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
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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.
