China: the world’s next great economic crash

[Free Tibet]

China: the world’s next great economic crash

By Gordon G. Chang / January 21, 2010
New York

Has the global economy recovered? Forecasters say there will be an uptick this year of 2.4 percent, but they’re forgetting something. China could fail soon, and, if it does, the world’s most populous state will drag the rest of us down.

At this moment, a Chinese crisis seems like the last thing we should be worried about. After all, last year China overtook America as the planet’s largest car market and passed Germany as the biggest exporter.

On Thursday, Beijing announced that growth for the fourth quarter of 2009 was 10.7 percent and 8.7 percent for the entire year. Some analysts said the numbers were so strong that the country zoomed past Japan to become the world’s second-largest economy. Stock markets, property prices, you name it: Everything Chinese is soaring.

Dubai was once soaring, too. Global markets therefore, shuddered in November at the news that Dubai World, Dubai’s state investment firm and biggest corporate debtor, had asked for an extension on its $59 billion of obligations. Troubles in the booming emirate had been evident for some time, but stock investors were nonetheless caught unawares, apparently thinking a default would not occur.

They were obviously wrong. Global markets, for the time being, got past the shock, in part because the emirate is small. China, on the other hand, is not. Legendary short-seller James Chanos, who predicted the failures of Enron and Tyco, calls the country “Dubai times 1,000 – or worse.”

Like Dubai at the beginning of last year, China is now reaching the peak of a bubble. At first glance, there is not much that connects the tiny city-state with the continent-sized nation. Yet both of them suffer from overexpansion.

China’s export-led economic model delivered spectacular growth in the post-cold-war period of seemingly never ending globalization and economic development. Yet global trade is now stagnant after dropping significantly last year. As a result of troubles abroad, Chinese exports declined 16.0 percent in 2009. There is little prospect for a sustained recovery this year.

Beijing, ignoring advice from Washington and other capitals, did not in the boom times try to restructure its economy to favor consumption. Instead, the Chinese government sought to take maximum advantage of then-surging foreign demand. The role of consumption, therefore declined – falling from a historical average of 60 percent of the economy to about 30 percent last year. No country has a lower rate.

To make up for slumping demand abroad and sluggish consumer spending at home, the State Council, the central government’s cabinet, announced a stimulus plan in November 2008. Beijing originally said it would spend $586 billion through 2010. In the first full year of the program however, it has directly and through state banks disbursed about $1.1 trillion in stimulus funds.

The plan, not surprisingly, is creating gross domestic product, but growth is an artificial “sugar high.” For one thing, Beijing’s stimulus spending last year was around a quarter of the total economy. Now, perhaps as much as 95 percent of China’s growth is attributable to state investment, as a Chinese analyst noted recently.

Despite the massive state spending, the country’s economy is not particularly robust. Power consumption statistics, a crucial indicator of economic activity, show the economy expanding at only two-thirds the announced rate.

Moreover, essentially flat consumer prices last year belie official reports of roaring retail sales. So does the full-year 11.2 percent decline in imports, another sign of sluggish domestic demand. And if the economy is really growing by double digits, why is Beijing insisting on continuing its stimulus?

Yet however fast the economy is growing, China’s policies are unsustainable. First, the central government will be hard pressed to find the money to continue the spending spree. Budget deficits are going up fast, a constraint on additional expenditures. More important, Beijing’s regulators are concerned that the state banks, the primary source of stimulus funds, are overextending themselves and accumulating bad loans.

New York Times columnist Thomas Friedman, however, thinks none of this will be a problem. Arguing that China is not the next Enron, he gives this advice to Mr. Chanos: “Never short a country with $2 trillion in foreign currency reserves.”

Yet Beijing’s record-setting reserves – now $2.4 trillion – are essentially unusable for this purpose. Why? China’s leaders need local currency, the renminbi, to deal with domestic needs. If they convert reserves into renminbi, they will cause the currency to zoom up in value and choke off the critical export sector. Foreign reserves have only limited uses in domestic crises.

Second, the state’s stimulus plan is taking the nation in the wrong direction. It is favoring large state enterprises over small and medium-sized private firms, and state financial institutions are diverting credit to state-sponsored infrastructure. Over the past three decades, China’s economy has expanded at an average annual rate of 9.9 percent because of the private sector, but now Beijing is renationalizing the economy with state cash.

Third, Beijing’s flooding of state enterprises with government cash will undermine their competitiveness, as a similar tide of money severely damaged Japan’s corporations during the bubble years.

Japanese managers discovered they could make more money managing cash than from anything else, and they therefore neglected their underlying businesses. Essentially the same thing is happening in China.

About a fifth of state bank loans have found their way into the country’s climbing stock markets, and another large portion is fueling property market bubbles. Worst of all, Macau casinos have enjoyed a recent boom, apparently attracting high-rolling Chinese cadres betting diverted stimulus money.

Finally, stimulus spending, as time goes on, becomes less effective in creating growth. The country already has one empty new city – Ordos in Inner Mongolia – and thousands of vacant facilities, especially shopping malls. New factories are underutilized.

For all its faults, the State Council’s spending program is just about the only thing generating growth at this moment. Unfortunately for the government, its plan is also creating imbalances and dislocations that will be difficult to handle this year.

Chinese officials, working in a state-led economy, once had the ability to defer problems. Yet the challenges they face have grown over time as they have pursued pro-growth policies instead of implementing structural change.

And that is why, when their growth policies run out of steam – as they soon will – China will become the next Dubai. Only bigger.

Gordon G. Chang is the author of “The Coming Collapse of China” and “Nuclear Showdown: North Korea Takes on the World.”

© 2010 Global Viewpoint Network/ Tribune Media Services. Hosted online by The Christian Science Monitor.

China: the world?s next great economic crash / The Christian Science Monitor - CSMonitor.com

 

[azfar]

I am sure you will have a good sleep for few days atleast.

and lols on comparing dubai's economy and conditions with china.

 

[brahmastra]

^^^ Don't shoot the messenger.

 

[Honor]

So far, China had been the engine of the world economy during this downturn.

If China failed, the world economy will be in great disaster.

 

[karan.1970]

So far, China had been the engine of the world economy during this downturn.

If China failed, the world economy will be in great disaster.

can't argue with that.. The 2008-2009 will seem like a walk in the park

 

[grey boy 2]

Rogers trains guns on Chanos for China remarks

By Andrew Moody Updated: 2010-01-19 07:53

American investment guru Jim Rogers has debunked contrarian investor James S Chanos suggestions that China's investment bubble may lead to a Dubai-style implosion. Rogers said the Chinese economy is not in any imminent threat of collapse, and investors and companies are wise to stay involved with it.

"It is absurd to say China is in a bubble when the stock market is 50 to 60 percent below its all-time high. If you have a bubble you have things going through the roof. You have everybody screaming fire every day," he said.

Chanos, a hedge fund investor who predicted the collapse of Enron, said speculation in China's real estate sector was 1,000 times worse than Dubai.

"His remarks show a lack of understanding about Dubai and of China. Dubai's economy is built on real estate speculation, whereas China's is not. It is just part of the Chinese economy," said Rogers.

He, however, warns that the world could be heading again for 1970s-style inflation.

Rogers, 67, lives in Singapore and is the co-founder of the Quantum Fund along with noted investor George Soros.

He said while concerted government efforts to bail out economies may have averted a depression, it would eventually lead to spiraling price increases.

"Whenever governments print a lot of money, you get inflation. That is the way the world has always worked," he said.
"I am sure inflation is going to go to levels seen in the 1970s, if not higher. It is not necessarily going to happen this year, but certainly over the next few years."

Rogers believes that the inflation risk would be more acute in China as exchange controls would trap funds and restrict outflows.

"It (the money) has only so many places it can go. You cannot go and buy a house on the (French) Riviera. More and more overseas Chinese investors would want to keep their money in yuan, as they know it would appreciate later.

Refuting claims that interest rates would need to remain low to avert potential deflation, he said central banks would have to hike rates in order to keep their economies under control.

"Governments around the world are going deeper and deeper into debt and this has got to be financed. Someone will have to pay higher rates eventually, " he said.

"Interest rates have already gone up to some extent. The US long-term government bonds market has already dipped beyond its low. The US government is trying to hold down interest and mortgage rates but there is only so much they can do."

Rogers, who last invested in China equities in October 2008, said he had no clear view on whether the recent rally in share prices in China and around the world would reverse.

"We are closer to some kind of top than we were and we are overdue for a correction. But are we going to have one? I don't know," he said.

Rogers said he would continue to invest in commodities, as demand continues to be strong.

"My investments have been mainly in commodities because if the world economy improves there are going to be shortages. If it doesn't improve, commodities are still the place to be in, as they (governments) are printing so much money," he said.

Rogers, whose latest book is A Gift to My Children: A Father's Lessons for Life and Investing, remains bullish about the prospects for the Chinese economy over the long term.

He believes the economic crisis could prove the catalyst for China to take over from the US as the next economic superpower.

"In the 1920s and 1930s there was shift from the UK to the US aggravated by financial upheaval and the same thing is happening now. We are in the process of a transition of economic power from America to Asia. It has been exacerbated by the financial situation," he said.

He believes that if China does become the world's dominant economic power again, it will have achieved something no other country has ever done before.

"Great Britain was great once, Egypt also once and Rome once too, but China will have done it four of five times. After 300 years of decline everything is coming together for China in the 21st century," he said.

 

[gogbot]

People have said China will fail before but CPC kept everything in Check.

I find it hard to believe that in a state where everything is so highly regulated. a crash can even happen.

 

[lockh33d]

China: the world’s next great economic crash

By Gordon G. Chang / January 21, 2010
New York

Has the global economy recovered? Forecasters say there will be an uptick this year of 2.4 percent, but they’re forgetting something. China could fail soon, and, if it does, the world’s most populous state will drag the rest of us down.

At this moment, a Chinese crisis seems like the last thing we should be worried about. After all, last year China overtook America as the planet’s largest car market and passed Germany as the biggest exporter.

On Thursday, Beijing announced that growth for the fourth quarter of 2009 was 10.7 percent and 8.7 percent for the entire year. Some analysts said the numbers were so strong that the country zoomed past Japan to become the world’s second-largest economy. Stock markets, property prices, you name it: Everything Chinese is soaring.

Dubai was once soaring, too. Global markets therefore, shuddered in November at the news that Dubai World, Dubai’s state investment firm and biggest corporate debtor, had asked for an extension on its $59 billion of obligations. Troubles in the booming emirate had been evident for some time, but stock investors were nonetheless caught unawares, apparently thinking a default would not occur.

They were obviously wrong. Global markets, for the time being, got past the shock, in part because the emirate is small. China, on the other hand, is not. Legendary short-seller James Chanos, who predicted the failures of Enron and Tyco, calls the country “Dubai times 1,000 – or worse.”

Like Dubai at the beginning of last year, China is now reaching the peak of a bubble. At first glance, there is not much that connects the tiny city-state with the continent-sized nation. Yet both of them suffer from overexpansion.

China’s export-led economic model delivered spectacular growth in the post-cold-war period of seemingly never ending globalization and economic development. Yet global trade is now stagnant after dropping significantly last year. As a result of troubles abroad, Chinese exports declined 16.0 percent in 2009. There is little prospect for a sustained recovery this year.

Beijing, ignoring advice from Washington and other capitals, did not in the boom times try to restructure its economy to favor consumption. Instead, the Chinese government sought to take maximum advantage of then-surging foreign demand. The role of consumption, therefore declined – falling from a historical average of 60 percent of the economy to about 30 percent last year. No country has a lower rate.

To make up for slumping demand abroad and sluggish consumer spending at home, the State Council, the central government’s cabinet, announced a stimulus plan in November 2008. Beijing originally said it would spend $586 billion through 2010. In the first full year of the program however, it has directly and through state banks disbursed about $1.1 trillion in stimulus funds.

The plan, not surprisingly, is creating gross domestic product, but growth is an artificial “sugar high.” For one thing, Beijing’s stimulus spending last year was around a quarter of the total economy. Now, perhaps as much as 95 percent of China’s growth is attributable to state investment, as a Chinese analyst noted recently.

Despite the massive state spending, the country’s economy is not particularly robust. Power consumption statistics, a crucial indicator of economic activity, show the economy expanding at only two-thirds the announced rate.

Moreover, essentially flat consumer prices last year belie official reports of roaring retail sales. So does the full-year 11.2 percent decline in imports, another sign of sluggish domestic demand. And if the economy is really growing by double digits, why is Beijing insisting on continuing its stimulus?

Yet however fast the economy is growing, China’s policies are unsustainable. First, the central government will be hard pressed to find the money to continue the spending spree. Budget deficits are going up fast, a constraint on additional expenditures. More important, Beijing’s regulators are concerned that the state banks, the primary source of stimulus funds, are overextending themselves and accumulating bad loans.

New York Times columnist Thomas Friedman, however, thinks none of this will be a problem. Arguing that China is not the next Enron, he gives this advice to Mr. Chanos: “Never short a country with $2 trillion in foreign currency reserves.”

Yet Beijing’s record-setting reserves – now $2.4 trillion – are essentially unusable for this purpose. Why? China’s leaders need local currency, the renminbi, to deal with domestic needs. If they convert reserves into renminbi, they will cause the currency to zoom up in value and choke off the critical export sector. Foreign reserves have only limited uses in domestic crises.

Second, the state’s stimulus plan is taking the nation in the wrong direction. It is favoring large state enterprises over small and medium-sized private firms, and state financial institutions are diverting credit to state-sponsored infrastructure. Over the past three decades, China’s economy has expanded at an average annual rate of 9.9 percent because of the private sector, but now Beijing is renationalizing the economy with state cash.

Third, Beijing’s flooding of state enterprises with government cash will undermine their competitiveness, as a similar tide of money severely damaged Japan’s corporations during the bubble years.

Japanese managers discovered they could make more money managing cash than from anything else, and they therefore neglected their underlying businesses. Essentially the same thing is happening in China.

About a fifth of state bank loans have found their way into the country’s climbing stock markets, and another large portion is fueling property market bubbles. Worst of all, Macau casinos have enjoyed a recent boom, apparently attracting high-rolling Chinese cadres betting diverted stimulus money.

Finally, stimulus spending, as time goes on, becomes less effective in creating growth. The country already has one empty new city – Ordos in Inner Mongolia – and thousands of vacant facilities, especially shopping malls. New factories are underutilized.

For all its faults, the State Council’s spending program is just about the only thing generating growth at this moment. Unfortunately for the government, its plan is also creating imbalances and dislocations that will be difficult to handle this year.

Chinese officials, working in a state-led economy, once had the ability to defer problems. Yet the challenges they face have grown over time as they have pursued pro-growth policies instead of implementing structural change.

And that is why, when their growth policies run out of steam – as they soon will – China will become the next Dubai. Only bigger.

Gordon G. Chang is the author of “The Coming Collapse of China” and “Nuclear Showdown: North Korea Takes on the World.”

© 2010 Global Viewpoint Network/ Tribune Media Services. Hosted online by The Christian Science Monitor.

China: the world?s next great economic crash / The Christian Science Monitor - CSMonitor.com

Hey pal, you forgot to answer my last question, it was:

"Are you the Da Lai Lama by any chance?"

In addition, I thought Indians accepted the fact the Tibet belonged to China. Hence, why such a name as the one you adopted here? This just makes your article much less trustworthy and more of a propaganda for the typical hysterical Indian.

Thanks

 

[Free Tibet]

So far, China had been the engine of the world economy during this downturn.

If China failed, the world economy will be in great disaster.

China contributes only about 7% of World's GDP how can you say that. BTW India contributes about 3% of World's GDP.

World's progress stops for no one.

Japan was the 2nd largest economy and fell from that place does it means world has go down with Japan.

Even before china world was there and after china's fall world will be there.

Come out of your dreams. Be real, it is for discussion and you should be more concerned about it.

 

[Free Tibet]

Hey pal, you forgot to answer my last question, it was:

"Are you the Da Lai Lama by any chance?"

In addition, I thought Indians accepted the fact the Tibet belonged to China. Hence, why such a name as the one you adopted here? This just makes your article much less trustworthy and more of a propaganda for the typical hysterical Indian.

Thanks

What Indians have accepted is of matter of another debate and no concern to me as an Individual i have right to have my opinion. And the Millions of people share this opinion.

If you want to close your eyes it is your own opinion how can one force a individual, if you don't want to trust a article from a reputed International media giant of US origin then don't, who is forcing you?

You have taken a note of this and written a reply shows you are scared of the possibility and want to assure yourself with false seance of security by saying it propaganda.

You can live in your dreams. And by your reaction you have exposed your face of a Han Chinese hiding behind a US Flag.

 

[chinapakistan]

No one can predicate futrue........ To predicate futrue on paper is fool.

A Nobel laureate in economics said In 30 years the Chinese economy "will reach US$123 trillion"... We chinese dont believe this, our futrue will be created by ourselves, we dont need any predication.
Chinese Economy 'to Hit $123 Trillion' in 2040-China Mining

BTW: I think a Nobel laureate in economics is more believable than a reporter.

 

[H2O3C4Nitrogen]

No one can predicate futrue........

with the latest supercomputers one can simulate economic collapse ...!

 

[Free Tibet]

No one can predicate futrue........ To predicate futrue on paper is fool.

A Nobel laureate in economics said In 30 years the Chinese economy "will reach US$123 trillion"... We chinese dont believe this, our futrue will be created by ourselves, we dont need any predication.
Chinese Economy 'to Hit $123 Trillion' in 2040-China Mining

BTW: I think a Nobel laureate in economics is more believable than a reporter.

Brother, no one is saying you to believe everything blindly but we should talk about it. Why shy away from it, if you think your fundamentals are strong.

But every reasonable person will agree that the article have some valid points.

And you should agree that no govt. can artificially valuate its currency and provide stimulates for Indefinite period.

Also as the working people grows old the liabilities will be more and the earning will be less.

As the people get used to comforts, per capita incomes growth they will want more freedom like religion, elect and speak.

You can dictate a crowd of poor but not of riches. And in the results there will be unrest and rebels apart from the ethnic unrest. Then there is angel of uneven distribution of wealth etc.

So, read agree or disagree.

 

[Honor]

China contributes only about 7% of World's GDP how can you say that. BTW India contributes about 3% of World's GDP.

World's progress stops for no one.

Japan was the 2nd largest economy and fell from that place does it means world has go down with Japan.

Even before china world was there and after china's fall world will be there.

Come out of your dreams. Be real, it is for discussion and you should be more concerned about it.

China is the biggest export market for Japan, Korea, Taiwan, Australia...etc

Their growth depends upon China now.

Sweet dreams? You bet!!!

 

[oct605032048]

扯淡
China‘s gdp is 4 times larger than your indian papa's.