Chinese Economics Thread

[lostsoul]

Big Outflow Trouble In Not So Little China?

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China has two problems... well more than two we are sure, but these seem critical.

First, there is a significantly slowing economy that 'desperately' needs the hand-of-god Central-Banker to stimulate it with free-money - but is hand-cuffed by the huge disconnect between 'apparently' low CPI and extreme highs in food and energy prices which will only exaggerate spending retrenchment should any money-printing be enabled.

Second, it seems for many investors the writing is on the wall as money is flowing out of the world's growth engine faster than oil from a wok. While at the surface USDCNY appears to be doing its 'stable' thing - the PBOC is soaking up unprecedented amounts of CNY as the market 'sells' out.

 

[J-XX]

China's economy is slowing but it's way better than any other major economy. Just look at the European economies, Japanese economy, Indian economy and the US economy. Europe, US and Japan are in ultra easy monetary policy and they are in contraction. Not only that but Europe, US, Japan and India all have debt and deficit problems. Their fiscal situation is dire. So they have shrinking growth even with ultra loose monetary policy and massive debt problems.

China's economy is bad, but compared to the others, it's doing well. First, china don't have a debt crisis as the fiscal situation in china is very strong. Second, china is still under tight monetary policy with the RRR at near 20% and interest rates at 3% for deposits and 6% for lending. So china has alot of room for easing. And with a strong balance sheet, china is not burdened by chronic debt problems. The only time china went into debt was at the height of the financial crisis, it was a one off event, not annual debt issues like in Europe, US, Japan and India

Every economy in the world is doing poorly.

 

[Equation]

Every economy in the world is doing poorly.

Yep...all thanks to the EU.

 

[delft]

Yep...all thanks to the EU.

That's a bit simplistic. This morning I found this article in the Dutch newspaper Financieel Dagblad:

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America’s Exceptional Fiscal Conservatism
Simon Johnson
Monday 27 August 2012, 14:16
update: Monday 27 August 2012, 14:19


In most countries, to be “fiscally conservative” means to worry a great deal about the budget deficit and debt levels – and to push these issues to the top of the policy agenda. In many eurozone countries today, “fiscal conservatives” are a powerful group, insisting on the need to boost government revenue while bringing spending under control. In Great Britain, too, leading Conservatives have recently proved willing to raise taxes and attempted to limit future spending.
The United States is very different in this respect. There, leading politicians who choose to call themselves “fiscal conservatives” – such as Paul Ryan, now the Republican Party’s presumptive vice-presidential nominee to run alongside presidential candidate Mitt Romney in November’s election – care more about cutting taxes, regardless of the effect on the federal deficit and total outstanding debt. Why do US fiscal conservatives care so little about government debt, relative to their counterparts in other countries?
It has not always been this way. For example, in 1960, President Dwight D. Eisenhower’s advisers suggested that he should cut taxes in order to pave the way for his vice president, Richard Nixon, to be elected to the presidency. Eisenhower declined, partly because he did not particularly like or trust Nixon, but mostly because he thought it was important to hand over a more nearly balanced budget to his successor.
The framework for US macroeconomic policy changed dramatically when the international monetary system broke down in 1971. The US could no longer maintain a fixed exchange rate between the dollar and gold – the cornerstone of the postwar Bretton Woods system. The arrangement collapsed because the US did not want to tighten monetary policy and run more restrictive fiscal policy: keeping US voters happy was understandably more important to President Nixon than maintaining a global system of fixed exchange rates.
Ironically, however, rather than undermining the predominant international role of the US dollar, the end of Bretton Woods actually boosted its use around the world. Much has been written, and many hands wrung, about the dollar’s decline over the last four decades, but the fact remains that holdings of US dollar assets by foreigners today are vastly greater than they were in 1971.
This turns out to be a mixed blessing, because it has allowed the US to become less careful about its fiscal accounts. Foreigners now hold roughly half of all US federal government debt, and they are willing to hold it when it yields a very low return in dollars (and even when the dollar depreciates).
In fact, whenever the world looks unstable, investors want to hold more dollar assets – even when the US is the cause of the instability. When big US banks are in trouble or Americans are having another debilitating political fight over their public finances, global investors scramble into US Treasuries. Last year’s congressional showdown over the federal debt ceiling may have cost the US its AAA sovereign rating with Standard & Poor’s, but the federal government’s borrowing costs are actually lower now than they were then.
What has America done with this opportunity – arguably the lowest-cost funding in the history of humankind? Not much, in terms of productive investment, strengthening education, or maintaining essential infrastructure. But the US has done a great deal in terms of adopting tax cuts that boost consumption relative to income and lower government revenue relative to expenditure. This is the lasting legacy of the “temporary” tax cuts adopted by George W. Bush’s administration in the early 2000’s.
And Americans have shifted greatly toward political philosophies – on the right and on the left – that regard public debt merely as a distraction. Or, as former vice president Dick Cheney put it, “Reagan taught us that deficits do not matter” – meaning that Ronald Reagan cut taxes, ran bigger deficits, and did not suffer any adverse political consequences.
Ryan and members of the Tea Party wing of the Republican Party undoubtedly want to cut the size of the federal government, and they have articulated plans to do this over several decades. But, in the near term, what they promise is primarily tax cuts: their entire practical program is front-loaded in that direction. The calculation is that this will prove politically popular (probably true) while making it easier to implement spending cuts down the road (less obvious). The vulnerability caused by higher public debt over the next few decades is simply ignored.
For example, Ryan supported George W. Bush’s spending spree. He also supports maintaining defense spending at or near its current level – resisting the cuts that were put in place under the Budget Control Act of 2011.
The assumption here – unstated and highly questionable – is that the US will be able to sell an unlimited amount of government debt at low interest rates for the foreseeable future. There is no other country in the world where fiscal conservatives would want to be associated with such a high-stakes gamble.

Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog, The Baseline Scenario, a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
© Project Syndicate 1995–2012

 

[delft]

A nice extension of the previous article, this from Martin Hutchinson and Asia Times on line:

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THE BEAR'S LAIR
Into the monetary vortex
By Martin Hutchinson

Last week's revelation in the US Federal Reserve minutes for its August 1 meeting that another quantitative easing - "QEIII" - government bond purchase is almost inevitable has intensified the recent upward trend in markets. With fiscal and monetary policies more extreme than any in history, now entering their fifth year, and equally unprecedented advances in communication and computing enabling ever-faster trading, it's not surprising that market behavior is anomalous.

Only the almost total absence of inflation is strange. Soon, however, that anomaly will be explained, as the immense supply of negative-cost money causes the global economy to spiral into a vortex of hyperinflationary collapse. The Mayan calendar, in which the fourth world ends on December 21, leading us to a Fifth World of greater enlightenment, may be only too accurate, economically speaking - but that enlightenment will have been purchased at a fearful cost.

Probably the central puzzle of monetary policy in the past two decades is that of velocity. Money supply, however measured, has increased consistently more rapidly than nominal gross domestic product (GDP), so we are told that monetary velocity has declined. The non-appearance of the expected inflation in the past several years of negative real interest rates is explained by monetary velocity having declined even further. This variable, which had increased consistently in every decade since the Industrial Revolution or even before, has now mysteriously turned tail and is heading steadily downwards. Yet nobody can explain why.

Ludwig von Mises was scathing about the velocity concept; he called it "a vicious mode of approaching the problem of prices and purchasing power". When you examine the concept more closely, you can see what he meant. Since the invention of the Internet, our ability to transfer money through means such as PayPal, both within single economies and around the world, has increased geometrically and our need for physical cash has declined. Credit cards also allow us to spend money in advance of receiving it, thus further increasing its velocity.

Above all, there is the phenomenon of "fast trading". More than two thirds of the volume on the world's stock exchanges results from computers flicking buy and sell orders at each other, trying to make a tiny profit through insider knowledge, for a millisecond or so, or these days even less, of the other guy's trades. Every week or so one of these systems malfunctions, losing its owner several hundred million dollars, causing the year's largest initial public offering of shares to go up in flames, maybe one day causing a planet-wide catastrophe - who knows? - certainly not the owners of these computer systems and their laughably misnamed "risk managers". There's monetary velocity for you!

Yet for two decades reported monetary velocity has declined. The concept is self-contradictory.

The explanation lies in the rise in the last two decades of immense stagnant balances, earning near zero interest rates, which are never spent but simply build up idly. The largest of these is international central bank reserves, increasing at 17% annually since 1998 and now at a level of some US$10 trillion. The chairman of the Bank of Thailand said this week that Thailand's $176 billion of official reserves "should be spent on boosting the economy rather than on doing nothing useful" and was vilified by orthodox economists, but really he has a point. (Unlike the Argentine government, which has persistently found endless unproductive ways to waste their currency reserves, the current Thai government might spend the money on useful infrastructure.)

A second vast pool of useless liquidity is that of the US banking system's free reserves at the Fed, currently some $1.6 trillion. The Fed pays interest on these, so since there are no other uses for the money that don't involve risk, it's not surprising that the banking system keeps them high. It is however surprising that, four years after the crisis, the system has not found a way of deploying this pool of money more efficiently.

A third pool of useless money is the "Target 2" balances of the European payments system. This pool is somewhat different, even chimerical. Even though the head of the Bundesbank may go to sleep each night happy that he has $850 billion of short-term central bank obligations sitting in his vaults, in reality these obligations are derived from such as the Bank of Greece, and not worth the paper that, being virtualized, they are not written on.

Then there is the $2 trillion of cash sitting on the balance sheet of US non-financial corporations. This can best be explained by thinking of all the prudent corporate Treasurers, seeing interest rates at record low levels, who have borrowed next year's capital spending plan in the long-term markets in order to avoid tapping them at next year's higher rates.

Of course, since this has gone on for several years, there are many corporate Treasurers who are now working on the capital spending plan for 2043. Still at least this avoids actually returning some of that cash to shareholders - perish the thought! After all, at some time in the next couple of decades there may come an opportunity for a truly value-destroying acquisition on which the cash can be spent.

The result currently is a situation in which a small part of the world's money supply is rushing around like a blue-arsed fly, carrying out transactions at a rate of several terabits a second, while most of it sits idly polishing its fingernails and earning its owners a measly 0.0005%. Needless to say, this is not a stable situation.

It's difficult to specify precisely what will be the outcome of all this, since neither theory nor past experience offer much guidance - indeed we are in the area of wild, unsubstantiated guesses. Mine, for what it's worth, is that the small portion of the money supply that is doing all the work is now redoubling its efforts, given additional verve by "quantitative" easing by the Fed next month and a further massive bond purchase program by the European Central Bank.

Asset prices are once again headed to the skies and the glorious, celestial gold bull market for which gold bugs have yearned for the last decade is at last in progress. From July 1978 to January 1980, the gold price soared from $175 per ounce to $850; we may well see such a rise again, from a base almost 10 times as high.

This will not last, of course; indeed its most obvious terminus is already in sight, in the form of November's election. Whichever candidate wins, time horizons in the market will shift in early November from the next six months to January 2017. On that time horizon, the market picture is clouded. Another $5 trillion on US Federal debt, which will be incurred in the next four years, puts it at an Italian or Greek level (though still short of the lofty heights reached in Japan).

What's more, 2017 is the year that the Social Security system, which since 2009 has been running an unexpected deficit instead of the anticipated surplus, tips over finally and starts running sizeable deficits, with the cash outflow increasing until the Baby Boomers start dying off in large numbers in the 2030s.

This could lead to two possible outcomes (again, remember, we're guessing here, but anyone who says they are not is a liar!). One would be a bond panic, in which US real interest rates rise because risk premiums soar, much as has happened in Spain and Italy, where 10-year rates are in the 6% range.

European monetary policy, as here, attempts to be ultra-sloppy, but in Spain and Italy it can't be because anyone wanting to borrow in those economies must pay a premium over the local governments, ie, a substantial real interest rate. Such a rise in real interest rates, which might happen quite suddenly, would cause a crash in stock markets and gold prices, and a substantial recession. Since the recession would worsen the budget deficit, the Fed would be powerless to alleviate it, and "stimulus" would be out of the question. This would be very unpleasant, and is rather the outcome our political class deserves. On the other hand - look on the bright side - we would probably avoid major inflation.

The other possible outcome would be a further surge in optimism about the economy, without a bond panic. In that case, stock markets would continue to rise, gold would soar to the moon, and all the idle cash balances in the US banking system, corporations, central banks, and so forth would be put to work. Since at this point we would have active money supply far larger than before, and today's elevated level of tech-induced velocity, the result would be burst of inflation, not 4-5% as in the 1970s, but Weimar-style, reaching 20-25% very quickly and soaring thereafter.

The good news - we would not necessarily experience another major recession, at least not immediately, and the federal debt problem would become much less onerous. This is the outcome that Fed chairman Ben Bernanke deserves, and would provide a useful lesson to future Fed chairmen not to get drawn down his path.

Both outcomes are possible with either party winning in November, but if you asked me to guess, I'd say the first outcome is more likely with a Barack Obama victory and the second outcome more likely with a Mitt Romney victory. Either way, the denouement will not be pleasant, and we will emerge from the Mayan apocalypse wiser about economic cause and effect.

Meanwhile, until November, we are caught up in the vortex. Enjoy the ride!

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website

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- and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

(Republished with permission from PrudentBear.com. Copyright 2005-12 David W Tice & Associates.)

 

[lostsoul]

Things are not as rosy in China as some here would think...

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China’s credit risk is rising, probably much more rapidly than the official non-performing loan (NPL) statistics indicate. SocGen is concerned as they think we are only seeing the beginning of the end of this NPL cycle. While they do not anticipate an outright banking crisis, as the government will certainly keep intervening at each turn on the way to avoid such an outcome, this is no reason to feel relieved. The reason being a major structural element in China's NPL cycle as many industries have massive excess capacity - after years of aggressive expansion that ran way ahead of demand growth - which eventually has to be eliminated. This process will take some time, during which faster depreciation in the form of deleveraging and consolidation will be unavoidable; and while expectations of an imminent hard landing may be overdone, the landing will nevertheless be multi-year and bumpy in their view.

Societe Generale: The NPL issue is rearing its ugly head

According to the China Banking Regulatory Commission (CBRC), total NPLs at China's commercial banks reached CNY 456.4bn at end-Q2, 4.2% qoq and up 11.9% (or CNY 48.6bn) from the trough in Q3 11. The NPL ratio was unchanged at 0.9%, due to a similar pace of loan growth. However, special-mention loans that are doubtful but still performing increased to CNY 1.5tn, while the total loan loss reserves set aside were CNY 1.3tn.

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[bladerunner]

Heres a couple of articles from "zero hedge" to mull over

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and

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[J-XX]

Things are not as rosy in China as some here would think...

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Lol people have been predicting a Chinese banking collapse since 1978. The NPL are very low, it was very high in the 1980s and still no banking collapse.
If China does a good job in cleaning up the NPL, then it's lying.
If china has high NPL, then it's about to collapse.
Western propaganda.

I think SocGen should worry about itself before lecturing others, it's a bankrupt bank propped up by the ECB. Its balance sheet is full of useless Greek government debt. It's stock was plunging due to investor worries that Greece might default and banks like SocGen would go out of business.

As I said, china is slowing due to lower demand for Chinese goods from overseas markets, and property is tight to bring down prices, but the fundamentals in the Chinese economy is very strong. Strongest in the world imo. NPL have risen as admitted by Chinese banks due to some businesses going bankrupt due to no demand for their goods.

But as usual the western media propaganda machines take a problem in china and exaggerate that multiple times to say how bad things are in china and how china is about to collapse and then at the end of the article they add china is faking its numbers.
Rinse and repeat.
Happened every time china has slowed (1989-1990 slowdown, 1994-1995 high inflation, 1997-98 Asian financial crisis, 2008 GFC).

If you want to see a real crisis, wait till you see what happens when the US government bond bubble bursts. Amazing none of the western media are discussing this. Bonds are in a bubble just like NASDAQ bubble in 1999 and housing bubble. Bubbles are formed from cheap money, it happened to china in the current property bubble. It happened to the US when they added liquidity in 2000 to fight the bursting of the NASDAQ bubble and following recession, that cheap money blew up the housing bubble. When that burst, the fed added staggering amounts of liquidity, guess where that went.......government bonds!

 

[AssassinsMace]

It reminds me of sweeps ratings period on TV in the US. Those that don't know what sweeps is it's the parts of the year where people watch TV the most. It is this time where networks and TV stations across the country can determine how many viewers watch their shows and as a result determines how much they can charge advertisers for commercials. So the more viewers, the more they can charge. This is the time they show new shows and episodes of TV programs and the news report on things that will get the most attention. Every year during sweeps I always see news broadcast report how drinking wine can give health benefits like it was new news. They recycle old news to act as if was new. "Stuffed channel?" That's what they said when they called it "overheating" meaning China was producing more than demand. Remember back then when they said China was lying and growth was more than reported. Yesterday they said China was growing slower than reported. Now it's a "stuffed channel" aka "overheating." I wonder when Jim Chanos is going to come out with a China collapse prediction like he never predicted the one that was suppose to happen by the end of 2010. Yeah I also read Ordos is now a bustling city of two million and growing. It's big on the animal husbandry industry. Foreigners are not just going there for that but are flocking there because apparently now it's the place where the rich in China go to learn equestrian horse riding from top experts from the West.

The fact is the media are just lemmings making conclusions based off of someone elses work. So it just takes one person to start the ball rolling. Look at Pinko from Kanwa. He's the one that put out there that China is not satisfied with their domestic fighters and are always looking to buy Russian. But the deal is hung up on intellectual property theft. Aren't we seeing that story over and over again like it's new news? A messy example of this is Fareed Zakaria caught plagarizing other people's work and not giving credit. All of them do it. Fareed was just too lazy or not smart enough to spin it into his own.

 

[Franklin]

Zero Hedge is not part of the main stream media and is consider to be a "dissident" website. I take China's problem's seriously, the problem with the western media regarding China is that they cried wolf so many times that they have now lost all their credibility to speak and people respond as "just another China collapse story". But like with the story with the boy that cried wolf one day the wolf will be at the door. Rather China's economy is going to "collapse" is hard to say. But the problem with China is overcapacity in it's economy and a inefficient state own sector. China needs to shed this by allowing them to go bankrupt just like it happened in the 1990's when China took the painful decision to allow a lot of state owned enterprises to go bankrupt and promote privately owned enterprises and got more than a decade of astonishing growth. They need to allow property developers that cannot repay their loans to go bankrupt and they need to allow banks to work through their non performing loans and perhabs break them up and allowing some to go bankrupt. This is what should have happened in Japan in 1990, the US in 2008 and Europe in 2010 and they didn't allow it to happen and now are facing depression like conditions. To China's government's credit they haven't gone for a massive stimulas program like in 2008 and has been putting the breaks on property price rises. The 150 basis point drop of bank RRR is fair because of capital outflows, but the 56 basis point drop in interest rate is not and it's helping more speculation and create more non performing loans. One of the things that i disagree with Zero hedge is that they draw a straight line between GDP growth and electricity use. They say that because electricity use has gone down so much that the economy must be crashing. But the fact is that there are other factors at play like the increase of energy efficiency in the Chinese industry, a fast growing services sector that is low on energy intensity, the increase use of solar energy that is sometime of the grid and yes economic slowdown. The increase use of alternative energy like hydro, solar, wind and nuclear energy and others may also help in part to explain the pile up of coal which they use as another indicator of China's slowing economy. China is slowing no doubt but perhabs not as bad as the media wants to make it out to be.