However, overall the infrastructure they have built has put this country in a position to achieve dominant superpower status over the next century.
For example, within 5 more years the entire of Guangdong Province will be connected by high speed rail and subway - meaning 100 million people and businesses will be connected by public transit with no more than a 2 hour ride. There is already a critical mass of manufacturing capability here, and with that added layer of network infrastructure, even if labor costs rise 100% YOY to match USA and Germany in a decade, Guangdong China will still be the worlds factory.
Furthermore, the internal consumption machine of 1.3B people is undeniably ramping up now. They are spending money, the largest middle class on the planet is clearly taking shape, and lives are measurably improving all around me.
There may be a few bumps in the road but there will be no collapse.
Ex-pat since 2007 here. Change is happening quite slowly, internal consumption is still moribund as people save to cover retirement and health expenses (social insurance isn't very strong). Even a big city like Beijing has a lot of fairly empty malls, and if you go to 2nd tier cities, you'll see new developments everywhere that are basically empty.
China does have better infrastructure than say India, and its long term outlook is good. But there are definitely challenges in this and the next few years to get through.
>>internal consumption is still moribund
Do you ever go to the supermarkets? Every time I go to eat outside in the evening at the mall, I have to wait a line of at least 5 numbers to get a table, and I live in the suburbs, very far from downtown.
Everything is crowded in China, what does that prove? That consumption of food happens is of no doubt, but you have to save like crazy for everything else. I have a few years of salary saved up in the bank since there is absolutely nothing to buy except overpriced real estate and cars (but then I'd have to join the lottery for a plate).
Taobao, 360.com and the likes are selling Billions and Billions trough the internet, massive amount of internet consumption, home appliances, electronics, clothes. Thats not food nor real state and cars
This is what Japan has been doing since their dominance in the 1980's fizzled out. In both the US/FDR case and Japan's, I believe the infrastructure spending was seen as a way to re-ignite growth while also creating something long lasting.
There certainly is some truth to the long lasting piece. A country with poor infrastructure will have a very difficult time growing. What is controversial is building things either few people use or are far more expensive than they should be. On the flip side, infrastructure has to be serviced to remain viable. In addition to using money that is "borrowed" one way or the other, the maintenance cost is created as well. Easy to get carried away.
Oh, I'm not saying that I embrace the theory (I actually am against such policies - most of the times they are used to get people re-elected), but I was just mentioning it's still being regarded as a valid way of creating jobs and stimulating the Economy by numerous economists.
In Japan there was a good deal of abuse of funds in the name of infrastructure. Investing in creation of high speed rail lines: clearly beneficial. Concreteing nearly every riverbed in the country: ???.
Just as capital investment can lead to increased efficiency and drive growth and prosperity within a firm, public infrastructure can lead to the same type of net gains for society at large. Ultimately, it increases the rational real options available for further investment, and this creates potential future upside where none previously existed.
How many of the people commenting here read the Chinese-language press? (I mean, publications in the Chinese language from either inside or outside the region where the Communist Party of China exercises prior restraint on publication.) The one thing I've learned from studying the language, history, and culture of China since 1975 is that almost everyone who doesn't know the language is full of crazy ideas about China, even if they live there.
Native Chinese here. I guess the best way is to apply those better tools for thinking to the Chinese context. To be honest, I don't think there is much information in Chinese politics and economy worth reading. The tools we use are outdated. The information(meta data) we can get is actually very limited and very distorted. The knowledge and how people perceive the world are far behind those in developed countries. When cheap labour becomes less and less competitive, things will go south. Domestic consumer market growth does have a chance to save us, that was what I thought the best way out when I was younger. But that would never happen, when you have some understanding how the nation's stakeholders operate. This is a topic that is too big to discuss here. I do believe, sadly, there is a long dark road ahead for most of people in my country. I wish not but from where I can see I'm quite pessimistic on this. Just my 2 cents.
> Domestic consumer market growth does have a chance to save us, that was what I thought the best way out when I was younger. But that would never happen, when you have some understanding how the nation's stakeholders operate. This is a topic that is too big to discuss here.
I understand you do not want to discuss it here, but can you briefly explain why this would never happen ? This is a very interesting point.
One dimension you can look into is the percentage the county's administrators get from average people's income and their consumption. I don't know if there is anything public in English. But I can tell you it's very very high. And the social safe net is not reliable in the long run. That's why people need savings in the bank.
Another key dimension is to have some knowledge about the party that rules China. As an organization, it is quite efficient in some straightforward tasks. However, sometimes there are tasks that require more advanced way to organize people. Any organization has its limitation. And most organizations have very limited capability to adapt/evolve. The way to form the organization is the biggest obstacle. Once this is understood, everything becomes clear.
Sorry that I have not given a clear answer but some clues. The tools I recommend are some basic understanding of concepts in organization behavior, complex system(such as complexity theory), Austrian school economics and, of course, some history of the party, how it operated economically from its early days.
No need to get deep in the tools I listed, just have some ideas of how they perceive the world. These tools are not perfect. But with them, we may have a better view of the thing we want to know.
Hope this helps.
Could you point out or give examples of some of these crazy ideas? For the sake of us who assume we know nothing, and wouldn't know how to tell a crazy idea from an unconventional-yet-reasonable one. No sarcasm intended and I'm sure an exhaustive list is a bit much to ask, but I would be interested to read even a few examples and/or explanations.
Best resource I know, neither pro nor foe, is the Sinocism newsletter, a daily email of Chinese and English sources, that distills analysis from sources with multitudes of viewpoints.
Chinadaily often runs editorials directly translated from Chinese. They are quite bizarre and often just diatribes. My wife is a Chinese but has no respect for the press, so doesn't even bother reading those articles anymore (most young Chinese are the same).
I've been in China for 6+ years now, I have expat friends who have been here for 10+ (which is an old hand these days). We aren't incredibly divergent in our thinking. Chinese have different viewpoints, but this is primarily cultural rather than linguistic.
But if you truly want an unbiased view of China, read a Taiwanese newspaper :)
But honestly, i dont even see that as problem with China alone. Heck today it is hard to find ANY decent newspaper that are unbiased. ( In the Context of Chinese and English only ).
I dont think they are crazy ideas. Any country, be it US, UK, Japan or China have their own set of problems. Although I do generally agree that the Western World dont generally always understand the language and culture difference.
Diatribes authored by public officials is quite unique in the category of those countries that haven't failed. It has nothing to do with cultural differences and everything to do with the party, which still thinks in a very authoritarian way even if that power is slipping away. There is no real public debate, only harmony; there is no seeing or even just explaining both sides, only a forceful statement that their side is right.
I suggest reading ChinaDaily often...it gives you a good perspective into what the government is thinking at least, and if you read it as a contrarian, it is good to get a heads up on what is coming when they deny something specifically (e.g. Beijing will not restrict license plates 2 months before they did).
It seems as though China is undergoing a Keynesian expansion. So I'm probably wrong about that. I'm going to watch to see if I can figure out the difference between what they seem to trying to say is a problem due to massive government spending and Keynesism.
Or are they saying "too much" Keynesism is a bad thing?
Okay, these seem to be the main differences and concerns I am getting from this vid.
1. Many loans eventually come via a shadow banking system
and so are not transparent, ie, no one know how much is
loaned and regulation is poor, this could lead to a
huge credit crunch, and China's own too big to fail
2. Some large amount of housing is speculative in nature
and kept empty as an investment and hence could be
causing an enormous bubble
3. This real estate bubble brings benefits to rich but
doesn't improve the economy for the poor
4. The boom has made the local authorities very rich and
powerful (political corruption, crony capitalism, ...)
5. The sheer size of it is unprecedented in modern
financial history
6. Citizens save too much (1/3rd of earnings). So economy
is dangerously unbalanced, fueled by debt spending and
not enough by consumer spending or shopping (41:10)
7. Investment is 50% of economy, consumption 30%, so when
investment slows down, it can't be replaced with
consumption. Credit is at a level of twice the size
of the economy.
8. State owned companies are filled with inefficiencies.
"Shaking" them up would leave huge numbers of people
unemployed.
9. There is beginning to be a fear of collapse (that
could lead to collapse.)
10. Punk Rock pointing out corruption in the system
and how the rich are getting richer.
11. Hard to see further economic reform without political
reform, yet it seems that Chinese are intent on
not reforming their political system further.
Recommendations to balance economy:
1. China needs to become more like us and consume more
themselves.
My interpretation is that China did the heavy lifting of pulling the world out of the last crisis. Neither the US nor Germany had the political wherewithal to do large scale stimulus and/or structural reform. The Chinese also had the most to loose.
The cost of propping up the global economy had been highly damaging to China's weak institutions if we are lucky it will recover in 20 years. If we are unlucky there will be a partial collapse.
Not sure what you're talking about. The exact opposite is true. The US massively stimulated, including running up about $10 trillion in new federal public debt alone, which was a form of deficit stimulus. The Fed of course has been running hundreds of billions in annual stimulus.
I'd roughly estimate that the total US stimulus in all forms, from the treasury to the fed, totaled $15 to $20 trillion (some of which was repaid, eg loans to european banks, or the AIG and Fannie bailouts, or GM etc). That's two to three times the size of the entire Chinese economy.
That new federal debt paid federal salaries, contractors, welfare, social security, you name it. Those people then purchased hundreds of billions of dollars worth of Chinese goods.
"U.S. Bailout, Stimulus Pledges Total $11.6 Trillion"
The Fed kept the entire global financial system solvent during the crash. They lent huge sums to European banks.
"the central bank lent billions to foreign banks that operate in the U.S., including Germany's Deutsche Bank Securities, which got $290 billion in mortgage securities; London-based Barclay's, which received a $47.9 billion loan; France's BNP Paribas Securities, Switzerland's UBS Securities LLC and Daiwa Securities America, a subsidiary of one of Japan's largest brokerage houses."
You said China did the heavy lifting regarding pull the global economy out of the crash, then you say that Fed QE drove growth in emerging markets.
All that stimulus drives massive consumption, which bolsters global manufacturing. And you ignored the part where the Fed kept the entire first world solvent during the crash, that alone is more than China did.
And the US is hardly post-industrial. It's the world's largest manufacturer (yes, larger than China).
I have lived in Shanghai for the past 3 years but I also lived here from 2001-2002. Back then, there were buildings constructed that were totally empty and it seemed ridiculous to think anyone would live in those distant undeveloped areas. Fast forward a decade and now Shanghai has 20 metro lines instead of two, with each metro station under a sprouting mini-city, complete with its own H&M, Burger King and Starbucks. It seems like the urban planners strategically placed them all perfectly close to each other, like settlements in Civ. The condos that stood empty 12 years ago are now at full capacity and people are moving even further out into the exurbs where more empty buildings await them. The energy and buzz in Shanghai is just as palpable as it was 12 years ago and although there are some ghost cities and failed projects across greater China, the megalopolises will easily compensate for them. The United States has its share of empty, abandoned cities (Detroit, anyone?) but when you visit San Francisco or Manhattan, you would not know it.
Sure, Kunming is the provincial capital so a worst case example. The rest of the province is pretty damn clean, and being semi-rural to outright wilderness much cleaner in most cases than western cities. Personally I'm on the next lake over... https://en.wikipedia.org/wiki/Lake_Fuxian ... it's like Kunming 15 years ago. We still have horse-drawn carts, and you can go fishing, horseriding, or paragliding with ease. We also have some of the oldest fossils in the world, a submerged neolithic village and a not-so-secret Chinese navy submarine testing base.
What kind of tech work can you do in Lake Fuxian? Or are you doing remote? If remote, then ya, there are a lot of nice places in China to hang out in, though personally I would pick Bali or Thailand.
Kunming was ok 12 years ago. I'm getting old though.
I work remotely for Silly-Valley and change bases frequently. This is just one of them. Bali is too crazy-drinking or hooneymooner for my meetup tastes, and Thailand while safe enough does still mean a new visa run for a lot of people, which is why keeping any potential meetup in China might be nice. I too was in Kunming from ~2001, however I am definitely not getting any older!
China has been cracking down on visas lately also...I'm not sure I would pick China if I could go anywhere, it is more expensive than the alternatives, and I still feel like I'm crossing into the developed world when I fly to Thailand or even the Philippines. And still no Chai Tea Lattes at starbucks (though Indonesia doesn't have them either).
I'm dreaming about moving to India, but I like my current job too much, and my next move is probably back to the states to settle down.
China owns part of many industries, Governments that start having issues start selling their stakes and come up with plenty of money. Like everyone I am fascinated with China building new cities where no one lives, but they are going to totally get away with it and come out the other side unharmed.
I saw an explanation somewhere for the ghost cities. The CCP realizes that construction labor there is currently very cheap, land is cheap (in terms of political capital to displace people --- wealthier citizens will make it more expensive to displace them), and materials are relatively cheap. As they develop further, all three cost inputs will only get more expensive. So the CCP is deliberately allowing the rapid development of these projects in anticipation of the massive shift from rural to urban population migrations over the next several decades. If the CCP is trying to stem catastrophic inflation when the mass migration hits a peak, then these ghost cities can in retrospect appear a prudent, long-range measure.
There are also also quirks of the Chinese property market [1] and mass media's penchant for sensationalism that might more reasonably explain the ghost city phenomena.
I don't know about Eastern China, but I was told first hand from a relative:
a) General lack of maintenance in all buildings. At the most basic level this includes keeping things clean, at a higher level fixing things when they break.
b) Air pollution causing external wear.
c) Individual was surprised when told a stadium was 6 years old. It looked decades old due to pollution and lack of maintenance. The locals were just going to build a new one to replace it.
I have lived in Shanghai for the past 3 years but I also lived here from 2001-2002. Back then, there were buildings constructed that were totally empty and it seemed ridiculous to think anyone would live in those distant undeveloped areas. Fast forward a decade and now Shanghai has 20 metro lines instead of two, with each metro station under a sprouting mini-city, complete with its own H&M, Burger King and Starbucks. It seems like the urban planners placed tem all perfectly close to each other, like settlements in Civ. The condos that stood empty 12 years ago are now at full capacity and people are moving even further out into the exurbs where more empty buildings await them. The energy and buzz in Shanghai is just as palpable as it was 12 years ago and although there are some ghost cities and failed projects across greater China, the megalopolises will easily compensate for them. The United States has its share of empty, abandoned cities (Detroit, anyone?) but when you visit San Francisco or Manhattan, you would not know it.
A lot of this opportunistic construction isn't done very well, and often its just a form of money laundering (build this, charge a lot, do a very crappy job, lots of pockets are padded). Many of these buildings will be torn down before they are ever used; every few months there is a scandal where this actually happens.
Are there any statistics of buildings collapsing? I've seen the "tipped over building" picture, and heard some other sketchy stories but its all anecdotal.
The result you point to, in terms of taking up overdevelopment slack due to China's urbanization having a long way to go yet, may turn out to be true. But it's generous to say anyone anticipated that in building these white elephant projects.
China's economic growth will cover numerous sins. As will the oil boom in the US. But they're still sins.
isn't chinas foreign debt still net negative? if so, wouldn't be the obvious strategy be to start outsourcing the debt as the US did? we possibly have a few more years and as poulson said, there are quite capable people steering the ship.
Every year , for the last 20 years, many articles say that we can be sure of the imminent Chinese economy collapse. Then every year they are proven wrong. This is just one more of these articles. The guys have no idea what they are talking about. The education effort is as huge as the infrastructure building effort, and it will bring its benefits. At some point the growing will slow down; at some point it will be 1% yearly growth; but a political collapse is very unlikely, and economic collapse is even more unlikely.
Every year, for the last 20 years, many articles say that we can be sure of an imminent housing crash. Then every year they are proven wrong. This is just one more of these articles.
... Bubbles are bubbles until they pop. A lot of infrastructure in China is under utilized, and let's not even get started on empty shopping malls and apartment buildings, even here in Beijing!
Whether the government can pull off a soft landing is up for debate, but every year with people, local governments, and companies become more leveraged, not less, I think a hard landing is more likely.
Now, if that happens, this doesn't necessarily mean that the government collapses, but many of the bandits who are making out on this have gotten their money out of the country, and a correction is more likely to negative effect those who didn't really benefit in the gorging. And if that happens, the CCP (many whose relatives have already fled abroad) is going to be facing a lot of pissed off nongming.
The Chinese internal economy is not as robust as its export economy, and shifting the economy to one based on consumption is an important goal to making it actually healthy. Right now, people just save or invest...and the investments are limited to some shady financial products and...real estate.
>>and the investments are limited to some shady financial products and...real estate. This is in Beijing , or Hebei, Henan and the 3 northern provinces. At the Pearl River Delta and the Shanghai-Zhejiang-Jiangsu triangle the investment is in production.
People from Wenzhou basically invented highly leveraged real estate speculation.
Also, as a normal person without guanxi, you can't really get access to the sure bet industrial investments, and participating in shadow lending is very risky.
chinese dont live on credit like americans, they live for saving. The financial market is slightly more regulated than the american financial market, aswell.
Exactly. Most of the money is kept in saving accounts with interest rates that are far below inflation. And what do you think the banks are doing with that money?
China is in fact buried in a massive pile of debt, from corporate to muni to personal, that they will never be able to climb out from under. And they've had to pile on ever larger amounts of debt just to keep faking the 'growth.' The notion of China being the land of savings and low debt is completely a myth.
"In the meantime, some investors are increasingly alarmed by the speed at which local governments are piling on debt to pay for public works. China's state auditor said in its report on Monday that local governments had total outstanding debt of 17.9 trillion yuan ($2.96 trillion), including contingent liabilities and debt guarantees, at the end of June."
"A report by Nomura said Thursday that Chinese municipal debt, a focal point of major concern about the country’s economy, had grown at an alarming 39 percent clip in recent years."
"China's overall debt-to-GDP ratio has sprung to over 200% from about 120% in five years. Most of this is from local governments and state-supported companies."
China's corporations are drowning in debt, at 151% debt to GDP ratio, the highest basically in the major industrial world. Twice as high as America's ratio.
For the past 20 years I've been hearing how China was going to take over the United States in everything. Invasion of Taiwan would happen whenever they wanted. I've never heard anyone say their economy was about to imminently collapse.
I'm surprised any one thought that China's "bailout" was doing anything more than kicking the can down the road? It is the end of the road now, and they get to deal with unserviceable debt. There are many options. All are ugly in unique ways. For who and when are the questions left undetermined.
It's a mistake to believe that either China's will continue along uninterrupted or that it will fall into severe crisis. The reality is that China has a strong economy AND also a very flawed and troubled economy (India has similar problems but in a different way).
The result will probably be that China's growth will at some point stall out before reaching developed world levels and they will probably be faced with some manner of serious problems at a level less than countrywide existential crisis.
Also, as to "predictions being proven wrong", remember that every year during the 2000s many people predicted that the housing market would implode and lead to a major economic crisis. They were "proven wrong" every year until it actually happened.
Last time I checked, China had 1 Trillion dollars in reserves. Chinese people is not living on credit cards, actually quite the opposite, they save a lot, even the little waitress at the cheap restaurant has a lot of savings. Every year, at spring festival, hundreds of millions of young chinese give their savings to their parents to keep, and those old people can save! I dont know where is the debt guys are talking about.
The US economy was badly hurt by household debt because household spending fuels the US economy, this is not the case for the Chinese economy. An 8x increase in corporate debt in China in the last 5 years means something in an economy driven by industrial production instead of individual consumption. I do not know exactly what it means but I suspect there is some grounds for believing it may not be entirely good.
Chinese households might be less inclined to take on debt, but they've still managed to rack up about 30+% of GDP worth, so they are working on it.
You can lose your savings from a bank default, this happened to some weak banks in the US. You go to withdraw your money it is not there.
You can lose your saving from currency devaluation. In order to pay off debt, a government can issue new currency (debt denominated in its own currency; in Eurozone countries they can only raise taxes and cut spending to pay off debt.) Your savings don't matter because there is so much more money. An old unit of currency is equal to new units.
If I was Chinese, I would not be too concerned as long as I did not have liabilities for my business or money deposited in a bad bank. If yes to either of these, you are at risk of losing everything.
China has $3 trillion in reserves, and it's completely meaningless when stacked against their rapidly expanding pile of debt. China is one of the most indebted nations, and to keep their GDP growth going they have to keep adding ever larger sums of debt. The amount of growth they get from $1 of capital has crashed the last six years. It's obvious how it's going to end: either in a very long period of dire stagnation, or crash.
If someone say it for long enough, they're bound to be right one day. It's the same about the decline of the US.
All we can do is judge them on a case-by-case basis.
In this case, it's really hard to judge because the threat, similar to the US credit crisis, is hard to measure. China has a really sizable foreign reserve that some people think will buffer any economic crisis. However, some estimates of the shadow banking system puts it well beyond its reserves. That said, not every loan in the shadow banking system will go bad. It just means the loans were made off the books. One can reasonably assume that the lender did his work and made loans that have a decent chance of success. Also, I don't know what falls under some of the definitions of shadow banking. The Chinese have been loaning each other large sums of money for generations. This "tradition" is one of the theories put forth in the rise of overseas Chinese communities and their dominance in business in those areas. Anyways, my point is that it's not all doom and gloom. The threat is there but don't panic yet.
The problem with leverage is that you don't need a 100% failure to be wiped out. This is why the US crises was not very surprising, the investment banks had upwards of 1:30 leverage ratios. Similar things were happening to real estate investors.
So no, not all of the loans will go bad. But, some go bad. First prices stop growing. No growth? Why borrow to buy? Next prices drop, and then suddenly a lot of loans that should have been ok are worth far more than the underlying assets. Then it is just a big mess.
Think of a credit bubble as a game of musical chairs. The people who borrow money at the end always lose (also the ones that lend money.)
Yes there are random empty apartment buildings and a few absurdities like --> http://en.wikipedia.org/wiki/New_South_China_Mall.
However, overall the infrastructure they have built has put this country in a position to achieve dominant superpower status over the next century.
For example, within 5 more years the entire of Guangdong Province will be connected by high speed rail and subway - meaning 100 million people and businesses will be connected by public transit with no more than a 2 hour ride. There is already a critical mass of manufacturing capability here, and with that added layer of network infrastructure, even if labor costs rise 100% YOY to match USA and Germany in a decade, Guangdong China will still be the worlds factory.
Furthermore, the internal consumption machine of 1.3B people is undeniably ramping up now. They are spending money, the largest middle class on the planet is clearly taking shape, and lives are measurably improving all around me.
There may be a few bumps in the road but there will be no collapse.