Chinese Economics Thread

[Anlsvrthng]

As long as your conclusion is that China's GDP will keep growing at the government set pace, none of your arguments has substance. It's like complaining about the food at a restaurant while eating there every day.

If you wanna debate about something, then you need to set out the precise negative consequences that you expect to see on the Chinese GDP in a well-defined span of time, and it should be very near-term because nobody wants to go on a 20 year imagination journey with you.

There was a company in easter europe in the 80s ( actually there was countless fo them like it) that manufactured hundreds of expensive equipment for a customer.
But there was a flop in the quality of them, so they had to store all of them in the back yard.


This was finished goods, so all work/material was accounted like if they sold it, and it shown in the GDP number as manufactured item.
However in the 90s the liquidator of the company simply forked all euipment to the scrap yard.

So, what was the return on the investment on these machiens?

Example Pettis talking exaclty about this.

IF the driver of the growth is investment, then in the late phase ( where is China now) it is very hard to move all of the money into projects that has positive return.

It is easy to hide the losses under the rug ( the European banks are doing it with the greek goverment bonds, so it is not only Chinese speciality) nd book the machiens with full value, regardless if the liquidation value of it is the metal price

At the moment we don't know how big part fo the 60% investment/goverment/export activity hiding losses .

All that we know is the 40 % ish household consumption is extremly low, and if you use it as an indicator of the sustainable GDP number then there is at least 10 % loss in the headling GDP .

I have to remid you the GDP number important as a matter of national pride, but the household consumption can be used to buy food, shelter and cloth.

So the drop in the GDP doesn't metter , only the consumption important for the households.

In japan during the lost decades the consumption stayed as on level and slowly imporved, but all crazy investment/export business colapsed in slow motion.

 

[Hendrik_2000]

There was a company in easter europe in the 80s ( actually there was countless fo them like it) that manufactured hundreds of expensive equipment for a customer.
But there was a flop in the quality of them, so they had to store all of them in the back yard.


This was finished goods, so all work/material was accounted like if they sold it, and it shown in the GDP number as manufactured item.
However in the 90s the liquidator of the company simply forked all euipment to the scrap yard.

So, what was the return on the investment on these machiens?

Example Pettis talking exaclty about this.

IF the driver of the growth is investment, then in the late phase ( where is China now) it is very hard to move all of the money into projects that has positive return.

It is easy to hide the losses under the rug ( the European banks are doing it with the greek goverment bonds, so it is not only Chinese speciality) nd book the machiens with full value, regardless if the liquidation value of it is the metal price

At the moment we don't know how big part fo the 60% investment/goverment/export activity hiding losses .

All that we know is the 40 % ish household consumption is extremly low, and if you use it as an indicator of the sustainable GDP number then there is at least 10 % loss in the headling GDP .

I have to remid you the GDP number important as a matter of national pride, but the household consumption can be used to buy food, shelter and cloth.

So the drop in the GDP doesn't metter , only the consumption important for the households.

In japan during the lost decades the consumption stayed as on level and slowly imporved, but all crazy investment/export business colapsed in slow motion.

For one last time don't use Petis argument he is outdated by several decade now. China investment component of GDP has been going down for years or steady Government spending stay more or less constant Consumer part of GDP has been growing over the year So economy is essentially restructuring
And Chinese economy is more innovative and export is resilience So you are using very old data
Contrary to your prejudice most of Chinese export are not toy or pot and pan anymore it is more electrical machinery, computer, white good etc

 

[Anlsvrthng]

And they’ll move in many cases to the biggest cities, because that’s where the best jobs are.

The increasing house prices syphon out the money from the middle class.

The increase of value in the existing houses doesn't matter, but the new houses will sell on that price, and they will scale up the house making business - and this will increase the GDP.

Just ask the US construction workers what happened after 2007.

For one last time don't use Petis argument he is outdated by several decade now. China investment component of GDP has been going down for years or steady Government spending stay more or less constant Consumer part of GDP has been growing over the year So economy is essentially restructuring
And Chinese economy is more innovative and export is resilience So you are using very old data
Contrary to your prejudice most of Chinese export are not toy or pot and pan anymore it is more electrical machinery, computer, white good etc
View attachment 45415

I don't dispute that the biggest item in the grwoth of economy was the consumption, however that is the reason why the falling phone sales. stagnating car sales and TV set sales are intereting.

And the exponentialy grwoing consumer debt showing that the fuel of this growth is not sallary ang wage increase, but debt.

So, if the debt burden too high , then the consumption grow hit a wall, unless someone found a way to increase the households share from the pie.

Challange : )

As it looks like u to 2007 the consumption growth was organic, but afterwards it become debt fuelled.
And the consumer debt growth similar to its part from GDP growth , 3.6% in one year.

If the consumer run out of steam then the investment will be left (but it running out of steam) and gowerment (healthacre reform, armament making)

 

[Hendrik_2000]

Still it is lower than most European country and they go in the debt because of the housing price But the increasing asset does not show up in the GDP because it does not count
So you are looking at the debit side of the ledger and forgetting the credit side
But consumption is not based on country debt but based on disposable income and consumer confidence they are going higher year on year because consumer feel rich due to asset appreciation and rising wages gong double digit every year for the last 10 years, plenty of job . Add to that stable politic and economic situation. So why not spend!

So you are just using useless metric to predict Chinese consumption


See Europe and everybody else has more debt than China

 

[azesus]

I think Gordan Chang 2.0 got China and the West mixed up, China's debt are business based because they used it as capitol investment driven, by using the USA as market. It's USA that's debt consumption fuel based because USA is run by bankers they don't want to invest in their local population and then those corporate elite used those cost down savings of outsourced surplus value as gambling chips and wasted away in stock and real estate bubble. Even thou China has large business debt at least China has over capacity of production and that's why now they are de-leverage and optimizing their resources allocation, but USA has already atrophied, it only has another set of domino wave of finance bubble waiting for her

 

[manqiangrexue]

There was a company in easter europe in the 80s ( actually there was countless fo them like it) that manufactured hundreds of expensive equipment for a customer.
But there was a flop in the quality of them, so they had to store all of them in the back yard.


This was finished goods, so all work/material was accounted like if they sold it, and it shown in the GDP number as manufactured item.
However in the 90s the liquidator of the company simply forked all euipment to the scrap yard.

So, what was the return on the investment on these machiens?

Example Pettis talking exaclty about this.

IF the driver of the growth is investment, then in the late phase ( where is China now) it is very hard to move all of the money into projects that has positive return.

It is easy to hide the losses under the rug ( the European banks are doing it with the greek goverment bonds, so it is not only Chinese speciality) nd book the machiens with full value, regardless if the liquidation value of it is the metal price

At the moment we don't know how big part fo the 60% investment/goverment/export activity hiding losses .

All that we know is the 40 % ish household consumption is extremly low, and if you use it as an indicator of the sustainable GDP number then there is at least 10 % loss in the headling GDP .

I have to remid you the GDP number important as a matter of national pride, but the household consumption can be used to buy food, shelter and cloth.

So the drop in the GDP doesn't metter , only the consumption important for the households.

In japan during the lost decades the consumption stayed as on level and slowly imporved, but all crazy investment/export business colapsed in slow motion.

1. Use as suppository to treat oral diarrhea:

2. Reread https://www.sinodefenceforum.com/chinese-economics-thread.t3715/page-859#post-495938
3. Fix your ailing national economy first before imagining problems and imagining solutions for other people's economy, economies that have never been in recession. You need to fix your own economy to convince other people that you know what you're talking about.

 

[broadsword]

The increasing house prices syphon out the money from the middle class.

The increase of value in the existing houses doesn't matter, but the new houses will sell on that price, and they will scale up the house making business - and this will increase the GDP.

Housing prices increase in many cities of the world, especially where rich immigrants like to settle, like London, Melbourne and Vancouver. Dampening a surge in prices is very difficult due to rigid supplies. You can't built a house in a month. The Chinese government build housing for subsidized sale to the people, as do other countries. They also try prevent big dips in housing prices as that will make the owners out of pocket, as you rightly pointed out.

The bottom line is so long as the people buy to occupy and not to speculate, there will be less to worry because housing prices tend to bounce back up in the long run in a sound economy.

Actually, housing prices in China have not gone as fast as in some other countries where land is a lot scarcer like Singapore and Hong Kong.

 

[broadsword]

@Anlsvrthng

There are several charts there for you - or anyone curious about how well Mao did. Title is also the link.

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, Read a lot about this

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Mao took some very tough decisions, to get a stagnant and fragmented society back on track.

He did make some errors, but was right a lot more often than he was wrong. Even the Cultural Revolution was more successful than generally credited. (Naturally bad-mouthed by officials who got very rich under Deng.)

 

[supercat]

My bad, I did a not finished correction.

Not the GDP getting negative (at this moment) but the return of the new marginal debt.

This happened in Japan,USA,and this will ( or happened) in China.

If you compare China's per capita GDP with that of Japan's and America's, you will see that China still has a long way to go - her potential for economic growth is still enormous.

The point is simple : if the economy underdeveloped then any new investment ( say combined harvester machine) increase the productivity ( and GDP) dramatically, but there is an n-th harvester that will have 0 return, and after that the following ones will have negative return.

The manufacturer can make cobined harvesters for stock, and if it can get cheap loan then it can roll over the debt for infinite time, and even if it growing the production can contribute posivily to the GDP. The company can do it until it can not get any more financing. At that point the GDP will take a big hit.

This was the issue with the socialist block in the 70/80s. Negative return on the marginal investments/ debts.

What happened in the "Socialist block" in the 1970s and 1980s was that not only their economic policies were extremely sclerotic, they were also cut off from trading and science and technology exchange with the West. Ideologically, they were also undermined by the Western propaganda each and every way. Diminishing marginal returns was not a deciding factor.

The above example can be done with diferent combination of tools, but the common element is the exploding need of financing.

The exploding need of new debt in china can be ( or is ) the mark of the hiden negaive return on marginal investment.

But I can point out the fact ten years ago less ammount of new debt created twice as much GDP as today.

The exploding new debt is never a good sign.

C'mon, Pettis talking about this for 10 years : )

If you compare investment with the absolute number of GDP growth and factor in the improvement in quality of life (increased life expectancy, decreased infant mortality rate, better education and health care etc etc), then the new debt is not necessarily so explosive. Furthermore, the marginal rate of return is the most basic concept of economics and budget planning, it's quite doubtful that any Chinese policymaker will allow it to drop below 1, let alone negative, when they evaluate new investments. Since every Chinese business manager and economic policymaker understand the concept, how could their collective policy-making generate a marginal return of below 1 (forget about negative)? Granted some of them will make mistakes when planning new budgets, but I doubt that most of them will make such basic mistakes.

BTW, I'm not a fan of Michael Pettis, he is the one who "predicated" that Chinese GDP growth would average 3% a year in the 2010s. He made the predication in 2012 or 2013. Since then, He has claimed that since Chinese GDP is growing at 6-7% a year, so 3% of Chinese GDP has to be mal-investment. So according to his logic, every country can potentially have 3% of their GDP as mal-investment. So most developed countries would have negative GDP growth every year in recent years.

 

[N00813]

BIS report on the "Shadow Banking" sector summarised and analysed by Glenn Luk; essentially he makes the argument that the Shadow Banking sector is essentially the rise of private investment banking activities.

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Outstanding report bringing some much-needed clarity to China’s “shadow banking” sector

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China’s financial sector has gotten a lot more complicated over the last decade. For some reason, whether China is or is not facing an imminent credit-induced crisis is quite a polarizing issue and generates a lot of noise from the perpetual optimists to the perma-bears. This has made it quite difficult to analyze exactly what is going on. But the draft report recently released by the Bank of International Settlements finally starts to clear things up and some of the observations are quite interesting.

First, here is the key table from the report that shows how financing ultimately flows from the creditors to the borrowers. When I first embarked on my career in finance nearly two decades ago this chart would have been a lot less complicated, as there was really only one key source of debt financing available in the form of bank loans.

Some key takeaways from the report:

• The state (through the banks) is actually quite involved in the activity of the “shadow banking” sector. [1]
  • The “bear” narrative has been that the “shadow banking” sector is working to get around regulation and perhaps working in opposition to state directives — the result being greater instability.
  • However, the reality is that the “shadow banking sector” is sanctioned and facilitated by the state via proxy. As the report points out, the state-controlled banking sector is heavily involved, among others, in the issuance of “shadow banking” products like wealth management products (WMPs) and entrusted loans.
• The much-maligned “shadow banking” sector itself has really been a way to provide alternative financing options for China’s private enterprises. [2]
  • Historically, access to bank loans has been very difficult for non-SOEs (state-owned enterprises) so China’s private enterprises had to rely largely on equity which is the most expensive form of financing.
  • Through “shadow banking” products like WMPs and entrusted loans, China’s much more productive and efficient private sector now has greater access to a variety of financing mechanisms.
  • This is a positive development and the explosive growth in “shadow banking” products is a sign of how much pent-up demand there had been for less-expensive financing sources.
• In the analyst community, there is a wide range of views on how exactly China’s debt-to-GDP ratio should be calculated. Often, the calculation of this figure is skewed by one’s stance on the “China credit bubble” question. But the problem with some of the higher debt-to-GDP (i.e. more bearish) calculations I have seen out there is that there is significant “double-counting” [3] in the debt figure.
  • For example, SOEs often re-lend money they have borrowed in the form of entrusted loans which ultimately finds its way (through intermediaries) into the private sector. Here the SOE is basically monetizing its lower cost of financing and making money on the interest rate spread. But if you count both the SOE’s bank loans and the ultimate entrusted loan product at the private borrower, you would be double-counting the effect of the original loan.
  • Depending on how you calculate the debt-to-GDP ratio over time, the increase in the ratio might overstate the amount of actual new credit in the system. Instead, it may be a measure of increasing complexity in the financial system from the double-counting of credit products.
• An increasingly complex financial system of course brings a set of new risks that are not necessarily related to over-investment. However, one must remember that China’s financial system used to be really, really simple (i.e. banks lending to SOEs; equity for everyone else). So taking one or two steps forward does not mean it is overly complicated, especially when you put it up against developed countries. Indeed, the BIS report describes how China’s financial system is still quite a bit simpler than that of the United States [4].
• The more accurate narrative about the development of the “shadow banking” sector is that it is merely another step in the long arc of the China financial liberalization story. In this case, “shadow banking” products are effectively providing interest rate flexibility — as mentioned above, primarily for the private sector (which is a good thing!).
• “Shadow banking” also provides creditors with more ways to invest their excess capital at presumably higher rates of return.
  • Historically, because the financial sector was controlled so tightly, households had only a few viable options to park their savings — deposit it in a bank, purchase real estate or invest in the stock market. If you deposited in the bank, you would be earning an interest rate that was below the rate of inflation.
  • This was a key mechanism in China’s “financial repression” policy where the household was basically subsidizing SOEs through, among others, this negative real interest rate.
  • Now with “shadow banking” products like wealth management products (as well as a greater flexibility on interest rates on deposits), the household sector can actually earn positive rates of return on their bank deposits.
  • The net effect of this is like lifting what had been a fairly massive tax on the household sector [5] which is one reason why I think the China consumption story is just getting started.

The report also provides very clear descriptions of the various “shadow banking” products like wealth management products and entrusted loans and how they fit into the overall system.

In any case, I highly recommend a thorough read of the BIS report for anyone who is interested in trying to really understand China’s evolving financial system and/or trying to figure out the “credit bubble” question.