Sunday, December 6, 2009

China 2009, US 1929?

"In a world still awash in economic worry, China has stood apart as the one country that has come through the global slump with only the briefest of hiccups. ... A lot of global CEOs, of course, are on the thank-God-for-China bandwagon, and it might seems a little churlish to question one of the world's few good-news economic stories. Yet a growing number of observers believe that China is creating its own bubble economy. And they have a case to make. ... In the first nine months of the year, Beijing has sholveled $1.27 trillion in new loans into the economy, up 136% from the same period last year. That money has gone into three main areas: infrastructre, manufacturing, and real estate. ... China's total lending reached 140% of GDP at midyear. That kind of lending makes China an 'outlier' compared with other BRIC (Brazil, Russia, India and China) countries--and is already well beyond the levels that 'have led to sharp and brief credit crises in the past,' the Pivot Capital report contends. ... From 2000 to 2008 it took just $1.50 in new credit to generate $1 of GDP growth. Now that ratio is 7 to 1. (In the US, just before the financial crisis hit, the ratio was only 4 to 1.) That's because the loans are creating huge amounts of manufacturing capacity--which is unneeded in the bears' view. China's spare capacity in the cement industry, for example, equals the total annual consumption in the US, Japan, and India combined", Bill Powell at Fortune, 23 November 2009.

"Barely a year ago steel mills all over China slumped dramatically after making too much of the stuff. In the fourth quarter of 2008 their output plunged 15% from 2007. Now, prolonging the buzz of government stimulus, producers are bingeing again, accumulating stockpiles of 80-million-plus tons at a time of year when construction usually slows. ... There's a similar story in aluminum (with an inventory of at least 250,000 tons) and cement (300 million tons of annual overcapacity). ... Further drops in prices are inevitable, as are forced consolidations and shutdowns of state-owned factories in the months or years ahead. ... China, or course, was supposed to save the world with its $586 billion stimulus therapy, its $1 trillion-plus in new first-half lending by state banks and the enviable spike in third-quarter GDP growth (8.9% year-over-year). ... A centrally run economy can stave off a severe slump by keeping monetary policy loose for a while", my emphasis, Gady Epstein at Forbes, 30 November 2009.

"President Obama's recent trip to China reflects a symbiotic relationship at the heart of the global economy: China uses American spending power to enlarge its private sector, while America uses Chinese lending power to exapnd its public sector. Yet this arrangement may unravel in a dangerous way, and if if does, the most likely culprit will be Chinese economic overcapacity. ... To help make this work, the Chinese government has subsidized its exporters by pegging the renmibi at an unnaturally low rate to the dollar. This has supported relatively high-paying export jobs; additional subsidies have included direct credit allocation and preferential treatment for coastal enterprises. ... Those same subsidies, however, have spurred excess capacity and created a dangerous political dynamic in which these investments have to be propped up at all cost. China has been building factories and production capacity in virtually every sector of its economy, but it's not clear that the latest round of investments will be profitable anytime soon. Automobiles, steel, semiconductors, cement, aluminum and real estate all show sign of too much capacity. ... Regional officials have an inventive to prop up local enterprises and production statistics, even if it mean supporting projects or accounting practices that are not sustainable. For an individual business, the standard way to get more capital resources is to put forward a plan for growth. Because few sectors are mature, and growth has been so widespread, everyone can promise to be profitable in the future. ... China's statistics on its gross domestic product are based more on recorded production activity than on what is actually sold. Chinese fiscal and credit policies are geared toward jobs and political stability, and thus the authorities shy away from revealing which projects are most troubled or should be canceled. ... History has shown that no major economy has grown into maturity without bubbles, crises and possibly even civil strife or civil wars along the way. Is China exempt from this broader pattern?", my emphasis, Tyler Cowen (TC) at the NYT, 29 November 2009, link:

During the 1920s the Fed supported the British pound. This led to the roaring 20s. Similarly China is supporting the dollar now. China is an economic disaster waiting to happen.

Is this true of all "centrally run" economies, the US included? The US depression in the 1930s was more severe than Europe's, so I expect China to have a more severe depression in the next few years. Chinese shares should prove disastrous investments for the next five or so years.

TC is a George Mason University economics professor. I agree with TC, China is a disaster waiting to happen.


Anonymous said...

"...A centrally run economy can stave off a severe slump by keeping monetary policy loose for a while"

I thought you were writing about Bernanke and the US...

houses Toronto said...

Hi and thanks for the article. I must admit that I feel a bit skeptic about this "simbiotic relationship". Exactly these mistakes such as lending too much money and taking too many loans made the Americans triggering "housing bubbles" and, consequently, the financial crisis. Yes, I'd say that China is on the right way to create its own bubble economy, too.
All the best,