FOUNDATION FOR INDO-TURKIC STUDIES
Tel/Fax ; 43034706 Amb (Rtd) K Gajendra Singh
Emails; Gajendrak@hotmail.com A-44 ,IFS Apartments
KGSingh@Yahoo.com Mayur Vihar –Phase 1,
http://tarafits.blogspot.com/ Delhi 91, India
28 February, 2010.
THE CHINESE ENIGMA
"Let China sleep, for when she wakes the world will shake", Napoleon Bonaparte
Having never been posted east or north of India my knowledge or feel for China is not much ,in spite of newspaper and book reads. Li, La, Chou convey nothing to me.
Still there is no choice but to study China , now that it is awake and ponder on its future and the ramifications . In my opinion the jury was still out regarding a soft landing for China ( a phrase Shankar Menon then Joint Secretary dealing with China , used in late 1980s when quizzed ) but I am now inclined towards possible economic and social problems and political turmoil in China's periphery like Xinxiang and Tibet .Perhaps earlier in the former which adjoins other Muslim and Turkic republics which gained freedom after the collapse of the USSR . China is almost the next bogey attached to 'Runaway US Train' which it is by now agreed is hurtling towards a hard landing leading and an end of US led West's era of almost total dominance since last few centuries.
One can at worst be wrong .Remember western triumphal forecasts at the beginning of this millennium or the failure of the vaunted CIA and a gaggle of Kremlinologists to forecast the collapse of the Soviet Union earlier.
I had done my first piece ,"Decline of American Century ' for Asia Times a year after 119 , which many people now suspect was an inside job.
The URLs of articles updating this epochal change are as follows.
The decline of the American Century Sept11, 2002 Atimes
The US Empire –Beginning of the End Game 24Nov, 2006
The Decline And Coming Fall Of US Hegemony March 30 ,2008
WESTERN MILITARY-CAPITALIST CIVILISATION IN DISARRAY September 25, 2008
Corporate Culture and Greed Sink the American Republic 17 May, 2009
by K. Gajendra Singh http://www.boloji.com/analysis2/0442.htm
Confirmation of Pressure on Dollar and US Decline 8 October, 2009
So how about looking at what some knowledgeable experts say on China's future.
"The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It's China's turn, the theory goes, as American consumers — who propelled the last global boom with their borrowing and spending ways — have begun to tighten their belts and increase savings rates.
The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as "socialism with Chinese characteristics," are still thriving, though, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles.
That's prompted some cheerleading from U.S. officials, who want to see those Chinese consumers begin to pick up the slack in the global economy — a theme President Barack Obama and his delegation are certain to bring up during next week's visit to China.
"Purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past," Treasury Secretary Timothy Geithner said during a trip to Beijing this spring. "In China, ... growth that is sustainable will require a very substantial shift from external to domestic demand, from an investment and export-intensive growth to growth led by consumption."
That's one vision of the future.
But there's a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
A Chinese collapse, of course, would have profound effects on the United States, limiting China's ability to buy U.S. debt and provoking unknown political changes inside the Chinese regime.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.
Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.
His most famous call came in 2001, when Chanos was one of the first to figure out that the accounting numbers presented to the public by Enron were pure fiction. Chanos began contacting Wall Street investment houses that were touting Enron's stock. "We were struck by how many of them conceded that there was no way to analyze Enron but that investing in Enron was, instead, a 'trust me' story," Chanos told a congressional committee in 2002.
Read more: http://www.politico.com/news/stories/1109/29330.html#ixzz0gK7IVo1W
PIVOT CAPITAL MANAGEMENT - China's Investment Boom the Great Leap Into the Unknown
We conclude that the capital spending boom in China will not be sustained at current rates and that the chances of a hard landing are increasing. Given China's importance to the thesis that emerging markets will lead the world economy out of its slump, we believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the US subprime and housing boom. The ramifications will be far-reaching across most asset classes, and will present major opportunities to exploit. There are three key reasons why we take this view:
China's expansion cycle surpassing historical precedents: It is widely believed that China is still in an early development phase and therefore in a position to expand capital spending for years to come. However, both in its duration and intensity, China's capital spending boom is now outstripping previous great transformation periods.
Policy actions not sustainable into 2010. This year's burst in economic activity has been inflated by a front-loaded stimulus package and a surge in credit growth. Given their exceptional and forced nature we believe growth rates in government-driven lending and capital spending will collapse in 2010.
Overcapacity and falling marginal returns on investment: Analysis of industrial capacity, urbanisation and infrastructure development shows that China's industrialisation and structural modernisation are largely complete.
Combine this with falling returns on investment, and it becomes obvious that China's long-term investment needs are grossly overestimated.
From Short-Term Trading Saturday, January 30, 2010
"Is there a China Bubble
The idea is that capital spending in China cannot continue at this rate. The coming slowdown will have global consequences.
Let's see the main points supporting this thesis:
- China' s investment boom is unprecedented with growth highly dependent on capital spending. However, decreasing marginal returns on investment will lead to a pullback in capital expenditures. This can happen in a soft landing scenario or a hard landing one where a banking crisis would occur.
- Credit has played an important role in Chinese growth. Credit has expanded 50% more than GDP. If loans continue at this rate, in 2010 credit to GDP ratio will be 200% (similar to Japan in 1991 and US in 2008). Credit is going to luxury property and stocks, but not much into the real economy.
- Some say that China can afford this level of spending because of the low debt (23% of GDP) and huge reserves. However, the size of debt is understated. There are also other off-balance sheet liabilities that would bring the debt to GDP ratio to 62%. Moreover, inflows of money into China cannot fuel further capital expenditures.
- Capital expenditures went into manufacturing, real estate and infrastructure in the past years. Further expansion will not impact as much on growth as in the past.
- The manufacturing capacity is at developed country levels. The manufacturing base is mature with few areas for further expansion especially in traditional sectors (steel, cement, aluminium, energy). There is excess capacity in many sectors.
- Urbanisation rate is actually low in China. Moreover, the lending boom has boosted housing construction. There is an excess housing construction compared to the household formation. The price to income ratios are at extreme levels.
- China infrastructure is relatively well developed. Economic justification behind latest infrastructure projects is questionable.
- Consumption growth cannot replace the investment boom. Private consumption would have to grow 3 to 4 times faster than in the past decade to compensate for the imminent retraction in investment.
A slowdown of China would have global consequences (China Economic Growth And Global Risks). As signs of weakness appear, other governments would introduce further stimulus. This may prolong the top. However, the transition from a model based on investment to one based on consumption, although with a slower rate of growth, cannot be avoided. The crunch could come in H2 2010. The issue is when markets will start discounting the slowdown. The impact would be on cyclicals, industrial commodities, equities and credit. There would be a move toward more defensive assets. What is the role of China in the debate on deflation vs inflation? The slowdown should be deflationary, given their overcapacity. However, depending on how aggressive the policy response will be there may be inflationary risks again.
I find the report interesting. All points have a merit although I am not an expert about China, so I cannot really judge the data presented. Provided that the scenario presented is correct (but I am sure there are many who see things quite differently), I think, however, that there are some areas that should be further discussed:
- Systems of these complexity and size continue to run with an impressive inertia and do not change direction until the inevitable happens. I do not believe in a soft landing scenario. There would be a crash some time in the future (Global Bear Rally: Apocalypse Ahead).
- Is it going to have political and social implications in China?
- The strategy to prepare for such an event is not clear. When is this going to happen? Is second half of 2010 realistic (what they continue to go on for another 2-5-10 years)? What are the defensive areas where money should go? What happens to the US dollar and the Treasuries? Will they be a safe haven again or China will be forced to liquidate their assets?
- The inflation and then deflation scenario is not substantiated enough.
- What will be the opportunities generated by this crisis if there will any?
- What are the global implications of a slow down in China? Will it be possible for western countries to inject in the system further stimulus? How will western countries react politically and economically to a second round of the crisis? (Through bailouts, nationalizations and protectionism? Will they have the strength to do it given their high levels of debt?) Will emerging countries react better than western countries?
All this looks a little bit a fanta scenario. However, things develop quite quickly once the ball starts rolling. The main problem of these studies is that the number of variables involved is so high that eventually things unfold differently from what was envisaged. It is very hard to forecast the implications at the various levels. From an investor perspective it is even more difficult because timing is important. "
From Short-Term Trading Saturday, January 30, 2010
Jim Chanos Is Wrong: There Is No China Bubble
Shaun Rein, 01.11.10, Forbes .com
He misunderstands basic facts about income, real estate and the currency there.
The famed short-seller Jim Chanos has been making waves lately by saying he thinks China is in a bubble and ready to collapse in 2010. He argues that easy credit has let real estate and stock market prices shoot upward. He also says the Chinese government is cooking the numbers to show 8% growth in gross domestic products, when actually China can't keep growing when the rest of the world has been hit so hard by the financial crisis.
Chanos called it right on Enron and Tyco ( TYC - news - people ) before they collapsed. He is no lightweight observer of the economic scene. However, he is wrong about China. For once I agree with the famed investor Jim Rogers, who cofounded the Quantum Fund with George Soros. He says China is not in a bubble and adds that he finds "it interesting that people who couldn't spell China 10 years ago are now experts on China."
Betting against China in 2010 is a bad mistake for investors and companies alike. Here are three reasons why Chanos is wrong and Rogers is right about the strength of China's economy:
Chanos' first error is his belief that China's real estate sector soared in 2009 because of speculation triggered by a loosening of credit by China's banks. Lending in China doubled to $1.35 trillion in the first 11 months of 2009. Real estate prices rose sharply throughout the country and almost doubled in cities like Shenzhen. Chanos calls that a bubble--"Dubai times 1,000--or worse"--that could lead to fallout like the subprime mortgage mess in the U.S.
There are, however, fundamental differences between China's real estate and consumer finance markets and those of the U.S. and Dubai, which Chanos compares them to. First, when buying residential properties, consumers in China have to put down 30% before taking out a mortgage. For a second home, they have to put down 50%, no matter what their net worth. Therefore, China doesn't have the reckless consumer behavior that occurred in the U.S., where people with bad credit were taking out huge loans from Countrywide with no money down, or were buying 10 homes without deposits in the hope of flipping them in a few months. People who buy homes can afford it.
Also, mortgages are not being spliced up and packaged and securitized by the likes of Citigroup ( C - news - people ) and Bank of America ( BAC - news - people ). Instead mortgages are held by the original lenders, the way they were in the U.S. before financial innovation and lack of regulation broke down the old rules.
The Chinese government also has no qualms about overseeing the market and has not been run by Ayn-Rand-loving free marketers like Alan Greenspan, who seemed to believe that no government intervention at all was best. The Chinese government is gravely concerned about social stability because of the widening gap between the rich and the poor. It is therefore limiting the sizes of new apartments and restricting the construction of stand-alone luxury villas. (Most people in China's urban areas live in high-rise apartment buildings. I myself live in a 60-story building.) The government is also forcing developers to build low-income housing. And to prevent flipping and excess speculation, it is heavily taxing sellers who unload their properties within two years of buying them.
The real estate business to be concerned about is commercial building. There has been way too much construction of large office towers, especially in Shanghai, which is gearing up for its World Expo this year. Too many gleaming skyscrapers sit empty of tenants. The glut of office space has already caused rental prices to drop in places like the Shanghai financial district, Pudong.
Too much leverage, not high prices, caused the problems with real estate in Dubai and the U.S. There just isn't that much leverage in China. So even if prices are too high, a drop of as much as 20% or 30% wouldn't cause anything like the tsunami that hit the American and Dubai markets.
The second way Chanos is wrong about China is that he, like most economists and Wall Street analysts, underestimates income there. I have recently been debating several Harvard economists who worry that incomes haven't risen as fast as GDP in China. They argue that it shows that too much of China's growth has been a matter of government investment in unsustainable infrastructure projects like bridges and highways, as happened earlier in Japan. They point out that Chinese consumers account for just a third of the economy in China, vs. two-thirds in the U.S. However, my firm, the China Market Research Group, estimates that Chinese consumers will come to account for half of the economy within the next three to five years as the role of exports diminishes. (See my "Three Myths About Business in China.")
If anything, incomes are grossly underreported in China. A simple look at how accounting works will show why. Whereas in the U.S. individuals must report their income to the Internal Revenue Service every year, in China all individual tax is reported and paid for by companies, except for that of high earners. Many Chinese companies limit the tax they pay by reporting low salaries and then paying their employees higher amounts while accounting for the difference as business expenses like phone bills. The employees are happy because they make every bit as much as they were promised, and the companies are pleased to lower their tax exposure.
Also, many companies pay for housing and cars for their employees, a holdover from the old system of state-run businesses. Most Western economists don't count those expenses as income, but they should. Deceptive accounting of income is so widespread that the government has announced plans to tax some business expenses in state-run enterprises--the kinds of expenses that let executives pay taxes on earnings of $300 a month while living in multimillion-dollar homes and driving Mercedes.
The third thing Chanos gets wrong about China is the notion that the yuan is likely to appreciate. In the short term, it would be disastrous for China to let that happen, as I wrote in "Why Krugman Is Wrong About The Yuan." It would cause China's exports to plunge, swell the Chinese unemployment rolls by millions, and destabilize the financial system. In the long term, however, once the world's economy stabilizes, appreciation of the yuan might make sense. Getting exposure to Chinese assets now would benefit an investor when that time comes.
Chanos has an excellent track record in divining the future. However, part of his job as a short seller is to make money by causing markets to question good things. That can be useful for keeping companies honest and in check. But in this case he clearly doesn't understand the economic system he's talking about. China is not in imminent threat of collapse, and investors and companies are wise to stay involved with it, as Rogers argues.
Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. Follow him on Twitter at @shaunrein.
Alert | China By RBS ( Royal Bank of Scotland) February 2010
Is there a bubble in China?
Worries about a bubble in China have shaken global
markets. These worries are unlikely to disappear.
GDP growth is forecast at 10% in 2010, inflation is
rising, and policy has yet to be tightened materially.
The lack of published data also makes it difficult to
argue decisively for or against the existence of a
Bubbles are not new to China. The soybean crushing
sector collapsed in 2004, the auto sector overheated
in 2005, and Shanghai property prices fell sharply in
2006. However, these examples were limited to
specific sectors or cities. Today's worry, by contrast,
is that there is a systemic bubble that threatens the
It is the aggressive fiscal stimulus of 2009 that lies at
the heart of concerns. The speed at which GDP
growth slowed surprised many, and officials
responded by easing policy dramatically, Two year's
of credit was pumped into the economy in less than
six months, while fixed investment growth
There is thus good reason to worry about a bubble.
Fixed investment was already the largest driver of
growth prior to the economic crisis and officials were
talking of the need to rebalance the country's growth
drivers. However, fiscal stimulus worsened
imbalances with a large share spent on road, rail,
and other capital projects.
The chances of a bubble bursting in 2010 remain
small. The infrastructure needs of the poorer interior
provinces, the fact households put at least a 30%
payment down on their home purchases, or the way
robust nominal GDP growth helps to absorb the
outstanding stock of non-performing loans, all argue
against a short-term bubble today.
However, the medium-term risks of a bubble remain
high if no corrective action is taken.
Rapid credit growth and over reliance on capitalintensive
growth means supply may outpace
demand. Worries about a double-dip in the global
economy may also discourage the government from
tightening. But eventually, aggressive tightening will
be needed producing a sharp, and painful,
correction in growth.
Simultaneously, high savings rates, tight capital
controls, and a lack of investment alternatives mean a
large pool of trapped liquidity will continue to search
for higher yields. Expectations of higher inflation will
only accelerate the switch out of deposits into other
assets, especially housing, and the risks of an asset
bubble will grow.
What follows are answers to the most commonly
raised questions. The final page looks at likely
triggers of a bubble.
Fixed investment is 42% of GDP. Surely, this is
China's gross fixed capital investment as a share of
GDP is indeed high. The sudden increase in China's
spending is unsustainable.
China's fixed investment is undoubtedly high as a
share of GDP, but the data is also exaggerated.
Having lived in a handful of emerging markets in the
past two decades, I am constantly struck at how fast
China replaces its capital stock relative to the other.
emerging markets. Airports are knocked down, roads
are ripped up, and steel plants are relocated.
A good example is Guangdong's cement industry.
The industry suffers from oversupply. However, an
estimated 40% is accounted for by vertical kiln
cement and is heavily polluting. The provincial
government has proposed replacing such factories
by 2011 and thus deal with its overcapacity problems
while also spur more spending. It is for this reason that
the character for demolish, or chai, has become symbolic
of China's growth over the past decades.
The phenomenon owes in part to the way officials are
measured on the basis of targets. Faced by a growth
target, a county official will be tempted to build
bigger and better public infrastructure or residential
apartments. In many instances, this will mean
demolishing existing structures to make way for
Fixed investment as a share of GDP is still excessive
by any measure. However, after accounting for the
country's rapid consumption of capital, there is
arguably less reason to worry about a large build-up
of excess capacity. And while it is not possible to
measure the net capital stock owing to a lack of data,
it is likely lower than popularly believed.
Coastal provinces Central and Western provinces
emerging markets. Airports are knocked down, roads
are ripped up, and steel plants are relocated. The phenomenon
owes in part to the way officials are measured on the basis of
targets. Faced by a growth target, a county official will be
tempted to build bigger and better public infrastructure or
residential apartments. In many instances, this will mean
demolishing existing structures to make way for replacements.
Fixed investment as a share of GDP is still excessive
by any measure. However, after accounting for the
country's rapid consumption of capital, there is
arguably less reason to worry about a large build-up
of excess capacity. And while it is not possible to
measure the net capital stock owing to a lack of data,
it is likely lower than popularly believed.
So isn't fiscal stimulus resulting in more "roads to
Not all such spending is wasteful. For instance,
building a more efficient steel factory reduces its
water consumption. Building a better road to a
coastal port improves the competitiveness of export
factories. Nonetheless, there are also examples of
wasteful spending that amount to little more than
digging holes and filling them in again.
Still, a large share of today's fiscal stimulus is aimed
at the less developed interior provinces..
The statistical bureau of Zhejiang, a large coastal
province, underscored the imbalance in a report
issued last year. The report noted that while fiscal
stimulus spending had prevented a deeper
contraction in growth, it had not benefited Zhejiang
greatly, as the province's infrastructure was already
well developed. A trip around the interior provinces shows
the region's infrastructure has a long way to catch up.
GDP per capita is just 17,500 yuan ($2,600 at today's
rate) against 39,000 yuan ($5,800) in the coastal
provinces. Indeed, the interior provinces only have
the same GDP per capita as the coastal provinces
did in 2001.
The rising nominal value of China's
GDP is fast overtaking Japan's.
It is China's size that also makes comparisons with
other emerging economies misleading. Its interior
provinces have a population of over 700 million, or
larger than that of South East Asia combined. This a
major source of demand. Being able to turn to the
interior provinces, each equivalent to another
Malaysia, Thailand, or the Philippines, provides a new
source of investment demand, prolonging the
Of course, infrastructure is not the only area of
concern. There are also fears of excess
manufacturing capacity. An excellent report by the
European Chamber of Commerce in 2009 identifies
six areas of special concern, specifically, steel,
aluminium, cement, chemicals, refining, and wind
It is important that all are heavy industrial sectors. It
was heavy industry that has benefited most from the
recent investment boom. Light industry, by contrast,
experienced its own bubble in the 1990s, as money
poured into the sector ahead of WTO-entry and after
Deng Xiaoping's economic reforms. However, light
industry has since largely restructured and has
attracted less fixed investment in recent years,
underscoring that overcapacity problems are not
Won't the economy eventually collapse under a
growing NPL burden?
Certainly not all investment is productive. And where
structures are demolished before they are obsolete,
the result is rising non-performing loan (NPLs). Add
to this the surging credit growth of the past year and
risks of additional capacity, and there is a high risk
that rising NPLs will ultimately drag on medium-term
Yet, the rapid credit growth in 2009 amounted to 29%
of GDP. Even if twenty-five percent of this resulted in
NPLs it would translate into a not small, but still
manageable 7.0% of GDP. Moreover, infrastructure
loans tend to have a longer tenure, at near 5 years,
and have lower historical default rates, albeit their
quasi-sovereign status is partly to blame.
Equally important is strong nominal GDP growth. In
the past ten years,
"Overcapacity in China: Causes, Impacts, and
$1,320 billion to $4,930 billion, an average 14%
annual increase. Strong nominal growth helped to
absorb the stock of NPLs created during the 1990s
boom, and the financial sector's official NPL ratio is
The risk is that the rapid credit growth of 2009 is
repeated in 2010. January's credit growth surged by
1,390bn compelling the PBOC to hike its required
reserve ratio the same month. And this rate will have
to slow substantially if annual credit growth is to fall to
a more tolerable 7,000bn yuan against near 10,000
yuan last year.
Why is the government ignoring the risks of a
The government is aware of the risks of a bubble. In
an unusual step, the Party Central Discipline and
Inspection Committee and Ministry of Supervision
sent out joint- teams from late-2008 to inspect fiscal
stimulus projects. The central government has since
cracked down on wasteful investment, and has also
required that provincial governments match central
government spending dollar for dollar.
The banking regulators have meanwhile tightened
mortgage lending, reduced off-balance sheet
lending, and proposed raising capital ratios in a flurry
of decisions all taken in the past six months. The
Property-related loans have only recently started to surge
Is there a bubble in the housing sector, and what
if it bursts?
There is no consensus on the risks of a housing
bubble. This is unsurprising. The housing sector was
liberalized only 10 years ago and published data is
limited. Conditions vary by city, and even by suburb.
Vanke, the country's largest listed-developer,
accounts for just 2% of the market. The upshot is that
opinions on the housing sector's outlook can vary
widely even among experts.
Underscoring this point, I heard estimates last year
on the stock of unsold homes ranging from 3 to 18
months, all from experienced observers of the
For this reason, measures of price to income ratios
are unreliable. The popular NDRC's measure shows
prices rising nearly 10%y/y in December, or not far
above estimated wage growth. However, other
official measures put the rise at a higher 25%y/y,
signalling risks of a bubble. Still, the change varies
widely between cities with some having barely
registered an increase.
There are certainly risks of bubbles in specific cities,
especially first-tier cities. However, it is not worries
about bubbles in, for instance, Beijing or Shanghai
that are the worry—these two cities account for only
10% of the market. It is worries about a national
Yet, worries about speculative froth must also be
balanced against powerful structural drivers of
demand. Rising urbanization is one such driver.
Unfortunately, it is no easy thing to measure.
Critics argue that China's low rates of urbanization are
underestimated, for example, by excluding outlying
suburbs or not taking into consideration the
industrialization of rural areas.
Maybe so. But the residency system, or hukou, still
makes it difficult for many migrants to settle
Nonetheless, if housing sector activity slows, or
collapses, its impact on GDP growth would be
How big an impact? The usual caveats apply when
working with China's data. First, there is no real
expenditure-based GDP data to accurately measure
the importance of fixed investment to GDP growth.
Second, the supply-based GDP data offers only
limited details on the construction sector's
contribution. Thus estimates of the sector's impact
are, just that, estimates.
Proxy estimates suggest residential investment
accounts for 14% of fixed investment and 6% of GDP.
The latter figure is equivalent to what the United
States was investing in 2005 before its bubble burst.
This certainly rings alarm bells, although China has a
less mature market, while urbanization and
upgrading demand provide stronger structural
Housing does have a knock on effect for other
industries. Its demand for steel beams, copper pipes,
and home furnishings, to name just a few items, is a
major reason for the strength of manufacturing
activity. Manufacturing accounts for a large 33% of
GDP in China and slower demand would seriously
drag on growth.
The risks to the financial sector are, however, smaller.
Most mortgages require a 30%, or higher,
downpayment, while speculators often pay for highend
properties with cash. Property-related loans
account for 18% of banking assets versus 32% and
38% in the U.K. and U.S., respectively, thus limiting
the systemic risks to the banking sector.
So there isn't any reason to worry about a
While there may not be a bubble today, there will be
a bubble in the medium-term if the government does
not tighten policy and speed up economic reform.
There are two major sources of bubbles that must be
addressed. First, is reducing the economy's reliance
on capital-intensive growth. Second, is reducing the
level of surplus savings.
I have argued that worries about excess capacity are
overstated. The anecdotal consumption of fixed
capital is high as roads, bridges, and factories are
torn down. Infrastructure demand in the interior
provinces is also strong. Nonetheless, China's capital
intensive growth strategy is about to run into some
First, the focus on capital-intensive growth was
helped by opening up new, or "untapped", industries.
In the 1990s, it was the export sector. In the 2000s, it
was the auto and metals sector. But, as the economy
matures, it is increasingly difficult to find untapped
industries, and fixed investment is focused on
already mature sectors thus raising the risks of
There must be a shift towards less capital-intensive
growth. The services sector, especially logistics,
health, and tourism, is a good candidate for an
"untapped" and non-capital intensive industry.
Services accounts for just 40% of China's GDP, a
figure that is low even when compared to Korea
(51%) and Taiwan (70%), the region's other big
Second, the focus on capital-intensive growth was
helped by opening up external markets. But external
demand is slowing, and China's private consumption
is worth just $1,600bn versus a combined $17,400bn
in Europe and the United States. The risk is that fixed
investment is accelerating at the same time that
overall demand is slowing relative to its earlier rapid rate.
Critics argue that consumption growth in China is
relatively faster than in Europe and the United States.
But this misses the point that the biggest gains in
external demand came from market share expansion,
as opposed to consumption growth, and it is difficult
for China to capture market share at home as it
already owns near to 100% of the market.
The risk is supply will race ahead of demand even as
the number of "untapped" industries fades and
external demand remains sluggish.
The problem of surplus savings is meanwhile well
documented. Gross domestic savings account for
49% of GDP, among the highest rates in Asia.
Nonfinancial sector deposits have risen from 117% to
167% of GDP between 2005 and 2009, albeit with
recent research indicating that the corporate sector
accounts for the larger share.
The temptation to invest these savings in equities,
properties, and other non-deposit assets is strong.
Nominal 12-month deposit rates have averaged
2.4%, in the past decade, compared to nominal GDP
growth of 14%. This owes to the fact that the PBOC
sets deposit rates while cheap funding has
supported the country's growth.
The risk for 2010 and beyond is that rising inflation
spurs the flow into non-deposit assets. CPI inflation is
forecast to reach 3% in 2Q pushing real deposit rates
into negative territory. Inflation is not forecast to spike
markedly from 3%, but the medium-term trend will be
for higher prices owing to growing shortages of land,
raw materials, and youth labour.
The problem is compounded by tight capital controls
and a dearth of investment alternatives. This traps
surplus savings in China and funnels a large share
into a limited number of assets, mainly equity and
property assets. The risks have only grown in the
past decade with the liberalization of the equity and
What are the triggers for a bubble?
I do not expect a bubble in 2010. However, there are
a number of responses that are necessary to prevent
a bubble in 2012.
The PBOC must more aggressively curb credit
growth to keep the annual increase at around 7 trillion
yuan. The problem with bank credit is that it tends to
fund heavy-industrial and state-owned projects,
further concentrating investment in a few specific
sectors, such as steel, and raising the likelihood of
Inflation must be prevented from rising above 5%.
Inflation expectations are already worsening as food
prices are firm, home prices are rising, and there are
tentative signs of wage inflation. January's CPI eased
worries that food prices may spike, and inflation is
likely to stabilize around 3% in 2010, but risks are
A combination of tighter restrictions on second-home
purchases combined with increased construction of
low-cost housing will help to reduce risks of a
A pullback in fiscal stimulus, deemphasising growth targets, the
resumption of CNY appreciation and restructuring in
the export sector will help reduce risks of excess
capacity. Accelerating service sector liberalization
will shift the focus to less capital-intensive growth.
Accelerating capital account liberalization will help
release trapped liquidity.
Is all this likely? The challenge for the government is
tightening policy in spite of fears about a double-dip
in the global economy. The export sector is an
important driver of employment growth, so signs of
renewed global weakness would tempt officials to run
with an easier than optimal policy and, most
worryingly, rely excessively on the property sector to
drive growth. The upcoming leadership change in
2012 may also harden views on the economy and
discourage the government from pursuing policy reform.
There is reason for optimism. It is important that
Shanghai recently dropped its ranking of
municipalities by GDP, focusing on the quality, as
opposed to the pace, of growth. Jiangsu and
Guangdong have similar lowered their GDP forecasts
for 2010. Nonetheless, the changes are not yet
material enough to prevent risks of a bubble
emerging in the medium-term.
Finally, a note of caution. There will be bubbles in
certain sectors and cities over the coming years,
such as in the steel sector or Shanghai's property
market. I expect that media coverage of these
bubbles will regularly shake global risk appetite.
However, the challenge will be in determining
whether they do in fact threaten the economy's
Beginning of the end of the Chinese miracle May, 2009
By: Gordon G Chang
HIMAL South Asian, May 2009..
After two decades of uninterrupted prosperity, the initial stages of the downturn are exposing the inherent weaknesses of China's economy, and those fissures will be felt near and far.
China has the world's fastest-slowing economy. According to official statistics, gross domestic product skyrocketed a staggering 13.0 percent in 2007. In fact, in all likelihood that figure was even higher, with poor sampling procedures failing to properly take into account the output of small manufacturers, which at the time constituted the most productive part of the economy. Even without that extra bump, however, this put China in the top echelons in terms of economic growth.
Last year, however, the economy tumbled. GDP growth, Beijing tells us, was 10.6 percent in the first quarter, 10.1 percent in the second, 9.0 in the third, and 6.8 percent in the fourth. The decline continued this year, with growth reported as 6.1 percent in the first quarter, the lowest rate since China began issuing quarterly GDP statistics in 1992. The falloff is even more dramatic if we dig a bit beneath these numbers. China's National Bureau of Statistics reports GDP by comparing a quarter with the corresponding one during the preceding year. If, instead, it compared a quarter to the preceding one – as most countries do – it would have reported essentially no growth during the fourth quarter and, possibly, a contraction. And we have to remember that small manufacturers are suffering more than other producers, so current statistics still do not reflect the real drop-off in output. When other distortions in the statistics – some the result of fakery – are taken into account, it becomes clear that no economy is currently falling faster than China's.
-- Chinese output will contract this year. Such a scenario has not occurred since Beijing policymakers dramatically overhauled the contours of the Chinese economy three decades ago; China's economy has not shown a year-to-year decline since 1976.
What are Chinese leaders doing about the alarming deterioration of the economy? Beijing's technocrats, to their credit, saw problems coming by the middle of 2008. In late July of that year, the Politburo officially reversed course from fighting persistent inflation to attempting to 'lift growth'. Since then, the technocrats decided, among other things, to provide tax rebates, hand out incentives for home purchases, adjust currency policies, and cut interest rates. Nothing, however, seemed to work. Late last year, Chinese leaders adopted a rescue strategy to tackle the situation, with tactics designed to increase domestic investment through fiscal stimulus.
In November 2008, China's State Council unveiled its stimulus package. The body, the central government's cabinet, said it would spend an "estimated" RMB 4 trillion, about USD 586 billion, over the next two years in ten major areas. In addition, Beijing promised to loosen credit and reduce taxation. The plan, at least as announced, disclosed few details and, therefore, had a distinct made-up-on-the-spot quality to it. Since then, the central government has adjusted the programme, but, even with improvements, the plan appears deficient in important respects.
First, as big as it is, the contemplated spending is not sufficiently large. (Indeed, this assessment comes from the government itself. The State Council's National Development and Reform Commission, the NDRC, estimates that the November stimulus plan will add only one percent to GDP over its existence.) Second, the stimulus programme does not look as though it will work fast enough. Third, the spending plan is pushing the country in the wrong direction, with the policy having an apparent bias toward large-scale infrastructure projects.
Overbuilding has also plagued the country's great cities. I recently stayed at a brand-new hotel in the central Wangfujiang shopping section of Beijing. Even though this was a high season for tourists, the place was almost empty, as were the others next to it. I was certainly impressed – even astounded – by the ambition of Chinese officials, but inevitably wondered about the economic viability of their grandiose plans. In a country with too much of most everything, the government's concept now appears to be simply to build more. Eventually, and inevitably, inefficient investment is counterproductive and catches up with an economy.
Many observers at the moment unthinkingly say that Beijing can solve the country's economic problems by engineering increased domestic consumption to take up the slack. This is indeed true as a theoretical proposition, and it is also something that Chinese technocrats understand is exactly what China must do in the long run. Optimists point to the fact that the list of ten areas in the original announcement of the stimulus plan includes some – such as affordable housing, health and education – that look like they could boost consumption. Yet, as we have seen, the plan instead overemphasises government investment. Only a small percentage of the USD 586 billion spending plan will go to desperately needed social services – a clear indication that Chinese leaders are still operating within the mindset of a state-investment-dominated economy.
As a practical matter, it is unlikely that China will have a consumer economy either this decade or next. For one thing, the country is currently moving in the wrong direction: consumption's role in the economy has been sliding, dropping from its historical average of about 60 percent of the overall economy to just 35 percent today. That is almost certainly the lowest rate in the world; and while some may say consumption cannot go any lower, it most definitely can. First, Chinese consumers, reacting to grim economic news from home and abroad, have in recent months been pulling back in terms of spending, especially as property values on the coast collapse and as stock markets, despite a few upticks, slide.
Labour unrest has spread throughout China, but especially in southern Guangdong province, where many of the country's toy manufacturers are located. Incredibly, factory owners facing the prospect of closure have demonstrated against the government there. Protests in coming months are bound to become larger, more frequent and more violent as the economy continues to weaken and as workers begin to feel safety in numbers. Chinese workers, even poor migrants, are starting to think they can get what they want by defying local authorities. So far, local governments have tried to buy off protestors with small payments, but this in turn is fuelling more protests. Yet with the accelerating failure of industry – more than half of China's toy factories went out of business in the first seven months of last year, for instance – local officials will have fewer resources to fund benefits to those who have suddenly lost their jobs. As Guo Cheming, a Communist Party cadre, noted late last year as he watched a workers protest in southern China, "When times are bad economically, a small incident can rapidly become a big one."
Chinese citizens and businesses sense this instability, and therefore foresee the end of the so-called 'Chinese miracle'. They evaded Beijing's strict currency controls, and smuggled out some USD 126 billion from China from last October through December. Another estimate, using a broader definition of 'hot money', put the figure as high as USD 240 billion for the same period. By ferreting their money out of the country, the Chinese people are sending the rest of the world an important message: among other things, they are saying that China's economy is slowing fast. The ramifications will be felt inside and outside the country.
Gordon G Chang is the author of The Coming Collapse of China.
The End of the Beijing Consensus
Paul Krugman bluntly remarked last April that "China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place." Against this backdrop – of a Chinese confidence in its fiscal economic strength that had staved off an immediate collapse of the Chinese economy but also a deeper fear of the vulnerability of its asymmetric interdependence with Western economies suggests that the Chinese political economy was itself in a state of flux.
Be prepared for a China –US struggle and not a G-2 Tango
Zorawar Daulet Singh wrote recently;
" A fundamental weakness of the G-2 image, aside from the comprehensive national power asymmetry between the two potential collaborators was the fatuous presumption that the national interests of America and China were convergent enough to seriously consider seamless geopolitical cooperation on diverse issues such as North Korea, Iran, Afghanistan, Pakistan, energy security, climate change, non-proliferation, and reforms of the international financial system. And since the terms of resolution to most of these strategic questions were largely being conceived in Washington, the G-2 in retrospect was probably a euphemism to extract Chinese concessions.==
"China's post-crisis massive fiscal expansion and its apparent success combined with a declining confidence in the Anglo-Saxon financial system created an impression among Beijing's rulers that their improvised model of capitalist development, which had cultivated powerful state-owned enterprises, had been vindicated by the financial crisis. Such triumphalism was palpable in Chinese commentary in the months following the crisis. This optimism, however, soon gave way to a rising concern over China's dependence on the dollar, which in turn was linked to China's structural dependence on Western consumer markets to sustain its high growth rates. Nothing captured this anxiety more than the laughter the US Treasury Secretary, Tim Geithner, invited from his Chinese audience last summer when he declared that "Chinese assets are very safe".
"By mid-2009, the consensus among Chinese economists was that China's dollar holdings posed great risks to its future economy. Yet, China grudgingly recognized that not only did its dollar holdings provide it with little actionable leverage in a world with a single reserve currency but that the post-crisis US response to revive its economic system via unrestrained fiscal and monetary expansion was tantamount to shifting a major portion of the financial risks of US debt to creditor economies. "
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