China's Coming Economic Slowdown

[24107]

I think it should be a priority to stay focused in righting are own ship here in the U.S. before worrying about China.

 

[specklebang]

China will move away from cheap junk as we did and make cars, planes and weapons, just as we did. Its not a quick process and yes, we were first - the first rich country. Hopefully, we'll find our place or our lifestyles will change.

I'm sure you've noticed how poverty is spreading. The nature of the 21st century appears to be one in which the educated will do well, and the uneducated will not. Obviously, I would love to be wrong about this.

How long was America top dog in the world regarding manufacturing before those jobs were moved overseas?

In comparison, how long has China been a major player regarding manufacturing? If China loses it's manufacturing jobs now, it will be in big trouble economically.

 

[johnny_rebson]

China will move away from cheap junk as we did and make cars, planes and WEAPONS,....

As I read your post, the term foreshadowing came to mind.

 

[specklebang]

We can only hope they've learned from our mistakes.

 

[JP Hochbaum]

The subsidation of private industry by the government is generally malinvestment. If it wasn't, then those businesses and industries wouldn't have to be subsidised. I am sure that you can find a few recent examples of these types of failures.

Thats part of the reason that I don't agree with the way that you suggest we implement a guaranteed jobs program (although I agree with the concept of a guaranteed jobs program).

I mentioned once that money should be given to small businesses to hire, but for the record I only mentioned it in passing and don't actually believe in it.

 

[cpwill]

If we could get the minimum wage law scrapped and the environmental and labor laws gutted, then America could see huge growth in the next century.

Well I don't know about "gutted", but "sanity-ized" would indeed be helpful. Putting in a "loser pays" provision that allows for punitive damages against the EPA when it brings frivolous suits would help as well.

 

[cpwill]

but if the chinese economy sputters, who then will finance our annual deficit?

More to the point - if China decides to do what the rest of the world has done, and nationalize a portion of it's bad semi-private-sector-debt by paying it out of their soveriegn wealth fund...


...how the **** are we going to handle the collapse of the dollar / massive inflation that will occur here?

 

[American]

I predicted something like this a while back, China is getting to big for its britches.

 

[Diogenes]

Stop trying to turn this into a comedy thread.

I leave that to you.

 

[Cardinal Fang]

I'm sure the Chinese leaders have noticed manufacturing moving to Indonesia, Vietnam, and other nations in Asia.

They ought to have by now. Their manufacturing workforce peaked in 1995. They have lost some 15 million manufacturing jobs since then -- more than the US currently has. But then ALL of the world's twelve largest manufacturing economies have lost manufacturing jobs since then, even as manufacturing outputs have soared. What slow-on-the-uptake folks need to learn from this is that -- like agriculture a century or so earlier -- manufacturing has lost the ability to provide jobs for the masses. Get used to that idea.

 

[Cardinal Fang]

How long was America top dog in the world regarding manufacturing before those jobs were moved overseas?

The largest manufacturing economy in the world in 2009 was the United States, as it has been every year since post-WWII data have been collected.

In comparison, how long has China been a major player regarding manufacturing?

China has been a major manufacturing economy for quite a while, certainly since 1980 when they were fifth in the world. They passed Japan to rank second in the world in 2005 and continued to expand rapidly through 2009. They may have matched or surpassed the US in 2010. It should be close one way or the other with differential effects from the economic downturn potentially being the deciding factor.

 

[Cardinal Fang]

but if the chinese economy sputters, who then will finance our annual deficit?

Had you thought that maybe this is all about China investing its surpluses as much as about the US financing its deficits? If not, that would be a good thing to wonder about for a while.

 

[Cardinal Fang]

I think it should be a priority to stay focused in righting are own ship here in the U.S. before worrying about China.

We need each other. Each of us should (and in fact does) care about the economic well-being of the other.

 

[Cardinal Fang]

China will move away from cheap junk as we did and make cars, planes and weapons, just as we did. Its not a quick process and yes, we were first - the first rich country. Hopefully, we'll find our place or our lifestyles will change.

Junk? Some folks just live in Comic Book World. China's top five exports last year were electrical machinery and equipment, power generating equipment, apparel, iron and steel, and optics and medical equipment.

I'm sure you've noticed how poverty is spreading.

Yeah. It results from all that Republican class warfare and wealth redistribution upward along the income scale. Reverse that crap, and poverty will subside.

 

[Cardinal Fang]

Well I don't know about "gutted", but "sanity-ized" would indeed be helpful. Putting in a "loser pays" provision that allows for punitive damages against the EPA when it brings frivolous suits would help as well.

"Frivolous" here meaning any action that you personally fail to approve of? Actually frivolous suits expose one first to having one''s case laughed out the door, and then to penalty if for some reason the case survives. Courts don't really like wasting their time on matters that have no merit.

 

[Cardinal Fang]

More to the point - if China decides to do what the rest of the world has done, and nationalize a portion of it's bad semi-private-sector-debt by paying it out of their soveriegn wealth fund...how the **** are we going to handle the collapse of the dollar / massive inflation that will occur here?

Can you like outline the steps that would occur in this cataclysmic process of yours? I'm having a little trouble imagining it...

 

[Mach]

When 90% of all private start ups fail, you have to wonder which sector is really the leader in malinvestment.
I would also love to see some kind of quantifiable data showing what is malinvestment, and what isn't by the federal government.

Depends on why they stopped. The private sector may have offered them a better job doing a similar thing.
It also depends on what they invested. If it was just their own time primarily, its not going break any records on malinvesment.

Where is the big malinvestment in a new restaurant? So you break even for a year and then close up shop. People were still fed, rent was paid, you didn't go bankrupt...if you don't have a lot you don't have a lot to lose!

Large systems almost by design cannot deal with a few levels down in complexity. The billions in waste are not a result of idiots, it's just unmanageable by humans in such a large organization. You can't be worried about $10 here and there when your budget is billions. Meanwile the street vendor can worry about $10 here and there. Decentralization of the economy is one of the reasons why it works so well.

 

[cpwill]

Can you like outline the steps that would occur in this cataclysmic process of yours? I'm having a little trouble imagining it...

step by step the way I see the OP pushing into the future:

1. China (this surprised me at first, but it makes sense upon reflection) is currently sitting on massive malinvestment of borrowed funds by state-run corporations.

2. The lucky-lucky holders of the bonds of these bubble-corps are Chinese Households.

3. Ergo, when these bubbles start to pop (and they will likely pop as a group) China's aging populace, which has had a massive savings rage, will suddenly see what they had saved for old age go up in smoke. This will be a violation of the current basic governing bargain wherein the CCP provides national pride and continual growth in wealth in return for which the populace acquiesces to autocratic rule.

4. When this debt goes bad, therefore, the CCP will be looking at a potentially regime-ending national crises. For a CCP that values stability at home above all else, that is unacceptable.

5. (here is where we start getting into the cpwill-prediction phase) Faced with such a crises, the CCP will nationalize the bad debt that was already government driven. They will probably throw some populist meat out there by executing the relevant heads of the disgraced corporations. In order to pay this massive new demand on government finances, China will reach into her sovereign wealth fund. This gives China a potential advantage:

6. By de-pegging their currency, China can allow the value of their money to rise. This means that as part of the take-over deal, China can give it's lenders a haircut (making it easier on them) while at the same time not destroying saved wealth. You've only got two thirds of your original savings, but you, the lender, think that the CCP saved that two thirds (you're going to be very loyal after this), and besides, that two thirds can buy just as much as the old three thirds could.

7. In order to pull the money from it's sovereign wealth fund and give that money to bondholders, however, China has to divest itself of foreign paper, and trade it back for Chinese currency. US Dollars and Treasuries flood the global market. Since the supply of both are growing, the ability of the Fed to counteract is extremely limited.

8. This would wreck China's current export model (which is already failing), and so as a part of this shift, China goes into the mercantilist model she has been preparing for the last decade, decade-and-a-half or so. China now no longer needs to be part of the global supply chain to a Europe that is falling apart, a Japan that is going under, or a United States that is facing deleveraging; she is at the head of her own regional order of trade, which is where she has wanted to be all along.


This will hurt China. They will lose significant value when they sell off their foreign assets to shift to pay off bondholders and move to a China-centric system. In addition, Mercantilism works less well than free trade, which means that their growth from here on out will be hampered. But what they won't go through is a threat to regime stability, which is what the CCP cares about. This series of moves will leave the CCP more firmly ensconced in a poorer nation that is now comparatively more powerful in the region, as the former hegemon (the US) deals with a monetary and fiscal crises. The CCP is more than willing to make that trade, when and should it become necessary.

 

[Cardinal Fang]

step by step the way I see the OP pushing into the future:

Well, I'll be on the lookout for all that, but I'm actually expecting the bulk of it to remain on the fanciful webpages of whackjob internet financial guru wannabes where it all came from.

1. China (this surprised me at first, but it makes sense upon reflection) is currently sitting on massive malinvestment of borrowed funds by state-run corporations.

Here's something else that may surprise you. Both sides of the bond market in China are dominated by state-owned entities. The government essentially owes the money to itself. And by the way, what means did you use to identify the portion of this market that represents what you call malinvestment? I don't think that term carries any weight at all to begin with, and I suspect that whatever methodology (if any) was employed would be worth even less than that.

2. The lucky-lucky holders of the bonds of these bubble-corps are Chinese Households

No, state-owned banks are the dominant bond holders and investors in China.

3. Ergo, when these bubbles start to pop (and they will likely pop as a group) China's aging populace, which has had a massive savings rage, will suddenly see what they had saved for old age go up in smoke. This will be a violation of the current basic governing bargain wherein the CCP provides national pride and continual growth in wealth in return for which the populace acquiesces to autocratic rule.

The median age in China is 34.9. In the US by comparison, it is 37.2. All sectors in China (state, corporate, and household) have the same high savings rates, and obviously only a small part of one of them is saving up for retirement.

4. When this debt goes bad, therefore, the CCP will be looking at a potentially regime-ending national crises. For a CCP that values stability at home above all else, that is unacceptable.

How will this happen given that virtually all of the debt is either state-owned or state-guaranteed? Certainly there have been squabbles and turf-wars between Chinese state agencies from time to time, but prospects for their engaging in "regime-ending" behavior are really, really close to zero.

5. (here is where we start getting into the cpwill-prediction phase) Faced with such a crises, the CCP will nationalize the bad debt that was already government driven.

They are going to nationalize state-owned debt? Oh noes!!!

They will probably throw some populist meat out there by executing the relevant heads of the disgraced corporations.

That would be literally shooting themselves, but probably not just in the foot.

In order to pay this massive new demand on government finances, China will reach into her sovereign wealth fund.

What's a sovereign wealth fund, and what are they hiding in there? Maybe there is some confusion between sovereign debt funds and foreign exchange reserves???

6. By de-pegging their currency, China can allow the value of their money to rise. This means that as part of the take-over deal, China can give it's lenders a haircut (making it easier on them) while at the same time not destroying saved wealth. You've only got two thirds of your original savings, but you, the lender, think that the CCP saved that two thirds (you're going to be very loyal after this), and besides, that two thirds can buy just as much as the old three thirds could.

Full de-pegging would indeed allow the value of Renminbi to rise. It would also cause Chinese exports and export-based employment to fall. Not too good for China. The rest above is indecipherable flight-of-fancy chicken-scratching and gobbledygook.

7. In order to pull the money from it's sovereign wealth fund and give that money to bondholders, however, China has to divest itself of foreign paper, and trade it back for Chinese currency.

Since most of these notes do not mature for quite some time, the only way to do that would be for China to sell the notes that it holds on the secondary market -- to itself. China is the world's only holder of such large piles of Renminbi.

US Dollars and Treasuries flood the global market. Since the supply of both are growing, the ability of the Fed to counteract is extremely limited.

The supplies of dollars and Treasuries are irrelevant, and the Fed has nothing to do with secondary markets for US Treasury securities. China can seek to sell all the US securities it wants, but it won't be getting any of the Renminbi they are allegedly seeking from anyone but...China.

8. This would wreck China's current export model (which is already failing)...

China has problems when its customers have problems. Europe, the US, etc.

...and so as a part of this shift, China goes into the mercantilist model she has been preparing for the last decade, decade-and-a-half or so.

Maybe we should send them some copies of Smith or Ricardo. But can you describe some of these pre-mercantilist "preparations" they've been making since 1997 or so?

China now no longer needs to be part of the global supply chain to a Europe that is falling apart, a Japan that is going under, or a United States that is facing deleveraging; she is at the head of her own regional order of trade, which is where she has wanted to be all along.

That's a wonderful plan. Walk away from all of your biggest and best customers. Maybe they can gin up some similar sorts of markets in Bhutan or Kyrgyzstan. Your purported reading of Chinese tea leaves is pathetically terrible.

This will hurt China.

No kidding.

They will lose significant value when they sell off their foreign assets to shift to pay off bondholders and move to a China-centric system. In addition, Mercantilism works less well than free trade, which means that their growth from here on out will be hampered. But what they won't go through is a threat to regime stability, which is what the CCP cares about. This series of moves will leave the CCP more firmly ensconced in a poorer nation that is now comparatively more powerful in the region, as the former hegemon (the US) deals with a monetary and fiscal crises. The CCP is more than willing to make that trade, when and should it become necessary.

Way to top it off not with a bang, but a whimper. This is all such a farce. It's amazing to me that you actually hit the Post button after typng all that. Big mistake, there...

 

[cpwill]

Well, I'll be on the lookout for all that, but I'm actually expecting the bulk of it to remain on the fanciful webpages of whackjob internet financial guru wannabes where it all came from.

Well, the indicators would be trade-treaty obligations subordinating third-party decisions to China.

Here's something else that may surprise you. Both sides of the bond market in China are dominated by state-owned entities. The government essentially owes the money to itself.

No, state-owned banks are the dominant bond holders and investors in China.

Suggest you read the article linked in the OP

And by the way, what means did you use to identify the portion of this market that represents what you call malinvestment? I don't think that term carries any weight at all to begin with, and I suspect that whatever methodology (if any) was employed would be worth even less than that.

Fascinating. So you believe there is no such thing as an asset bubble?

But I suppose it would include something like....

...GENGHIS KHAN SQUARE in Kangbashi, a new city in the northern province of Inner Mongolia, is as big as Tiananmen Square in Beijing. But unlike Tiananmen Square, it has only one woman to sweep it. It takes her six hours, she says, though longer after the sandstorms that sweep in from the Gobi desert. Kangbashi, or “new Ordos”, as it is known, is easy to clean because it is all but empty. China’s most famous “ghost city”, it has attracted a lot of journalists eager to illustrate China’s overinvestment, but not many residents.

Ordos was one of the prime exhibits in an infamous presentation by Jim Chanos, a well-known short-seller, at the London School of Economics in January 2010. Mr Chanos argued that China’s growth was predicated on an unsustainable mobilisation of capital—investment that provides only for further investment. China, he quipped, was “Dubai times 1,000”...

The median age in China is 34.9. In the US by comparison, it is 37.2.

That is correct. The difference is that the US has a fertility rate of 2.06, and is a net-importer of young people, while China's is 1.55, and it is a net-exporter of young people, meaning that China's populace is aging somewhat faster than the United States. In addition the larger share of household savings will naturally tend to be in the older households.

All sectors in China (state, corporate, and household) have the same high savings rates, and obviously only a small part of one of them is saving up for retirement.

Yes and their real-estate bubble makes ours look like a friggin picnic. We had empty strip malls and housing developments. China has empty cities.

How will this happen given that virtually all of the debt is either state-owned or state-guaranteed?

The CCP's current rule is built on two pillars of legitimacy; solid continuous growth, and nationalism. When they fail on either of those, they risk losing their modern mandate of heaven. The stability of Chinese rule is already weaker than most realize, and the destruction of household savings will rip that governing bargain to shreds.

They are going to nationalize state-owned debt? Oh noes!

No, they are going to nationalize SOE debt. Think the bail-out of Frannie and Freddie, but much larger. Think, California and Illinois both go bankrupt and the federal government nationalizes their debt, prompting other troubled states to hop on the same bandwagon.

And yes oh noes. Once the PRC is on the hook for that money, they are going to need to get it from somewhere, and we are rather dependent upon them using that money instead to subsidize us.

That would be literally shooting themselves, but probably not just in the foot.

No, it would be shooting convenient scapegoats, some of whom are indeed quite loathsome, and all of whom are generally despised by the Chinese middle class. The children and grandchildren of the long march vets have not made themselves popular by creating their own special caste in China.

What's a sovereign wealth fund, and what are they hiding in there? Maybe there is some confusion between sovereign debt funds and foreign exchange reserves?

A Sovereign Wealth Fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments.

China's, for example, owns about $1.2 Trillion in US Treasuries (third largest holder in the world behind the SS Trust Fund and the Fed) and about $1.73 Trillion dollars.

Full de-pegging would indeed allow the value of Renminbi to rise. It would also cause Chinese exports and export-based employment to fall.

So long as their main export destinations remained Europe, the US, and Japan, yes. However, of those three, Europe is going to see some pretty major upheaval if the Euro even survives, Japan is screwed pretty soon, and the US is in for a period of painful deleveraging. Those three markets look like pretty shaky places to make long term plans for a basis of regional hegemony.

Not too good for China. The rest above is indecipherable flight-of-fancy chicken-scratching and gobbledygook.

Apparently you weren't paying attention. This is the best of the available options for the CCP, as it reinforces their governing legitimacy in the midst of chaos, and allows them to bolster one of their pillars of legitimacy while mitigating the damage done to another.

Since most of these notes do not mature for quite some time, the only way to do that would be for China to sell the notes that it holds on the secondary market -- to itself. China is the world's only holder of such large piles of Renminbi.


The supplies of dollars and Treasuries are irrelevant, and the Fed has nothing to do with secondary markets for US Treasury securities. China can seek to sell all the US securities it wants, but it won't be getting any of the Renminbi they are allegedly seeking from anyone but...China.


China has problems when its customers have problems. Europe, the US, etc.


Maybe we should send them some copies of Smith or Ricardo. But can you describe some of these pre-mercantilist "preparations" they've been making since 1997 or so?


That's a wonderful plan. Walk away from all of your biggest and best customers. Maybe they can gin up some similar sorts of markets in Bhutan or Kyrgyzstan. Your purported reading of Chinese tea leaves is pathetically terrible.


No kidding.


Way to top it off not with a bang, but a whimper. This is all such a farce. It's amazing to me that you actually hit the Post button after typng all that. Big mistake, there...

aaaand I will have to get to the rest later, as the wife insists that I can argue with people in the internet in the morning.

 

[Cardinal Fang]

Well, the indicators would be trade-treaty obligations subordinating third-party decisions to China.

Which would mean what exactly in your demon-haunted world?

Suggest you read the article linked in the OP

It states that the majority of both sides of the bond market is comprised of state-owned enterprises.

Fascinating. So you believe there is no such thing as an asset bubble?

I simply don't think you have any reliable means for slapping a "malinvestment" label on things (a belief that is further reinforced here by a failure to define one), and I challenge the notion that the term is anything more than a voodoo term that has no practical, a priori meaning to it to begin with.

That is correct. The difference is that the US has a fertility rate of 2.06, and is a net-importer of young people, while China's is 1.55, and it is a net-exporter of young people, meaning that China's populace is aging somewhat faster than the United States. In addition the larger share of household savings will naturally tend to be in the older households.

Chinese young people will have to leave in droves quite quickly if their exodus is to offset the boon to savings that GDP growth rates of 6.5-8.0% will provide over 2.0-3.0%. And of course, everybody who stayed (1.3 billion or so?) would still have those same high savings rates.

Yes and their real-estate bubble makes ours look like a friggin picnic. We had empty strip malls and housing developments. China has empty cities.

Yes, it will all be of biblical proportion, I'm sure. One cannot overstate the extent of the calamity to come.

The CCP's current rule is built on two pillars of legitimacy; solid continuous growth, and nationalism. When they fail on either of those, they risk losing their modern mandate of heaven. The stability of Chinese rule is already weaker than most realize, and the destruction of household savings will rip that governing bargain to shreds.

Well, your plan for destroying household savings has shall we say some flaws in it, and what will undermine confidence in and support for the government is household loss of the WAGES that all those JOBS supporting exports to the US in particular are presently providing.

No, they are going to nationalize SOE debt. Think the bail-out of Frannie and Freddie, but much larger.

Fannie and Freddie were private enterprises. You are talking about the equivalent of nationalizing the debt of the US Treasury.

Think, California and Illinois both go bankrupt and the federal government nationalizes their debt, prompting other troubled states to hop on the same bandwagon.

Are investors and counterparties across the table from California and Illinois almost exclusively government-owned enterprises? Try thinking up better examples.

And yes oh noes. Once the PRC is on the hook for that money, they are going to need to get it from somewhere, and we are rather dependent upon them using that money instead to subsidize us.

They are not subsidizing us. They are doing with their US dollar trade surpluses the only thing that they can do.

No, it would be shooting convenient scapegoats, some of whom are indeed quite loathsome, and all of whom are generally despised by the Chinese middle class.

Wow..Chinese Mitt Romneys.

A soverign welath fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. China's, for example, owns about $1.2 Trillion in US Treasuries (third largest holder in the world behind the SS Trust Fund and the Fed) and about $1.73 Trillion dollars.

So this is all just extra and unnecessary verbiage to refer to the central bank's accumulated trade surplus holdings. These investments are denominated in US dollars. That's all they can be redeemed for. If China had anything else to do with these dollars, it would not have invested them to begin with. China cannot spend dollars in China. It must first convert them to Renminbi, which puts the dollars right back in the very same hands that held them to begin with. It's kind of like when you accidentally glue your fingers together with Krazy Glue.

So long as their main export destinations remained Europe, the US, and Japan, yes. However, of those three, Europe is going to see some pretty major upheaval if the Euro even survives, Japan is screwed pretty soon, and the US is in for a period of painful deleveraging. Those three markets look like pretty shaky places to make long term plans for a basis of regional hegemony.

If China has no US, Japan, or EU to partner with, it will be a new and perhaps quite different government deciding on what nations they will partner with instead. China is very heavily invested in and dependent upon the health and stability of so-called western economies. They have so far been a distant echo of the foolishness of Sarkozy and Merkel in not being willing to step into the breach. Perhaps they will soon change their approach, and perhaps they will not, but pressure for the former may rise quickly given the latter.

Apparently you weren't paying attention.

I was, and it didn't help at all. An indecipherable and inscrutable screed was all that remained.

aaaand I will have to get to the rest later, as the wife insists that I can argue with people in the internet in the morning.

I'm sure she knows best.

 

[samsmart]

If we could get the minimum wage law scrapped and the environmental and labor laws gutted, then America could see huge growth in the next century.

Well, I would say that all that extra money would have to be spent on helping those laborers deal with the physical illnesses suffered by the laborers, not to mention the cost in retraining new laborers to replace the ones who become disable by hazardous work environments and so cannot pursue their occupation anymore, and the stress that that would put on our charities and social programs.

But none of the extra money would go to these things. Rather, it'd be pooled to a greater degree as executive pay for people who don't need it.

 

[iliveonramen]

Only the left appears to idolize those who inherit wealth.

Does the left hate rich people or idolize them. You rightwingers can't even get your own talking points straight.

 

[Diogenes]

Does the left hate rich people or idolize them. You rightwingers can't even get your own talking points straight.

The left idolizes the ones who talk the lefty line, regardless of how corrupt or dishonest they may be. The left hates anyone who thinks independently (= different from lefty talking points), especially those who have become successful.

 

[Bigfoot 88]

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