The Real Reason to Worry About China

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A laborer works in a chemical plant in Hefei, central China's Anhui province, April 7, 2013.

The world is worried about China, but not for the right reasons. Global financial markets were roiled after the world’s second largest economy notched only a 7.7% boost to GDP in the first quarter — a drool-worthy performance for most nations, but a disappointment for a country that routinely jumped 10% or more over the past three decades. Economists are busily debating the usual: Will China have a hard or soft landing? Will the government step in and stimulate growth? Those questions miss the bigger picture. The reality is that China is unlikely to witness those astronomical growth rates, at least for some time. We may never see them again.

The recent slowdown is not a temporary cyclical blip or solely the knockoff effect of the tepid global recovery. China’s growth model is broken and can’t be so easily fixed. Since the start of capitalist reforms in the 1980s, China excelled by throwing tons of resources into a modernizing economy — mountains of cash to build factories, roads and apartment towers, and millions of poor people into making iPads, blue jeans and cars. Under China’s “state capitalism,” bureaucrats often directed the cash into massive infrastructure projects or favored industries. However, this growth engine can’t keep purring indefinitely. The pools of idle labor that filled Foxconn’s assembly lines are drying up — China’s one-child policy made sure of that, by aging the population more rapidly. The workforce has already started to shrink. Even more worrying, the state-led, investment-obsessed system spawns too much debt and too many factories, leading to wasted resources and a debased financial sector.

(Click here to read TIME’s cover story on how China sees the world.)

That’s what is happening in China today. Everywhere you look, the signs of rot are apparent. In a mad-cap quest to dominate green energy, China’s banks pumped billions into solar-panel manufacturing, creating hundreds of factories and vaulting China into the world’s largest producer. Now the sector has become a victim of its own excess: companies are failing, symbolized by the recent bankruptcy of market leader Suntech Power. Steel companies continue to invest in new capacity even though debt is rising and losses mounting. Each mill is backed by local officials eager to create jobs but dismissive of the larger costs. The investments top up GDP, but not the health of the overall economy. Inefficient, subsidized state-owned enterprises gobble up credit while more nimble private firms starve. The froth on China’s booming property market defies government efforts to calm it down. Facing meager investment options in China’s controlled financial markets, couples are choosing divorce to sidestep restrictions and taxes on apartments deals. Most frightening, debt has risen precipitously. Rating agency Fitch says credit relative to GDP reached 198% at the end of 2012, a startling increase from 125% in 2008. Local government debt has escalated in recent years, to an estimated $2 trillion, or 25% of GDP. The risks have been heightened by the emergence of “shadow banking” — mysterious, unconventional sources of lending often kept off the banks’ balance sheets — which George Soros recently warned could be as risky as the toxic subprime-mortgage securities that tanked Wall Street.

(PHOTOS: Deadly Earthquake Strikes China’s Sichuan Province)

Where is this all headed? “Panda huggers” (the optimists) believe that China’s leadership is tackling these problems and there is no threat to economic stability. “Dragon slayers” (the pessimists) warn that similar surges of debt have toppled other economies into financial crises. Everyone, however, agrees the current situation can’t last. The economy requires more and more debt to produce the same amount of output. In order for China to keep its current growth model running, therefore, debt levels must continue to rise — to ever more dangerous levels.

(MORE: Inside the Chinese Company America Can’t Trust)

There is also consensus on the solution. Economists have been warning for years that China must decrease its dependence on investment for growth and “rebalance” to allow consumption to play a bigger role. Government officials point out signs of progress — first-quarter GDP was driven upward more by consumption than investment, for instance. But progress is, at best, at a crawl. Private consumption relative to GDP in China is still the lowest among major economies. The government has simply balked at the reforms necessary to change that. Feeble health care and pension systems force households to save; then controls on interest rates keep returns on bank deposits meager, punishing them for saving. If anything, much government policy has reinforced China’s old growth model — including the heralded state-heavy stimulus program launched after the 2008 financial crisis. Businessmen in China speak of a “lost decade” of stalled reform.

Even if China reforms more quickly, the economy is likely to slow as it transitions to more consumption-heavy growth. But if China drags its feet on reform, growth will likely be slower anyway, as its old model sputters and creaks. That means that under just about every scenario, the world can’t count on a supercharged China to hold up global growth while the U.S. and Europe remain mired in debt and joblessness. But a slower China may actually be a good thing. A reformed, rebalanced Chinese economy will be a less risky, more stable force in the global economy. The much bigger risk comes from a China that doesn’t discard its failing growth model. That could push China into a financial crisis. Now that’s really something to worry about.

MORE: Can China Escape the Middle-Income Trap?

120 comments
sandisa
sandisa

China is fairly competative country and their labour system encourage economic growth

sandisa
sandisa

Comment after a get all my facts right

humpty
humpty

The US seems to cope with debt, well at least  postpone it successfully. So what's the big deal ?

I think reality will 'force' China to change plans, such as to domestic consumption instead of exports. Perhaps this will weed out the 'make-a-quick-buck' companies and I think you'll see the quality of life improve.

dutchs
dutchs

"This growth engine can’t keep purring indefinitely." NO growth engine can keep purring indefinitely. The illusion of perpetual growth is a Ponzi scheme. We buy stuff today, hoping to pay for it with future growth, until the growth slows down and the last cohort gets stuck. China's froth is property. So was ours until the housing crash (which wasn't anywhere deep enough to make housing affordable for many). The latest froth: Windows 8. Tinker with the user interface to create the illusion of continuing innovation. Patent trolling. You can't invent anything useful, so siphon off money from those who do. And of course, derivatives.

newotark
newotark

> Everywhere you look, the signs of rot are apparent.

People, what are you smoking there? Whatever it is I want it too. 

MaryFloyd
MaryFloyd

This is the most interesting piece that has been in TIME since Mark Halperin left. Please bring him back! 

Rome270AD
Rome270AD

China's real growth is around 3% the rest comes off the back of building stuff no one needs, and built on borrowed money, this is one rotten system that has to become more rotten and indebted to survive, eventually it will crash, as the Chinese leadership have no will to do what needs to be done.

deetler
deetler

The Chinese having been saying for over 2 years that they are aiming to cool their economy and have growth stabilize at 7.5% per year. But when the Chinese economy "slumps" to 7.8% everybody freaks out!

JohnRintala
JohnRintala

How can there be a financial crisis? The state owns all the big banks. It owns all the land. It owns the commanding heights of the economy. It can change from investment to consumption whenever it wants. The 80 million member CPC has its fingers into every pot. What it decides is what goes. There will no crisis.

tschorr
tschorr

Does anyone else reading these comments get the idea that they are being written by Chinese people who are probably being paid to write them?  I get the fact that someone in the USA calling other country's debt ratios bad is like the pot calling the kettle black, but China does have some things to be concerned about. In a planned economy there is going to be a lot of money spent for things that you wouldn't spend it on in a market economy. I think that is the real concern Americans see looking at China. How much money is being pumped into the wrong projects by the government and what are the long term effects of their artifically controlled economy. For people living in an open market economy like the USA it is such an obvious concern that maybe people in China can't see it or understand it. We aren't perfect in the USA and I have a lot of concerns about what our government is doing, but some of these posts are obviously being written by people who are pushing a "China has no problems, everything here is great" agenda.

xiangrufan
xiangrufan

I live in CHina, In recent years the average wages and old time pension in my hometown is rising 10% per year, clearly the government is starting to give more money to feed the people. The middle-income trap and stagnation is less likely to happen in china than in other countries, partly due to its shear size, partly due to the strong education focused morale of Confucius countries

MaxFlynn
MaxFlynn

That was really bad.  Some of it even bordered on out-right propaganda.

China's public debt to GDP ratio is 38.5%, with its gross government debt at 22.16% of GDP.  The author's somewhat obvious attempt at trying to pull a 'fast one' semantically by using 'credit' instead of 'debt' was downright despicable.  That was a clear and obvious attempt to distort facts to create a narrative the actual facts of the matter do not support.  Those debt to GDP numbers are fantastic.  The vast majority of countries on this planet would love to have such ratios.

Unstable?  The reason why markets reacted the way they did to the news of China's last quarter GDP growth of 7.7% was precisely because their economy is so stable.  The expected growth rate was 8%.  China missed that mark by hitting 7.7%, which in turn caused a triple digit decline in the markets.  Chinese GDP is so stable and predictable that missing 8% by .3% was enough to cause a significant jolt in global markets.

Running short on cheap labor?  Approximately 15% of Chinese live under the extreme poverty mark, which is $1.50 a day in China.  With China having about 1.4 billion people, that's 210 million people living on less than $1.50 a day.  

Know how many people in China live on less than $2.50 a day?  It's about half the country, almost 700 million people.  You know, more than twice the population of the United States.

One can only conclude that China is running out of cheap labor by not being able to count.

China has shown increases in domestic consumption and decreases on investment dependent growth for two decades now.  Of course China's consumption relative to GDP is the lowest among major economies, it's a developing market!

The author, literally, pointed at the highest domestic consumption growth rate in the developing world and claimed it was poor by comparing it to countries like the US, and Norway.  That's just one example of the borderline propaganda of this article.

China has one of the least risky and most stable economies on the planet.  That's what happens when a country with a population of 1.4 billion utilizes a state directed and controlled socialist market system. 

China's economy certainly has some issues.  The author however doesn't seem particularly interested in things like 'facts' and 'math'.  

What a poorly written article with a clear attempt to distort the facts in support of an economic-political ideology.

I'm very disappointed, Time.   That article, maybe, would merit an opinion piece at The Wall Street Journal.

bizbird6
bizbird6

Sure, China's wage scale is increasing, but mainly along the Coastal Cities like Shanghai, Beijing, and Hong Kong areas, NOT in the Interior.

If China continue to move its factories and jobs to the interior the wage scale will continue to stay low for many years. to come.

China will continue to be very competitive for many years.

There is NOT just one China, but many Chinas.


j.villain1
j.villain1

Exactly how is China running out of cheap labour a bad thing?  All they have been doing is driving the working classes wages down all around the world including in China.

bizbird6
bizbird6

@Rome270AD 

I disagree.

 I visited China some 15 years ago and there were hardly any cars at all, just a lot of old dirty trucks, taxi cabs, and a lot of bicycles.  In fact, the streets were almost flooded with bicycles.

 I visited China again last year, and do you know that the streets are completely filled with cars?  In fact there were lots of traffic jams and the bicycle have become almost rare.

 And there were brand new building every where.  The horizon was covered with high rises.

There has to be tremendous growth, because the whole country is different!

And it has to be much, much more than 3%.

I have been to poor, stagnant countries before.  And China is totally different. 

There has to be tremendous growth in the last 15 years in China.

 

MaxFlynn
MaxFlynn

@deetler They're aiming for 8%.  The biggest reason they missed the last quarter's GDP predicted growth rate was because of the continuing measures of deflating the real estate bubble.  Thankfully, it's been addressed and in some ways, largely resolved.  The problem still persists, but now the cause of foreign based speculation has been all but muted.  In order to buy property in Beijing one is now required to have lived within the city limits for at least five years.  Why this plan is working very well in regards to deflating the bubble, it also means GDP predicted growth rates are going to take a hit.

rockachalk
rockachalk

@deetler  

China depends increasingly on stimulus to spur economic growth. The problem is; easy credit isn't having the same impact on the Chinese economy that it used to. That is because it is creating more debt than it is actual profit. Hu Jintao said it again in his farewell address. "The Chinese economy us un-cordinated, unbalanced, and unsustainable." It is in this sense a broken system. They need consumption based growth. 

 However, this looks impossible do to the high saving rate that is typical in China. Why do they save? So they can support their Parents, Grand parents, and some times, Great grand parents once they retire. But due to the one child policy, there are fewer people to support the older generation. They have to save their incomes and watch their money to support themselves and 4-6 other people! There is no quick easy solution to Chinas problems. Much of it is self inflicted by incoherent policies pursued by the CCP. 

Rome270AD
Rome270AD

@deetler You really don't understand do you? Most of that growth comes from unsustainable DEBT.

fyl5023
fyl5023

@JohnRintala dont you remember what happened in Iceland and Cyprus? The State can go bankrupt too when they create a bubble they cant digest

rockachalk
rockachalk

Yeah...Do you remember a certain country with the abbreviations U.S.S.R.? Anyway, the had a centrally planned economy and state owned banks...How did that work out in the end for them?


China is not immune to the boom/bust cycle.

bizbird6
bizbird6

@tschorr

 China has a lot of problems, so does any other country in the world.

 But there is no denying that there also has been tremendous growth there.

 No one is paying me to write these things and the obvious is obvious. 

If China is doing as badly as you think, then why are so many people so concern about China? 

 There over 200 countries in the world, so why all this concern about one country?  Why are there so many products made in China being sold in the USA, if China is doing so badly?

 Why this outcry about all those US jobs that are being exported to China?

Even the fact that you and other people are willing to spend your valuable time reading and writing about China shows that China is not doing badly

  In fact, not only is China not doing badly, it is doing great.  That is why so many people are so concerned.


JohnRintala
JohnRintala

@tschorr How many people do you know who are actually producing a good or service that actual real people can use? I would guess the answer is "none" or "very few". People in the US are digging holes and filling them up. They push paper. They sell what others make. They lend money. They hustle. The lower paid among them service the hustlers, sellers, agents, brokers, talking heads and assorted parasites. The Chinese, on the other hand, are building everything from their infrastructure (and increasingly infrastructure in the rest of the world) to the goods that the paper pushers and hole fillers in the US buy in their malls every day.

rockachalk
rockachalk

@MaxFlynn 

"Chinas economy is unbalanced, unco-ordinated and unsustainable" -Chinese Premier Wen Jiabao

Chinas former premier acknowledges that China is far from being "one of the most stable economies in the world." You're only kidding yourself to think otherwise. The fact is, China has relied on easy credit and fixed investment to achieve its high growth rates of the past. An example would be the ghost cities that are, and have been, 90% empty for the past several years now...

There are 60+ million empty apartments in China alone. Like the ghost cities in Ordos, people cannot afford to live in them. China is not immune to the boom and bust cycle. When you build overcapacity like the Chinese have (which has given the illusion of growth) and there is no demand for it, you face a non-performing loan problem. But Chinas issues aren't just in malinvesment, credit, etc. A rapidly aging population, a decline urbanization rate, environmental degradation, a demographic gender imbalance, high rate of saving due to no social safety net, etc. will hamper future economic growth in China. 

 As for Chinas debt, they just do a much better job at hiding it. Private debt in China includes all kinds of quasi-state borrowers, such as local provincial governments, and state-owned corporations which all comes out to about 200% of GDP.

 http://online.wsj.com/article/SB10001424127887324338604578325962705788582.html

rockachalk
rockachalk

@bizbird6  

 That isn't quite how it works in the real world. You can't simply move infrastructure to the interior because it is completely counter productive and not feasible. Doing that would be incredibly expensive, and likely would result in a mass exodus of businesses moving their assets and businesses offshore to cheaper destinations like India. 

 But lets say it is (for whatever reason) feasible. What happens to all the people on the coast who lose their job to someone on the interior? And before you say that they will still have their job on the coast, note that demand alone isn't high enough to keep that person on the coast employed.


China is falling into what is known in economic vernacular as "middle income trap". There really are so many different issues China faces. A declining workforce, rapid aging population, demographic imbalance (50 million less women in China than men), faltering economic growth due to exhausting its old growth pattern of the past 30+ years, environmental degradation, mounting debt at an alarming pace, corporate profitability implosion, etc. etc. etc. China isn't what it used to be. They are headed for a Japan/Soviet style crash, and it won't be pretty.

bizbird6
bizbird6

@j.villain1

Sure, China's wage scale is increasing, but mainly along the Coastal Cities like Shanghai, Beijing, and Hong Kong areas, NOT in the Interior.

If China continue to move its factories and jobs to the interior the wage scale will continue to stay low for many years. to come.

China will continue to be very competitive for many years.

There is NOT just one China, but many Chinas.


Hadrewsky
Hadrewsky

@bizbird6 @Rome270AD 

the place is building entire empty cities and malls nobody uses... it is plain scary how bad it could get

MaxFlynn
MaxFlynn

@rockachalk @deetler Consumption based growth, within the special economic zones.  Other posters such as mike, and myself, have been trying to get you to understand that there are 'many Chinas'.  In particular the vast differentiation between the economic zones on the coast, and the under development of the interior.  

You do realize that China has the fastest domestic consumption rate on the planet of any developing market, yes?  

Yet again, you are proposing a theory that states what is actually happening is impossible.

You conclude increased domestic consumption is impossible.

In reality, they're one of the fastest growing domestic consumption rates in the world economy today.

China actually peaked at a literal 50% ratio.  Domestic consumption hit a peak of 50% of GDP before the economic crisis in the US began.  It had dropped as low as 35% at the height of the financial crisis, and is now moving back up at one of, if not the, fastest rate on the planet.

This is one of the main points of the 12th five year plan.  

The Yangtze Development plan is starting to do for the interior along the river what the plan did for the economic zones on the coasts.  

A domestic consumption focus in the economic zones on the coast are causing drastic increases in actual domestic consumption.

That's not incoherent.  That's not impossible.

That's actually what's happening.  You might want to research some of this material.  You're putting out a lot of theories that are just factually denying reality.

MaxFlynn
MaxFlynn

@Rome270AD @deetler I understand very well.

China: Public debt to GDP ratio, 38.5%.  Gross government debt to GDP ratio, 22%.  Total debt to GDP ratio, 200%.

US: Public debt to GDP ratio, 75%. Gross government debt to GDP ratio, 105%.  Total debt to GDP ratio, 280%.


Yes, someone here doesn't understand what the ratios are if they're sustainable or not.  That would be you however.

MaxFlynn
MaxFlynn

@rockachalk Ah, really?

What happened was that when they opened up their economy under Perestroika via glasnost their economy collapsed.  

The collapse of the economy was one of the chief reasons why Yeltsin was able to force Gorbachev from power.  He did so backed by the newly created oligarchs, due to the mess that was Perestroika.  

How did it work out for them?  The abrupt shift to open markets caused their economy to collapse.  It caused massive unemployment, drops in living standards, drastically increased poverty and even brought up serious issues of starvation.  

This is why Gorbachev was forced from power by Yeltsin and the oligarchs.  Yeltsin brought Putin up to national prominence who in-turn forced Yeltsin into retirement and started jailing the oligarchs and restoring the Russian economy.

Yeah, I remember what happened...

tschorr
tschorr

Actually the answer would be most. My brother and sister in law work for Bradford White, a company that manufactures water heaters, many of my friends work for Perrigo, a large drug manufacturer. I don't know where in China you live but around here there are many huge industries that make things people buy. Don't believe everything your Chinese bosses are telling you to write in these comment sections. You would be much happier and have much more freedom here in the USA than in China.

MaxFlynn
MaxFlynn

@rockachalk @MaxFlynn No, that's not what Wen said, just as you quoted.  You, literally, quoted someone then claim they said something different.  

The reason it's unsustainable is because it's not balanced.  This level of infrastructure spending was never an indefinite plan.  That doesn't somehow mean the economy isn't stable, just the opposite: the reason the 'Dengist' focus so heavily on an unbalanced capital infrastructure expenditure model is precisely because it's so stable.  

That's not me, or anyone else, kidding themselves.  Plus, of course, Wen is a politician who has some disagreements with the Dengists on economic policies.

China certainly has too much of a focus on real estate, at least in the special economic zones on the coasts.  This is a great example of a state directed economy that is uncoordinated due to local party leaders.  Never said, nor even remotely implied, that this problem didn't exist.  The current real estate situation in China is arguably, though almost certainly, the greatest threat to the macroeconomic health of the nation.  It's certainly an issue that needs to be addressed, quite seriously.

The latest focus on the debt issue isn't being properly compartmentalized in my opinion, and in the opinion of many economists.  Total debt in relation to GDP in China is believed to be about 200% in China.  As you point out, it is hidden well and it's difficult to get a real firm number of the ratio.

Know what the total debt to GDP ratio is in the US?  It's about 300%.  UK and Japan are both around 550%.  Ireland's is real bad, they're at about 650%.  

Yeah, China's total debt to GDP is about 200%.  And?  They don't even rank in the top 12 of the planet.  The 10 largest economies, not counting China, run at about an average of 350%.  This is yet another reason why China's economy is so stable.

No offense, but why would you think that this ratio would mean something without comparing it to other nations?

mikecheung99
mikecheung99

@rockachalk @MaxFlynn 

Those :ghost cities", typically in tier-3 cities, are owned by real estate conglomerates that have sound balance sheets, since more of their assets are in cities like Shanghai and Beijing, where real estate is doing just fine. You really need to be in China to get the full picture/

MaxFlynn
MaxFlynn

@rockachalk @bizbird6 Wow, that's not remotely accurate.

First, infrastructure development not only can be oriented towards the interior, but that's exactly what is happening.  You're claiming something is impossible that's actually happening.  Counter productive?  That doesn't even make sense.  It's not counter productive to increase infrastructure capital in the interior.  

In on way, whatsoever, would infrastructure development in the interior lead to a mass exodus of businesses and assets to other countries, especially India.

This too makes no sense.  China is already moving infrastructure development towards the interior.  This is not causing any sort of exodus, at all.  It's not even largely possible, legally, for one.  For two, it's a largely incoherent correlation.  

No offense, but you seem to be entirely unaware of the Yangtze development, which is in fact the largest infrastructure project in China today.  It's the center piece of the 12th five year plan.  

Really, rockachalk, it was a lead story on Forbes.com literally a week ago, last Tuesday.  

I'm sorry, but you're creating some odd theories that are in fact counter-factuals of current affairs.  

You really need to do some research on this issue.  You're claiming the largest economic development project in the country doesn't exist, is not feasible and counter productive.  I'm sorry, but you just don't seem to know what's going on.  

rockachalk
rockachalk

@fyl5023 @rockachalk 

 Agreed. Chinas debt is whatever China says its debt is. In other words, China can say that their debt is 27% (as the IMF reports)...But that doesn't actually mean it is. That is just what China says it is. In reality, its probably 50x bigger than that. Especially if you factor in the shadow banking plaguing the country.

fyl5023
fyl5023

@rockachalk dont forget the debt from those shadow lenders, which is a lot!

rockachalk
rockachalk

Max, you might also want to include Chinas corporate debt, which is the highest in the world at 151% of GDP (and still growing).

rockachalk
rockachalk

@MaxFlynn@rockachalk

 No offense, but that not only sounds arrogant, but ignorant. You should read it for yourself, and then make your own conclusions.

As for Chinese millionaires. Funny how many of them are moving to the West (the US in particular). But I digress, China is no where near to the US in terms of nominal millionaires or Billionaires. And with the way their economy is being ran on a "treadmill to hell", is it any wonder why these rich chinese are moving their money, AND their families outside of China?

 http://online.wsj.com/article/SB10001424052970203806504577181461401318988.html

 


MaxFlynn
MaxFlynn

@rockachalk I did want to read Why Nations Fail when it came out, but then it was panned for being so simplistic and politically oriented I just didn't get around to it.  Maybe eventually.

China certainly has some issues when it comes to innovation, no doubt.  They need to shift more resources towards R&D, protect intellectual property rights better and really need to start public-private projects.

Really?  You've never heard Huawei, the largest telecommunications equipment maker in the world?  

Hmm.

Yeah, China have to shift its economic focus to areas that are more oriented towards domestic growth.  You know, just like I've said in half a dozen posts now.  Trying to equate that with entrepreneurship however is just a fallacy.  Europe would, of course, be the obvious example.  It's important, and happening actually, but I don't think that variable should be interchanged with the other variables.

For example, did you know that China is running about a 31% increase in millionaires, annually?  That absolutely crushes the US.  

Hadrewsky
Hadrewsky

@MaxFlynn @rockachalk 

Max the Soviet economy stall started in the late 70's followed by a miserable decade of decline.

The policies you cite merely allowed the rot to be recognized by everyone.

rockachalk
rockachalk

The Soviet Union faced stagnation throughout all the 70's and 80's. They couldn't even feed their people without US grain aid, which began in the 70's. Bread lines, mounting debt, etc. meant that the USSR HAD to change. Gorbechev saw the writing on the wall and did what he thought was in the USSR's best interest. Embracing capitalism, which was shown to work quite well in the West, and in particular, the US.

 Also, the Soviet Union was not all that competitive economically. Again, I would urge you to read "Why Nations Fail". It describes how and why the Soviet Union shifted people from agriculture into Industry, had a strong military, and very high growth just before it stagnated and collapsed. In China, much of their 'real' growth of the past 35 years was achieved by shifting people from agriculture into low grade industry. 

China does NOT foster a lot of innovation. They are the "work shop" of the world. Not the innovative leaders of the world. Again I can't personally think of any major Chinese companies that aren't state owned utility companies. When the Soviet Union was considered to be fully "industrialized", growth stagnated, then the country collapsed. This is because there was effectively no innovation or incentives within the Soviet system. 

Once China industrializes past a certain point, any further growth will have to come from innovation, entrepreneurship and so on (something China seems incapable of doing by further restricting freedom and access of information). If they can't do this, their economy will run out of steam, their cheap labor will likely be replaced by automation in the west, and they will fall even further down.



rockachalk
rockachalk

LOL at "deflating" a bubble. Prices in China have increased 10-fold since the year 2000. It's a bit too late to start with "new rules".  Bubbles pop, that is their nature...they don't deflate. China has attempted to "cool" the market, but there are so many loopholes around the current regulation. For instance, couples are divorcing to circumvent the Governments regulations on property so that they can purchase more properties which in turn drives up the value in real estate. But it isn't just residential real estate that is in trouble, but commercial real estate!


As for the price to income ratio in major Chinese cities. Look at residential affordability comparisons between Chinese cities, and rich western cities like New York, and London. It takes on average, 28.1 years to pay off a home in Shanghai China. Compare this to New York which takes roughly 10 years each... 

http://floatingpath.wpengine.netdna-cdn.com/wp-content/uploads/2013/04/Residential-Affordability-Comparison.png

And corporate profits flat in an economy that is growing at 7.7%?! And you blame it on the central committees actions? LOL Housing has gone up every year per annum in China for the past two years. They didn't increase much in 2012, however, as the graph shows below, they had a shallow dip only to then accelerate back upward.

http://si.wsj.net/public/resources/images/WO-AN074_CPROP_NS_20130318183332.jpg

I always find these excuses convenient. It's also rather odd that China has quadrupled its nominal GDP in the last ten years, yet the Chinese stock market has remained stagnant at the same time. Needless to say, Western investors have not made much money in the Chinese stock market during the same time that the Chinese economy has quadrupled...Seems a bit...off. If for instance the US GDP had quadrupled in the past 10 years, the stock market would be significantly higher today than it currently is. What do the investors know that people like you don't? HMMMM.

http://www.financialsense.com/sites/default/files/users/u781/images/2013/China-returns-vs-GDP.jpg

MaxFlynn
MaxFlynn

@rockachalk @mikecheung99 @MaxFlynn Within the special economic zones.  You making a particular a universal.

The rate of return, in the special economic zones, has dropped from a 1 to 1 ratio to a 3 to 1 ratio.  The GDP growth return rate, in the special economic zones, has dropped from about 100% to 33%.  It's nowhere near 6 to 1.  

And mikecheung isn't kidding, and raises a good point about being in country.

You seem to be unaware of the now near 2 year old process of deflating the property bubble in China.  That was a primary cause for many of the issues you raise.  You have the cause incorrect however.

Corporate profits have, largely, taken a hit because of the central committees moves to deflate the real estate bubble.  

It's simply not the case that housing prices are in the ratio you claim to income.  At the height of the fear of the bubble, in the fall of 2009, the World Bank concluded in the largest study of the issue ever undertaken that in fact income levels kept pace with real estate price increases.

Regardless, Standard and Poor's lowered the credit rating for real estate development from stable to poor in 2011.  The fear persisted and the government took active steps to deflate the bubble.  

Much of this took place, and started in the summer of 2011.  You are, literally, a couple of years behind on the issue.  

China hasn't exhausted it's current growth model, the special economic zones have largely exhausted their current growth models.  This is a primary reason why a real estate bubble in those zones started.

No offense, but again, you seem to be about two years behind on current events in China.

rockachalk
rockachalk

@mikecheung99@rockachalk@MaxFlynn 

You're kidding, right? The average home price in Beijing is 20x that of the average income in Beijing (and growing). And Shanghia isn't far behind Beijing.  Those two cities alone have the first and second highest home prices in the world...This is what we call a bubble. Prices cannot continue on at this rate indefinitely.

 I don't know what type of corporate accounting you're referring to, but state owned and operated conglomerates are losing money big time.We see this in the incredibly high corporate debt throughout China. It didn't help either, that in the last year, corporate earnings  virtually imploded in China... We also see that this round of stimulus and loose credit formation ($1 trillion usd in the first Qtr this year alone) is not having the same desired effect that it has had in years past. It's just not as profitable as it once was.

It takes anywhere from $3-$6 USD of new debt TODAY in China, just to get $1 of a return on said investment...In the early 2000's, the rate of return on investment was much higher than today. So China really has exhausted its current growth model. This was further exacerbated  by the recessions in the US and EU. And just like Japan, the USSR, South Korea, etc.  before it, I don't need to be in China to see a bubble economy. Without all the investment, and real inflation taken into account, real growth in China is probably anywhere from 2-4%.

rockachalk
rockachalk

@MaxFlynn @rockachalk @bizbird6  

 I'm in international investment banking. This IS my field. China is in many ways similar to 1980's Japan, 1990's South Korea (late 90's asian 'tigers'), hell even Dubai in the mid 2000's, in terms of malinvestment in infrastructure contributing towards a good percent of overall GDP growth.

I'm aware of the underdeveloped economic zones in China. What you seem to be unaware of is that there are several cheaper even less developed destinations all around China. Vietnam, India, Philippines, Malaysia, etc. As well as 'reshoring' due to dropping energy costs in the US thanks to fracturing w/ the Oil/Natural Gas boom.

As an investor myself; I truly wish China operated a sustainable economic plan that was friendly to foreigners.. But the fact is, westerners are not making money in the Chinese boom. The stock market today is not at all indicative of an economic boom. There is no confidence in the China boom...and with central planning being Chinas preferred economic course of action, it really is no wonder why.

MaxFlynn
MaxFlynn

@rockachalk @MaxFlynn @bizbird6 Then you clearly need to do some research on the material.  Particularly, I would suggest the Yangtze river development project.

You're not going to tell me how China achieves GDP growth, I'm an analyst and this is my field.  For example, your conclusion of a consequent of fixed investment is entirely arbitrary.  Fixed investment does not mean over capacity, or actually an over abundance of capital infrastructure investment.  

Hell, last post you said that not only did the Yangtze project not exist, you said it was impossible.  You should really start asking more questions, and lecturing less, on this material.  No offense, but your posts are very indicative of an internet perusing grasp of the material.  

You don't have domestic consumption rates accurate.  You don't have domestic consumption growth rates accurate.  You don't have knowledge of actual capital infrastructure investment projects accurate.  You don't have geographic differentiation between special economic zones and non-special economic zones accurate.  You don't have the impact of the real estate deflation inverse variables correct.

It's just obvious you're approaching this material from a point of a specific political ideology and not only grasping for, but regularly changing, the information as you're researching.

Hell, you even went so far as to claim that Huawei didn't exist.  

What do you possibly expect to happen to your theorizing without a strong grasp on the material?

rockachalk
rockachalk

@MaxFlynn @rockachalk @bizbird6  

The only infrastructure development happening in the interior that I know of is fixed investment; which in China, meanss over-capacity in the form of 60+ million empty apartments, incomplete skyscrapers that nobody is using (or has plans of using), and the worlds largest mall which is 95% EMPTY (and has been for the past 5 years since its creation).

Wanna know how China achieves GDP "growth" today? They destroy a 7 year old bridge and replace it with a new one. They will then repeat this same process again in another 7 years. These are 'shovel ready' projects in China, and they count as growth in China. But does this create any sort of lasting wealth? Maybe if they enact a toll fee to use the bridge, but then if that toll fee is used by the central planners to build more bridges to nowhere, whats the point?

In terms of moving industry and manufacturing to inner China; thats pretty stupid. It's counter productive to move manufacturing to the interior when the infrastructure does not exist. There is no cost savings to doing that, especially considering the infrastructure already exists, and is right on, or near the point where all that they have to do is load it onto a ship. Now you build infrastructure in some craphole in inner China, and still deal with the added cost of having to transport said goods to where they were formerly manufactured? Can you comprehend in the least bit how incredibly silly that sounds? Might was well move said industries to India!