Is it All Just Bad Luck?
China is riding several turbulent waves of potential disaster, hoping that it can leverage an “appearance of strength and stability” into a position of relative strength in the aftermath of what is coming.
Look at industrial overcapacity, for example:
China … faces a high probability of being the next major power to face an economic collapse and is now at a tipping point.
One major reason is industrial overcapacity. Overcapacity is not new in China, but in sectors such as iron and steel, glass, cement, aluminium, solar panel, and power generation equipment, the overcapacity rate has recently surpassed 30 per cent, the threshold at which overproduction may trigger loan defaults by companies that have borrowed and then watched their profits fall. __ http://www.scmp.com/comment/insight-opinion/article/1862024/overcapacity-time-bomb-chinas-economy
Massive industrial overcapacity is just one cause of China’s massive surge of debt. China economist Michael Pettis, investor Jim Chanos, and others, see China on the verge of a debt catastrophe:
China is facing a debt explosion of unprecedented proportions which may end in a full-blown crisis or a “lost decade” for economic growth, one of the world’s leading experts on the region has warned.
Michael Pettis, finance professor at Peking University in Beijing, told us that every “growth miracle” since the Second World War has ended either in financial collapse or stagnation – without exception.
He said the only thing that was different about China was that the scale of its imbalances was even greater than anything witnessed before. __ China’s Lost Decade
The parallels between the economic trajectories of a Japan of the late 20th century and a China of the early 21st century, are striking.
China is on a path similar to the one that preceded Japan’s lost decade in the 1990s as the country’s debt level grows twice as fast as its economy, according to Jim Chanos, the hedge fund manager who predicted the 2001 collapse of Enron Corp.
“We have an economy addicted to credit,” Chanos, founder of Kynikos Associates LP, said during a panel discussion on China in New York Tuesday. … [China] is on a trajectory similar to the one Japan was on before its asset-price collapse in 1991 “but on steroids,” he said.
An entire financial industry based upon bad debt has grown up inside China’s shadowy banking industry — and it is intimately tied to the country’s regional and local governments.
Distressed debt investors in China buy the loans from state-backed agencies known as asset management companies (AMCs), at a heavy discount, and aim to turn a profit by selling collateral on the loans at a higher price or getting the bankrupt borrower back on its feet.
“Banks are under increased pressure from regulators to lower their NPL ratios,” said Ted Osborn, a senior partner at PwC in Hong Kong, who started advising on Chinese NPL transactions 14 years ago. “More loans are being offloaded to state-owned asset management companies and other players in the market.”
China’s commercial banks saw their total NPLs rise to 1.8 trillion yuan ($280 billion) in the first half of 2015, the 15th straight quarterly rise, according to China’s banking regulator.
These bank NPLs could double during the second half, says Liao Qiang, senior director of financial institutions ratings at Standard & Poor’s. __ http://www.reuters.com/article/2015/09/24/china-debt-distressed-idUSL3N1011K420150924
These investors are riding a particularly turbulent wave, given that many of these ultra-high risk investments are based upon multiple levels of earlier debt. It is much like building houses of cards upon several lower layers of houses of cards. When it collapses, it will make the 2007 – 2008 sub-prime collapse look like recess on the pre-school playground.
Also contributing to China’s debt is a gargantuan real estate bubble, the frailty of which is difficult to overestimate.
The country’s sky high real estate prices—and the prospect of their fall—will mean far more to the world than the recent widely ballyhooed downturn in the country’s stock markets. In reality, relatively few Chinese actually participate in equities. Only one in 30 Chinese owns stock. Investment in property is by far the favorite means by which affluent Chinese invest in the future… __ http://www.thedailybeast.com/articles/2015/09/24/china-s-planned-city-bubble-is-about-to-pop-and-even-you-ll-feel-it.html
The article above explains how the collapse of China’s labyrinthine real estate debt market will influence real estate markets around the world.
Here are four of the bubbles upon which modern China is built:
Bubble 1: Exports
Now at 23 percent of national income, exports have been the mainstay of Chinese growth since the early 1980s. However, exports could never have achieved that status without subsidized credit from the government-controlled banking system and an artificially low exchange rate… the world will no longer absorb Chinese exports growing at 20 percent annually, and the credit subsidies have led to overcapacity among exporting firms…
Bubble 2: Real Estate
The oversupply of housing and commercial real estate in China’s major cities is a direct result of government policy. As China’s growth soared, government leaders looked for ways to employ skilled and unskilled laborers, while at the same time benefiting the booming middle class yearning for homes in cities. And yet, ghost cities abound: Consider, for example, Jingjin — located between Beijing and the industrial city of Tianjin — which has thousands of unoccupied villas.
A comparable phenomenon occurred in China regarding office space. Province and city leaders created new office towers as a way to attract companies and entrepreneurs who would employ local residents and pay taxes. An added attraction was that builders usually shared their profits — corruptly — with government officials who supplied permits and provided land, energy, and water. Over the past two decades, the speculative fever has been such that there has been a nearly continuous “build” signal for contractors…
Bubble 3: Excess Infrastructure
The third major distortion in the Chinese economy relates to excess infrastructure — especially the new roads, ports, airports, and tunnels built over the last two decades. This pattern relates to overbuilding in real estate, but has different causes. After the early 2000s recession and the Great Recession in 2008, Beijing maintained its country’s growth rate by a massive public works program. The problem is not that China doesn’t need new infrastructure: It’s that many of these facilities are underutilized, and the capital could have been invested in more productive ways. China’s toll roads reportedly lost $25 billion in 2014. Many of the costly Olympic facilities in Beijing lay fallow (though Beijing may be able to use some for its Winter Games in 2022).
Worse, party officials pressured state-affiliated banks to lend billions for these projects. Since the main way that local governments bring in large sources of income is through long-term leases of land, this leads to a vicious cycle: A local government gets control of land and leases it to private developers so they can build apartments and office space. This incentivizes government officials to collude with private developers — but neither are constrained by normal budgetary or market signals.
Bubble 4: Rigid State-Owned Enterprises
State-owned enterprises, or SOEs, exist in dozens of sectors, employing tens of millions of people and generating roughly 40 percent of China’s GDP. In many cases, they are either monopolies or oligopolies. The central concern with the SOEs is their inflexibility: They have trouble adapting to new market conditions. Continuing to build new government-owned steel plants, for example, when there was already oversupply created pressure to dump steel overseas.
In addition, political connections often determine employment of management and laborers in the SOEs, so it is extremely difficult for even the central government to cut them back… __ http://foreignpolicy.com/2015/09/15/where-did-chinas-economy-go-wrong-bubbles-politicized-banking-industry/
There are many subtle and byzantine details that could be explored, into China’s massively interconnected corrupt warp of financial and political bubbles. There is much more at the FP link above.
Interested observers should understand that the calamity underlies the hopes, dreams, positions, and power of everyone in China, from the lowest to the highest.
If China’s quasi-communist government defaults on the guarantee of a better life for the Chinese people, no one can predict how the multiple overlapping houses of cards will shake out.
China is Propping Up a World of Corruption
It is not only the corrupt instability within China that is concerning, but also the corrupt instability around the world, which China has been busily propping up all of these years. From Russia to Africa to Latin America to Central Asia and beyond, lazy and corrupt governments and industries have grown fat on China’s bubble-building. When these bubbles pop, there will be a great deal of collateral damage — across the globe.
The threat of economic collapse in China, followed by civil war or widespread insurrection, will certainly have global aftereffects. But once the flames have died down inside China, and China’s intelligent and industrious people pick up the pieces and start to rebuild, what will be facing them?
A toxic world of poisoned soil, water, air, food, and people as far as the eye can see. More
It is a tragedy that in the process of building an untenable series of bubbles and houses of cards, China’s government has allowed the entire nation to be made into a toxic wasteland.
As you can see from the above links to the original Al Fin blog (closed unilaterally by Google in January, 2013), China’s problems are not new. They date back before the 2007-2009 global deflation and sub-prime crisis. But China had a golden opportunity in 2009 to re-structure its economy away from bubble-making and building on card houses. Instead, China’s greedy central, regional, and local governments doubled down on stupid, and inflated the entire mess to the point that no one can sort out the unstable mess — much less clean it up for sustainable growth.
What is China’s timetable? Qien sabe? What is Russia’s timetable? What is the timetable for Iran, North Korea, Saudi Arabia, or the United States? It depends upon how deeply the solid and semi-solid foundations go.
Bad leaders — such as Obama, Putin, the Castros, most African, Muslim, and Latin American leaders — speed up the timeline of collapse by their own stupidity and drunken grips on power. For most of the nations of Europe and the Anglosphere, a large new crop of good leaders could open up the gates to a more expansive and prosperous human future.
The collapse of any one of China, Russia, or the United States would set off a brutal period of war and anarchy, perhaps capped off by a large scale use of nuclear, biological, chemical, and cyber weapons — leading to the collapse of modern civilisation in most of the surviving world.
Rebuilding after such a violent global collapse — to say nothing of creating an expansive and prosperous human future — is not something that humans have thought very much about, in any constructive manner.
Here at the Al Fin Institutes, we are assembling an agency — as of yet ad hoc — to combine the best concepts of “The Next Level,” “The Dangerous Child,” and “The Society for Creative Apocalyptology.” This is likely to be our most ambitious and difficult project to date, but it may eventually prove to be the most important.
As we always say, hope for the best, prepare for the worst.
An internetwork of cooperating Dangerous Communities and Dangerous City-States might help get some of the best of humanity through what is coming, so that they can re-build a better future.
It is never too late to have a Dangerous Childhood.