Archive for the 'China' Category

Imagine what the real numbers might be

Thursday, July 18th, 2013


With the latest GDP data, China’s growth has slowed down in nine of the last 10 quarters. The government’s official growth target for 2013 is 7.5 percent, impressive by world standards but it would be the slowest pace in 23 years for China. The latest data showed the economy grew 7.6 percent in the first half of the year from a year earlier, just ahead of the full-year target. Analysts have cut their forecasts for 2013 full-year growth in recent weeks following a run of weak data and government comments on slowing growth. Ahead of Monday’s economic figures, they were mostly forecasting 2013 growth between 7 and 7.5 percent. Last week, customs data showed China’s exports fell 3.1 percent in June

Not good. The economy is seriously overleveraged, there are too many empty cities, exports are falling, and it now takes $3 of credit to generate $1 of growth, when it was 1:1 only a few years ago. Frankly, we’re not quite sure what policy options remain to deal with this.

Three Days of the Gondorff

Sunday, July 7th, 2013

The NYT reports on 1800 requests, zero denials, and all in secret:

the FISA court hears from only one side in the case — the government — and its findings are almost never made public. A Court of Review is empaneled to hear appeals, but that is known to have happened only a handful of times in the court’s history, and no case has ever been taken to the Supreme Court. In fact, it is not clear in all circumstances whether Internet and phone companies that are turning over the reams of data even have the right to appear before the FISA court.

Created by Congress in 1978 as a check against wiretapping abuses by the government, the court meets in a secure, nondescript room in the federal courthouse in Washington. All of the current 11 judges, who serve seven-year terms, were appointed to the special court by Chief Justice John G. Roberts Jr., and 10 of them were nominated to the bench by Republican presidents. Most hail from districts outside the capital and come in rotating shifts to hear surveillance applications; a single judge signs most surveillance orders, which totaled nearly 1,800 last year. None of the requests from the intelligence agencies was denied…

The officials said one central concept connects a number of the court’s opinions. The judges have concluded that the mere collection of enormous volumes of “metadata” — facts like the time of phone calls and the numbers dialed, but not the content of conversations — does not violate the Fourth Amendment, as long as the government establishes a valid reason under national security regulations before taking the next step of actually examining the contents of an American’s communications.

This concept is rooted partly in the “special needs” provision the court has embraced. “The basic idea is that it’s O.K. to create this huge pond of data,” a third official said, “but you have to establish a reason to stick your pole in the water and start fishing.”

Under the new procedures passed by Congress in 2008 in the FISA Amendments Act, even the collection of metadata must be considered “relevant” to a terrorism investigation or other intelligence activities. The court has indicated that while individual pieces of data may not appear “relevant” to a terrorism investigation, the total picture that the bits of data create may in fact be relevant, according to the officials with knowledge of the decisions.

Let’s see. All your internet information, all your phone calls, credit card charges, and your locations at the time, and all the same information about your counterparties, including secret, shared email accounts that serve as dropboxes for private communications. That’s how they got the goods on Petraeus and his girlfriend. It’s the Chicago Way after all, and think of what they have on reporters and editors, congressman and senators, businessmen and union heads, and everyone on both sides thinking about running in 2016. You doubt this? Come on.

It’s a good plot for a movie. Sort of Three Days of the Condor, apparently without the murders. But there’s something missing. Most of the commentary on potential abuse of the NSA’s comprehensive database has focused on political corruption. It’s a big story and a good story, and no doubt it is going on. But there’s a bigger and better plotline as well. Money. Imagine every hedge fund senior staff getting the scrutiny that Stevie Cohen and his crew get. The senior Wall Street types, every Fortune 500 CEO and BOD, the Silicon Valley VC’s, the PE moguls, etc. And oh yes, here’s where the international reach of the NSA comes in.

The NSA’s surveillance captures international corporate communications, those of the global Forbes 400, and places like Russia, China, Saudi Arabia, Switzerland, etc where insider trading and market manipulation are perhaps more the rule rather than the exception. Imagine knowing in advance that an investor was going to break the pound. Imagine knowing in advance what OPEC or the oil manipulators of 2008 were going to do. Or knowing about the bear raids on banks in 2007-2009 just before they happened. Do you keep the information or sell it to your unsavory friends? Who knows? We haven’t written the script yet, but we have a working title: Three Days of the Gondorff.

China: what happens when more lending is not an answer?

Saturday, July 6th, 2013

Deutsche Bank:

the authorities in Beijing are trying to bring some discipline back into the system following the conclusion of the leadership transition. The method which appears to have been chosen, namely to engineer a squeeze in the interbank system, does however strike us as an extremely blunt instrument, which runs the risks of unintended consequences.

Given that the ultimate stated objective of the new leadership is to increase the role of the private sector in the economy using a more market-determined cost of capital, it seems strange to then put pressure on precisely those medium-sized banks which conduct a disproportionate amount of lending with the only significant component of the indigenous private sector in China, namely the SMEs. This episode reinforces our conviction that the authorities in China face an almost insurmountable task to restore historic rates of productivity growth, in terms of complexity and the vested interests involved.

The major structural problem is the very blurred boundaries which exist between the state and private sector which distort capital allocation at enterprises above the SME level. The only way to resolve this situation over the longer term is for a complete overhaul of the fiscal relationship between local and central government, which would also involve wholesale changes to the fundamentals of land ownership…

the authorities in Beijing have a major problem of conflicting priorities, given that on the one hand they warn against adding more industrial capacity but on the other talk of the need for the banks to serve the interests of industry and to protect ‘labour intensive’ sectors of the economy. In the meantime, overcapacity is visibly growing in most sectors covered by DB analysts, while companies were complaining about difficulties in accessing credit, well before the PBoC action. We would expect to see clearer indications of more cash flow problems across different industrial sectors in China in the near future…

we believe that the improvement in the Chinese economic and corporate data, which has become evident since the end of August, is not sustainable’ and that ‘the Chinese growth story is starting to unravel’.

Through 2007, a dollar of credit generated a dollar of economic growth in China. Since then, it has taken three dollars of debt to generate a dollar of growth. But growth was the objective, so banks lent amounts approaching 100% of China’s GDP in order to make growth happen, much of it in building empty buildings and empty cities.

We are given to understand that the PSC runs China, and that the PSC used to be run by so-called technocrats, who were apparently happy to abet the build-to-prosperity model that worked very well for China 1989-2007. Now we understand that the new PSC composition is weighted in favor of princelings, party officials born 1945-1960 who have done very well indeed in the amazing post-1989 growth of the economy. They face a very difficult situation, in that the build-to-prosperity model is now broken, because it has resulted in overcapacity and overleverage at the same time. There’s no easy way out. Countries often look at currency devaluation as a fix, but consider the historical track records of Italy and Argentina, for example.

In the Middle East, things are unraveling and at record speed. In China, things seem about to hit a wall. Meanwhile, America sits on its hands, and the government tries to distract the Julia’s with things like SSM and silly fantasies about scary monsters. A strange time indeed.

Pointless, self-inflicted waste and suffering

Thursday, June 27th, 2013


Coal companies are expected to continue shutting higher-cost mines, bringing more economic pain to states like West Virginia and Kentucky. In the first quarter of this year there were 900 active coal mines, down 17% from a year earlier. The top 100 producing mines account for 80% of the U.S. coal supply…Last year, U.S. utilities burned 825 million tons of coal, down from 1.045 billion tons in 2007. Meanwhile, coal companies exported 126 million tons last year, up from 59 million tons in 2007. At the same time, China’s coal consumption soared to 4.33 billion tons last year, up from 2.97 billion tons in 2007. Global demand for coal is currently about eight billion tons a year. Officials in India, which uses coal to produce more than half its electricity, recently said they intend to boost coal imports

So let’s get this straight. US utilities burn 800 million tpy of coal. China was 3 billion and now is 4 billion tpy and soaring. So these new restrictions accomplish nothing except pointless, self-inflicted pain. Forget the flat earth society. Somebody is living in Fantasyland.

Dawn of the UCAV

Wednesday, June 26th, 2013

Defense News:

China has successfully produced and fielded a wide variety of tactical UAVs that operate at low to medium altitudes and in short to medium ranges. According to Hsu, tactical UAV systems constitute about 93 percent of Chinese UAV projects. The rest are devoted to strategic-level systems and UCAVs. However, this is expected to change. “In the long term, China’s continued interest and progression in strategic-level UAVs appear poised to position China as a leader in the high-end UAV market,” Hsu wrote.

The UCAV model on display at Paris follows the static display of an operational platform at the 2012 China Airshow in Zhuhai. Defense News attended the show and acquired AVIC brochures that indicated it had air-to-ground attack configurations, including “ground target designation” and “ground moving target indication” capabilities. Maximum payload was only 440 pounds. The Pterodactyl at Zhuhai was exhibited along with four weapons: BA-7 air-to-ground missile, YZ-212 laser-guided bomb, YZ-102A anti-personnel bomb and 50-kilogram LS-6 miniature guided bomb…

The multirole, medium-altitude, long-endurance BZK-005, now in service with the Chinese military, was developed by Beijing University of Aeronautics and Astronautics. The Northwest Polytechnical University, also known as Xi’an ASN Technology Group, is the “most prominent and prolific organization focusing on domestic UAV research and development” and holds about 90 percent of the domestic Chinese UAV market. “Thus far, it has delivered over 1,500 UAVs” to the Chinese military, Hsu’s report said.

A UCAV is an unmanned combat aerial vehicle. Unheard of 10 years ago, soon there will be tens of thousands of these creatures roaming the skies if current trends continue. Lethal drones may seem like a good thing if you’re the only one who has them; it’s quite a different story when they become commonplace.

Drone on, volume 2

Tuesday, June 25th, 2013

Popular Science:

The Switchblade is a one-use drone, powered by a quiet electric motor, that weighs about six pounds and flies up to 50 mph for 15 minutes. Switchblade carries a high-explosive warhead that can blow up everything within a 1-, 5-, or 7-meter range around the drone; it can take out an individual, or a truck. A high-resolution video camera in the nose allows a human operator to verify the target before detonating the drone. This is a far less destructive than the 20-pound warhead on the Hellfire missiles fired by Reaper drones, which can cause considerable collateral damage. Although they won’t give operational details, the Switchblade has received good reviews from users in Afghanistan, where the drone has been deployed since late 2012.

So we have tiny drones that can fly for 15 minutes and kill you, and big drones that can fly for 42 hours and kill you and a lot of other people. What happens when these things proliferate and everyone has them?

China: debt to GDP 221%, interest rates way up, efficiency of capital way down

Sunday, June 16th, 2013



total credit in Chinese financial system may have reached 221pc of GDP, jumping almost eightfold over the last decade. Companies will have to fork out $1 trillion in interest payments alone this year…“Liquidity conditions have tightened severely due to the crackdown on shadow banking activities,” said Zhiwei Zhang from Nomura. “We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy,” he said

Morgan Stanley: “Through 2007, creating a dollar of economic growth in China required just over a dollar of debt. Since then it has taken three dollars of debt to generate a dollar of growth. This is what you normally see in the late stages of a credit binge.” So is the spiking of interest rates in Shanghai.

It gets weirder

Monday, June 10th, 2013

The NYT from 2006:

HONG KONG, Aug. 6 — Pro-Beijing lawmakers approved legislation here today giving broad authority to the police to conduct covert surveillance, including wiretapping phones, bugging homes and offices and monitoring e-mail. The bill passed the 60-member Legislative Council on a vote of 32 to 0 soon after pro-democracy lawmakers walked out…the heads of security agencies are allowed to order less intrusive surveillance, like monitoring e-mail and phone calls through servers and telecommunications switches…The bill was particularly controversial because it does not prohibit covert surveillance of journalists and because it imposes only a few restrictions on covert surveillance of lawyers…Chinese agencies have tended to operate with considerable independence from the Hong Kong government and its institutions.

The Guardian on Snowden: On May 20, he boarded a flight to Hong Kong, where he has remained ever since. He chose the city because “they have a spirited commitment to free speech and the right of political dissent”. Huh? HT: LGF

A man who can keep secrets

Wednesday, June 5th, 2013


“Wang Huning still believes in Marxism, and he still believes that the party makes the correct choices. He doesn’t believe China should become a multiparty system or have division of powers.” Mr. Wang’s influence derives in part from having daily access to the Chinese leader. He has accompanied three successive presidents on almost every domestic and foreign trip of the past decade…

As head of the Research Office for the past 11 years, Mr. Wang has overseen the “brain trust” for the top leadership, giving policy advice, commissioning research and writing speeches and official reports. “Wang Huning is the biggest internal brains of the CPC,” or Communist Party of China, said Zhu Xufeng, a professor at Tsinghua University in Beijing who has studied the role of think tanks in the Chinese system. As a speechwriter, Mr. Wang would be evaluated based on how much his speech drafts had to be revised, Mr. Zhu said. “If it’s rarely revised by leaders, it’s good — you’re familiar with the leader’s thoughts”…

Mr. Wang’s political break came in 1995, when he was summoned to join the Research Office by then President Jiang, who had gotten to know him as Shanghai party chief in the 1980s and embraced his neoconservative views after the Tiananmen crackdown. Since then, Mr. Wang has played a role in almost every major political initiative…Friends and analysts described Mr. Wang as a workaholic and insomniac who is discreet and almost obsessively low-profile. Several friends said he had largely cut off communication with them since taking charge of the Research Office

China bear Jim Chanos: “The entire Chinese political system is tilted to the current model. Truly changing it will bring on a serious economic contraction. It remains to be seen if Xi/Li have the political will to risk that outcome as a by-product of reform.” Bank loans to GDP are 134% which is unsustainable. We wonder what Mr. Wang is advising.

Drone on

Saturday, June 1st, 2013


more than 75 countries have remote piloted aircraft. More than 50 nations are building a total of nearly a thousand types. At its last display at a trade show in Beijing, China showed off 25 different unmanned aerial vehicles.

The MQ-9, pictured above, is a serious aircraft. New versions will have 1K thrust engines, 88 foot wings, 12,000 pounds GTOW, and up to 42 hours of non-stop ISR flying. They can carry 14 Hellfire missiles or 4 of those plus two 500LB laser guided bombs. The technology is advancing very quickly in this arena, and soon there will be thousands of them flying globally. The current US order book is less than 500, but that will no doubt increase substantially. Oddly enough, we don’t recall ever hearing of the company that makes these aircraft before now. From the Google car to this, a brave new world.

Green around the gills

Tuesday, May 28th, 2013

Bret Stephens:

“China is pulling ahead on the environment,” was the title of a 2009 column in Forbes. “China is pushing ahead on renewable technologies with the fervor of a new space race,” Peter Ford reported in the Christian Science Monitor the same year. “Green Giant” was the title of a 7,000-word thumb-sucker by Evan Osnos in the New Yorker, which spelled out the scale of the Chinese government’s investment in green tech. And there was this: “Being in China right now,” wrote Tom Friedman of the New York Times in January 2010, “I am more convinced than ever that when historians look back at the end of the first decade of the 21st century, they will say that the most important thing to happen was not the Great Recession, but China’s Green Leap Forward. The Beijing leadership understands that the E.T. — Energy Technology — revolution is both a necessity and an opportunity, and they do not intend to miss it”…

The heady optimism of four years ago has now given way to more sober views, thanks to the accretion of facts. Facts like 16,000 dead pigs floating down Shanghai’s Whampoa river in March. Or the worst air pollution on record in Beijing in January, with levels of tiny particulate matter reaching levels 25 times higher than the standard in the U.S. Or 80% of the East China Sea lost to fishing because of the pollution, according to Elizabeth Economy of the Council on Foreign Relations. Or 1.2 million premature deaths due to air pollution

That Friedman bit is a dead giveaway, isn’t it? Try finding some safe drinking water in the countryside in China. Finally, in a nasty bit of irony, the wind turbines in the West are killing people in China.

From the department of good ideas

Monday, April 22nd, 2013

The NYT’s Friedman:

Until we fully understand what turned two brothers who allegedly perpetrated the Boston Marathon bombings into murderers, it is hard to make any policy recommendation other than this: We need to redouble our efforts to make America stronger…the best place to start is with a carbon tax. A phased-in carbon tax of $20 to $25 a ton could raise around $1 trillion over 10 years, as we each pay a few more dimes and quarters for every gallon of gasoline…It’s the only way to revive the country and a moribund Republican Party.

Imagine the nonsense you have to believe in order to write the words above. But then again, “to be in Tahrir Square tonight, to feel the energy and pride of a people taking back the keys to their country and their future from a tired old dictator, was a privilege.” QED.

Doubt creeps in

Wednesday, April 17th, 2013


Over the past 15 years air temperatures at the Earth’s surface have been flat while greenhouse-gas emissions have continued to soar. The world added roughly 100 billion tonnes of carbon to the atmosphere between 2000 and 2010. That is about a quarter of all the CO₂ put there by humanity since 1750…An unpublished report by the Research Council of Norway, a government-funded body, which was compiled by a team led by Terje Berntsen of the University of Oslo, uses a different method from the IPCC’s. It concludes there is a 90% probability that doubling CO₂ emissions will increase temperatures by only 1.2-2.9°C, with the most likely figure being 1.9°C. The top of the study’s range is well below the IPCC’s upper estimates of likely sensitivity. This study has not been peer-reviewed; it may be unreliable. But its projections are not unique. Work by Julia Hargreaves of the Research Institute for Global Change in Yokohama, which was published in 2012, suggests a 90% chance of the actual change being in the range of 0.5-4.0°C, with a mean of 2.3°C. This is based on the way the climate behaved about 20,000 years ago, at the peak of the last ice age, a period when carbon-dioxide concentrations leapt. Nic Lewis, an independent climate scientist, got an even lower range in a study accepted for publication: 1.0-3.0°C, with a mean of 1.6°C. His calculations reanalysed work cited by the IPCC and took account of more recent temperature data. In all these calculations, the chances of climate sensitivity above 4.5°C become vanishingly small. If such estimates were right, they would require revisions to the science of climate change

Common sense seems to be clawing its way towards the surface when things like this appear in the Economist.

Religion is religion, Science is science, and so forth….but not today

Thursday, March 14th, 2013



“Global temperature…has risen from near the coldest to the warmest levels of the Holocene within the past century” is not true. The coldest part of the Little Ice Age occurred about 400 years ago, during the Maunder Minimum, so right off the bat, their conclusion is flawed. They appear to be unaware of the cyclic nature of temperature change and use the low point of the 1880-1915 cool period as their starting point for assessing the rate of warming over the “past century,” rather than 1913-2013. Comparing the depth of cooling in a cool period with a warm period peak is comparing apples and oranges. It distorts the real rate, which should be measured from cool peak to cool peak or warm peak to warm peak. The 1880-1915 cool period was followed by the 1915-1945 warm period, the 1945-1977 cool period, and the 1978-1998 warm period. The rate of warming from 1913 to 2013 is about 0.7°C per century (which is about the same as the warming rate over the past 400 years as we have been thawing out of the Little Ice, long before atmospheric CO2 began to rise significantly).

The so-called elites believe in some things as ardently as the Aztecs and Incas did in now-unfashionable gods. They believe in these falsehoods for a lot of reasons, but one reason is that it confirms their being the apotheosis of human wisdom, a task made all the easier because technological progress reinforces their views that certain trends are profound and irreversible, and therefore they stand at the peak of humanity and wisdom. (The other reason is money of course.) And Oh how fashionable are their beliefs. Hubris. Pride goeth before the fall. It is stunning to watch the decline of skepticism among those whose North Star should be skepticism. This can’t end well. HT: PL

More economic warning signs from China

Thursday, February 28th, 2013

The head of emerging markets at Morgan Stanley Investment Management:

To keep China’s economy growing, panicked officials launched a half-trillion-dollar stimulus and ordered banks to fund a new wave of investment. Investment has risen as a share of gross domestic product to 48% — a record for any large country — from 43%…the amount of new credit generated annually has more than quadrupled to $2.75 trillion in the 12 months through January this year. Last year, roughly half of the new loans came from the “shadow banking system,” private lenders and credit suppliers outside formal lending channels. These outfits lend to borrowers — often local governments pushing increasingly low-quality infrastructure projects — who have run into trouble…

China’s total public and private debt has exploded to more than 200% of GDP — an unprecedented level for any developing country…if private debt as a share of GDP accelerates to a level 6% higher than its trend over the previous decade, the acceleration is an early warning of serious financial distress. In China, private debt as a share of GDP is now 12% above its previous trend, and above the peak levels seen before credit crises hit Japan in 1989, Korea in 1997, the U.S. in 2007 and Spain in 2008…

if private credit grows faster than the economy for three to five years, the increasing ratio of private credit to GDP usually signals financial distress. In China, private credit has been growing much faster than the economy since 2008, and the ratio of private credit to GDP has risen by 50 percentage points to 180%, an increase similar to what the U.S. and Japan witnessed before their most recent financial woes…

Alan Taylor examined the 79 major financial crises in advanced economies over the past 140 years and found that they are just as likely in countries that rely on domestic savings and owe little to foreign creditors. The bulls also argue that China can afford to write off bad debts because it sits on more than $3 trillion in foreign-exchange reserves as well as huge domestic savings. However, while some other Asian nations with high savings and few foreign liabilities did avoid bank crises following credit booms, they nonetheless saw economic growth slow sharply…

Japan used its vast financial resources to put troubled lenders on life support. Debt clogged the system and productivity declined. Once the increase in credit peaked, growth fell sharply over the next five years: to 3% from 8% in the 1970s and to 1% from 4% in the 1980s…

Through 2007, creating a dollar of economic growth in China required just over a dollar of debt. Since then it has taken three dollars of debt to generate a dollar of growth. This is what you normally see in the late stages of a credit binge

China’s credit binge seems rather similar to what the Fed has done with six years of QE. What happens when China’s borrowers can’t repay their loans and the bond market becomes less accommodating of Treasury bonds?


Monday, February 25th, 2013

What’s happening in this nondescript building in Shanghai?

Mandiant released a much-anticipated report Tuesday morning, offering the most detailed look to date inside the Chinese People Liberation Army’s direct involvement in hacking into American government and corporate websites. The PLA Unit 61398 is identified by the report as the most prolific hacking group inside the Chinese government. Dedicated to infiltrating English-language sites, the unit recruits English-language proficient speakers and experts in computer security, but otherwise scrubs any mention of its organization from Chinese-language websites. Operating out of a 12-story, 130,663 square foot facility in the Pudong New Area sector of Shanghai, its building is able to contain as many as 2,000 personnel. Special high capacity fiber-optics were installed by China Telecom when the building was constructed in 2007 and the outfit utilizes over 1,000 servers. In this three-year investigation, Mandiant documented Unit 61398 hacking into 141 companies (including 115 in the U.S.) across 20 industries, and stealing many terabytes of compressed data in sustained attacks averaging 356 days. The longest persistent attack documented by Mandiant lasted 4 years and 10 months. The largest recorded theft was 6.5 terabytes from a single company over 10 months. These attacks were just a small number of the total conducted by Unit 61398 and were conducted by individual hackers with online personas such as “Ugly Gorilla”

This has been going on for many years now, and so many of the details appear to be in the public domain. Wonder what we’re doing about it.

On the other hand….

Sunday, February 10th, 2013

Globe and Mail:

here are four reasons Chinese growth may be better than expected — from an unlikely source: Ian Russell, president of the Investment Industry Association of Canada. Mr. Russell took some notes from the recent Asian Financial Forum in Hong Kong, where he says delegates “were probably surprised” by the many presentations “pointing to an optimistic near-term outlook.”

Reason 1: Fears that China’s export sector will sputter due to a loss of competitiveness and rising labour costs are overblown. Sure, some lower paying work may migrate to poorer countries in Asia, but China is starting to move into more profitable, higher value-added manufacturing that requires skilled and more pricey labour.

Reason 2: A growing middle class numbering 300 to 400 million people will trigger substantial consumer and investment spending. A knock against China has always been that its economy is overly dependent on exports and investment. But China is changing quickly and growth is about to be boosted by the needs of its increasingly wealthy middle class.

Reason 3: China tightened the monetary spigots because of worries about inflation. But prices seem to be under control and the housing market has cooled. Residential construction could come roaring back to its traditional 40 per cent share of fixed investment from the currently depressed 35 per cent. This would add several percentage points to growth.

Reason 4: The government will boost stimulus spending should it be needed. Those fearful of a hard landing have to keep in mind that the government has shown itself to be adept at intervening at key points to keep growth buoyant.

This view contrasts sharply with the detailed analysis we pointed to the other day. Who is right? Hard to say. It’s interesting that the US is suing S&P for not warning the world that housing was about to collapse in 2006. That suit, which seems politically motivated for at least two reasons, will no doubt find emails and documents that question the sustainability of the housing boom. But, really, did you think that housing was about to collapse in 2006?

China’s credit bubble about to burst?

Tuesday, February 5th, 2013

This fascinating article explores the many problems with China’s credit bubble, a subject we return to from time to time. It makes the point (page 3) that government debt, adjusted for off-balance sheet liabilities, is 90% of GDP, not 30%. When will the wheels come off, if ever they will? The chart above suggests that bubbles have a way of bursting on a rather predictable schedule. We note this post from mid-2007 when the US housing and financial sectors were just about to unravel and we didn’t see it coming at all. These things are surprises for a reason.

Don’t worry, be happy

Friday, February 1st, 2013


American manufacturing is more dependent on metals and minerals access than ever before. Yet there is no country on the planet where it takes longer to get a permit for domestic mining. Among other consequences of this red tape, there are now 19 strategic metals and minerals for which the U.S. is currently 100% import-dependent — and for 11 of them a single country, China, is among the top three providers…The U.S. has domestic resources for 18 of those 19 metals and minerals we now exclusively import from abroad. But a maze of government regulations has made mining them here too difficult. That’s the consistent finding of the annual Behre Dolbear Country Rankings for Mining Investment, known in the mining world as the “Where-Not-to-Mine Report.” The U.S. is currently tied for last place (with Papua New Guinea) in the time it takes to permit a new mine — seven to 10 years on average.

The unemployment rate in ND, where all that fracking is taking place, is 3%, versus 7.9% in the US overall. Imagine what could happen to the US economy if we just stopped shooting ourselves in the foot.

History and predictions

Sunday, January 27th, 2013

From Zero Hedge:

By the early 1980s, Japan’s economic success was beginning to lead to unrealistic expectations about future prosperity. Many commentators, abroad as well as at home, used the ‘fool’s guideline’ of extrapolation to contend that Japan would, in the foreseeable future, oust America as the world’s biggest economy. The international expansion of Japanese banks and securities houses was reflected in the proliferation of sushi bars in New York and London. Boosted by the diversion of still-cheap capital from industry into real estate, property values in Japan soared, peaking at $215,000 per square metre in the prized Ginza district of Tokyo.

Comforted by inflated property values, banks made loans which the borrowers were in no position to repay. The theoretical value of the grounds of the Imperial Palace came to exceed the paper value of the entire state of California. Meanwhile, a soaring yen was pricing Japanese exports out of world markets.

Though comparatively gradual – mirroring, in true bubble fashion, the relatively slow build-up of asset values – the bursting of the bubble was devastating. Properties lost more than 90% of their peak values, and the government’s policy of propping up insolvent banks and corporations created “zombie companies” of the type that exist today in many countries. Having peaked at almost 39,000 at the end of 1989, the Nikkei 225 index of leading industrial stocks deteriorated relentlessly, bottoming at 7,055 in March 2009.

The Japanese economy was plunged into the “lost decade” which, in reality, could now be called the ‘lost two decades’. In 2011, Japanese government debt stood at 208% of GDP, a number regarded as sustainable only because of the country’s historic high savings ratio (though this ratio is, in fact, subject to ongoing deterioration as the population ages).

With hindsight, we now know that the Japanese asset bust was an early manifestation of the ‘credit supercycle’, which can be regarded as ‘the biggest bubble in history’. The general outlines of the super-cycle bubble are reasonably well understood, even if the underlying dynamic is not. To understand this enormous boom-bust event, we need to distinguish between the tangible components of the bubble and its underlying psychological and cultural dimensions.

Conventional analysis argues that tangible problems began with the proliferation of subprime lending in the United States. Perhaps the single biggest contributory factor to the subprime fiasco was the breaking of the link between borrower and lender. Whereas, traditionally, banks assessed the viability of the borrower in terms of long-term repayment, the creation of bundled MBSs (mortgage-backed securities) severed this link.

Astute operators could now strip risk from return, pocketing high returns whilst unloading the associated high risk. The securitisation of mortgages was a major innovative failing in the system, as was the reliance mistakenly placed on credit-rating agencies which, of course, were paid by the issuers of the bundled securities. Another contributory innovation was the use of ARM (adjustable rate mortgage) products, designed to keep the borrower solvent just long enough for the originators of the mortgages to divest the packaged loans.

We agree with the history regarding both Japan and the US. Pretty disturbing. With the MBS’s, mortgages became simply bundled bets, with the bookies the only ones sure to make money. A fool’s game, but apparently fun while it lasted.

As you would expect with an analysis of this sort, things are predicted not to end well in the credit super-cycle. There are lots of predictions (here and here for example) that China will go the way of Japan. We don’t know about that. As for the US, with its unique ability (so far) to print money or have the Fed finance Treasury borrowings, it’s hard to believe that this will end better than it did for Japan. We’ll see.