Blackstone
Brigadier
Even Chinese economists say debt growth is a serious problem, because it takes increasing more amount of debt to generate the same percentage of growth.
Chinese Economics Thread
- Thread starter Norfolk
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Equation
Lieutenant General
Even China's so called most serious debt problems can't be compared to the US $18 Trillion and growing. China's 6-7% GDP growth is about to bottom out and therefore a higher growth rate is coming to balance out the initial debt. Bottom line as long as you have a stable government to keep an eye on it and deal with it properly when the time comes, debt will not hindered growth like here in the US and pretty soon EU.
AssassinsMace
Lieutenant General
The problem is outsiders believe China can't have more money than is officially reported. They want to believe news is always bad. The West sees China's military in the way they see theirs. But then complain about how the PLA has a web of businesses many having nothing to do with the military to which the US military doesn't. Do you think the money PLA businesses are making gets reported to the government? I brought this up before where even US figures on per capita income says the average Chinese citizen cannot afford to buy a car yet China is the largest car market in the world with prices equivalent to what American consumers pay. And how is it still that over 200 million Chinese travel overseas every year spending more money than any other group per person? That means the average Chinese has more assets than reported. China is where people secretly become billionaires and don't get noticed for tax evasion until they make too much money where they can't hide it anymore. The critics can't get past the stereotype of the Chinese police state where everything going on is scrutinized by authorities. Remember how Western governments were upset that China wasn't hurt by the 2008 Western financial collapse? They saw China doing well while accusations over currency manipulation. If critics believe China lies and manipulates on its economy, then why not believe China would downplay the economy to silence those over currency manipulation? That's when the Chinese economy turned sour right after threats of tariffs on China as punishment for currency manipulation. But ironically and hypocritically any bad news reported by the Chinese government happens to be the most truthful to them.
Xi wanted to turn China's economy to more domestic consumption and services. When I see the media use lower export and manufacturing numbers out of China as bad news, that could also mean China is moving into the direction of domestic consumption and services.
China hasn't come close to the kind of collapse the experts predicted. China can't hide a collapse as big they said was going to happen. As a result they're relegated to spinning and exaggerating any scraps they can find to keep up the narrative.
Xi wanted to turn China's economy to more domestic consumption and services. When I see the media use lower export and manufacturing numbers out of China as bad news, that could also mean China is moving into the direction of domestic consumption and services.
China hasn't come close to the kind of collapse the experts predicted. China can't hide a collapse as big they said was going to happen. As a result they're relegated to spinning and exaggerating any scraps they can find to keep up the narrative.
I know it's easy to make generalisations about foreigners being anti-China, feeling threatened by it, and wanting it to fail etc, but you can't tar us all with the same brush. All criticisms I make are intended to be constructive, and I'm pretty sure Blackstone feels the same way. I certainly don't want to believe all news is bad, but I won't blind myself to economic reality either.
It's an economic fact excessive levels of private debt are a major problem, and just because most of the debt isn't consumer debt doesn't stop it from being a concern. It's not an attack on China to point this out. Business ventures fail or don't go as well as expected all the time. Owners and corporations can easily find themselves unable to meet their debt obligations. It's true the government has been using its largess and control of the major banks to keep companies solvent, but so far this appears to be extending and pretending rather than writing debt off completely.
It's also true the Chinese government has the policy means to reduce the debt, but so far these haven't been used to the degree they need to be, or we wouldn't be seeing the debt continue to rise. It's time to act now, before a crisis hits.
Japan sleep walked into its debt crisis, and has never used the policy tools necessary to reduce its debt burden, which is the only thing that can get its economy out of stagnation. I get the impression policy makers in China don't appreciate the problem (and what's necessary to solve it) as much as they need to. Everything I've read from a wide variety of English language sources in the last couple of years gives me the impression they are listening far too much to the advice of orthodox economists, whose policy recommendations are what created the mess in the first place. They need to start reading up a lot more on heterodox economists, the likes of Keynes, Minsky, Keen, and Mosler.
I would love for my concerns to be groundless. I don't think they are though.
The Chinese growth story is one which has always been ideologically contentious.
I think it is absolutely important to try and have an accurate assessment of any nation's economy, however I also agree with A-mace in that there are at least some groups who see any news out of China as bad news and interpret that bad news to the worst possible, largest scale effect.
OTOH, there are also some other groups who are able to identify risks in China with the good intention of trying to accurately assess the economy, but who may or may not accurately identify the potential effect of those risks in light of China's economic model and the nuances it has in its financial systems and private/public relationships, etc.
For example, last year when the stock market fell off its peak, there were a large number of pundits and seemingly credible media outlets who portrayed it as the immediate first step of the collapse of the Chinese economy because they believed the movement of the stock holders accurately reflected the state of the real economy and real productivity and real demand. However now that it's come to pass, I think the general consensus is that the stock market was slightly over priced and was long due to correct and fall, and also important was the fact that most of China's stock market players were (and likely still are) retail investors, many of whom likely did not have any accurate gauge of the state of the real economy and relied on hearsay, gossip, and gambling instincts rather than that of an informed investor.
In the case of China's debt, there are all sorts of arguments about its potential size, its potential risk, and the Chinese economy overall, depending on how what principles and assumptions one uses to analyze it.
For instance, a few of HSBC's analysts a little while back came out with a rather comprehensive analysis (attached) of why China's debt reached the state it is at and how it relates to other similar economies depending on proportion of debt, and their conclusion was that the debt risk is relatively low and benign and a reflection of China's high saving rate and relatively immature financial systems.
Now, there may also be some analysts which argue against this using other methodologies, and as someone who only took a first year macroeconomics paper as my highest level of economic education, it's obviously impossible for me to judge the validity of the various organization's arguments.
That is why I think it's important to read widely, but also to keep in mind that certain assumptions and methodologies by even well intentioned economists seeking to accurately assess a nation's economy might read the tea leaves wrong... and also to remember that the media may well be more interested in giving stories of a more negative light with more exposure (not only for China necessarily, but also for the world -- after all the media thrives off negativity), which can skew the tea leaves even further.
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What is happening in China is that the economy is in full transition from a low end manufacturing based economy to a higher end manufacturing and services based economy. This transition will require a lot of investments into new plants and equipments. Hints a lot of the debt that you see. China's debt structure is the following as of 2015:
household debt is 39,5% of GDP
government debt (including local government debt) is 43,9% of GDP
corporate debt is 145% of GDP
That makes a grand total of 228,4% of GDP
These are the official numbers and people out there say that the real debt is much higher. But that's up to conjecture as one can argue about what constitute debt and how much double counting there is based on different calculation methods. Since then the debt has gone up to 237% of GDP as of april 2016.
The good news for China
Private wealth is 23 trillion dollars in 2015 or more then 200% of GDP. And then there are the public assets that's not being counted in that like the new transport and utilities infrastructures that has been build.
Income is growing fast. China has the fastest growing wages amongst the major economies about 10% in nominal terms and about 8% in real terms in 2015. While at the same time China is capturing an ever larger share of the global export markets. China in 2015 has captured 13,8% of the global export market the highest since the US in 1968. And the trade surplus is between 40 to 50+ billion dollars a month. That dispels the notion of China losing its competitiveness internationally because of higher wages. It simply shows you that China is moving up the value chain fast and that China is creating more well paying jobs domestically and are selling more of those goods internationally. This also has an effect on the investments that China has made in the past. As a lot of investments that were previously seen as underutilized are now more and more in use. One example of that is the high speed rail system that China is building. From 2009 to 2013 people have been saying that the HSR was too expensive for the common people and was seen as a prestige project and is a white elephant. Since 2014 they are no longer saying that as the trains are all pulling in and out of the stations full of people. The reason for it is that more people now can afford a ride on the HSR as income for many people in China has nearly doubled over that period. And other public investments are experiencing the same. I think the investments in transport and utilities will pay off for China and most of the high end industries too because China can fall back on a huge domestic market for those.
The bad news for China
A lot of the debt has gone into money losing SOE's to keep them afloat this simply creates bad debt.
China has made a lot of investment into real estate and shopping malls that are underutilized. That is because a lot of the real estate is being build in smaller towns with lower income and shopping malls is a losing bet because of the success in the growth in popularity of online sellers like Alibaba.
China is facing a lot of overcapacity in the steel, cement, aluminium, coal and ship building and other sectors. (This is linked to the first issue of keeping SOE's afloat.)
Shutting down SOE's creates three problems for China. Those are bank loans, unemployment and pensions. And thats why they are reluctant to shut down these SOE's and also because of the political connections these big SOE's have with the powers to be both on a national and local level.
China have been facing a lot of capital outflows recently. This is because Chinese citizens are spending more money abroad on real estate and holidays. Chinese companies are buying more foreign assets. Since the Yuan devaluation in august 2015 companies have been rushing to pay back their dollar denominated foreign debt. And China like other EM countries is being hit by speculative outflows as the US FED is said to begin a new tightning cycle.
The key for China is that they have to deal with the money losing SOE's and that is going to cause them a lot of pain. But it will be short term pain for long term gains. China already did that once in the 1990's and will need to do that again now.
In conclusion
China has a lot of problems but the sky in the short term isn't going to fall down. But there are growing problems in the economy that need to be solved. Letting money losing SOE's go under is the only salution for China's long term economic health. Overinvestments in condos and malls can be easily absorbed. But the endless blackholes of the SOE's will do China in.
household debt is 39,5% of GDP
government debt (including local government debt) is 43,9% of GDP
corporate debt is 145% of GDP
That makes a grand total of 228,4% of GDP
These are the official numbers and people out there say that the real debt is much higher. But that's up to conjecture as one can argue about what constitute debt and how much double counting there is based on different calculation methods. Since then the debt has gone up to 237% of GDP as of april 2016.
The good news for China
Private wealth is 23 trillion dollars in 2015 or more then 200% of GDP. And then there are the public assets that's not being counted in that like the new transport and utilities infrastructures that has been build.
Income is growing fast. China has the fastest growing wages amongst the major economies about 10% in nominal terms and about 8% in real terms in 2015. While at the same time China is capturing an ever larger share of the global export markets. China in 2015 has captured 13,8% of the global export market the highest since the US in 1968. And the trade surplus is between 40 to 50+ billion dollars a month. That dispels the notion of China losing its competitiveness internationally because of higher wages. It simply shows you that China is moving up the value chain fast and that China is creating more well paying jobs domestically and are selling more of those goods internationally. This also has an effect on the investments that China has made in the past. As a lot of investments that were previously seen as underutilized are now more and more in use. One example of that is the high speed rail system that China is building. From 2009 to 2013 people have been saying that the HSR was too expensive for the common people and was seen as a prestige project and is a white elephant. Since 2014 they are no longer saying that as the trains are all pulling in and out of the stations full of people. The reason for it is that more people now can afford a ride on the HSR as income for many people in China has nearly doubled over that period. And other public investments are experiencing the same. I think the investments in transport and utilities will pay off for China and most of the high end industries too because China can fall back on a huge domestic market for those.
The bad news for China
A lot of the debt has gone into money losing SOE's to keep them afloat this simply creates bad debt.
China has made a lot of investment into real estate and shopping malls that are underutilized. That is because a lot of the real estate is being build in smaller towns with lower income and shopping malls is a losing bet because of the success in the growth in popularity of online sellers like Alibaba.
China is facing a lot of overcapacity in the steel, cement, aluminium, coal and ship building and other sectors. (This is linked to the first issue of keeping SOE's afloat.)
Shutting down SOE's creates three problems for China. Those are bank loans, unemployment and pensions. And thats why they are reluctant to shut down these SOE's and also because of the political connections these big SOE's have with the powers to be both on a national and local level.
China have been facing a lot of capital outflows recently. This is because Chinese citizens are spending more money abroad on real estate and holidays. Chinese companies are buying more foreign assets. Since the Yuan devaluation in august 2015 companies have been rushing to pay back their dollar denominated foreign debt. And China like other EM countries is being hit by speculative outflows as the US FED is said to begin a new tightning cycle.
The key for China is that they have to deal with the money losing SOE's and that is going to cause them a lot of pain. But it will be short term pain for long term gains. China already did that once in the 1990's and will need to do that again now.
In conclusion
China has a lot of problems but the sky in the short term isn't going to fall down. But there are growing problems in the economy that need to be solved. Letting money losing SOE's go under is the only salution for China's long term economic health. Overinvestments in condos and malls can be easily absorbed. But the endless blackholes of the SOE's will do China in.
LOL. USA actually fully invaded another country in 2003, killed like 600,000 to 1 million people over something a lot of the world didn't really believe, and the US economy was growing at like 3-4% from 2003 to 2007.
Even the 2008 GFC wasn't due to the Iraq or Afghan wars, but mortgages.
Regarding debt, the thing I really want to know is:
Who owes most of the debt, and who has lent out that debt?
I have been hearing that the biggest it's super difficult to get loans if you are a SME because all the lenders are state-owned banks, and they only trust big companies and other SOEs.
So I assumed much of the debt is state-owned banks lending to state-owned enterprises. Since both sides are organs of the state, can't the government literally order the state-bank to write off some of the bad debt of the state-enterprises?
Who owes most of the debt, and who has lent out that debt?
I have been hearing that the biggest it's super difficult to get loans if you are a SME because all the lenders are state-owned banks, and they only trust big companies and other SOEs.
So I assumed much of the debt is state-owned banks lending to state-owned enterprises. Since both sides are organs of the state, can't the government literally order the state-bank to write off some of the bad debt of the state-enterprises?
Hendrik_2000
Lieutenant General
China will never experience Japanese malaise for the simple reason that China is her own master beholden to no one. Unlike Japan which is semi colony yep I said it. Loosing her competitive edge, the US forced Japan and Europe to appreciate their currency and at the same time lower the value of US dollar. This is against the Laissez fair principle of capitalist economy
At simple glance China situation look similar to japan in the 80's, But there are major differences as well
See Japan long decline start with plaza accord which forced Japan to appreciate Yen to 50% to a dollar But practically double that figure In Sept 1985 Japanese Yen went from 242 yen to a dollar to 152 yen to a dollar. Because there are no currency control
In response the Japanese government introduce stimulus and tell Japanese central bank to lower the interest rate to 4%. This create Real estate bubble and asset appreciation encouraging even more speculative bubble . Using stock as collateral to get loan then invested in real estate.
Due to financial deregulation where Japanese company has now access to financial market and lessen their dependence on bank loan. So in response the Japanese bank are now more than eager to give mortgage to company or individual. Thing get worse because of the interlocking nature of Japanese Keiretsu bank
All is well so long the Japanese economy is booming and booming they did in early 80's
But the yen appreciation combine with China rise slowly take their toll. Overnight Japanese product get more expensive Whole industry lost their market to Korean and Chinese product. I can think of textile, Toy, Utensil, small appliances
Japan home market is small so they depend more on export than China does
Japanese stock market crash and the whole house of card start to crumble . The Japanese miracle stop dead in its track!.
The thing get exacerbate by incompetent measure that they take since bubble crash.
Japanese economy are dominated by large corporation and most people work for them.There are no counterweight of small, nimble and feisty entrepreneur in the Japanese economy. Most small company are subcontract for the larger company.Reflecting the hierarchical nature of Japanese society
Eg Japan Sony was one of the first to introduce cell phone in early 90 But they are slow to update and keep up with the market. It doesn't come to anything.
Now lets look at China . First of all the real exposure of China bank is much smaller than in Japan combine with higher down payment requirement in China should limit any damage due to down turn in real estate.
Another thing China development is much lower than Japan does in 80. The urbanization rate in China is only 50%. So real estate is still in demand as the data show in recent statistic show that real estate value is recovering.
Now how about Zombie company and excess capacity. This is difficult to solve for the simple reason that these SOE provide employment to large number of people. You can just can't simply shut it down like Zhu Rongjie did in 80's For the simple fact that Chinese society has evolve since then .
Back then most people doesn't own their own home and live either on company housing or government housing which is dirt cheap. They don't have car, consumer product etc.No internet no we chat no weibo So the expectation is low. Not much to loose!
But now people are better educated, own home, car and see rising wages year after year. In short rising expectation. And with incomplete social welfare safety net transformation, If suddenly they lost their job it will be catastrophic for China. Because they now have much to loose. Middle east come to my mind
It is not that the government ignore it It just that the risk outweight the benefit.
So weaning off the SOE and trim excess capacity can only be done slowly with the hope that the private sector will absorb the surplus labor. You cannot train 45 yr old to become computer programmer
Fortunately China has booming private sector dominated by feisty, small, independent entrepreneur Just look at Shengzen, Alibaba , Taobao, Tencent, Xiaomi, OPPO etc
And she has huge market. China will escape the Japanese malaise and become the dominant economy in Asia if not the world
At first look high tech E commerce has nothing to do unskilled labor. But the warehousing, sorting, processing and delivery need huge amount of unskilled labor. Combine with rising living standard and expansion of service economy this should be the savior of Chinese economy.
I am optimistic about Chinese economy because the Chinese are by nature independent, entrepreneur, and hard worker.
People doesn't give enough credit to how better China manage their economy compare to Japan. They are more agile and responsive But due to ideology blinder this is not acknowledge in the west
We see now million of migrant worker going back to their villages and open up business using skill they that they acquire while they stay in cities. And taking advantages of improve infrastructure of road, Transport, internet, phone etc. It will propelled China to next stage of economy
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