ending up quite ok in the end, the financing element of it cannot be wished away in terms of "oh its the state owning to itself"...

chola wrote:Who owes what money to whom? In the end, all that money is owed to Chinese banks who are in turn the government. Some wealthy Chinese individuals might be wiped out but in the end, this is a desperately poor nation where the vast majority are peasants who never invested in a home and who by the way might benefit from government subsidies or straight forward nationalization of homes

Till now, Chinese banks have coped with the issue by two methods - 1) grow the denomoinator (assets) even faster, and 2) dodgy accounting norms...The latter can be supported in the medium term only when the #1 happens apace..If (or when) Chinese asset growth slows, the NPAs in banks books will become apparent, and will need to be solved for...And just because the banks are state-owned doesnt mean that they cant go bankrupt - the Chinese govt will need to pump in additional cash to write-off the bad assets...

How much cash do they have? Its questionable, really..

chola wrote:It would be messy if China were a free market system with rule of law. It is hardly messy in a one-party dictatorship who basically owes money to itself and at any rate has a $3T kitty to draw from

Those 3T are China's Fx reserves, not "sovereign wealth"...by definition, all of those reserves dont belong to the sovereign - they are simply obligations to various people and entities (foreign investors and exporters) that the central bank holds in a diferent ccy as custodian...While part of it can be used to recapitalise banks (they did so a few years back), drawing down those reserves in a big way would give rise to serious crisis of confidence, specially if the banking system itself is under stress (whcih ironically will be the time when they are likely to do it!)...

With bankruptcy laws et al, the relatively "free" countries can get rid of the excesses more regularly..A system like China will face a major crisis to do so...

Raghav Bahl though makes a good point - the reason why there are reasonable odds of China pulling this off is because a lot of the building in in infra, and not just residential/commercial RE....Which means at some stage, there will be use for the asset, and some user charges can be levied....

All this talk of long term multi-decade competititon is a bit of bunk - in the long run, we are all dead! In the meanwhile, China has built fancy infrastructure, great cities (though sometimes overhyped - Shanghai is not half as good to live in as Singapore or HK or even maybe KL), and offer its citizens a better quality of life than India....Alongside of course, some really dodgy (but HUGE) banks...the challenge before them is to manage the transition from middle income to high without bankrupting themselves completely, engendering a collapse...All of which, within a commie system...

Interesing times!

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Re: PRC Economy and Industry: News and Discussions

Postby amit » 07 Jul 2011 11:24

Very good arguments Chola.

However, one point: Nothing exists in vacuum. I don't see how a China sans institutions - which allow the release of public frustrations - can keep on building infrastructure the way they are and in the process make large sections of their populations impoverished (and these are the educated people who have the money to invest in speculative buying of housing) and still be able to keep the lid on discontent indefinitely. IMO somethings got to give. Already there are a lot of anecdotal reports of massive protests in various interior parts of China it will take little for all that to snowball.

Also another point you make, that of 80 per cent of the Chinese people wanting to be urbanised over the coming decades doesn't sound right in terms of numbers. According to the CIA Factbook in 2008 43 per cent of China's population was already urbanised. And according to Reuters by as early as 2015 more people will be living in cities in China than in rural areas.

And the point to note is that a significant percentage of these "rural" dwellers are women and children whose menfolk have already migrated to the cities for low paid factory jobs and old unemployable folks. And most of the rest already work on agriculture. China (as is the case with India) really cannot ever afford to have just 5 per cent of its population living off agriculture because they'd be a food crisis otherwise.

The other point to note is that its not just a question of giving free houses to the poor rural folks who want to urbanise. What will they do in a city in terms of living? Will the state give them regular pensions to just stay in the cities. I don't think the idea of first build a city, get people in and then build factories works as a successful economic model.

You also cited the example of Japan and US infra building. You are correct but I must point out as I did in the case of USSR, one variable you are not taking into account is the time line of this build up. What the US, Japan and USSR did over several decades the Chinese have done within a decade and a half and at far higher cost of per square feet of build up. I don't think there was ever any major infrastructure project undertaken in the US or Japan which did not have a sound business case (again we come to the all important RoI) to push it.

In China what's the business case of a city like Ordos which has been lying empty for close to a decade?

You may think that the Communist party owns every thing so the financial aspect does not matter but here again there's a caveat. If China had been an isolated economy like North Korea, what you say is probably true. But in today's interconnected global economy, to which the Chinese are so intricately woven in, I don't think the Communist party can indefinitely keep the lid on NPAs and bad investments. Just look at the quantitative easing (QE) they just did? The figures resulted in shock and awe around the world. But two years on, it looks like they would need another QE. How many QEs can even the mighty Communist party afford before the system breaks?

The other point which you should look at and I've written about this, is exactly why the Chinese keep on building endless infra. One reason of course is GDP numbers. But IMO the other more vital reason is that it needs to do so in order to keep feeding the massive capacity it has built up in steel, cement and other basic raw materials capacity as there's no world market to absorb the output. How can one justify the fact that China with 1/6 th the economic size of the US ( a short while ago) had more steel making capacity than the 10 countries that followed it?

The problem is pretty serious and it remains to be seen if the CCP can wriggle out of this one.

JMT

chola
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Re: PRC Economy and Industry: News and Discussions

Postby chola » 07 Jul 2011 11:49

somnath wrote:Till now, Chinese banks have coped with the issue by two methods - 1) grow the denomoinator (assets) even faster, and 2) dodgy accounting norms...The latter can be supported in the medium term only when the #1 happens apace..If (or when) Chinese asset growth slows, the NPAs in banks books will become apparent, and will need to be solved for...And just because the banks are state-owned doesnt mean that they cant go bankrupt - the Chinese govt will need to pump in additional cash to write-off the bad assets...

How much cash do they have? Its questionable, really..


A very good reply! The financing element of it cannot be wished away in terms of "oh its the state owning to itself." What you said makes all the sense in the world -- if they were in a normal free market system.

But let me explain why I am taking up this contrarian position. Those banks we are talking about. You know, the big four of China -- Bank of China, ICBC, Construction Bank, Agricultural Bank, were all insolvent in the 1990s.

Back in the 1990s, they had bad loans from SOE (State operated Enterprises) that were a far larger percentage of a far smaller Chinese economy than the possible bad loans we see today. A magic wand was waved and all four banks were re-capitalized, all the SOE's debt disappeared into these holding corporations that kept debt that will never be repaid.

Now, in a free market, in a nation with rule of law, the investors will come a-knockin' for repayment. They will have the law on their side to collect. If there is no government bailout, that bank with declare bankruptcy and the court will order re-organization or fire sale. It will be resolved in a dismantling of the institution.

In China? No, these four banks are by market value among the 10 largest in world. Banks that were insolvent. As much as I abhor this abomination, I am a fierce free market advocate, I can't help but admire a government so ruthless and powerful that it can bend the laws of the market. Maybe those bad loans and these new ones will eventually catch up with them. Or maybe not.

Finances don't disappear per se. Someone has to eat the losses. In China, as in Russia (remember the 1998 Russian financial crisis?), the government can make everyone eat bad loans. In Russia, that government basically defaulted on its foreign loans and revalue the ruble which basically made every Russian citizen pay for the mess. In China, the millions of SOE workers basically paid by being laid off and having their cradle to grave iron-rice bowl broken.

What happened in the 1990s was far worse but what it did was give China a new start and we saw what happened since. This time, if they write off bad loans again, they do even better. They end up with real hard assets in infrastructure spanning a whole country.
chola wrote:It would be messy if China were a free market system with rule of law. It is hardly messy in a one-party dictatorship who basically owes money to itself and at any rate has a $3T kitty to draw from

Those 3T are China's Fx reserves, not "sovereign wealth"...by definition, all of those reserves dont belong to the sovereign - they are simply obligations to various people and entities (foreign investors and exporters) that the central bank holds in a diferent ccy as custodian..


As far as I know, those $3T are sovereign wealth since China gets it foreign reserves by "washing" all foreign currency that comes into the hands of its citizens. Every US dollar that a Chinese exporter gets must be given to the state in return for 7 or whatever the government set going rate of the Yuan to Dollar exchange is at the time.

All FX are held for two major reasons, to pay for imports and to serve as the backing for the local currency (the world doesn't have enough gold to back everything.) Holdings of for either reason can always be reduced. In a democracy, you can never hold $3T in reserves. That money would have been used to increase the living standard of its people by funding health care, social security, etc. But China instead uses this money to lend to Americans ten times wealthier.




All this talk of long term multi-decade competititon is a bit of bunk - in the long run, we are all dead!


We might be dead in the long run but why not have fun and speculate? Besides, things happen sooner than we think. What's 20 or 30 years? Most of us I wager will still be around.

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Re: PRC Economy and Industry: News and Discussions

Postby shyam » 07 Jul 2011 12:07

One thing about China is that it is one of the few trade surplus nations and is still going strong. It has positive fiat cash flow, and I suspect PRC understands that this may not last forever, and is using this once in a millennium opportunity to build the necessary infrastructure by buying raw materials from all over the world. When the global economic mess explodes, it can wipe out its slate and start using the already built infrastructure.

But, the question I have is what is the quality of the infrastructure built? If picture below is any sign of the quality, then many of those investments will go waste.

Image

I read somewhere that during last earthquake (in Chengdu?) it appears that many of the buildings that crashed were newly built. One of my friends told me that his Chinese friends themselves are not so confident about the Shanghai buildings. But they have no choice.

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Re: PRC Economy and Industry: News and Discussions

Postby ashi » 07 Jul 2011 12:07

amit wrote:How can one justify the fact that China with 1/6 th the economic size of the US ( a short while ago) had more steel making capacity than the 10 countries that followed it?

JMT


1) China is the world's factory and manufacturing center
2) large scale and rapid urbanization and industrilization

Theo_Fidel

Re: PRC Economy and Industry: News and Discussions

Postby Theo_Fidel » 07 Jul 2011 12:19

Yes, It will be interesting to see how it comes out. Will this one be different. My vote is no.

It has all been done before, nothing new here. Any system/growth that is not directly connected/generated to ROI has always come to a sticky end.

----------------------------

China's trade surplus is a function of arbitrating cheap energy and rock bottom worker wages to cheap products. If you are willing to do the same you too can join in. Most countries including India hesitate. We expect value for national wealth/effort.


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