Archive for the 'China' Category

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.

Well, what did you expect?

Wednesday, May 14th, 2014

WaPo editorial:

With a $1 billion oil rig the size of a football field, China has literally laid down a new marker in its ambition to dominate the South China Sea — and challenged President Obama’s “rebalancing” policy in Asia, only weeks after the president’s tour of the region. The rig is about 130 miles off the coast of Vietnam, in waters that Vietnam claims as an exclusive economic zone under international law. China’s claim is more tenuous, but it is backed up with a flotilla of some 80 ships that for a week have engaged in a dangerous contest of ramming and water-hosing Vietnamese vessels.

The message of the deployment is as simple as it is provocative: The regime of Xi Jinping intends to unilaterally assert China’s sovereignty over almost all of the South China Sea without regard for the competing claims of five other countries or Mr. Obama’s newly restated commitment to uphold defense agreements with two of those nations. In that sense, the rig, like Russia’s invasion of Ukraine, is a fundamental challenge to the international order the United States has tried to preserve since the end of the Cold War.

China’s ambitions are described by an audacious map, dating from the pre-Communist era, that claims some 80 percent of the South China Sea and a number of island chains or waters also claimed by Japan, the Philippines, Taiwan, Brunei and Indonesia, in addition to Vietnam. For years Beijing has talked with those countries and others in Southeast Asia about establishing a code of conduct for the sea, and it discussed the possibility of joint development of oil and gas with Vietnam a few months ago.

The move of the oil rig appears to reflect a calculation that a more aggressive policy will not meet meaningful resistance from China’s neighbors or the United States.

Wretchard: “The West is transfixed, stunned by its own toxic cocktail of lies. That we will wake up is inevitable. The danger is that if we remain asleep too long, the world may already be burning by the time we look out the window.” For most of two generations, the universities have been obsessed with creating a strange alternative narrative of the US and western history. They teach rubbish and worse. With some exceptions, only the geezers know the real story, and they are now mostly shouted down and persecuted by know-nothings.

Cancelled, with malice aforethought

Tuesday, May 13th, 2014

We seem to be in an era of hating the past and hyping the future, a recipe for disaster. Huh? — “those who opposed Lagarde said they were attacking the IMF for being ‘a corrupt system’ that fuels the oppression and abuse of woman worldwide.” Funny/sad comments here. Finally, Ruth Wisse speaks for the geezers, the only Americans who seem not to have lost their minds. The young and their mentors in the faculty lounge have created disaster — the question of whether it will be the disaster of the 1930′s or 1970′s is still open…

Reality bites

Friday, May 2nd, 2014

Bonior. And Dude! We have referred to the faculty lounge, but it’s more like the way college freshmen used to be. Read Steyn to get really depressed.

The gums of August

Wednesday, April 30th, 2014

You know there’s a serious situation when not only VDH and Wretchard are alarmed at the feckless or non-existent US foreign policy, but so is the head of the CFR. In part we suppose this was to be expected, since the faculty lounge is all about words and not deeds; thus you get a red line here and an apartheid there and no matter. And it’s not just the senior faculty. The TA’s are writing both the blah-blah and the cover-up memos, and truth be told, they don’t know very much. So we’ve wound up in an easily foreseen terrible place, and in the next couple of years we will learn what China and Russia would do in a world unfettered by the presence of the USA.

Leave the gun, take the hashtag

Sunday, April 27th, 2014

It is inconceivable that a picture such as this (and the caption) would come from the US State Department until these serious/trivial times, and we’re not talking about the technology of it all. Some appropriate mocking commentary is to be found here. Tick, tick, tick. Oh, yes, in these times the bizarre and gaudy take center stage until the more bizarre and gaudy thing comes along.

Final point: nice piece by Conrad Black on Steyn/Mann.

Ambiguity, how nice!

Saturday, April 26th, 2014

AEI:

“we don’t take a position on final sovereignty determinations with respect to Senkakus.” This has been longstanding US policy…it does introduce a bit of ambiguity into the security guarantee.

Indeed it does with 3 countries claiming ownership. You’d think that this might be a good occasion to duck questions and refer them to the State Department for repetition of policies of long standing. Ah, well. (They’re all playing us, because they know how easy and how much fun it is — wait ’til they get to something really serious.)

Up a notch

Friday, April 25th, 2014

The US has drawn a Red Line around the Senkaku Islands, controlled by Japan but claimed by China, and the line was drawn personally by the LDIC. NYT:

the disputed islands fell under the United States-Japanese mutual defense treaty. “And we oppose any unilateral attempts to undermine Japan’s administration of these islands,” he said in a written response to the newspaper, The Yomiuri Shimbun. A Chinese Ministry of Foreign Affairs spokesman, Qin Gang, said Wednesday that China was “firmly opposed to treating the U.S.-Japan security treaty as applying to the Diaoyu Islands.”

“The United States should respect the facts, in a responsible manner abide by its commitment not to choose sides over a territorial sovereignty issue, be cautious on words and deeds, and earnestly play a constructive role for peace and stability in the region,” Mr. Qin said during a news conference.

Encounters between military vessels in the region have prompted concerns about the risk of escalation. Last year, a Chinese Navy vessel cut within about 100 yards of the Cowpens, an American cruiser that had been monitoring China’s aircraft carrier, the Liaoning, in the South China Sea.

Chinese and Japanese vessels in the East China Sea have also had several potentially dangerous encounters in recent years. In 2013, Japan said Chinese warships used radar that helps target weapons on a Japanese military vessel and a helicopter near the disputed islands. In an interview on Tuesday, the day the rules were approved, Adm. Wu Shengli, the commander in chief of the Chinese Navy, said the tensions with Japan remained serious and the risk of incidents at sea persisted.

“Nothing can be excluded,” Admiral Wu said in the interview with Phoenix Television, a satellite service based in Hong Kong. “That’s what we often call accidental discharge when cleaning a gun. The gun is an objective fact, but what we need to study is how to avoid accidental discharge when cleaning a gun.”

We see a pattern forming as we noted the other day. Wretchard has more of course. The question has become, not whether dangerous adventurism will take place over the next two years in the Pacific, but what form it will take.

Maybe just a coincidence, but…

Tuesday, April 22nd, 2014

National Post:

A Chinese court has ordered the seizure of a Japanese ship as compensation for the loss of two ships leased from a Chinese company before the two countries went to war in 1937. The 226,434-ton Baosteel Emotion, owned by Mitsui OSK Lines Ltd., was impounded on April 19 as part of a legal dispute that began in 1964, the Shanghai Maritime Court and Mitsui OSK said in notices on their websites. The move is the first time a Chinese court has ordered the seizure of Japanese assets connected to World War II…

The legal dispute over the ship comes as Japan and China spar over islands both countries claim in the East China Sea, and over Japan’s wartime aggression. Prime Minister Shinzo Abe sent an offering to the Yasukuni Shrine in Tokyo, following the visits this month of two cabinet ministers to the site that honours Japan’s war dead, including World War II criminals.

We saw massive Chinese anti-Japan demonstrations a decade ago based in large measure on WWII, so in one sense there is not much to see here. But you can’t help wondering whether this seizing of assets also reflects in part Ukraine syndrome, which also seemed to be on display in Chuck Hagel’s recent visit to China.

Through a glass darkly no more

Thursday, March 20th, 2014

Scott Johnson has a Tough Guy vs. Wimp visual that is pretty funny but misses an important point. The so-called wimp can be a tough guy — here and here are evidence as to whom he despises and is more than willing to act against. This is consistent with the standard religion of leftism by the way, that the US is an imperialist bad actor that has created enemies abroad and repression at home. Exactly what the faculty lounge is all about, but quite a bit more intense and ruthless. (BTW, these fellows and gals are often seriously lacking in historical knowledge, but they fill in the blanks with ideology; after all, truth isn’t about truth, it’s about a technique to get power to enforce equality of outcomes.)

Ah, but how did we get so far away from the America many of us know in our bones? The answers are the university and the media. 3% of Yale donations went to Romney, which is pretty good, by the way. The media are 12-1 against conservatives, which we think slightly understates the case. Still, it’s kind of shocking that things have gotten this bad this fast; yet we only have to look back to the cases of Iran and Honduras to see that the pattern was fully formed and evident years ago. But still, this far this fast? Well, citizens, pause to consider a breathtaking exercise in projection from five years ago, and consider what, unfettered, this level of narcissism has wrought. And there you have it, this far this fast…

“Sometimes-inefficient”

Friday, March 14th, 2014

NYT:

For industrial output, the expansion of 8.6 percent for the two months, compared with the same period last year, was the weakest since April 2009. Retail sales growth, at 11.8 percent, was the weakest since early 2011. Investment in fixed assets rose 17.9 percent, the weakest pace in more than a decade. The January and February figures were grouped together to reduce distortions from the Lunar New Year holiday, which moves from year to year and can fall in either month. To some extent, the slowdown in China’s growth is the result of deliberate engineering by policy makers. Beijing realizes that the economy must shift away from exports and heavy manufacturing, and toward consumption-led growth,. At the same time, it is trying to rein in the sometimes-inefficient lending that has taken place during the last few years

Sometimes-inefficient lending? Could this rather inappropriate delicate tone have anything to do with China’s kicking NYT reporters out of the country?

Final point: check out the CSFB chart in this piece.

China brain teaser

Saturday, March 8th, 2014

As we were just saying, China is predicting lower growth and (at last!) slower secular fixed asset investment. Now it turns out that China has had its first domestic corporate bond default in recent memory — yes it was on one or another of Solyndra’s Asian relatives.

Mostly to date credit problems have been masked by the country’s mind-boggling shadow banking system that has tried to insulate the economy from post-2008 world economic problems. None of that taxes the brain, and we’ve covered related topics for years. But here’s a doozy: if you can figure out this infinite-loop-copper-trading-L/C scheme that apparently doesn’t require physical copper — well, more power to you. We’ll try to figure it out on our next long flight; if we do, we’ll report back.

China’s growth target 7.5% and lower fixed-asset investment

Friday, March 7th, 2014

Guardian:

In an annual parliament meeting that began on Wednesday, premier Li Keqiang said China aimed to expand its economy by 7.5% this year, the highest among the world’s major powers…China’s economic planner, the National Development and Reform Commission, told parliament the government will target 17.5% growth in fixed-asset investment this year, the slowest in 12 years. Investment is the largest driver of China’s economy and accounted for over half of last year’s 7.7% growth by rising 19.6%

And check out slides 3 and 4 of the presentation linked here. Slower is still fast.

Pow Zoom to the Moon

Wednesday, March 5th, 2014

No not the Honeymooners routine. NBC: “NASA astronauts cannot get to and from the station without Russian help, due to the retirement of the space shuttle fleet.” What’s Plan B?

Bonus question: what is China planning?

Gas attack

Tuesday, March 4th, 2014

What passes for wisdom today: “in the old Westerns or gangster movies, right, everyone puts their gun down just for a second. You sit down, you have a conversation; if the conversation doesn’t go well, you leave the room…if you look at Iranian behavior, they are strategic, and they’re not impulsive. They have a worldview, and they see their interests, and they respond to costs and benefits.” Fellow sure likes the sound of his own voice, and he’s far from alone in his naïveté. It’s what they really believe inside the beltway, the media, the media, and the academy. There’s a war on, but only one side is fighting.

Reality versus fantasy again

Sunday, February 23rd, 2014

Wretchard:

Ladies and Gentleman, I bring you Professor Arithmetic and Engineer Murphy. Screw up and stuff happens. America has been screwing up and therefore Q.E.D. Of course none of these turnabouts should surprise us. The Soviet Union (remember them?) were going to take over the world all the way up to the moment it collapsed. How could they have collapsed when they had the KGB, the Red Army and half the papers in their pocket? Well they were overmatched. Dr. Evil, however powerful he imagines himself to be, always loses to God, Reality, Professor Arithmetic, Engineer Murphy — whatever you want to call them, because that’s the way things work. But before anyone breaks out the champagne, remember this doesn’t mean that “we” will always win. We are not always on the side of reality. The disaster visited on Chavez might just as soon overtake anyone who thinks he can print and inflate his way out of economic destruction. We will share their fate should we imitate their corruption, because reality doesn’t understand “too big to fail”. The world is partial to competence; as mathematics is partial to correctness; as natural selection favors the survival of the fittest. People knew that once.

At some time in the fairly recent past, truth stopped being a virtue. It was replaced by daft utopianism. The US can go further away from reality than most countries, courtesy of the reserve status of the dollar. But that doesn’t mean there won’t be a day of reckoning.

Numbers, numbers, who’s got the numbers?

Wednesday, January 29th, 2014

China Post:

In an article last Thursday titled “The enigma of China’s GDP statistics,” Xinhua said: “After the National Bureau of Statistics on Monday unveiled economic data for 2013, what grabbed the most attention was not only the 7.7-percent annual growth figure, but also a somewhat peculiar math problem.” While the country’s GDP amounted to 56.9 trillion yuan, or US $9.3 trillion dollars, Xinhua pointed out, the aggregate of the provincial GDP figures exceeded the national figures by 2 trillion yuan — with three of 31 provincial-level bodies not having reported their figures yet.

This phenomenon is not new. As Xinhua said, “the combined economic output of China’s provinces has long exceeded that of the national level compiled by the NBS.” The reasons are “overlapped calculation” and “price divergence” among different regions and “GDP obsession” of local officials.

“Due to local officials’ obsession with governing performance, the local figures will be more or less overblown,” Cong Liang, deputy head of the department of national economy of the National Development and Reform Commission, said at a press conference. “The NBS is working hard to correct this.” Hitherto, each year, local officials have been assessed on the basis of the increase in GDP in their localities. Thus, there is a huge incentive for officials to focus on increasing GDP regardless of any adverse effect and, in fact, to overstate GDP growth.

WSJ, quoting Lombard: “China’s economy grew just 6.1% in the fourth quarter of 2013…That compares with the 7.7% fourth-quarter increase reported by China’s statistics bureau.” When China’s was growing 10% a year give or take, the massive cooked books issue was less of a problem. In a 6% growth environment, it’s a different story. And remember, even this lower growth rate is part fantasy.

Bright lines, perilous times

Sunday, November 3rd, 2013

The NYT is still happy, though concerned that their man “misspoke” two dozen times or so. The AP is running news that was unthinkable five years ago, and ABC is mocking their erstwhile messiah. A line has been crossed, the line demarcating the limits of political BS.

So now we have a world where Saudi Arabia, Syria, Russia, Iran, Israel, Germany, England, and most of the rest of the world don’t believe a word the BS-er in chief says, along with at least the half of the USA that is paying attention — and that number seems likely to grow. Only the NYT and its followers, parts of the Washington press corps, and faculty lounges take the college professor seriously now. Everyone who wants to know now knows that a bright line has been crossed, and as a consequence we live in perilous times for the next three years or so.