11 May 2010

China Bad Loan Bubble Threatens Continued Growth

China's economy is teetering on the edge of a major slowdown...David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world's third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge. _Marketwatch

“China is at risk of overheating, with spot fires breaking out in various parts of the economy.” _Bloomberg

China was well-situated to profit from the technology and debt-driven hyperkinetic growth spurt of western economies during the 80s, 90s, and early to middle 00s. Cheap, high-quality labour drew trillions of dollars of outside investment, and reaped more trillions of dollars of export profits. Many financial analysts have been slow to realise that the dynamics have changed since the 2008 global slowdown. Many financial journalists have mistaken China's recent manic internal lending, construction, and commodities-buying spree, for a sign of genuine economic growth and wealth-building.
...in China...when the Central Banks says "Lend", that is a command, not a suggestion and thus banks lend. However, the only realistic place that money can be lent is more housing, more infrastructure, or more manufacturing, none of which China remotely needs at the moment....Meanwhile bad loans are piling up, just as they did in the US with subprime.

The moment China's property bubble collapses (and it will), the bad loans on the books of China's banks will be exposed for what they are, in spite of the widespread fallacious belief China's banks are protected because China's borrowers are putting more money down.

...Also note Li Daokui's statement "Europe’s rescue package makes another global slump less likely". Once again I beg to differ. The bailout imposes some fiscal restraints on many countries. More importantly, the loans come at the expense of productive portions of the European economy for the misguided notion that the unproductive European countries can be bailed out.

Such policies are never good for long-term growth. All they provide is an short-term illusion that something good is happening. As soon as the stimulus is taken away, more debt remains than before. _Mish

Video via Mish

China's government is hoping to bluff long enough for Europe and North America to get back to growing another huge debt bubble, involving much more investment in China and the "involuntary" buying of $trillions more in Chinese exports.

This is where the debt / demographic collapse of Europe begins to throw a monkey-wrench into such optimistic ad libbing by the CCP. And it is where the ongoing economic destruction by the massively inept Obama - Pelosi regime begins to work against China's ability to maintain its blowing bubble of bad debt.

Perhaps China's economic growth rate will fall from 12% down to 6%? Or perhaps China's government cannot survive any significant fall in economic growth, or any serious downturn in economic activity. Internal Chinese politics rests upon an explosive foundation. There is no telling what might set it off.

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Blogger kurt9 said...

China will have a recession, meaning a 2-3 year period where they grow around 2-3% per year. Afterwards, growth will resume in the 7-8% range. This is the pattern they had during the 80's and 90's. Even though it will be painful for people, I do not expect such a recession to be destabilizing politically for two reasons. One, they had two recessions like this during the 90's and nothing happened. Two, I think most Chinese people are sensible like people here and understand that sooner or later there will be a recession. Infinite growth without any recession is like a perpetual motion machine.

The problem will be if the government does not deal properly with corruption during the recession. If government officials or connected businessmen get off free from any scams, then people will get pissed off. Otherwise, they will suck it up and carry on to the next growth phase.

Although I expect a severe recession in China soon, I am not the China pessimist that you seem to be.

BTW, your coverage of the oil spill is excellent!

Tuesday, 11 May, 2010  
Blogger al fin said...

Thanks. The deep sea environment is a dangerous -- therefore intriguing -- place.

China's government had it easy when the whole world was on a spending spree of Chinese made goods. But now it is trying to ad lib its way through a volatile economic period -- while maintaining its addiction to high growth.

So you gotta ask yourself: How much of China's economy rests upon a market basis, independent of government fiat? And how much depends upon central and regional government dictate?

Because government dictated economies are abysmally inefficient. Perhaps manageable when a nation is making profits hand over fist via exports. Not so manageable otherwise.

Wednesday, 12 May, 2010  
Anonymous Anonymous said...

I am fairly pessimistic about China in the near to medium term. Next Big Future had a post recently about how China and India have made progress on reducing slums which is good for China and the world but it also increases the number of people who have something to lose when things go bad.

But given the shape Russia is in, Europe's debt crisis, America's new economic "direction" and other economic problems around the globe, I don't have much optimism for any place in the near term. Oh, and let's add volcanic ash induced flight disruptions with the threat of more potentially to come - just for fun. I think I might go into hybernation for a few decades.

Wednesday, 12 May, 2010  
Blogger kurt9 said...

China's economy is going to go up and down and all around and I am also bearish in the near term. However, I think China's prospects are good in the long term. Yes, they are certainly corrupt. However, corruption is endemic to all East Asian societies, including Japan. Both Taiwan and South Korea are notoriously corrupt and it is not clear to me that mainland China is that much worse (I have done business in China).

I am well aware of quality issues in Chinese manufacturing. I have dealt with this from time to time. However, a certain perspective is required. Do remember both Taiwan and South Korea had shitty quality as well when I was a kid in the late 70's. The first Korean cars sold in the U.S. (hyundai and Daewoo) in the 80's were shitty as well, though not as bad as the infamous Yugo. Ask any older baby boomer and they will tell you about the crappy toys the Japanese used to make when they were kids in the 50's.

I fail to see why the Chinese will be unable to move up the technology/quality ladder just like their East Asian cousins have before them.

Thursday, 13 May, 2010  

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