How Likely is a Japan-like Collapse in China?
That’s the question Richard Koo asks in his latest note. He says:
“How likely is Japan-like collapse in China?
Driving these concerns is the fact that house prices have risen to the point where they cannot be purchased on an ordinary income. There is also the worry that China could experience its own lost decade (or two) if the housing bubble were to collapse.But at a time when problems in the eurozone have led to an export slump, it will not be easy for the Chinese authorities to generate another economic expansion while preventing a housing and real estate boom. Infrastructure is one of the few sectors other than exports and housing capable of driving the Chinese economy.
During my recent trip to China, even a person working in national security told me that if the Chinese economy continues down its present path the resulting bubble collapse could do tremendous damage, just as it had in Japan. His remarks suggest that the economy has become a key strategic issue for the government in Beijing.”
Koo says a sustained collapse in China is avoidable if their government enacts the right policies. I wish I had a good response here, but unfortunately, I just can’t honestly say that I (or anyone outside of the Chinese government) really understand what is going on in China….It’s like a black box economy as far as I can see. The takeaway for me is (and has been) – stay away from that which you can’t understand.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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11 Comments
“The takeaway for me is (and has been) – stay away from that which you can’t understand.”
– Which is a sentiment reflected in the Chinese stock market; trust and transparency are critical to garner investment.
China is toast. Europe, the US, Japan are in recession. And that’s going to hurt China.
Perhaps it’s time that the Chinese produce items for domestic consumption.
There is not enough financial freedom (and transparency/accountability) in China to have the kind of collapse seen in liberal democratic countries, but rather they face stagnation and slow decay like the former Soviet Union. They’re in a precarious position; it only takes a Romney/Ryan hardline on trade and revaluation (like Reagan and Japan) to trigger the decline. People forget that globalization is not a one way trend, it has also ebbed and flowed through the course of time. Politics matters for autonomous currency issuers and their trading partners.
Revaluation ? From 2005 up to 2012 the yuan appreciated against the USD. They did precisely what the US wanted: Revalue !
But NOW (!!) the yuan is actually weakening against the USD in spite of having a Trade Surplus. Seems A LOT OF chinese citizens notice the writing on the wall. A collapsing chinese economy. Those evil chinese currency manipulators, right ?
By any measure China’s Fx reserves are off the charts. They still run a trade deficit and are accumulating assets.
China is running a Current Account Deficit. And that means an outflow of money, and that means that they are selling/could be forced to sell assets (e.g. US T-bonds).
http://www.macrobusiness.com.au/2012/08/chovanec-china-hard-landing-already-underway/
(The Trade Deficit is only one of the factors determining the Current Account Balance).
It’s very similar in india as well. Lots of free money enabled huge bubbles in real estate markets of major cities. Corp Sector has funding problems. From where i sit in APAC & South Asia it’s going to be Deja Vu.
“Stay away from that which you can’t understand” – that’s a very good conclusion to make when your fate isn’t all that dependent on China. Unfortunately for me in Australia, our fate is so very closely tied to China and thus we need to try and make sense of it as best we can.
The lesson from Japan, and pretty much all other countries which experienced a period of very strong growth driven by investment is that they all ended and a new period of much lower or even negative growth emerged. Given China is embarking on perhaps the most extreme investment-driven growth model ever tried, the historical precedent doesn’t make me confident they will somehow escape the same fate experienced by everyone else who used the same strategy.
I agree with Koo that government policy changes will be a big factor. Sadly, I think the damage is already done…
Check this out:
http://www.marketplace.org/topics/world/dam-shows-flaws-chinas-economic-model
Relevant section quoted:
Weng is the former head of the government bureau charged with protecting the Yangtze. He first heard about the project when Bo Xilai sent a team to try and sell him on the idea.
Weng Lida: Economically, the project made no sense. They wanted billions for a dam that would generate relatively little electricity. Then I thought the dam might help with irrigation, but that didn’t make sense either.
Weng was convinced Bo Xilai wanted to build this dam for only one reason.
Weng: This is all about GDP. This will cost five billion dollars to build. It’s one of the biggest investments in the history of Chongqing. Bo wanted the best GDP growth numbers in China—he wanted to make sure growth stayed over 14 percent annually.
How much of the impressive numbers we see are just pointless make-work? And keep in mind that fixed capital investment has been increasing as a proportion of the national income.
You know what this reminds me of? Impressive Soviet growth in the 50s and 60s, but with even fewer concessions to reality. They’ve got all the problems of government planning without the worthwhile elements that real central planning can give you.
Cullen: nobody knows exactly how the Chinese economy does, including the highest ranking officials(even the incoming Prime Minister admitted as much in a Wikileaks document).
We do know, however, that the Chinese housing bubble was at least 50 % bigger than the American one, and possibly 100 % if you believe some stats.
We also know that government-controled economies over time tend to malfunction. The Soviets had very impressive growth for over 3 decades until the mid-1960s, but you can’t do that well for that long.
China is a little bit different because despite all the political favoritism, there is still more than a sliver of genuine capitalism, often introduced by foreign corporations.
Actual debt is around 80 % when you count all the hidden stuff in local governments. I’m not even counting corporate debt-to-GDP which is around 107 %(highest in the world of the major economies).
And then there’s all the bad bank loans which have been shuffled since the late-1990s Asian crisis and were starting to subdue until the 2008 shock came.
China isn’t going to do very well over the next coming decades, but it isn’t going to freefall either(neither did Japan).
Also, remember that the working-age population is peaking next year in China. The overall population is peaking in about a decade, but the relevant issue here is the working age-population. From here on out, the amount of working people will steadily decline, supporting an ever growing older population. Fertility rates are at 1.4-1.5 per woman.
That’s European levels, only that Europe is already wealthy and is managing it’s soft decline. (Except for the Greeks) and even in places like the Netherlands, Scandinavia, Germany, Austria etc, things are actually in many respects better than they are in the USA for the average joe.
China still has a huge massive rural population, most of whom will not see a modern Western living standard.
And I haven’t even begun to delve into the resource question.