China’s Great Wall Of Debt

[cirr]

When will these poor foreigners have the slightest idea about China？

I guess the way China works is too complicated for these guilaos。

 

[Lure]

On a mobile, so no links or fancy charts this time. You and Viet are correct, in that China (and Japan) have the vast majority of their debt denominated in their own currencies, which means that the government has total control over the ability to repay or monetize debt. As Viet also points out, debt is not bad in itself, it is only bad if the return from the investment financed by the debt does not enable debt repayment.

That said, there are limits. The US also has its debt denominated in USD, but the ability to manage the debt doesn't mean it will not have severe consequences (see: the financial crisis). The least damaging way to manage the debt is for the central government to leverage itself (I.e. spend and increase debt/GDP) while corporations and households deleverage (what Ray Dalio calls "a beautiful deleveraging").

China has a low debt/GDP ratio, so this is possible. The problem is that the government spending will almost certainly be malinvestment (in other words, wasteful spending with low or no returns), since much has already been done to build out China's infrastructure and housing, and the corporate sector has already created too much factory capacity and oversupply. What then? That's the worry. That's what happened to Japan, and it resulted in several "lost decades" of growth.

There is no question that China can and will survive the debt build-up. But the credit super-cycle is coming to an end, and so is China's era of high growth. Will China glide into a soft landing and normal growth, or will it experience a 2008-style crisis with a slow, grinding recovery afterwards? Time will tell.

Yeah that's exactly the point. But there is a difference between Japan and China's case. When Japanese economy crushed it's GDP per capita in nominal terms was higher than US. Meaning it was a developed nation that has a very little room to grow other than innovation for new products or renovation of the existing infrastructure.

On the other hand, US GDP per capita in nominal terms is currently 8 times higher than China. Compared to regional economic engines, Soutk Korea is around 4 times higher and Japan is around 6 times higher.

That means China has still a lot more room to grow. Overcapacity of industry and wasteful infrastructure and housing spending made by previous administrations of China just for maintaining double digit growth should simply disappear as GDP per capita continues to grow. Because there will be demand for this oversupply sooner or later. China has a vast population that is hungry for consumption in a lot of means. At least that's what government relies on.

China slowing down it's growth is a very wise move. In market driven economies central banks makes estimation (coming from observartion) of how much the economy will grow. In China's case until now, government officials created goals for economic growth and used every monetary weapon that they can use to achieve this goal. If you want a robust economy government should audit the market and market itself should "decide" how much it will grow.

Now people would say that if it's so robust why does US has financial crisis. Because US government does not audit the economy effectively.

 

[feilong]

Vietnam reading Indian media news again? Lol, please read from world facts, not Indian BS media.

 

[LeveragedBuyout]

Yeah that's exactly the point. But there is a difference between Japan and China's case. When Japanese economy crushed it's GDP per capita in nominal terms was higher than US. Meaning it was a developed nation that has a very little room to grow other than innovation for new products or renovation of the existing infrastructure.

On the other hand, US GDP per capita in nominal terms is currently 8 times higher than China. Compared to regional economic engines, Soutk Korea is around 4 times higher and Japan is around 6 times higher.

That means China has still a lot more room to grow. Overcapacity of industry and wasteful infrastructure and housing spending made by previous administrations of China just for maintaining double digit growth should simply disappear as GDP per capita continues to grow. Because there will be demand for this oversupply sooner or later. China has a vast population that is hungry for consumption in a lot of means. At least that's what government relies on.

China slowing down it's growth is a very wise move. In market driven economies central banks makes estimation (coming from observartion) of how much the economy will grow. In China's case until now, government officials created goals for economic growth and used every monetary weapon that they can use to achieve this goal. If you want a robust economy government should audit the market and market itself should "decide" how much it will grow.

Now people would say that if it's so robust why does US has financial crisis. Because US government does not audit the economy effectively.

There is no natural limit to GDP/capita, Japan hit the wall because it was no longer able to use credit to expand its economy (real estate crash, zombie banks). US innovation in financial engineering, and competent clean-up after the savings and loan crisis and then the 2008 financial crisis meant that we are not subject to the same constraints.

On a side note, I am pleased you mentioned nominal growth, because on a real basis, Japan hasn't done so poorly.

As far as China's growth absorbing its oversupply, isn't that a paradox? That would require China's domestic demand to grow faster than supply, but because of China's high savings rate, mercantilist policies, repressive monetary regime, slowing economy, and high private debt levels, this will be a severe challenge.

That's why so many people are worried--China can't just export its way out of trouble this time, because it has already strangled its trade partners through its mercantilist policies, and the demand abroad (and more importantly, purchasing power abroad) simply is not there. To see another effect of mercantilism, look at how Germany has impoverished the EU withs its excessive trade surplusses.

It's effective of the CCP to spin the slowing growth as a choice, but there is no choice. When China is this large, it cannot sustain high growth. To whom will it export at the rates necessary to sustain that growth? The developed world is on its back. The emerging markets don't have the purchasing firepower. No, only China's domestic demand can absorb its own output, and that means credit-fueled consumption.

As I said previously, as long as the private sector delevers while the government engages in a spending binge, the economy will remain robust, even if private-sector delevering serves as a brake on growth. If the private sector doesn't take the opportunity to delever, that's when China is in danger of becoming a second Japan.

 

[Lure]

There is no natural limit to GDP/capita, Japan hit the wall because it was no longer able to use credit to expand its economy (real estate crash, zombie banks). US innovation in financial engineering, and competent clean-up after the savings and loan crisis and then the 2008 financial crisis meant that we are not subject to the same constraints.

On a side note, I am pleased you mentioned nominal growth, because on a real basis, Japan hasn't done so poorly.

As far as China's growth absorbing its oversupply, isn't that a paradox? That would require China's domestic demand to grow faster than supply, but because of China's high savings rate, mercantilist policies, repressive monetary regime, slowing economy, and high private debt levels, this will be a severe challenge.

Yeah exactly there is no natural predefined limit for GDP per capita but I use US economy as an indicator. I mean for post WW2 economic environment of the world, surpressing US in terms of nominal GDP per capita means you have a very "up to date" economy and you should make some difference (innovation) in order to push for more growth. Just like US does.

Japan was in that position after late 70's and still has comparable nominal GDP per capita with US. Meaning Japan collapsed it was already a developed country. That was my main point. Since China is not yet a developed country it has more room for maneuver. Of course size is bigger and that makes it much harder for them to enjoy "advantages(FDI, favorable economic environment for exports etc)" coming from abroad since the size of the "advantages" won't be big enough to finance the economy.

By the way another side note. Let me ask you an hypothetical question. If Country A is an economic superpower and the largest economy but country B has a nominal GDP per capita that is 3-4 times larger than Country A. Can country A still maintain an economic superpower position. Let me put it like this, if Japan did not collapse at 1995 and went on growing like there is no tomorrow, and eventually quadruples or triples nominal GDP per capita of US ( meaning surpess US as the biggest economy), would Japan become a superpower without an army? That's a very hard question that deserves a book to be written about.