China now greatest threat to world's economy.

[Cry Havoc]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6575883/China-has-now-become-the-biggest-risk-to-the-world-economy.html


China has now become the biggest risk to the world economy

"The inherent problems of the international economic system have not been fully addressed," said China's president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.

While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. "I'm more worried about deflation," he said.

By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – "stealing American jobs", says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.

Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.

At some point, American workers will rebel. US unemployment is already 17.5pc under the broad "U6" gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should.

President Obama said before going to China this week that Asia can no longer live by shipping goods to Americans already in debt to their ears. "We have reached one of those rare inflection points in history where we have the opportunity to take a different path," he said. Failure to take that path will "put enormous strains" on America's ties to China. Is that a threat?

It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.

Mr Hu sounded conciliatory last week. China is taking "vigorous" steps to cut reliance on exports, still 39pc of GDP. "We want to increase people's ability to spend," he said.

Beijing is indeed boosting pensions and extending health insurance to the countryside so that people feel less need to save, but cultural revolutions take time. All we have seen so far are "baby steps", says Morgan Stanley's Stephen Roach.

The reality is that much of Beijing's $600bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.

Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.

Pivot Asset Management said lending has touched 140pc of GDP, "well beyond" levels that have led to crises in the past. With the revolution's 60th birthday out of the way, the central bank has begun to tighten. New yuan loans halved in October. So be careful. Pivot said a hard-landing in China could prove as traumatic for world markets as the US sub-prime crash.

The world economy is still skating on thin ice. The West is sated with debt, the East with plant. The crisis has been contained (or masked) by zero rates and a fiscal blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough demand to compensate. It is adding supply.

My view is that markets are still in denial about the structural wreckage of the credit bubble. There are two more boils to lance: China's investment bubble; and Europe's banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle.

[Wild Cobra]

Yep, China keeps their currency low, and the factories keep getting built.

Why haven't Americans learned our dollar is too high?

[boutons_deux]

China doesn't GAF about the US govt, only about US corporations, because China has realized the US corps buy Chinese and own US govt.

============


The New York Times

November 16, 2009
Op-Ed Columnist

World Out of Balance

By PAUL KRUGMAN

International travel by world leaders is mainly about making symbolic gestures. Nobody expects President Obama to come back from China with major new agreements, on economic policy or anything else.

But let’s hope that when the cameras aren’t rolling Mr. Obama and his hosts engage in some frank talk about currency policy. For the problem of international trade imbalances is about to get substantially worse. And there’s a potentially ugly confrontation looming unless China mends its ways.

Some background: Most of the world’s major currencies “float” against one another. That is, their relative values move up or down depending on market forces. That doesn’t necessarily mean that governments pursue pure hands-off policies: countries sometimes limit capital outflows when there’s a run on their currency (as Iceland did last year) or take steps to discourage hot-money inflows when they fear that speculators love their economies not wisely but too well (which is what Brazil is doing right now). But these days most nations try to keep the value of their currency in line with long-term economic fundamentals.

China is the great exception. Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak. They’ve done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities.

And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.

What makes China’s currency policy especially problematic is the depressed state of the world economy. Cheap money and fiscal stimulus seem to have averted a second Great Depression. But policy makers haven’t been able to generate enough spending, public or private, to make progress against mass unemployment. And China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.

But why do I say that this problem is about to get much worse? Because for the past year the true scale of the China problem has been masked by temporary factors. Looking forward, we can expect to see both China’s trade surplus and America’s trade deficit surge.

That, at any rate, is the argument made in a new paper by Richard Baldwin and Daria Taglioni of the Graduate Institute, Geneva. As they note, trade imbalances, both China’s surplus and America’s deficit, have recently been much smaller than they were a few years ago. But, they argue, “these global imbalance improvements are mostly illusory — the transitory side effect of the greatest trade collapse the world has ever seen.”

Indeed, the 2008-9 plunge in world trade was one for the record books. What it mainly reflected was the fact that modern trade is dominated by sales of durable manufactured goods — and in the face of severe financial crisis and its attendant uncertainty, both consumers and corporations postponed purchases of anything that wasn’t needed immediately. How did this reduce the U.S. trade deficit? Imports of goods like automobiles collapsed; so did some U.S. exports; but because we came into the crisis importing much more than we exported, the net effect was a smaller trade gap.

But with the financial crisis abating, this process is going into reverse. Last week’s U.S. trade report showed a sharp increase in the trade deficit between August and September. And there will be many more reports along those lines.

So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.

Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.

And I’m not sure the Obama administration gets it, either. The administration’s statements on Chinese currency policy seem pro forma, lacking any sense of urgency.

That needs to change. I don’t begrudge Mr. Obama the banquets and the photo ops; they’re part of his job. But behind the scenes he better be warning the Chinese that they’re playing a dangerous game.

[RandomGuy]

Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again,

China's lack of transparency, local government corruption/ineptitude, and recent run-up in property prices smells to me like a bubble.

Sooner or later, their central government will NOT be able to maintain its "basket", i.e. de facto peg to the US dollar.

In 10-20 years after this nasty bubble implodes, as it must, those who jumped on the "OMG it's big bad China coming to get us with their invincible economy" bandwagon will be left looking foolish.

China will grow over time, but they have been growing a bit too fast in some sectors, such as real estate.

Castles made of sand.

[RandomGuy]

http://www.foreignpolicy.com/articles/2009/07/23/the_china_bubbles_coming_but_not_the_one_you_think


All in all, this spells trouble -- a big, big Chinese bubble. Identifying such bubbles is a lot easier than timing their collapse. But as we've recently learned, you can defy the laws of financial gravity for only so long. Put simply, mean reversion is a bitch. And the longer excesses persist, the harder the financial gravity will bring China's economy back to Earth.

[panic giraffe]

sorry to repost myself, but i feel its relevant in both this thread and the one about unemployment


maybe i'm an economical novice, but i think the heart of the problem is in our dependence of using foreign goods, so that we can turn a bigger profit. call me old fashioned but if we want jobs to return, we need a shot in the arm to make it happen. raise the tariffs on all foreign manufactured goods to basically make the costs of bringing in a product just as high as paying american minimum wage, use the tariff money to fund real brick and shovel projects like new highways, buildings, high speed rail, new electrical grids, etc. or if a foreign company wants access to one of the largest consumer market in the world, make them open a plant here.

then we would keep our money here, if someone wants a foreign good, make them pay the price for it by also funding growth here at home.

but maybe i'm just crazy.

[Winehole23]

http://www.nytimes.com/2009/11/16/opinion/16ferguson.html?pagewanted=1&_r=1&partner=rss&emc=rss

[MB20]

Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.

[admiralsnackbar]

Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it.

It wouldn't be such a kick in the ass if they didn't, in the same breath, ask for reduced taxes and other subsidies while most of their (and their executive workforce's) earnings live in off-shore tax havens. What are we subsidizing them for? The honor of their gracing executive offices on our soil?

[boutons_deux]

"Western capitalists are complicit"

Please don't touch the free market.

corps and capitalists must be allowed to pursue profits and reduced costs, unregulated and unimpeded and unaccountable, people and environment be damned.

[Cry Havoc]

"Western capitalists are complicit"

Please don't touch the free market.

corps and capitalists must be allowed to pursue profits and reduced costs, unregulated and unimpeded and unaccountable, people and environment be damned.

There's no "free" market when the other guys can use slave labor to manipulate the system.

[angrydude]

"Western capitalists are complicit"

Please don't touch the free market.

corps and capitalists must be allowed to pursue profits and reduced costs, unregulated and unimpeded and unaccountable, people and environment be damned.

what free market? The one where the government threw money at a ponzi scheme that was raping America allowing it to grow larger than it could have otherwise and then bailed it out when it all collapsed?

and who is for not regulating the financial industry anymore?

Its annoying listening to you call an orange an apple and then get pissed off that the 'apple's' skin is too hard and swear off all apples.

[MiamiHeat]

boutons_deux was being sarcastic....

[Danny.Zhu]

That's not fair.

You could blame China for tyranny, communism etc. But economy? Nope.

[Winehole23]

Slave labor and currency manipulation can distort the market and leads to malinvestment. Whenever the bubble bursts, there'll be plenty of Chinese blaming their own country.

[DarkReign]

Slave labor and currency manipulation can distort the market and leads to malinvestment. Whenever the bubble bursts, there'll be plenty of Chinese blaming their own country.

Then maybe they'll find the balls to live in an open society and not be repressed by a relic government hell bent on control and censorship.

I had/have more faith in the Chinese than I think they deserve sometimes.

[Danny.Zhu]

Then maybe they'll find the balls to live in an open society and not be repressed by a relic government hell bent on control and censorship.

I had/have more faith in the Chinese than I think they deserve sometimes.

Unfortunately the communist authority's survival ability is just astonishing. They have managed to survive without major challenge since taking over the power (1989 being an exception) although they have screwed up big times along the way.

On the other hand, historically speaking, Chinese people tend to be tame and endure the tyranny unless they simply cannot live anymore.

It's gonna be a long way.

[DarkReign]

Unfortunately the communist authority's survival ability is just astonishing. They have managed to survive without major challenge since taking over the power (1989 being an exception) although they have screwed up big times along the way.

On the other hand, historically speaking, Chinese people tend to be tame and endure the tyranny unless they simply cannot live anymore.

It's gonna be a long way.

Well, thats a shame because an open, creative Chinese society would be of supreme assitance to an ailing world economy.

[RandomGuy]

sorry to repost myself, but i feel its relevant in both this thread and the one about unemployment

maybe i'm an economical novice, but i think the heart of the problem is in our dependence of using foreign goods, so that we can turn a bigger profit. call me old fashioned but if we want jobs to return, we need a shot in the arm to make it happen. raise the tariffs on all foreign manufactured goods to basically make the costs of bringing in a product just as high as paying american minimum wage, use the tariff money to fund real brick and shovel projects like new highways, buildings, high speed rail, new electrical grids, etc. or if a foreign company wants access to one of the largest consumer market in the world, make them open a plant here.

then we would keep our money here, if someone wants a foreign good, make them pay the price for it by also funding growth here at home.

but maybe i'm just crazy.

Protective tariffs that favor domestic goods are bad ideas.

Economics 101.

The only real function they serve is to in-efficiently allocate capital to less productive uses, and lower standards of living.

You want to see massive inflation? Do exactly as you suggest, and watch people's buying power drop.

That inflation would MORE than eat away any overall job/salary gains.

You would be giving jobs to a segment of the population that might find manufacturing employment but taking money away from EVERYBODY, including those people with the new jobs, because you would be forcing people to pay artificially high prices.

[RandomGuy]

Unfortunately the communist authority's survival ability is just astonishing. They have managed to survive without major challenge since taking over the power (1989 being an exception) although they have screwed up big times along the way.

On the other hand, historically speaking, Chinese people tend to be tame and endure the tyranny unless they simply cannot live anymore.

It's gonna be a long way.

Such a lack of openness will eventually truly hinder Chinese development.

Cheap labor can only get you so far.

Without rule of law and transparency in both accounting and government, China will always be competing for investment money with the USA.

People are willing, up to a point, to risk money in non-transparent systems with little rule of law, but the first whiff of trouble will cause capital outflows faster than the sea rushing away from the beach before a tsunami.

Put it this way:

You have a billion dollars to invest and are a responsible, intelligent investor.

You have a choice between:

Investment in Company A with the following charactoristics:

a) 20% annualized return for the last 5 years
b) financial statements that show results of operations, but offer absolutely no evidence supporting those figures
c) partial governmental ownership by a government that has in the past seized full control of healthy companies to protect "national interests" without reimbursing other/foreign shareholders
d) country legal system known for both corruption and inability to enforce contracts

Investment in Company B with the following charactoristics:

a) 9% annualized return for the last 60 years
b) financial statements, audited by independant accounting professionals, using internationally accepted standards of auditing
c) little/no government ownership/interferance
d) legal system of country with strong contract protections and generally little corruption

You are looking to maximize your returns for the next 10 years and are willing to accept a moderate amount of risk.

Which do you choose?

[Winehole23]

Four Reasons Not to Worry About a Bubble in China (http://www.minyanville.com/articles/bill-gross-china-bubble-economy-stimulus-consumption-jobs-exports-imports-spending-savings-minyanville/index/a/25672/p/1)

(http://www.minyanville.com/articles/bill-gross-china-bubble-economy-stimulus-consumption-jobs-exports-imports-spending-savings-minyanville/index/a/25672/p/1)Keith Fitz-Gerald (http://www.minyanville.com/gazette/bios.htm?bio=183) Nov 30, 2009 12:10 pm


Bill Gross sent investors into an unnecessary panic attack.

Legendary investor Bill “the bond king” Gross made headlines last week when he said China would have to contend with a bubble of its own making. And, as you would expect millions of investors to react when somebody of his caliber makes a pronouncement, they panicked.

While I can see how Gross would arrive at such a conclusion, it needs a little perspective. For instance, in isolation, taking his remarks at face value is a little like saying that the “US will recover.” When and how isn’t exactly clear.

Therefore I think a little context might be in order:

1. Chinese consumption is accelerating



Chinese retail spending grew 16.2% in October and remains easily on for the 15% to 119% growth in retail spending, and if these numbers play out, consumer spending will be larger than the retail spending growth in the US, EU, and Japan combined when 2009 draws to a close.
Stimulus programs on car sales increased car sales by 43.6% in October. At the same time, government stimulus programs including rebates on “white goods” and tax cuts for low emissions cars helped China’s car sales increase by 43.6% in October. (China is already the world’s largest car market much to Detroit’s arrogant chagrin). Sales of home appliances are also up sharply, rising more than 35%.
At the other end of the spectrum, government spending and industrial power production are up nearly 20% in just the last quarter alone. According to Carbon Monitoring for Action, China’s power consumption has nearly doubled over the last decade. Just to keep up, China builds a new power plant capable of handling Kansas City’s needs every nine days and a city the size of Philadelphia every 30 days. Given the linkage between raw power consumption and economic growth, neither can even be remotely interpreted as a sign that things are slowing down.


2. China continues to transition to a service-based economy




The service segment is now growing twice as fast as construction and infrastructure. This is why China has directed huge portions of its stimulus package into the service sector. This is something that many Western analysts miss in their rush to dismiss China because they tend to view it through Western metrics using Western-centric economic modes. Simply put, China is unlike the West, therefore it’s not entirely appropriate to measure its progress or its potential for failure using tools that may not apply.
Incidentally, according to the latest data, services-related employment now accounts for more than 30% of the total Chinese workforce.
As for the industrial employment Western media frequently cites as a base reference, recent reports from the Chinese National Bureau of Statistics show that non-state-owned enterprises employed more than 70 million people, or 80%, of China’s total industrial workforce in 2008. (2009 figures are not yet available).
Then there’s the fact that China has created 7.57 million new jobs in the first eight months of this year at a time when we’re dealing with record unemployment that appears to be getting worse. That’s 84% of the Chinese national target for 2009 according to Huang Zhendong, chairman of the Committee for Internal and Judicial Affairs under the National People's Congress. So by the end of the year, China may have created as many as 9.01 million jobs.

3. China is not nearly as export-driven as the world thinks



One of the most common misperceptions about China is that it lives and dies by exports. In fact, Gross expressed concern that China is gearing up for an export market that may not find buyers.
In reality, net exports contribute only about 20% to China’s GDP growth. Infrastructure and capital investment make up the rest. In other words, this is hardly a nation that will live and die if the West stops buying, despite the widespread contention that has somehow become gospel over the past few years.
Exports: China’s markets are basically closed. This means that when it comes to the argument that a decline in exports will somehow sink China, the math really doesn’t work out.
Imports: What keeps Beijing up at night is how much it imports as a function of growth. According to BNP Paribas, China imports nearly $0.90 worth of goods for every $1 of exports. Therefore, there is, at most, $0.10 worth of flux in the economy.


4. China actually has an exit plan and private spending is taking up the slack




In recent months, Beijing has raised capital requirements for banks, raised lending standards, and generally put the kibosh on easy money. That’s not to say there aren’t problems, but overall China is already ahead of the curve. And, perhaps more importantly, unlike our government, Beijing is already taking steps to slow things down -- and its economy is still growing at 9% or more, even after it has tapped the brakes.
As for spending, that’s undergone a huge transition, too. You can see this very clearly when you take a look at what’s happening recently with regard to private versus public investment spending. In the old days, public spending and that of state-owned enterprises significantly outweighed private investment. But now, the two have flipped and private investment is higher than both state and public spending.
$2.3 trillion in reserves. I probably don’t need to say much about this but I will anyway. China has saved $2.3 trillion for a rainy day so it's spending it. We’re borrowing our way into oblivion. There’s a big difference.


No disrespect to Bill Gross, but the bottom line is that Beijing’s stimulus and massive government influence has actually refined value, accelerated private investment, and sped up the flow of money. And if that constitutes a bubble, so be it. There’s still plenty of money to be made if you know where to look.

Final thoughts:

First, people have been calling for China’s demise for 40 years, and for 40 years it’s not only refused to roll over but has actually grown at an average annual rate of 9.23%, as reflected by its GDP. The US is lucky to maintain a fraction of that.

Bubble or not, in China, you can invest, live through a pullback, and know there’s a $2.3 trillion tailwind driving your money. Here in the US, you can invest, live through a pullback, and know that you’ve got 10 years of headwinds facing you. Not to mention several trillion dollars of “fiscal hangover” to contend with.