Archive for the 'China' Category

Hard to top 37 years of uninterrupted growth

Wednesday, April 22nd, 2015

SCMP: “Measuring from December 1978, when the Chinese Communist Party ‘shifted its centre of gravity from propagandising class struggle and organising political campaigns to economic construction’, China is now in its 37th year of economic expansion.” BTW, this morning we saw up close and personal something resembling this. On balance we think they have a good shot at getting past the current problems, but it’s a drama such that no one can predict Act V with any certainty. A decade ago, we saw the past with some clarity, but didn’t know that within a few years billions of people would be walking around with tiny supercomputers. Live and (hopefully) learn.

Cryptic

Friday, April 17th, 2015

Stratfor:

On March 9, Liu Jian, a former military officer and grandson of Zhu De, one of China’s most revered revolutionary-era generals, told a state-affiliated news website that Guo Boxiong, former vice chairman of the central military commission, was responsible for the sins of his son, Guo Zhenggang. Guo Zhenggang, also a general, has come under investigations for corruption. His father had held a senior post in the People’s Liberation Army under the Hu Jintao government and was appointed by Jiang Zemin, Hu’s predecessor. Guo Boxiong’s colleague Xu Caihou was brought down in the first wave of purges against the military late last year. Liu’s comments about Guo Boxiong were widely publicized and republished in the South China Morning Post.

Arrests for corruption have been going on in China for more than a year. Given the endemic nature of corruption in the Chinese system, with its interlocking political and business relations, it is likely that corruption charges could be brought against an enormous number of officials; they have already been brought against hundreds of thousands of people since mid-2013, and that is likely just a fraction of the number of officials who could be charged. Therefore, from our point of view, the corruption campaign is as much a purge as a cleanup. A purge differs in that it takes place for political reasons — to weaken the opposition, strengthen the position of the government or, most likely, both. That raises the interesting question of who Chinese President Xi Jinping sees as his enemy, and why he is worried enough about them to purge them.

In this context, Liu’s statement is interesting. A person whose primary claim to fame is descent from a national hero has been showcased saying that in a particular corruption case, the father must be held responsible for what the son did. Put differently, Liu, whose grandfather is by definition beyond reproach, is saying that in at least this case, the son’s corruption is the father’s responsibility. The Chinese government has chosen to showcase this statement, and it must therefore be taken seriously and its meaning unraveled.

That is not easy. China has become increasingly opaque, recalling the time when Mao Zedong’s whims would be revealed in poems on wall posters for the world to scratch its heads over. We will assume that this statement is not simply directed at Guo Boxiong, but is stated as a principle of the anti-corruption drive. Otherwise Guo could simply have been arrested without this fanfare. So our best guess is that a generalizable statement is being made, and that statement is not simply about fathers and sons but the older generation of leaders and the younger.

Xi’s anti-corruption campaign is both a genuine attempt to deal with corruption and an attempt to strengthen his position, the position of the Party throughout China, and Beijing’s position as the center of China. The charge could be made that prior presidents had been lax in this. Excessively interested in economic growth and prosperity, they had let the instruments of state control atrophy and, as one outcome, permitted corruption to flourish. More important, the weakening of state control has made managing China during its economic downturn singularly difficult. It is not only an economic problem, but also a social and political problem. Xi has been put in the difficult position of managing political and social forces with weakened and corrupted instruments. Hence, the anti-corruption movement is aligned with a purge.

But obviously, corruption is systemic, and so is the weakness of state power. From Xi’s point of view, it is necessary to address these issues but also to assign blame. That blame would rest with prior Chinese administrations. In laying the blame at their feet — at the feet of the elders — Xi both weakens their residual power and strengthens his own. Jiang, who preceded Hu as president, retains substantial power, as prior presidents in China frequently do. He also presided over China’s major post-1989 economic surge, making it his primary goal. He was the dominant political figure in China during the 1990s and early 2000s and retains significant influence. He is also, according to Forbes, worth $1.7 billion. He oversaw the period of economic climax and intensifying corruption. His own wealth, if Forbes is right, likely had complex origins.

The Chinese public seems enamored with Xi and his fight to try to purify China. In an economic downturn, targeting those who became wealthy, particularly politicians, is a logical process. Xi is obviously locking horns with Jiang over these campaigns that are taking down the former president’s supporters at an accelerating pace. If this campaign were to reach its logical conclusion, then Jiang also would be a likely target.

In retrospect. the past was simple. Build factories for export, take advantage of the very low incomes in the countryside, and grow 10-15% a year. Highly successful for a long time. But that no longer works. What’s next? It’s not at all simple, and so you have dramas such as the above. Five years ago we looked at a number of the issues involved in China’s coming transitions, and the answers are no clearer today. Here’s a couple of amazing statistics for you, while we’re talking about transitions. 100 years ago, 42% of Americans lived on farms; now it’s negligible. China today is about where America was 100 years ago with over 40% on farms; what will the next century bring?

Recession?

Monday, April 13th, 2015

Stratfor:

In the second quarter, the depth of China’s economic problems will become even clearer, with virtually every major indicator — barring, perhaps, those for services industries and household consumption — likely to show slowing or negative growth. Attention will especially focus on the housing sector slowdown’s effects on financial stability and employment in regions most directly exposed to construction-related industries, especially the rust and resource belts of northern and northeast China. Stratfor expects reports of defaults by local property developers, resource companies and building materials businesses to become more common this quarter, along with anecdotal evidence of localized economic and employment crises in provinces like Shanxi. However, thanks in part to proactive government measures to calm local financial crises and in part to China’s inherent internal economic fragmentation, these crises will remain fairly isolated within the quarter.

Economic fragmentation, in conjunction with the government’s desire to allow the economic slowdown to continue and to use the slowdown to drive economic reform and restructuring, make it highly unlikely that Beijing will reverse course and engage in large-scale economic stimulus this quarter. Further interest rate or reserve requirement ratio cuts are possible — even probable — but will serve primarily to ensure that banks have ample liquidity to manage rising non-performing loan ratios. Otherwise, Beijing likely will continue using targeted fiscal and financial measures to boost certain regions and industries — notably services, agriculture and manufacturing — rather than opt for investment and credit expansion on anything approaching the scale of the post-2008 period. In the meantime, Chinese authorities will continue the messy process of implementing long-discussed reforms such as establishing a national property registry, creating a deposit insurance scheme (as a step toward liberalizing deposit rates at state-owned banks), and expanding municipal bond pilot programs.

In the political sphere, China’s second quarter will be dominated by the ongoing anti-corruption campaign. Over the coming months, the campaign will focus on officials from the 26 state-owned enterprises publicly named as potential targets in February, with particular attention to businesses in the struggling resources and construction-related industries. China will continue expanding investment, diplomatic and overland infrastructure ties across its periphery this quarter. Beijing will pay particular attention to implementing President Xi Jinping’s much-touted Silk Road Economic Belt initiative and solidifying plans to build overland rail ties to Thailand.

So we’ve gone from a world where 8% growth in China is a recession to the possibility of something much more traditional. Times appear to have changed.

Miscellaneous learning opportunity

Wednesday, April 8th, 2015

Stratfor:

The Yangtze River is the key geographic, ecological, cultural and economic feature of China. Stretching 6,418 kilometers from its source in the Tibetan Plateau to its terminus in the East China Sea, the river both divides and connects the country. To its north lie the wheat fields and coal mines of the North China Plain and Loess Plateau, which unified China’s traditional political cores. Along its banks and to the south are the riverine wetlands and terraced mountain faces that historically supplied China with rice, tea, cotton and timber. The river passes through the highlands of the Yunnan-Guizhou Plateau, the fertile Sichuan Basin, the lakes and marshes of the Middle Yangtze and on to the trade hubs of the Yangtze River Delta. Its watershed touches 19 provinces and is central to the economic life of more people than the populations of Russia and the United States combined. The river’s dozens of tributaries reach from Xian, in the southern Shaanxi province, to northern Guangdong — a complex of capillaries without which China likely would never have coalesced into a single political entity…

Only after the Qin captured the Yangtze’s three primary regions — the Upper, Middle and Lower stretches — in 221 B.C., thereby gaining access to the southeast coast, did “China” as a single unit come into being. In the two millennia since, the Yangtze has continued to mark the boundary between kingdom and empire. The constant cycle between periods of unity (when one power takes the lands north and south of the Yangtze) and disunity (when that power breaks into its constituent regional parts) constitutes Chinese political history.

If the Yangtze did not exist, or if its route had veered downward into South and Southeast Asia (like most of the rivers that begin on the Tibetan Plateau), China would be an altogether different and much less significant place. Its population would be much smaller, isolated to the southeast coast, Loess Plateau and North China Plain — the only parts of Han China where economic life does not depend on the Yangtze. The provinces of central China, which today produce more rice than all of India, would be as barren as Central Asia. Regional commercial and political power bases like the Yangtze River Delta or the Sichuan Basin would never have emerged. The entire flow of Chinese history would be different.

Three regions in particular make up the bulk of the Yangtze River Basin: the Upper (encompassing present-day Sichuan and Chongqing), Middle (Hubei, Hunan and Jiangxi) and Lower Yangtze (Jiangsu and Zhejiang provinces, as well as Shanghai and parts of Anhui). Geography and time have made these regions into distinct and relatively autonomous units, each with its own history, culture and language. Each region has its own hubs — Chengdu and Chongqing for the Upper Yangtze; Wuhan, Changsha and Nanchang for the Middle Yangtze; and Suzhou, Hangzhou and Shanghai for the Lower Yangtze. Each region has its own internal market networks, and each historically is more interested in protecting its autonomy and prosperity than uniting under the north’s control. Conquering and integrating them from the outside therefore required not only overwhelming military power — historically, northern China’s advantage — but also complex bureaucratic and internal security apparatuses. Finally, it required a transport and communications infrastructure comprehensive enough to make the exercise of central authority over vast distances and diverse populations feasible…

the Yangtze River is by far the world’s busiest inland waterway for freight transport. In 2011, more than 1.6 billion metric tons of goods passed through it, representing 40 percent of the nation’s total inland waterborne cargo traffic and about 5 percent of all domestic goods transport that year — up 250 percent from 2004. Over the last decade, dramatic increases in waterway freight traffic have been seen in some provinces along the Yangtze River corridor, such as Anhui (840 percent, to 364 million tons), Chongqing (640 percent, to 117 million tons) and Hunan (500 percent, to 179 million tons). By 2011, the nine provincial capitals that sit along the Yangtze and its major tributaries had a combined gross domestic product of $1 trillion, up from $155 billion in 2001. That gives these cities a total wealth roughly comparable to the gross domestic products of South Korea and Mexico. This growth, since roughly 2003, has been underpinned by a massive expansion in centrally allocated fixed-asset investment into the interior, and specifically to those parts of the interior Beijing considers most viable as potential alternative or supplemental industrial bases to the southeast coast. Unsurprisingly, areas with ready access to the Yangtze River system have been targeted as cores of future inland urbanization…

Investment in the interior accelerated rapidly in the wake of the 2008-2009 financial crisis, when the sudden evaporation of external demand revealed just how fragile and imbalanced China’s economy had become. Thirty years of export-oriented manufacturing centered in a handful of coastal cities generated huge wealth and created hundreds of millions of jobs. But it also created an economy characterized by deep discrepancies in the geographic allocation of resources and by very little internal cohesion. By 2001, the economies of Shanghai and Shenzhen, for instance, were in many ways more connected to those of Tokyo, Seoul and Los Angeles than of the hinterlands of Sichuan and Shaanxi provinces. For most of the 1990s and 2000s, this lack of cohesion was viewed as an unfortunate but necessary and temporary byproduct of an economic model that was otherwise doing its job. After the 2008-2009 financial crisis, internal economic disunity — like the growth model it embodied — became a social and political liability.

A debt bubble helped keep things moving for a while; however, this rebalancing towards the interior seems like a more effective program over the longer term. It’s amazing that China has come this far this fast, without the massive dislocations some had forecast. (Spengler chimes in as well.)

Vapors

Monday, April 6th, 2015

Larry Summers:

I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out. This failure of strategy and tactics was a long time coming…With U.S. commitments unhonored and U.S.-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank.

So it is that Larry Summers not only gives the vapors, he gets them too. HT: PL

Letting banks fail

Friday, April 3rd, 2015

Stratfor:

China has taken another step in shifting its economy. Zhou Xiaochuan, chairman of the People’s Bank of China, announced March 31 that starting May 1, the Chinese government would insure individual deposits of up to 500,000 yuan (about $81,000) at Chinese banks. By providing an explicit guarantee on ordinary bank deposits, the insurance scheme will pave the way for Beijing to liberalize deposit interest rates, allowing banks to compete more fiercely to attract new depositors.

At the same time, it will enable China’s government, at least in theory, to step back from its longstanding but implicit promise not to let individual banks fail, injecting risk into the system. This deposit insurance is a key step toward curbing the moral hazard and widespread capital misallocation that characterize China’s economy, something that has long eluded Chinese decision-makers focused on maintaining high levels of economic growth. It would have the added advantage of boosting consumer confidence and spending.

Soon we’ll probably see some bank failures. It makes sense, given the lending practices since 2008/9.

Sectoral slowing

Friday, March 13th, 2015

Fortune:

Chinese industrial production grew only 6.8% in January and February, the slowest since 2008. Real estate sales plunged 15.8% in value. Fixed-asset investment, the principal driver of Chinese growth, recorded anemic growth at 1.05% and 1.03% in January and February, respectively (compared with 1.49% and 1.42% in the same period last year).

This fellow has his work cut out for him.

Rudd: “The strongest Chinese president since Mao”

Thursday, March 12th, 2015

Xi Jinping, the last party plenum in 2014 with its entrenching of the anti-corruption movement into the fabric of Chinese law, and the restoration of party legitimacy are among the subjects of a remarkable interview of the 26th PM of Australia, Kevin Rudd (who speaks Mandarin and is known in some circles as 陸克文). Some rough excerpts: “All of us who’ve grown up in study of Western political science assume the $14,000 per capita income threshold; then people demand more liberties, and what you end up with is one form of democratic government or other. Xi Jinping does not have that as his game plan for China. What he is attempting is to defy history. Frank Fukuyama’s point, we end with liberal capitalism is not where China is going. Xi Jinping is seeking to advance a radical alternative. We need to be very cautious in saying this is inherently unsustainable. The folks at the center of this are determined to prosecute this model.” On a perhaps unrelated but interesting note, the SCMP reports that Xi Jinping just reshuffled the leadership at China’s version of the Secret Service.

Update: the WaPo covers some similar territory.

15 years that went by pretty fast

Saturday, March 7th, 2015

NYT:

entire industries have emerged and seized the dominant positions in the Nasdaq index even as their predecessors faltered. Apple, now the world’s largest company by market capitalization, barely registered in 2000, and the first iPhone was not announced until 2007. Over a billion smartphones were shipped in 2014.

Google, which now ranks third and dominates the market for Internet search advertising, went public in 2004 at $85 a share, giving the company a market value then of $23 billion. Today, its market capitalization is over $360 billion, and its shares were trading this week above $570.

Facebook, now No. 5 in Nasdaq’s ranking, dominates social networking, another industry that did not exist in 2000. It went public less than three years ago, and is already valued at over $180 billion.

Had the Nasdaq index itself not been transformed by innovation and competition, it would be nowhere near its previous peak. The stocks of many of the surviving companies, like Microsoft and Intel, have not come close to the levels they reached before 2000. That means investors who bought and held the stocks of individual companies in 2000, as opposed to broad mutual funds tied to the Nasdaq or index funds like the QQQs, are still underwater

Some things are going really well and some are going really badly. Hard to know where we’ll be in another 15 years.

Very unusual, and so forth

Wednesday, February 4th, 2015

Strong words from the Gallup CEO on the ridicuoulsly low labor force participation rate. Guy’s not with the program. What’s up with that? And the UN reports more horror from ISIS. Finally, China cut reserve requirements. That’s it. Things along the line of the UN report are so awful that words fail.

Fast

Wednesday, January 28th, 2015

Reuters

The company sold 74.5 million iPhones in its fiscal first quarter ended Dec. 27, while many analysts had expected fewer than 70 million. Revenue rose to $74.6 billion from $57.6 billion a year earlier.

Profit of $18 billion was the biggest ever reported by a public company, worldwide, according to S&P analyst Howard Silverblatt. Apple’s cash pile is now $178 billion, enough to buy IBM or the equivalent to $556 for every American.

Apple Chief Executive Officer Tim Cook said the Cupertino, California-based company would release its next product, the Apple Watch, in April.

The iPhone did not exist a decade ago. We wonder if official measures of productivity are way off today, much less than is actually happening. The instantaneousness of everything has its large downsides, but we think that historians may find that this current period of economic downturn and dislocation would have been far worse without the vast power and speed of these tiny talking computers.

Of course productivity is roughly defined as an increase in output when inputs remain constant. Most of the uses of the tiny computers in supply chain reductions, energy conservation and optimization, shorter and more accurate decision algorithms, etc. have yet to be discovered or implemented. Therefore, even with the ridiculousness of loons at the EPA etc., the economy might actually do well.

China changes

Sunday, December 28th, 2014

FT:

Beijing lifted controls on credit and flooded the economy with cash, much of which was funnelled into an expanding property bubble. The result was a construction boom and an unprecedented increase in total debt to GDP from 147 per cent at the end of 2008 to 251 per cent by the end of June this year, according to estimates from Standard Chartered. Credit expansion has slowed in recent months but is still growing a lot faster than GDP while providing less and less growth for each renminbi borrowed…Despite many years of extreme overcapacity and falling profits – the price of steel is now less than the price of cabbage in China – steel production in China was up 5.4 per cent in the first nine months of this year. Bankruptcies are another area where the pain has not yet really begun.

NYT:

Mr. Xing borrowed heavily to expand. The debt could be serviced as long as coal prices were high, but they began to fall in 2012 as the economy slowed. Mr. Xing sought to diversify, using his close ties with local officials to lease farmland and build apartment blocks, small dams, walnut plantations and a paved, solar lamp-lit road from the city to his home village. When coal prices collapsed, Mr. Xing’s company filed to restructure $5 billion in unpayable loans. The housing blocks are still concrete shells, and farmers say that the walnut plantations are not mature enough yet to harvest and that Liansheng owes them money. Mr. Xing was detained in March, and his whereabouts is unknown.

GE China CEO:

China is going through some fundamental changes. The next decade or two or three will be very different. If you look at some of the challenges the country is facing, they’re very much lined up with where GE’s core competencies are. Energy demand is going to continue to increase. Urbanization is going to continue. There will be more roads and more airports. There are definitely more people aging. Quality and affordable health care will be a big priority for the government. The point here is that, our portfolio and our technologies, they are a good fit…GE has over 18,000 employees in China today. Over 90% of employees are local…the direction the new administration is taking the country is the right one. They are trading the speed of growth for the quality of growth, shifting to more consumer-oriented growth.

Reuters:

China’s trade will grow 3.5 percent in 2014, implying the country will fall short of a current 7.5 percent official growth target, according to a report on the Ministry of Commerce’s website that was subsequently revised to remove the numbers. The initial version of the report published on the website on Saturday, which quoted Minister of Commerce Gao Hucheng, was replaced with a new version that had identical wording but with all the numbers and percentages removed…

Foreign direct investment will amount to $120 billion for the year, the earlier version of Ministry of Commerce report said, in line with official forecasts. The earlier version of the report also said outward non-financial investment from China could also come in around the same level. That would mark the first time outward flows have pulled even with inward investment flows in China, and would imply a major surge in outward investment…The earlier version of the report also predicted that retail sales growth would come in at 12 percent for 2014, in line with the current average growth rate.

Stratfor:

The rules that Beijing issued Dec. 22 will require local governments above the county level to create special departments for registering ownership and land use rights, housing and a variety of natural resources. They will mandate that local authorities keep entries electronically and in print and that they update them regularly. These records will then be subject to both central and provincial oversight. According to news reports, the regulations will require property owners to register their holdings with local authorities. Anyone found guilty of “abuse of power” or otherwise failing to fully disclose their holdings will be prosecuted…

the central government’s effort to expand a property tax scheme, which it is currently being piloted in Chongqing and Shanghai municipalities, to the national level. If effectively implemented, the effects of such a tax on China’s property markets would be manifold. Such a tax could provide a crucial supplemental revenue source for local governments, which are responsible for the vast majority of government-related expenditures in China today. Similarly placing a regular tax on homeownership would incentivize those who own more than one property to put their additional properties to productive use. Currently, homebuyers pay taxes at purchase but not thereafter. This means that many treat second and third homes as investments rather than as sources of income through rent. The new tax would create the basis for a more stable and sustainable rental market and curb extreme property speculation…

Beijing’s efforts to widen a municipal bond pilot program currently in progress in 10 regions and cities across the country will also be critical. By opening municipal bond markets, central authorities aim to create new ways for local governments to raise capital. This would allow these governments to repay outstanding debts and to cover new expenditures, further reducing their reliance on land sales for revenue generation. Beijing will need to implement bond markets and the national property registry in tandem over the coming years. This is essential. For a national property registry to be effective in curbing speculation, a municipal bond market must be in place. This would give investors new avenues for generating reasonable returns on their investments…

Opposition to these and other reforms still in the planning stages will run high. Most objection will come from local governments and a range of local-level actors — particularly property developers and speculators. Municipal governments will hesitate to carry out top-down reform initiatives that, in spite of long-term benefits, will likely result in direct revenue loss, slowing local economic activity and causing a rise in unemployment. Local government officials, too, are often directly and indirectly tied to property developers and speculators. Because of this, they will hesitate to carry out measures that either limit their own financial prospects or implicate them in illegal activity.

Stratfor addressed some related issues a few months ago. This is impressive stuff; these are difficult and complex changes. Obviously the changes are essential to getting to a self-sustaining economy and not the one that was 70% dependent on exports for success. Good luck!

Their trajectory and ours

Sunday, December 7th, 2014

On our flight to Hong Kong today, there was no internet, so what’s today’s American going to do? Read? Pshaw! We watched TV. One show was called Shades of Life, the Winter’s Fairy-tale episode. It’s a Horatio Alger story of a guy with a very tough childhood becoming a successful entrepreneur. He sure knows how to clean a toilet and polish an office; fortunately his wife (whose family seems to hate this guy at first) knows ppt and accounting and through pluck and luck and a number of bad rejections and false starts he creates a big building maintenance company. We also watched the film Two States. It’s about an MBA guy from Delhi and an MBA girl from Chennai who want to get married, but his Punjabi family can’t stand her Tamil Brahmin family and vice versa. They’re both intractable, and most of the film is about how to create enough peace so that there can be a wedding. At the end, enough problems are resolved so that an extraordinarily elaborate wedding takes place, and the flash forward at the end is about playing with the beautiful babies. (There were other entertainments that covered similar ground to these two productions.)

What struck us is that the TV show and the movie were, among other things, sermons; that’s a little strong but you catch the drift. The point of the Hong Kong story is that: life’s tough, and if you want to succeed, suck it up and keep trying. Indeed, at one point, the young wife, after yet another setback for hubby, actually says in English “Tomorrow is Another Day.” Hard to miss the point of that! The happy ending involves riches and a fabulous home and grounds. As for the Indian movie, well forget Murphy Brown — these guys refuse to even elope. The family issues absolutely have to be ironed out and there will be no wedding until that happens, and the notion that there might be kids on the side simply does not exist.

In contemporary America, would we be likely to often see a Horatio Alger story without a Hollywood sneer at an ending such as this one has? And as for the Indian movie, first click the Murphy Brown link above and let’s talk. 40-80% illegitimacy rates are insane because they lead to gangs, youth crime and violence for the boys and different but comparable disasters for the girls. But if you’ve watched CNN lately, it’s unlikely you’ve seen these important issues discussed. Much safer for one and all to wallow in the fetid swamps of victimhood than deal with the profound problem which is driving a stake into the heart of both personal and political self-governance.

It’s easy to imagine plentiful American versions of the Hong Kong and Indian shows in US theaters as well as prime time radio and TV 50-75 years ago. Are they still around much today? There’s more than one reason for that of course, and they doesn’t bode well for the future.

Been there, done that

Thursday, December 4th, 2014

Marketwatch (slightly edited):

It’s official: America is now No. 2…China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A. As recently as 2000, we produced nearly three times as much as the Chinese. To put the numbers slightly differently, China now accounts for 16.5% of the global economy when measured in terms of purchasing-power parity (PPP)

PPP? Where have we seen that before? Ah yes, we considered it at length a decade ago. (China has grown spectacularly in the last decade of course, but PPP is a little exaggerated compared to other measures.)

PS: doesn’t the reporter seem kind of happy about the story and headline?

4% growth?

Monday, October 20th, 2014

Bloomberg:

China’s economic growth will slow to about 4 percent annually after 2020 following decades of rapid expansion, according to the Conference Board.

China faces a “deep structural slowdown and broad uncertainty” in the decade ahead, the New York-based research group said in the report yesterday. China’s development model, based on state direction of capital and growth-fixated monetary policy, generated “deep seated” risks and imbalances, it said.

“The course of China’s growth has always harbored the potential for deceleration at least as rapid as its acceleration,” David Hoffman, vice president of the Conference Board’s China Center for Economics and Business in Beijing and a co-author of the report, said in a press release. “We are beginning to see the signs of this transformation take hold.”

China’s government has signaled it will tolerate slower economic growth this year by refraining from broad stimulus. Weighed down by a property slump, China’s gross domestic product probably expanded 7.2 percent in the third quarter, the slowest in more than five years

We’ll have much more to say about this after we have studied the report in question. 4% seems too low. But you know, cooked books of the past may be catching up.

Deflation here and there

Thursday, September 11th, 2014

Reuters:

China’s consumer inflation cooled more than expected in August, further evidence that the economy is losing momentum. Weak Chinese data had helped support markets on the bet that authorities would unleash new stimulus measures, but investors are becoming increasingly worried, said Eugen Weinberg, head of commodity research at Commerzbank in Frankfurt. “There’s no commitment yet from China to stimulate the economy in the short term,” he said. “Copper is the leading metal so it’s not surprising to see it coming under massive pressure with this overwhelming pessimism right now in the market.”

Three-month copper on the LME dropped to its weakest since June 20 at $6,770 a tonne before paring losses to close at $6,835 a tonne, down 0.5 percent. Adding to pressure on copper, the global refined copper market was seen flipping into a surplus. “The expectation of a surplus was postponed by a couple of different factors … but we still expect you’re probably going to see that by the end of the year,” analyst James Glenn of National Australia Bank in Melbourne said.

Aluminium was vulnerable to more losses, said Paul Adkins of consultancy AZ China in Beijing. “We feel the aluminium price is a little bit overbought at the moment. And we don’t see enough support from the fundamentals,” he told the Reuters Global Base Metals Forum. “All those restarted (Chinese) smelters are now starting to bring metal to the market and there is still 1 million tonnes of new capacity set to enter the picture through the rest of this year.” Commerzbank’s Weinberg said the metal was a candidate for a short position with a target of $1,900 a tonne by year end.

Deflation and devaluations also observed in language.

China’s productivity growth slows

Tuesday, September 2nd, 2014

WSJ:

“China is now at this critical juncture, and maybe has been for several years,” writes Harry X. Wu, a senior advisor to The Conference Board’s China Center and an economics professor at Japan’s Hitotsubashi University. “This explains the ongoing ‘soft fall’ slowdown in economic growth despite the government’s continued stimulus exercises and continuing high-levels of investment and supporting credit expansion.”

Mr. Wu argues in a Conference Board paper that China’s economic ascent may have been less miraculous than it appeared, with total factor productivity – a measure of an economy’s technological dynamism – badly lagging other Asian high-growth economies at a similar stage in their development.

China’s 1% average annual growth in total factor productivity between 1978 and 2012 – a period when average per capita annual incomes rose from $2,000 to $8,000 — compares with 4% annual gains for Japan during its comparable 1950-1970 high-growth period, 3% for Taiwan from 1966-1990 and 2% for South Korea from 1966-1990, he said, when purchasing power in the relative economies is taken into account.

“Our study shows that China’s spectacular growth in the reform period has been mainly investment-driven and quite inefficient,” Mr. Wu wrote.

A big problem, which often complicates efforts to assess the health of China’s economy, is the reliability of Chinese data. Using three measures of productivity, J.P. Morgan economist Haibin Zhu concludes in a research note that China’s total factor productivity grew 1.1% in 2013 from a 3.2% expansion in 2008. Mr. Wu draws on different methodology to argue that total factor productivity turned negative from 2007 to 2012.

China’s cooked books have been a problem for many years. Without explosive growth to cover up the issue, it’s going to be an interesting time shortly.

China’s restructuring challenges

Saturday, August 9th, 2014

Stratfor:

Chinese President Xi Jinping’s anti-corruption campaign is the broadest and deepest effort to purge, reorganize and rectify the Communist Party leadership since the death of Mao Zedong in 1976 and the rise of Deng Xiaoping two years later. It has already probed more than 182,000 officials…

China is in the midst of an economic transformation that is in many ways unprecedented. The core of this transformation is the shift from a growth model heavily reliant on low-cost, low value-added exports and state-led investment into construction to one grounded in a much greater dependence on high value-added industries, services and above all, domestic consumption. China is not the first country to attempt this. Others, including the United States, achieved it long ago. But China has unique constraints: its size, its political system and imperatives, and its profound regional geographic and social and economic imbalances. These constraints are exacerbated by a final and perhaps greatest limit: time. China is attempting to make this transition, one which took smaller and more geographically, socially and politically cohesive countries many decades to achieve, in less than 20 years.

The bulk of this work will take place over the next 10 years at most, and more likely sooner, not because the Xi administration wants it to, but because it must. The global financial crisis in 2007-08 brought China’s decadeslong export boom cycle to a premature close. For the past six years, the Chinese government has kept the economy on life support in the form of massively expanded credit creation, government-directed investment into urban and transport infrastructure development and, most important, real estate construction. In the process, local governments, banks and businesses across China have amassed extraordinary levels of debt. Outstanding credit in China is now equivalent to 251 percent of the country’s gross domestic product, up from 147 percent in 2008. Local governments alone owe more than $3 trillion. It is unknown — deliberately so, most likely — what portion of outstanding debts are nonperforming, but it is likely far higher than the official rate of 1 percent.

Despite claims that China’s investment drive was and is irresponsible — and certainly there are myriad anecdotal cases of gross misallocation of capital — it nonetheless fulfills the essential role of jumpstarting the country’s effort to “rebalance” to a new, more urban and more consumption-based economic model. But the problem, again, is time. China’s real estate sector is slowing. Sales, home prices and market sentiment are falling, even in the face of continued expansion of the overall credit supply. The days of high growth in the housing construction sector are numbered and prices, along with overall activity, are on a downward trend — one that can and will be hedged by continued high levels of investment and credit expansion, but not one that can be stopped for long. Real estate and related construction activity will remain the crucial component of China’s economy for the foreseeable future, but they will no longer be the national economic growth engines they were between 2009 and 2011.

This means that in the next few years, China faces inexorable and potentially very rapid decline in the two sectors that have underpinned economic growth and social and political stability for the past two or more decades: exports and construction. And it does so in an environment of rapidly mounting local government and corporate debt, rising wages and input costs, rising cost of capital and falling return on investment (exacerbated by new environmental controls and efforts to combat corruption) and more. Add to these a surge in the number of workers entering the workforce and beginning to build careers between the late 2010s and early 2020s, the last of China’s great population boom generations, and the contours emerge of an economic correction and employment crisis on a scale not seen in China since Deng came to power.

The solution, it would seem, lies in the Chinese urban consumer class. But here, once more, time is China’s enemy. Chinese household consumption is extraordinarily weak. In 2013, it was equivalent to only 34 percent of gross domestic product, compared to 69-70 percent in the United States, 61 percent in Japan, 57 percent in Germany and 52 percent in South Korea. In fact, it has fallen by two percentage points since 2011, possibly on the back of the anti-corruption campaign, which has curbed spending by officials that appears to have been erroneously counted as private consumption. There is reason to believe that household consumption is somewhat stronger than the statistics let on, but it is not nearly strong enough to pick up the slack from China’s depressed export sector and depressive construction industries. China’s low rates of urbanization relative to advanced industrial economies underscore this fundamental incapacity.

Whatever the Chinese government’s stated reform goals, it is very difficult to see how economic rebalancing toward a consumption- and services-based economy succeeds within the decade. It is very difficult to see how exports recover. And it is very difficult, but slightly less so, to see how the government maintains stable growth through continued investment into housing and infrastructure construction, especially as the real estate market inevitably cools. This leaves us with a central government that either accepts economic recession or persists in keeping the economy alive for the sake of providing jobs but at risk of peril to its reform initiatives, banks and local governments. The latter is ugly and very likely untenable under the current political model, which for three decades has staked its claim to legitimacy in the promise of stable employment, growth and rising material prosperity. The former is absolutely untenable under the current political model.

The pressures stemming from China’s economy — and emanating upward through Chinese society and politics — will remain paramount over the next 5-10 years. The above has described only a very small selection of the internal social and economic constraints facing China’s government today. It completely neglects public anger over pollution, the myriad economic and industrial constraints posed by both pollution and pervasive low-level corruption, the impact of changes in Chinese labor flows and dynamics, rising education levels and much more. It completely neglects the ambivalence with which many ordinary Chinese regard the Communist Party government.

CNN: Chinese President Xi Jinping has vowed to clean up the tarnished image of the Communist Party, pushing anti-graft campaigns and pledging to target “mosquitoes” — minor officials — as well as “tigers” — top officials…A report by the Ministry of Commerce cited in the English-language China Daily showed 4,000 corrupt officials had fled the country with at least $50 billion between 1978 and 2003.

2003? Just imagine how many expats and how many billions have fled since then. There is structural unrest in China as it seeks to make a very difficult transition. If push comes to shove, how do you quickly create unity and patriotic spirit? How do you spell Crimea in Chinese?

That mysterious bond market rally explained

Thursday, July 17th, 2014

WSJ:

Investors wrestling with the mysterious U.S. bond rally of 2014 got a clue about where to look: China…The yield on the 10-year U.S. Treasury note has fallen to 2.54%, from 3% at the end of 2013…

The Chinese government boosted its official holdings of Treasury debt maturing in more than a year by $107.21 billion in the first five months of 2014…Japan, the second-largest foreign owner of Treasury bonds, increased its note and bondholdings by $9.56 billion… the Treasury report isn’t a complete picture because it doesn’t account for China’s holdings at third-party custody institutions in other nations, such as the U.K. and Belgium…

China’s foreign-exchange reserves currently approach $4 trillion, the world’s biggest in size. China doesn’t disclose the composition of the reserves, but analysts say most are denominated in U.S. dollars…

“The big picture is that China buying may be helping to keep bond yields lower than they should be ahead of the Fed moving closer to raising rates,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. “The market could wake up and get quite a shock…if China changes course.” The risk for the U.S. economy, said Mr. Rupkey, is that any slowdown in Chinese purchases could push U.S. bond and mortgage rates higher, which would put “the fragile housing recovery in jeopardy.”

There’s an economic reason for China to be doing this of course. But you do have to wonder if it’s part of another strategy as well. We’ve seen China jab and retreat in Vietnam, and then there’s Japan. Wheels within wheels is our guess.

China’s growth rate reconsidered again

Wednesday, June 18th, 2014

WSJ:

Nearly every story about China’s extraordinary growth over the past 30 years asserts two things as a given: a). China has grown about 10% a year for 30 years and b). China’s long-term growth record in unsurpassed in modern history. A new report by the Conference Board says both of those assertions may be untrue. According to the report, written by economist Harry X. Wu, a senior advisor to the New York-based business research group, China’s economy grew at 7.2% a year between 1978 and 2012 — a rate far lower than what Beijing claims and nowhere near 10%…

What sets apart the Conference Board report is the length of time that Mr. Wu examines, which spans a number of rough economic patches for China. A great deal of the difference between the Conference Board data and official data reflects the years when China hit rough spots. In 2008, the year the U.S. financial crisis spread globally, Mr. Wu calculates that China’s economy grew 4.7% compared to China’s reported 9.6%. In 2012, when Europe was battered by recession, he estimates China’s GDP increased just 4.1%, compared to China’s reported 7.7%. The Chinese overestimates, he says, greatly affected the 30-year growth numbers. China’s statistics bureau didn’t respond to requests for comment.

Mr. Wu argues that China’s numbers especially diverged from reality after the country joined the World Trade Organization in 2001. That was a period, he says, in which “significant overcapacity was built in state-dominated and influence industries,” and localities competed fiercely to be top GDP dog and attract investment…

Mr. Wu argues that China overstates productivity growth and underestimates inflation, which tends to make inflation-adjusted GDP numbers –- the ones that get highlighted every quarter — higher than they otherwise would be. He also suggests that politics plays a big role, particularly the desire of local officials to exceed GDP targets, which have long been an important way to boost official promotion chances

No doubt the growth rate in China’s GDP has been impressive, no matter what the actual numbers are. However, always take note of the problems with PPP and bad loans, perhaps especially in the shadow banking system. Stay tuned.