China's economic crisis, explained

[Hellraiser007]

China

This spring, I spent three weeks traveling around China and needless to say, I, along with every other visitor, was impressed by the economic progress the Chinese have made in the years since the Cultural Revolution. Tens of millions have been moved from rural villages into megacities of gleaming skyscrapers, apartments, modern subways, and traffic jams of sleek, late model cars. The jams have become so bad that China’s major cities have had to implement restrictions on driving and on new car registrations.

There are of course downsides to this marvel which many believe will propel China into number one position in terms of economic and political power within a decade or two. On many days, the air in major Chinese cities is approaching lethality. Most rivers are cesspools, tap water is undrinkable, dangerous metals are building up in agricultural soil and starting to make their way into the food chain, and to top it all off nobody really gets to vote for leaders or on policy. The Chinese Communist Party rules with its own version of the “social contract” – shut up about “democracy, human rights, justice,” and all that western claptrap; let us rule as we see fit; and in return we are delivering world-beating economic growth so that someday you will all be rich.
n recent months, however, there has been increasing evidence that the good times may be in danger. One simply cannot grow an economy at circa 10 percent a year while ignoring the environment. Last winter air pollution in the major cities occasionally reached nearly 15 times the acceptable level. It is likely that thousands with respiratory problems died, but in China one does not talk about things like that.

The redeeming side of air pollution is that it affects rich and the poor, the powerful and the powerless alike, so that in recent months China’s new leadership vowed to take action against pollution after years of neglect in the name of economic growth. Remember that the US started passing clean air legislation in 1955 and got really serious with the EPA 43 years ago.
China’s pollution problem is rather simple; they now burn half the world’s coal – some 4.3 billion tons a year and 10 million barrels of oil a day. To cut pollution they have to cut coal consumption and at least put some controls on motor fuels, but to grow their economy at the targeted 7.5 percent a year, they almost certainly will have to increase coal consumption. Hydro, nuclear, and other renewables take too long to build or produce too little electricity. Something has got to go – breathable air or rapid economic growth.

This year another problem has arisen – China simply is not growing as fast as it used to. For weeks now the financial press has been wringing its hands over the lackluster numbers coming out of Beijing and their impact on the global economy. Although Beijing still claims to be growing its GDP at 7.7 percent a year, these numbers are becoming increasingly suspect. While the central government may see the merits of accurate growth statistics, those at lower levels have a great incentive to look as good as possible. Some recent numbers such as the growth in electricity production in the 1st quarter suggest that China’s economy may now be growing at a rate closer to three percent.

Part of the current problem dates back to 2008. In order to sidestep the effects of the global recession, Beijing undertook a $2.5 trillion stimulus program so that whatever was dear to local officials’ hearts was built with borrowed money no matter the economic benefit. Airports, apartments, high-speed rail lines, shopping malls sprang up everywhere. Many of these projects are seriously underutilized and are unlikely to ever pay back the money invested.

While the exact numbers are unknown, the debt acquired by China’s local governments is thought to be on the order of $2-3 trillion while much of debt has been off the books through "shadow financing." This surge in local government spending amounted to a Chinese version of America’s sub-prime lending debacle, except this one went for public works and apartment buildings rather than single-family housing.

Unregulated off-the-books "shadow banking," which has doubled in the last three years, is now thought to total some $6 trillion. Government officials are concerned that it is out of control. Last month efforts to clamp down resulted in a spike in inter-bank interest rates and fears of a liquidity crisis. Whether China has the tools to work its way out of all this without a major economic slowdown has yet to be seen — but many observers are worried.

Related article: Opportunities Abound in the Smart Power Sector – Interview with EDF

The impact on the global oil market of efforts to control pollution and unwind excessive debt could be considerable. For the last decade, Beijing has been increasing its demand for oil by circa 500,000 barrels a day or more in most years. Until recently projections had China’s demand for oil increasing at this pace indefinitely, surpassing US oil consumption by the end of the decade and buying up all the oil OPEC and other exporters can produce soon thereafter.

In last six months, however, reasons to rethink these projections are rising. Although China’s leaders want to grow their economy, the reality of un-breathable air should be enough to slow or even halt these ambitions. There are technologies out there which would allow China to produce increasing amounts of energy while maintaining air quality, but they will take years and much money to implement on the scale need to clean-up China’s air.

While chaos in the Middle East is threatening to curtail oil supplies from the region, the end of rapid growth in China is threatening to restrain a major source of increasing demand for oil. How these balance out and whether oil prices go up or down in the next few years remains to be seen.

 

[shuttler]

Indians don't keep savings in Rupee but in Gold. We have almost half the world's gold in private Indian hands. So, you first worry for the worthless US treasury bonds you have accumulated.

this is one of the reasons why ruupee drops like having a diarrhea!

 

[kena]

this is one of the reasons why ruupee drops like having a diarrhea!

partly... .........

 

[Hellraiser007]

I have pointed out the one of reasons. This is mid-July. still 45 days from end of September! fastern you seat belt!

You dont have enough economic knowledge to understand why a dropping ruupee will cause damage to your economy!

Is it??

China also undervalues its currency for its own advantages ...

 

[Uzair Younus]

Fact of the matter is that China has indeed witnessed a slowdown in GDP growth. All indicators, from export numbers to energy consumption (a figure used to measure industry activity) are declining over the last few months. Many attribute this to the consistent slowdown in Europe as well as the increase in Chinese manufacturing costs. Another major issue causing this is the relative strength of the Yuan against the Dollar as well as the depreciation in the Yen (Abenomics' monetary easing policy).
Now, it is but natural for all economies to go through a boom and bust cycle, this is how the world works. China has not had a bust in the last decade or so and this is the first real economic challenge that Chinese policymakers are facing since the great Chinese growth engine began to roar. Can the Chinese deal with this crisis? We do not know yet. However, evidence from China points to the fact that those in power are looking far ahead into the future. China is pursuing an aggressive policy of developing its cities inland and promoting growth and consumption in interior cities. These are not export-oriented regions and therefore promoting growth there goes to show that China is looking to turn into a consumption-focused society.
The recent liquidity crisis in China caused widespread fear, but the Chinese dealt with it rather well. They realize that there are structural and fundamental weaknesses in the economy. What they are doing now is cleaning up this mess and taking some pain, which is causing a slowdown of sorts. But it is better to deal with these issues now rather than wait for them to blow up in a major financial crisis (remember 2007-2008 in the US?).
We will know in a couple of years where China is headed, but if the country can restructure and deal with its economic weakness while maintaining stable economic growth (6-7%) the country will continue to do well.

 

[Hellraiser007]

The State Of The Chinese Economy In One Chart Of Luxury Watch Sales

Luxury brands in China are grappling with a worrisome trifecta.

1. Policymakers cracked down on 'gift giving' at the start of the year, as citizens got increasingly frustrated with official corruption. 2. The impact of the economic slowdown on consumption. 3. Chinese are traveling more, and making their luxury purchases abroad, benefiting from weaker currencies and lower taxes.

Swiss watches have been pretty hard. Back in May China said it would cut import taxes on Swiss watched by 60% over 10 years after the two nations sign a free-trade agreement.

In a new report, Deutsche Bank's Francesca Di Pasquantonio writes that "de-stocking in China is not yet over."

"The results of our analysis suggest that while globally exports should hold up reasonably well in a normalizing demand environment, we see de-stocking in China as not yet over, and in light of still poor sell-out indications in Q2 provided by industry players, we do not see a pick-up in supply to that region in the short term.

"However, when demand normalizes, a substantial positive impact on the supply side should be reported. This could happen earlier for other luxury spending categories, but in our view it will require a bit more time for the watch industry.'

The chart above looks at Swiss watch exports to Greater China, including Hong Kong, which accounts for 28% of Swiss watch exports. This luxury watch indicator if you will, shows China's slowdown registering since May 2012 in China, and September 2012 in Hong Kong.

Fact of the matter is that China has indeed witnessed a slowdown in GDP growth. All indicators, from export numbers to energy consumption (a figure used to measure industry activity) are declining over the last few months. Many attribute this to the consistent slowdown in Europe as well as the increase in Chinese manufacturing costs. Another major issue causing this is the relative strength of the Yuan against the Dollar as well as the depreciation in the Yen (Abenomics' monetary easing policy).
Now, it is but natural for all economies to go through a boom and bust cycle, this is how the world works. China has not had a bust in the last decade or so and this is the first real economic challenge that Chinese policymakers are facing since the great Chinese growth engine began to roar. Can the Chinese deal with this crisis? We do not know yet. However, evidence from China points to the fact that those in power are looking far ahead into the future. China is pursuing an aggressive policy of developing its cities inland and promoting growth and consumption in interior cities. These are not export-oriented regions and therefore promoting growth there goes to show that China is looking to turn into a consumption-focused society.
The recent liquidity crisis in China caused widespread fear, but the Chinese dealt with it rather well. They realize that there are structural and fundamental weaknesses in the economy. What they are doing now is cleaning up this mess and taking some pain, which is causing a slowdown of sorts. But it is better to deal with these issues now rather than wait for them to blow up in a major financial crisis (remember 2007-2008 in the US?).
We will know in a couple of years where China is headed, but if the country can restructure and deal with its economic weakness while maintaining stable economic growth (6-7%) the country will continue to do well.

After the recovery China will be no longer the manufacturing export oriented growth machine ,rather a giant with domestic consumption.
So we can easily say Chinese glorious decade is over.

 

[Hellraiser007]

Beware of investing in China, warns expert as country tumbles into crisis - Business News - Yorkshire Post

INVESTORS should be cautious about buying cheap shares in China, an Asia investment expert has warned.

Gary Dugan, chief investment officer for Coutts in Asia and the Middle East, said China had lurched into crisis, with falling gross domestic product (GDP) forecasts, expensive credit and no short-term props to growth.

He said: “At the heart of China’s crisis is the determination of the new government to bring much more economic discipline to the system and to rebalance growth away from (wasteful) investment and into consumption.

“However, this is a very delicate task that the economy has few effective levers to deal with.”

He added: “The bulls in the market are hoping that all of the recent turmoil in the financial sector was to an extent planned.

“Their theory is that the authorities are seeking to squeeze credit growth out of the system.

“The sceptics are concerned that the authorities are not in control and may be seeing consequences of their attempts to restrain lending growth that go far beyond what they had anticipated.”

Mr Dugan said earlier efforts to rein in lending to the real-estate sector had largely been ineffective in the regions, outside of Beijing.

“Central policies have not been implemented by regional governments; a reminder that a large part of regional government income comes from property development,” he said.

He added: “Chinese equities continue to look cheap, but we would caution that cheap valuations have never provided a consistently good signal of outperformance or absolute gains from the market.

“Like other major economies, China deployed enormous resources to fight off the impact of the global financial crisis.

“Like all countries, it is now coming to terms with the reality that even prior to 2007 economic growth was on the wane.”

He said: “The maturing of the economy means less employment growth, less productivity growth and fewer structural shifts that can boost GDP growth above a long-term sustainable rate of six per cent to seven per cent.”

 

[kena]

Fact of the matter is that China has indeed witnessed a slowdown in GDP growth. All indicators, from export numbers to energy consumption (a figure used to measure industry activity) are declining over the last few months. Many attribute this to the consistent slowdown in Europe as well as the increase in Chinese manufacturing costs. Another major issue causing this is the relative strength of the Yuan against the Dollar as well as the depreciation in the Yen (Abenomics' monetary easing policy).
Now, it is but natural for all economies to go through a boom and bust cycle, this is how the world works. China has not had a bust in the last decade or so and this is the first real economic challenge that Chinese policymakers are facing since the great Chinese growth engine began to roar. Can the Chinese deal with this crisis? We do not know yet. However, evidence from China points to the fact that those in power are looking far ahead into the future. China is pursuing an aggressive policy of developing its cities inland and promoting growth and consumption in interior cities. These are not export-oriented regions and therefore promoting growth there goes to show that China is looking to turn into a consumption-focused society.
The recent liquidity crisis in China caused widespread fear, but the Chinese dealt with it rather well. They realize that there are structural and fundamental weaknesses in the economy. What they are doing now is cleaning up this mess and taking some pain, which is causing a slowdown of sorts. But it is better to deal with these issues now rather than wait for them to blow up in a major financial crisis (remember 2007-2008 in the US?).
We will know in a couple of years where China is headed, but if the country can restructure and deal with its economic weakness while maintaining stable economic growth (6-7%) the country will continue to do well.

Its a pipe dream if China thinks that the Growth rate will be sustained even after a switch over to a largely internal consumption economy. Chinese are not spending freaks like the Americans who will buy all the unnecessary junk which China produces every year out of its massively bloated industrial capacity. The Chinese are the biggest savers in the world and their incomes are not really very high. If the exports crash, China will either be forced to close its factories and face massive unemployment or to invest in unnecessary infra and real estate ( Ghost Cities) and eat up its accumulated funds. ...Not pretty either way.

 

[asad71]

1. China is not the Soviet Union. China is a wise old civilization. It is foolish to imagine Chinese economy falling apart. In the gradual transformation from a socialist command economy to one of a mixed, Chinese leaders have shown a steady handling of affairs learning their lesson from the dismantling of the USSR.

2. PRC was formed under the Communist Party following the socialist route towards achieving a communist society. Private property was banned. Surplus production was disallowed. Trading in surplus production is anathema to the communist teaching. The question of allowing foreign capital into China was unthinkable.

3.But all these have happened - which must remain a marvel of our time. This has been possible because the Chinese are hard working and disciplined. Most important their leaders are patriotic, pragmatic, honest and wise - which make the people have total trust in them. With the gradual transformation, Chinese companies began producing fast. The market was mostly export since the local buying power had not come up to that level. But now Chinese consumers are able to absorb much of the nation's production.

4. However, meanwhile in the pipeline an inventory has developed between the factory out gate and the export terminal. Shops and warehouses can take only that much, but there seems to be quantities in the pipeline. A reason for this could be the lack of coordination between production and sales. Such a flap might have occurred owing to most of the Chinese corporations being govt or CPC owned. But this is not at all serious.

 

[Viet]

crazy to see how many India-China threads...you both are the best friends on earth.

 

[Nexus]

China is a $8.3 trillion economy growing at 8%.

India is a $1.8 trillion economy growing at 6%.

 

[StarCraft_ZT]

1. China is not the Soviet Union. China is a wise old civilization. It is foolish to imagine Chinese economy falling apart. In the gradual transformation from a socialist command economy to one of a mixed, Chinese leaders have shown a steady handling of affairs learning their lesson from the dismantling of the USSR.

2. PRC was formed under the Communist Party following the socialist route towards achieving a communist society. Private property was banned. Surplus production was disallowed. Trading in surplus production is anathema to the communist teaching. The question of allowing foreign capital into China was unthinkable.

3.But all these have happened - which must remain a marvel of our time. This has been possible because the Chinese are hard working and disciplined. Most important their leaders are patriotic, pragmatic, honest and wise - which make the people have total trust in them. With the gradual transformation, Chinese companies began producing fast. The market was mostly export since the local buying power had not come up to that level. But now Chinese consumers are able to absorb much of the nation's production.

4. However, meanwhile in the pipeline an inventory has developed between the factory out gate and the export terminal. Shops and warehouses can take only that much, but there seems to be quantities in the pipeline. A reason for this could be the lack of coordination between production and sales. Such a flap might have occurred owing to most of the Chinese corporations being govt or CPC owned. But this is not at all serious.

Well you are right. Friedrich Hayek once said that where there is no property right, there is no justice.

But media has appealed legislative protection of private property these years. In many chinese cities, private economy hold for more than 80% of the total economy. So it is time to protect private property, the only way to a developed and modern society.

 

[Truth Finder]

San Jose Mercury News?

China is a $8.3 trillion economy growing at 7.8%.

India is a $1.8 trillion economy growing at 4.5%.

You do the math.

SOME BITTER TRUTHS:-
1)Chinese economy grew @14% in 2007-08. Now it has come to 7% and moving more downwards.(check the Chinese Finance Minister's recent statements in Google.)

2)There is no prediction how worse it can get.

3) Indian economic growth is underestimated by 15% due to old procedures( Check Credit Swiss's website.)

4) Indian economy grew @5% during FY12-13.( Its worst was over in Q3 of FY 12-13 @4.7%) and it is on an upward move.(6% for FY13-14, 7% for 14-15 and 8%+ from 2015 according to all leading international research centres.)

5) Check the internet and you will not find a single optimistic news on china's economy.

6) Chinese exports are rapidly declining & manufacturing base is eroding. And no consumption story for china.

7) Prediction of World Bank( in 2010) was Indian growth will surpass China's by 2015. It seems that it will come sooner.(Do not mislead by saying that is was predicted to be in 2008 as the Chinese trolls lie on it in PDF)

8) Japan's gdp was $5 trillion in 1995 and in 2013 it is still $% trillion. So. don't get fooled by an upstart move.

 

[Truth Finder]

this is one of the reasons why ruupee drops like having a diarrhea!

That is why Chinese people are culled like chickens when they try to raise their voices against CCP (cut, copy & paste)

 

[StarCraft_ZT]

China's economic crisis, explained - San Jose Mercury News

SHENZHEN, China - To understand China's economy today, a local financial journalist recently told me, you need to picture a stool with three legs. We were having dinner, and he took a toothpick and one of the chopsticks from a serving dish to demonstrate.
One leg is investment, he said, propping up the chopstick. One is exports, he said, standing up the toothpick. And the other is consumption.
But the investment leg is too big, he continued, the export leg is broken, and the consumption leg is just a stump.
"The stool is very imbalanced," he said.
Simple as it is, this illustration gets at the heart of what's worrying many people about the future of the world's second largest economy.
After 30 years of meteoric, double-digit GDP growth, China's economy is at a crossroads. The main drivers - exports and infrastructure investment - have lost their punch. Meanwhile, low wages and high housing costs have made it impossible for Chinese consumers to fill the gap.
As a result, China's growth in 2012 fell to its slowest pace this century, and 2013 looks like it could be even slower. Last month, the International Monetary Fund lowered its projection to 7.75 percent growth from 8 percent, and UBS, Standard Chartered, and Bank of America have likewise lowered their predictions for the year.
Michael Pettis, professor of finance at Peking University, sees an even darker scenario, saying in a recent newsletter that his "expectation for long-term growth is that it shouldn't average much above 3-4 percent annually."
"Not only will China's real GDP growth drop as China shifts towards a different growth engine, but it will drop even more as China is forced to recognize the hidden losses buried in its debt levels," Pettis said.
China's leaders are well aware of these challenges, and have sought to manage expectations. In a speech at the end of May, Premier Li Keqiang told senior Communist Party officials that economic "complications are increasing," and that the government will have to step back and allow the private sector more power in the market.
"Scientific approaches are needed to ensure this year's social and economic goals," Li said, reiterating the government's target growth of 7.5 percent this year.
Yet even with these lowered expectations, the latest data have disappointed. In May of this year, China's exports, industrial production, and lending data all fell below analyst predictions.
In other words, the stool is starting to look shaky, and it's unclear what Beijing can do to fix it.
Take exports. With labor costs rising nearly 20 percent every year for a decade, China is no longer a low-cost paradise.
Add in an aging workforce and an appreciating yuan, and Chinese factories have become much less competitive. Labor intensive industries have begun to shift to Vietnam, Indonesia, and Thailand.
Then there's investment. China has long been the land of big government projects, especially after 2008, when Beijing deployed an estimated 4 trillion yuan ($652 billion) in spending to ward off a slump from the financial crisis. The countryside exploded with new train stations, airports, and apartment complexes. Analysts say many of these projects were ill-conceived. And now that they are built, there's even less the government can do to spur growth without risking additional waste.
"Across the board you've got overcapacity. Overinvestment. What that translates into is bad debt," says Patrick Chovanec, a longtime China watcher and chief strategist at Silvercrest Asset Management. "You can pump more money into the economy, but it's getting less and less of a result."
Or take consumption. China's middle class will eventually become the engine of its economy - as in America. But that transition is happening slowly, and insanely high housing prices in cities have suppressed people's ability to spend. At the same time, any fall in the real estate market could be catastrophic.
China's economic stool looks even shakier when you consider other factors. Debt is ballooning, and banks are being squeezed for cash. Last month, the inter-bank lending rate shot up to a high of 25 percent when the central bank warned that it would not step in to flood the market with liquidity.
Across China, city governments have issued dubious, high-interest-rate bonds to fund projects. The total amount of credit in China may now be more than twice the size of the economy, according to the China Securities Journal - nearly eight times what it was a decade ago. As a result, credit-rating agencies Fitch and Moody's both recently downgraded China's sovereign credit rating.
Remarkably, the mood among many Chinese remains very optimistic. Nearly 90 percent of Chinese people feel that the economy is doing well, according to a new survey of global attitudes by Pew. But Chinese analysts warn against complacency. Hu Shuli, the editor-in-chief of the financial magazine Caixin, recently argued that China should not wait for a crisis to start reform.
"To many Chinese, the fact that China managed to escape the worst impact of the global financial crisis is proof that its economic system is perfect," she wrote in an op-ed.
"This kind of view is harmful, because it blinds us to the deep-seated structural problems of China's economy, and how truly urgent comprehensive reforms and a transformation of China's economic model are."

Yes, regional government in China have always prefer real estate invesment to raise up GDP figure. Why? According to the tax-sharing system, central government is allocated 60% of taxes revenue while local and regional government is allocated only 40%. Just imagine, 40% revenues to conduct social affairs such as improving minimum wage, providing necessary education to children and subsidiary assistance to public hopital, college and transportation...... regional government has beared so large pressure by using only 40% revenues. While the purpose of fiscal expenditure from central government is never questioned and the the expenditure is approved, executed and monitered all by central government without segregation of dutie. So we cannot guarantee the appropriate use of cenral government expenditure to the right place. But india does not have a better situation than China in this area.

During the last a few years, China's steel and other building material industries have experience excess production capacity which cannot be consumed in the short term because government has banned access to high energy consumption and low productive natraul resources companies. But we will still carry on infrastructure construction becasue we have to consume the excess production.

Actually, we are transforming from a investment & export oriented economy to an endogenous growth with domestically innovated products, consumption and service industry.

What you say about inter-bank lending rate is true, I work in the bank, so I am very familiar with the situation.

Most of the money was lended to regional government to launch construction project and real estate project while they did not even seriously consider the real consuming power of people. Many of the road and real estate cannot bring a steady cash flow. No return, no revenue from excessive construction projects so regional government will bankrupt while central government have to pay the final bills for them. Many banks are experincing Money Shortage, so the interbank exchange rate rise to such high level. One of the bank even provide a free mac air book to attract deposit of yuan equals $ 100,000 USD.

Our PM Li Keqiang have determined to reform this area by forbidding Central Bank‘s Reverse-Repurchase Agreement which is a sign to support liquidity shrinkage. Because Li Keqiang insist to activite the currency in circulation while strictly control new currency into market, which will keep down the inflation rate and ease the pressure of regional government and banks. I am quite optimistic with his policies.