Another one bites the dust

November 21st, 2017


Lu Wei, a propaganda officer for China’s Communist Party who in recent years personified its effort to shape the global internet, on Tuesday became the first major political figure to come under corruption scrutiny since President Xi Jinping’s second term began last month. Mr. Lu, a former director of China’s top internet regulator, is being investigated for alleged “serious violations of discipline,” the party’s disciplinary agency said in a one-sentence statement, using a common party euphemism to describe corruption. Mr. Lu couldn’t be reached for comment and it wasn’t clear whether he has legal representation. The 57-year-old’s political career has been under a cloud since he was removed as director of the Cyberspace Administration of China in June 2016, though he has retained his title as a vice minister at the party’s propaganda department.

The state news agency served as a launchpad for Mr. Lu, whose first political post was as a Beijing vice mayor in charge of propaganda. In 2013, after Mr. Xi came to power, Mr. Lu was put in charge of civilian internet policy, first at the State Council and then at the new Cyberspace Administration. Much of that initial work involved promoting Mr. Xi’s leadership. Mr. Lu quickly too aim at China’s then-primary social media platform, Weibo Inc., and celebrity bloggers who often gained tens of millions of followers with biting commentaries on food safety, property prices and air pollution that couldn’t be seen in state-run media. To hammer home his seriousness, Mr. Lu sometimes met groups of the most famous bloggers for dinner, where he warned them that rumor-mongering was illegal in China.

Mr. Lu also met with editors of international media on news coverage he considered too critical. Several publications became inaccessible online in China after he came to office, including The Wall Street Journal.

TV news in China is pretty weird, sometimes blacking out and often being edited in odd ways that are sometimes funny. In other news, here’s an interesting discussion. Oops! We didn’t realize that one of the participants is a criminal, convicted of the crime of thinking clearly.

From 240% to 310% in just a few years

November 20th, 2017

Nikkei Asia Review:

Allowing giants like Goldman Sachs and J.P. Morgan Chase to grab 51% of mainland securities firms radiates confidence. So does removing caps on the overseas stakes in banks. But what if Xi’s unquestioned omnipotence makes China’s economy more fragile in the long run?

For all the pageantry, muscle-flexing and bold decrees at last month’s 19th Party Congress, Xi is demurring on what should be the most important reform: scrapping China’s annual gross domestic product target, now set at 6.5%.

Even before Xi’s time, back in 2010, famed short-seller James Chanos of New York-based Kynikos Associates began describing China as the Enron of economies. Beijing, he warned, was on a “treadmill to hell” with expanding asset bubbles, a fudging of official data, double account books, weak transparency and a dot-com-like denial than things could ever end badly. “Only in China,” Chanos quipped to Bloomberg recently, “would growth in banking assets of 15%, twice the GDP last year, be considered deleveraging.”

Now it is People’s Bank of China Gov. Zhou Xiaochuan raising related concerns as he prepares to retire. Zhou has gone so far as to warn of a “Minsky moment,” when a debt-fueled boom meets a nasty end. Chinese bank assets, it’s worth noting, are at least 310% of GDP compared with 240% in 2012, when Xi was taking the reins, according to the International Monetary Fund.

By clinging to the GDP target model, Xi is keeping China on the treadmill. His emperor-like dominion makes it all the more necessary for officials to toe the line. That’s why good news on China’s economy going forward may actually be bad.

The author also has a piece about 80% of skyscraper construction in the entire universe taking place in China.

China’s annual GDP growth only 50% of that reported?

November 19th, 2017


Typically, analysts assume that changes in reported GDP reflect movements in living standards and productive capacity. In China, however, this is not the case. Local governments are expected to boost spending by whatever amount is needed to meet the country’s targets, whether or not it is productive.

GDP growth is not the same as economic growth. Consider two factories that cost the same to build and operate. If the first factory produces useful goods, and the second produces unwanted ones that pile up as inventory, only the first boosts the underlying economy. Both factories, however, will increase GDP in exactly the same way.

Most economies, however, have two mechanisms that force GDP data to conform to underlying economic performance. First, hard budget constraints, which set spending limits, drive companies that systematically waste investment out of business before they can substantially distort the economy.

Second, there is a market-pricing factor in GDP accounting that when bad debts caused by wasted investment are written down, the value-added component of GDP and the overall level of reported growth are reduced.

In China, however, neither mechanism works. Bad debt is not written down and the government is not subject to hard budget constraints. It is the government sector that is mainly responsible for the investment misallocation that characterises so much recent Chinese growth.

The implications are obvious, even if most economists have been surprisingly reluctant to acknowledge them. Anyone who believes there has been a significant amount of wasted investment in China must accept that reported GDP growth overstates the real increase in wealth by the failure to recognise the associated bad debt. Were it correctly written down, by some estimates GDP growth would fall below 3 per cent.

Historical precedents suggest the potential magnitude of this overstatement. Japan’s economy in the 1980s, for example, had distortions that resemble those of China today. Although not nearly as extreme, Japan too suffered from a very low consumption share of GDP and an overreliance on investment that, by the 1980s, had veered into substantial misallocation.

In the early 1990s, Japan’s reported GDP comprised 17 per cent of the overall global total, and few doubted that its soaring economy would become the world’s largest by the end of the century. Instead, once credit growth stabilised, Japan’s share of global GDP began to plummet, and has since fallen by nearly 60 per cent.

The same happened to the former USSR. It grew so quickly after the second world war that by the late-1960s it comprised 14 per cent of global GDP, similar to China today, and was widely expected to overtake the US. But two decades later, its share of global GDP had fallen by more than 70 per cent.

These cases may appear shocking, but, like China today, 1980s Japan and 1960s Russia lacked the mechanisms to account for wasted investment in reported GDP. At their peaks, growth for each country was seriously overstated by the failure to write down the waste, and understated once debt levels stabilised.

The implications are clear. China’s growth miracle has already run out of steam. It is only by allowing debt to surge that the country is able to meet its GDP targets. This may be why President Xi has been eager to stress more meaningful goals, such as increasing household income. Whatever the reason, analysts should not read GDP growth as an indicator of China’s underlying economic performance. Piling up unsold and unsaleable goods or building empty airports may boost GDP in an economy whose financial system does not recognize bad debt, but it does not measure its performance.

The author teaches in Beijing. We’re a little surprised that he gets away with broadcasting these dour views there.

Diversity or excellence: pick one

November 18th, 2017

Apple chose, pathetically. Question: how many Colombians are in the NBA? How many Scots are in the NFL? How many Antarcticans are there among Nobel physicists? How many non-grads from high school program at Google? We live in pathetic times where thinking is practically against the law.

Interesting reading

November 18th, 2017

The Australian:

Mr Keating, who is chair of the international advisory council of the China Development Bank, said President Xi Jinping was ­determined to continue to grow China’s economy so it could become the world’s largest. He said this would involve pushing ahead with an economic growth rate of about 6.7% a year until 2021.

“They are going to head off the US at the pass at $US18 trillion,” he said. “China is the only country in the world which nominates a growth rate and then throws money at it.” He said the Chinese economy could be twice as large as that of the US by the 2030s.

The former prime minister’s speech directly contrasts with the tougher attitude the Coalition has taken towards China in the past 12 months. Yesterday Foreign Minister Julie Bishop appeared to take a swipe at China’s dealings with smaller nations over access to the South China Sea and over infrastructure projects, and said a foreign policy white paper released next week would focus on the “Indo-Pacific” or Asia.

“In a region where tensions over maritime and land disputes continue to increase or reignite, powerful countries must not selectively defy or circumvent international rules and laws for immediate gain,” Ms Bishop said while delivering the Alfred Deakin Institute Oration. Ms Bishop repeated previous criticism of China’s autocracy.

US President Donald Trump lavished praise on Mr Xi during his visit to Beijing this month, then turned on China in a speech in Vietnam in which he accused the country of “chronic trade abuses”. Mr Keating said Mr Xi had had to make tough decisions, including a crackdown on corruption and moves to strengthen the party’s role.

Mr Xi’s policy would see the growth of the Chinese economy from the current $US12 trillion to $US18 trillion by 2021. Once this was achieved, Mr Keating said, China would slow its growth policies but its economy would continue to outstrip that of the US in size and growth.

He said he strongly disagreed with former US president Barack Obama’s pivot to Asia, authored by former secretary of state Hillary Clinton, which was about the US maintaining a “strategic hegemony” in Asia.

He said this involved the assumption that the Chinese state “would be prepared to be superintended by the US Navy and that China would be happy to outsource its security to the US Seventh Fleet”.

Mr Keating said the world was set for a major “bifurcation”, with a region around the Atlantic Ocean, which had about 2% growth, and a region taking in China and India, which had much larger growth rates.

Australia needed to be ready for what would happen when the Chinese let their exchange rate float freely. “When the controls come off, there will be a flood of money out of China which will have a profound impact on this region,” Mr Keating said.

The piece meanders but is interesting. Why 2021? Here’s the answer.


November 17th, 2017

It’s the end of the work week so we’re taking it easy. Harvard nonsense and Princeton too. Speculation that in some ways is dumber than that which they’re speculating about. Sad story we barely understand one word of. We listen to the radio on our daily jog; one station we like went dark, and another may do so soon. No China economy news, whew! Have a nice day.

China M2 = 2x GDP

November 16th, 2017


Huang Qifan told a forum organised by the Chinese news organisation Caixin on Thursday that the People’s Bank of China had been releasing too much cash into the economy, leading to financial risks and asset price bubbles. Huang, a former mayor of Chongqing who survived a political storm in the city after his former boss Bo Xilai was toppled in 2012, is now a deputy director on the financial and economic committee at the National People’s Congress, a largely advisory role to the government.

The central bank’s forex management had had an impact on domestic monetary policy and led to a series of financial mess, Huang said, adding that the finance industry’s share in the economy was too large and China’s money supply volume was too big. As China’s broad money supply, M2, was twice as large as the country’s GDP size, it has driven property prices to rise eight-fold in the past decade and inflated the amount of large expenditure off company balance sheets.

US M2 is about $14 trillion and US GDP is around $20 trillion, so the US ratio is 70% versus 200% in China. There’s 3x as much money sloshing around in China versus the size of the economy. That doesn’t sound like a good thing, unless you’re trying to load up on debt of course.

Bonus: oddity of the day, in which we can say we’ve never seen the word emo, and we have no interest in starting now. Extra bonus, Harvard. Every day, low gets lower.

From $9 to $35 trillion in less than a decade

November 15th, 2017


This year, though, Chinese President Xi Jinping has consolidated power, becoming the most powerful leader in the country in decades. Now that his grip on the country has been secured, some say, he will go about the dirty business of deflating the debt bubble building in China’s financial system since 2009 — the bubble that exploded China’s banking system from $9 trillion to $35 trillion in less than a decade. In this scenario, instead of instructing officials to do whatever they can to stop the bleeding, Xi may wait for the pain to subside on its own — sending the global economy to destinations unknown.

4x in 10 years. Wow. Perhaps they’ll need to create a restructuring industry after all.

Output down, interest rates up

November 14th, 2017

We’re not going to quote the story, but the charts are interesting.

Bonus: why don’t the bureaucrats who permit this ask a simple question: what country would you prefer to live in? The answers should be interesting, and we’d support a government program that subsidized their moving to their chosen country. It’s an excellent idea, and the follow-up is a widely-broadcast interview with the enlightened snowflakes a year after their moves to Cuba or wherever.

Grey rhinos?

November 13th, 2017


A series of official economic indicators – from industrial output to consumer spending – released in the next few days is expected to show the world’s second-biggest economy is on a safe growth track, just months after Beijing warned of “grey rhinos” and “black swans” stalking the country. Among the figures to be released will be growth in fixed-asset investment, measuring Chinese spending on infrastructure and property. Fixed-asset investment rose 7.5 per cent in the first nine months and a Bloomberg survey of economists forecasts that rate to slow to 7.3 per cent for October. It’s a long way from the 20.6 per cent growth reported in 2012, the 23.6 per cent posted in 2011 and the 23.8 per cent recorded in 2010, when the investment was a major driver of gross domestic product. Zhang Yiping, an analyst with China Merchants Securities in Shenzhen, said a growth model relying more on consumption instead of investment meant China’s expansion down the track would be stabler. “China’s investment growth has already dropped to single digits from more than 20 per cent a few years ago, but there have been no big declines in GDP growth,” Zhang said, suggesting that consumption was taking up the slack. Consumption contributed 64.5 per cent of the GDP growth in the first three quarters, while the share generated through investment fell to 32.8 per cent, according to the National Bureau of Statistics. Investment-driven growth is one of the main forces behind China’s rapid build-up in debt which economists point to as a big source of danger for the country’s economy. That debt has been described as a “grey rhino” risk, one that is obvious to all but on which no action is taken.

Oh, it’s debt. And we thought it was some reference to GOPers following the Alabama senate race.

39% increase to $25 billion for a single day’s retail sales: not bad

November 12th, 2017


Alibaba (BABA.N), the Chinese e-commerce giant, said on Saturday its Singles’ Day sales extravaganza hit $25.4 billion, smashing its own record from last year and cementing it as the world’s biggest shopping event. As tills shut midnight on Saturday, Alibaba’s live sales ticker registered 168.3 billion yuan, up 39% from 120.7 billion yuan last year. Last year, the sales number rose by nearly a third at the eighth iteration of the event – though that was slower than the 60% increase logged in 2015. “A lot of the lower hanging fruit has been picked and there’s increased competition for a share of consumer spending,” said Matthew Crabbe, Asia Pacific research director at Mintel. The sale did though beat his forecast of 20% growth.

Bonus fun: this is amusing, and two thoughtful guys comment on human frailty (here and here).

Happy Armistice Day

November 11th, 2017

You probably figured that the Christmas perennial It’s a Wonderful Life won a few Oscars. It didn’t, though it was nominated for several (the RKO technical team did win an award for a new technique for making fake snow). All the awards in the major categories for which the film was nominated went to another film, The Best Years of Our Lives, which is airing on TCM now. It seems to get better with each viewing. Scott Johnson has an interesting piece on the movie and the remarkable team that put it together. That’s it for now. Have a happy Armistice Day.


November 11th, 2017


Goldman Sachs Chairman and CEO Lloyd Blankfein told CNBC it’s inevitable that the Chinese economy will be bigger than the U.S. economy based on the sheer population disparity alone. “These are the two biggest economies in the world,” Blankfein said in an interview from Beijing, where he is traveling with President Donald Trump as part of a delegation of business leaders. “On a constant dollar basis,” taking inflation into account, the Chinese economy is not that close to exceeding the U.S. economy in the near term, Blankfein said. U.S. gross domestic product was about $18.5 trillion in 2016 compared with Chinese GDP of $11.4 trillion. According to a PwC study, the Chinese economy will overtake the U.S. economy by 2030 by about $26.5 trillion to $23.5 trillion. But on the measure of “purchasing power” or PPP, China has already surpassed the U.S., Blankfein said. When considering China’s population of nearly 1.4 billion people last year versus the U.S. population of about 326 million, it’s not surprising the race between the world’s two largest economies tips in China’s favor, Blankfein said, “It’s just a question of timing. Eventually, it will. But you have to keep in mind their population is four times the population of the United States.”

We’ve dealt with the PPP issue a long time ago. Gee, GS has at least five offices in China. You don’t suppose that its CEO is trying to drum up business?

China trade big deal? We’ll see

November 10th, 2017


President Xi Jinping pledged Thursday to import more U.S. agricultural produce and energy products and to deepen trade cooperation during a meeting in Beijing with visiting U.S. President Donald Trump. Both presidents attended a dialogue with business leaders from both countries in Beijing’s Great Hall of the People, where they were present for the signing of trade deals worth $253.5 billion, a record figure in the trade history of the two countries, the state-run China News Service reported, citing Chinese Commerce Minister Zhong Shan. Xi told Trump that his administration would continue encouraging Chinese companies to invest in the U.S., according to the official Xinhua News Agency. “We’re also hoping that the American side will export more technologies for civilian applications to China,” he said. Xi said that the Chinese economy will become increasingly open and transparent to foreign companies, including U.S. firms. He also encouraged U.S. companies to participate in his “Belt and Road” infrastructure-led initiative. The two countries will maintain steady communication on issues ranging from their respective structural reforms to management of the global economy, according to a statement issued by China’s Ministry of Foreign Affairs. Xi emphasized the importance of Sino-U.S. relations at his meeting with Trump, saying cooperation between the two countries is “the only right choice,” according to Xinhua.

Bloomberg says lose-lose. We don’t think so. There are a billion bumps in the road in China vs USA, but Xi cannot let growth or prosperity slow down, as the decline of farming and the increase of manufacturing and services happen. Nor can the US penalize China imports to a great extent. So: so far, so good.

Liu He — a name to remember

November 9th, 2017


Liu He, a key adviser to Chinese President Xi Jinping known for guiding economic policy behind the scenes, appears destined to occupy more of the spotlight. The 65-year-old Cultural Revolution survivor turned Harvard-educated technocrat rose to prominence by doing a series of crucial jobs quietly. Now, analysts say the stage is set for him to become Xi’s key lieutenant tasked with preventing a financial meltdown. On Wednesday, it was announced that a new committee charged with corralling China’s disparate financial regulators into concerted action was led by 71-year-old Vice Premier Ma Kai. According to Communist Party conventions, Ma is due to retire soon, leaving Liu — freshly appointed to the Politburo — the obvious choice for the role. “Liu will be like a Chinese version combining both Larry Summers and Ben Bernanke, plus the chairman of the president’s economic council,” according to Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “He will not only oversee overall financial markets including monetary policy and financial supervision, but also the relevant fiscal and reform policy.”

With an economy-wide debt level approaching 3x GDP, comprised mostly of a complex web of corporate and household borrowing, China must ease its addiction to credit without creating a collapse in asset values that would seriously hamper the economy. A member of Xi’s inner circle, Liu has played a behind-the-scenes role as director of the Communist Party’s general office of the Central Leading Group for Financial and Economic Affairs, which is chaired by Xi himself. He’s also been vice chairman of the National Development and Reform Commission, the government’s top economic planning body. While Liu has avoided the spotlight, many economists regard him as the voice behind an anonymous missive on debt published in the People’s Daily in May 2016. The Communist Party newspaper published the comments from an unnamed “authoritative person,” who said China must face up to its nonperforming loans and other risks associated with soaring debt.

Bloomberg annoyingly hides the “authoritative person” bit behind a paywall. Here’s a bit on that missive from UBS.

Pictures and music

November 9th, 2017

Lot of nice pictures here, and who knew that Paul Simon co-wrote Red Rubber Ball, which for some reason was playing in our brain soundtrack today.

BTW, Tucker Carlson had on an idiot “professor” who argued this nonsense. We have friends who have given hundreds of millions of dollars to big name colleges to get their kids in and have buildings named for them. This nonsense must stop. Another brick in the wall.

Absent a crisis, it’s over

November 8th, 2017

Say what you want about Trump, but his views, with or without expletives, are pretty much standard for the time he grew up in. George Washington, Omaha Beach, Merry Christmas, and all that. Now we suggest you listen to this hour of Dennis Prager the other day, with a senior at the University of Wyoming (!!!). Wyoming!

You either agree with them or you’re evil, that’s the message, deeply believed by the college-educated young. Two generations of Americans have been wrecked by the education establishment, and there’s no coming back from that, absent some crisis that causes these fools to question their insidious indoctrination. The young have been wrecked in their thinking by fools, and there’s no partisan politics solution to this. (Frankly, we thought things were going to go the other way via internet, when we started our commentaries a decade and a half ago; we were wrong, so wrong.)

Probably we’ll write about China from time to time, since its economic progress has been so unbelievable, but there’s little point in commenting on US politics, since the young have been utterly poisoned against the views most Americans have held for almost four centuries.

Wow — unprecedented 9x increase in M2 in 15 years

November 7th, 2017


“The central bank is neither god nor a magician” China’s central bank chief Zhou Xiaochuan breaks silence over the yuan. Zhou called for broadened equity funding and direct finance to cut corporate leverage and eliminate “zombie” companies. He also warned that it was very difficult for regulators to find a big enough window of time to “right the wrongs”. Zhou’s pointed attack on the weekend comes months, if not weeks, before he is expected to step down from a job he has held since his opposite number in the United States was Alan Greenspan.

He is credited with steering the country’s robust economic growth in the past 15 years, freeing up interest rates at home and earning the yuan nominal international reserve currency status abroad. But Zhou has been criticised for allowing the economy to be flooded with money – China’s broad money supply, M2, surged from 18.5 trillion yuan at the end of 2002 to 165.6 trillion yuan (US$24.95 trillion) at the end of September.

His article was also included in the Communist Party’s handbook of official interpretations of policy from the party’s national congress last month, suggesting his view is a consensus position at the top rungs of power. Qingdao University economics professor Yi Xianrong said such a blunt accusation was rare from a Chinese official. Yi said China’s monetary policy had been held hostage by “the investment impulse of local governments”.

China has dealt with bad loans for more than a decade by printing money. So far not that many negatives, but a $25 trillion M2 money supply is a dragon that’s hard to ride.

Bonus fun: the last picture is very cute. HT: MF

One minute of numbers

November 6th, 2017


Economists expect that new loans in October dropped to a one-year low of 780 billion yuan ($117.59 billion) as banks restrict mortgage lending and corporates continue to shun bank loans. Despite government rhetoric about the deleveraging drive, bank lending would have to drop sharply from this year’s trend for new loans not to surpass last year’s total and reach a new high. The producer price index (PPI) is tipped to have risen 6.6 percent in October on-year, down from 6.9 percent in September when prices spiked on concerns supply would be short due to winter production restrictions. The consumer price index (CPI) meanwhile is seen up 1.8 percent on-year in October, versus 1.6 percent in September. China’s foreign exchange reserves are expected to have risen for a ninth month to $3.118 trillion in October, as capital curbs and a weakening dollar helped staunch fund outflows.

Forex: another variable handled well so far.

Make 1978 illegal, waaaaaaahhhhhhhh!!!!!!!

November 5th, 2017

Along with More Cowbell, King Tut is one of our favorite musical SNL skits. (It coincided with the King Tut exhibition that began at the National Gallery and was closing at the Met at that time of the SNL skit.) Who could have anticipated that 40 years later, it would drive the snowflakes insane? This really is getting to be too much. If you’re a college kid today, chances are you’ve never done anything significant of merit, and yet you walk around with technology in your pocket millions of times more powerful than all of NASA in Apollo 11. Shut up and sit down.