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thepeel
Joined: 08 Aug 2004
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 Posted: Sat Apr 21, 2007 11:05 pm Post subject: Is China's Economy Overheating? |
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(Yes)
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How, exactly, do you fine tune a freight train?
That's the question policymakers in Beijing face in the wake of Thursday's report that China's economy had grown at 11.1% during the first quarter of 2007. As is often the case with the Chinese economy, that number took a lot of people by surprise � it was much faster than expected. China's real economic growth has averaged more than 10% per quarter for four years now, and Li Xiaochao, an official at Beijing's National Bureau of Statistics, on Thursday addressed the creeping fears that the Chinese economy might be overheating: "One very important lesson we have learned is not to make excessively large policy adjustments, but rather to take small, micro steps, and fine-tune them. The aim is to avoid a hard landing of the economy," Li said.
So, why is it important that China avoid a "hard landing,� and how serious is the risk that it might not? The answer to the first question is easy: the growth of the global economy, outside of the United States, has rarely been stronger than it is now, and China is a big part of that story. It's true that China is racking up huge trade . surpluses with the United States (and Europe), and will continue to do so far into the future. But many companies in many industries have hitched themselves to China's extraordinary growth, and have made bets on the future that assume steady, rapid, and sustained growth there. Forget about the obvious beneficiaries of the China boom, such as producers of oil and commodities. China's growth is a huge boost to American companies like Procter & Gamble, Caterpillar Tractor and chip-maker Texas Instruments. The beneficiaries also include service companies ranging from law firms and investment banks to environmental consultants.
In late February, the two major stock markets in China dropped sharply, and that helped trigger a brief global sell off. Investors panicked, fearing that the Chinese economy was somehow falling off a cliff. As Thursday's growth number shows, that wasn't so. Not even close. Now, however, global markets are focused on a better question: is China's growth so strong that it is going to fuel inflation, followed by sharply higher interest rates, and, conceivably, problems in a deeply dysfunctional domestic banking system? And, will there be a hard landing, meaning a sharp reduction in growth from around 11% to anywhere between 6% and 8%?
The reason the Shanghai stock market cratered Thursday is that this has happened before: in the early 90s, authorities in Beijing let inflation get out of hand, and a hard landing ensued. In the first quarter of this year, inflation at 2.7% was at its highest level in two years, and money supply in China has been, in the view of some economists, excessive for quite a while now. Is fine tuning really an option? Or is this freight train now rolling with such momentum that a messy derailment is likely, if not inevitable? Jun Ma, the chief economist at Deutsche Bank Securities in Hong Kong, has been one of the more accurate forecasters of the Chinese economy in recent years. He still believes the inflation threat is manageable, and that the authorities in Beijing can avoid a train wreck even while bumping up rates and trying to curb bank lending to, among others, the still red hot real estate sector.
The optimistic view is still probably the consensus � but it's a shakier consensus than it was just one day ago. A critical question is whether the central government can actually rein in the parts of the economy that it believes are in bubble territory without causing broader economic damage. Real estate is a key EM] an industry in China that has deep political ties, particularly at the local and provincial level. For several years now, a lot of people have been saying that property is a bubble; that a crackdown is coming; and that widespread economic pain would ensue when it did. It it hasn't' happened yet, but if it does, you'll know it. In the first part of the '90s, when China slowed sharply, few people in the outside world cared much. That is not true now. A hard landing this time will be hard on everyone. |
http://www.time.com/time/printout/0,8816,1612783,00.html
A "hard landing" would be disastrous for the global economy. |
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4 months left
Joined: 07 Feb 2003
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| Posted: Sat Apr 21, 2007 11:26 pm Post subject: |
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It is a little bit but not that much. I think it needs to slow down a little but I think what most people don't realize how much more growth there is left. It's only beginning, with over a billion people there is still a long way to go. Analysts are saying that copper, zinc, nickel, moly are too high but add in India, add in SE Asia, add in Eastern Europe and South America, there is a huge expansion.
I've been the metal stocks for awhile and I think they still have a long way to go. |
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Kuros
Joined: 27 Apr 2004
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| Posted: Sat Apr 21, 2007 11:39 pm Post subject: |
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The good news is that Beijing seems to understand the problem. The CCP has a total of $1 TRILLION in reserve, which is enough to address all the Non-Performing Loans that are on the books, which total about $700 BILLION. Proof that these reserves are held to counter the looming NPL crisis comes from the recent development that the CCP seeks to invest $200-$250 billion of their reserves into the global market, leaving a still large sum just sitting around doing nothing...nothing that is but hedging against the total default of all the loans on record. Of course, the CCP would also set a disasterous precedent by just paying off all the loans now, which would tell banks that their spurious lending habits in the future will only be enabled by the government.
Edit: See words in Dark Red.
Last edited by Kuros on Sun Apr 22, 2007 5:57 am; edited 1 time in total |
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JongnoGuru
Joined: 25 May 2004
Location: peeing on your doorstep
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| Posted: Sun Apr 22, 2007 5:09 am Post subject: |
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| Kuros wrote: |
| The good news is that Beijing seems to understand the problem. The CCP has a total of $1 billion in reserve, which is enough to address all the Non-Performing Loans that are on the books, which total about $700 million. |
Tr & B |
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thepeel
Joined: 08 Aug 2004
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| Posted: Sun Apr 22, 2007 5:13 am Post subject: |
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The real issue is how the poor masses (all 700million of em' living on 2$usd/day or less) will react to the slightest inflation in the context of European standards of living on some parts of the eastern coast.
A hard landing could be very destabilizing for the CCP. |
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4 months left
Joined: 07 Feb 2003
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| Posted: Sun Apr 22, 2007 5:30 am Post subject: |
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| BJWD wrote: |
The real issue is how the poor masses (all 700million of em' living on 2$usd/day or less) will react to the slightest inflation in the context of European standards of living on some parts of the eastern coast.
A hard landing could be very destabilizing for the CCP. |
That's just the point, 700 million living on $2 per day, there is so much potential growth there. China doesn't want to slow down that much, from 11% to the 7-9% area would be just fine. |
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thepeel
Joined: 08 Aug 2004
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| Posted: Sun Apr 22, 2007 5:48 am Post subject: |
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| 4 months left wrote: |
| BJWD wrote: |
The real issue is how the poor masses (all 700million of em' living on 2$usd/day or less) will react to the slightest inflation in the context of European standards of living on some parts of the eastern coast.
A hard landing could be very destabilizing for the CCP. |
That's just the point, 700 million living on $2 per day, there is so much potential growth there. China doesn't want to slow down that much, from 11% to the 7-9% area would be just fine. |
Well, no. The area that is dirt poor isn't growing in any meaningful way. I've read that the growth rates outside of the major east coast cities and some other major cities is around 1.5% with the coasts growing at 18-20% (or higher, I don't remember). Ian Bremmer has written about this in great detail.
If you take a hard look at recent economic history, it is going to be darn hard to make the case that China will keep this high growth up for much longer. It just isn't the case that they can slow or speed the economy when they don't have real macroeconomic control to begin with.
Check out this thread, it is relevant:
http://www.eslcafe.com/forums/korea/viewtopic.php?t=84158
Here is Ruchir Sharma, a MD at Morgan Stanley, on China.
Quote:
Everyone seems to be convinced that a new superpower is on the verge of overtaking the US. History, of course, never plays out in purely linear fashion. We've seen this before. In the 1990s it was the small economies of East Asia, the "Asian Tigers", which were the wave of the future. recall that in the 1950s, based on linear projections, Burma and the Philippines were supposed to become the most developed countries of the region. And in the early 1980s the CIA was projecting that the Soviet economy was nearly as large as that of the US.
Linear projections are not the entire story; they do not encompass the quality of growth or social benefits. it takes a lot more than uninterrupted growth rates to match or even surpass the United States. We don't focus on the very real challenges China faces in making it to the next level of development. I wonder how, in five years time, we are going to evaluate some of these overblown expectations about China.
It is popular to underestimate how well the US economy is doing, and to be worried about the Chinese juggernaut. China is still very dependent on exports to the US to sustain its economic growth. Domestic demand in China is flat. For along time to come, China is going to need a healthy, strong and prosperous US to ensure its own prosperity and development.
From the Sept/Oct The National Interest. (I typed it so any mistakes are my own).
China has serious problems and even the Economist has long assumed that they are no longer in control (in a meaningful way) of the economy (and that was in 2005 or 5). |
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thepeel
Joined: 08 Aug 2004
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| Posted: Sun Apr 22, 2007 5:56 am Post subject: |
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What I was trying to get at (and failed) was that the inequality is a source of potential destablization. Further growth at this pace, provided it remains unequal (which it will) would actually bring social unrest by itself.
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China: Hu's power play
Ian Bremmer International Herald Tribune
Published: July 14, 2006
NEW YORK Last August, China's security minister, Zhou Yongkang, announced that 3.7 million citizens had participated in some 74,000 public protests in 2004. Chinese officials say the number of demonstrations rose to 87,000 in 2005. What do these statistics tell us?
Considering the source, many analysts conclude that China has a substantial and growing problem with social unrest, and that the Communist party takes that problem very seriously.
But why would Chinese officials invent a number that suggests the country is plagued with so much popular anger? The answer reveals the more immediate challenges facing President Hu Jintao's political and economic agenda.
Over the past year, a battle has begun within the Chinese leadership, pitting Hu and his allies against a growing range of critics. Hu's predecessor, Jiang Zemin, aggressively promoted the view that China's government must feed rapid economic development and that explosive growth in the country's eastern cities would fuel China's rise. Jiang's supporters, many of them based in Shanghai, have profited mightily from this strategy. But Hu warns that the social costs have now become unacceptably high.
Gaps are widening between rich and poor, and between residents of the eastern boomtowns and the slower-to-develop interior provinces. Rapid industrial development has resulted in enormous levels of environmental damage. The "creative destruction" generated by the ambitious restructuring of the economy has put millions of Chinese out of work and forced millions more to abandon rural villages for the cities.
Hu has built his base of domestic support on promises to solve these problems. To ensure that China's future growth is "balanced" and "harmonious," he has ordered that some of China's newfound wealth be redirected toward the provinces that Jiang's policies overlooked.
Jiang himself has largely retreated from the political stage, but many of his loyalists remain within the government. Some have criticized (even obstructed) Hu's reforms. To consolidate his authority, Hu believes he must win the reform argument and purge the party of as many as possible of his predecessor's allies.
That's where the statistics come in. Jiang's government didn't publicize data on social unrest. When Hu assumed the presidency, protest statistics began to appear. To force policy changes through China's labyrinthine bureaucracy, senior officials are often forced to generate a crisis atmosphere that lends urgency to the implementation of their plans.
Data suggesting that unrest is growing as quickly as the country's GDP bolsters Hu's case for reforms. If successfully implemented, these reforms might consolidate the strength of Hu's political position, inspire loyalty from excluded segments of the population, and dismantle the growth-at-all-costs model. It's probably no coincidence that protest statistics appeared in time for the release of Hu's new five-year development plan.
But the president's inability to end the year-long debate suggests that he's increasingly vulnerable. After four years in power, Hu still has not managed to monopolize control of core positions in the party hierarchy.
Failure to consolidate control may embolden Hu's rivals to challenge the very basis of his authority by pushing a leadership conflict into the open. Up to this point, Hu has moved cautiously. But if he is to assume full control before the 2007 party congress, he must move against some still-powerful senior officials. Attempts to appease all sides may simply signal that his position is weak and encourage his rivals.
Though the numbers that document domestic unrest may not be reliable, the problem of domestic unrest is real - and Chinese officials know it. Last August, the central government assigned special police units to 36 Chinese cities. In December, police fired on angry farmers and fishermen in the southern village of Dongzhou, killing as many as 20. The incident was probably the worst example of such bloodshed since the assault on Tiananmen Square. Reports of demonstrations appear each week.
Social unrest clearly threatens China's long-term stability. But it's the unrest within the leadership that now has Hu Jintao's attention.
Ian Bremmer is president of Eurasia Group, a political risk consultancy.
NEW YORK Last August, China's security minister, Zhou Yongkang, announced that 3.7 million citizens had participated in some 74,000 public protests in 2004. Chinese officials say the number of demonstrations rose to 87,000 in 2005. What do these statistics tell us?
Considering the source, many analysts conclude that China has a substantial and growing problem with social unrest, and that the Communist party takes that problem very seriously.
But why would Chinese officials invent a number that suggests the country is plagued with so much popular anger? The answer reveals the more immediate challenges facing President Hu Jintao's political and economic agenda.
Over the past year, a battle has begun within the Chinese leadership, pitting Hu and his allies against a growing range of critics. Hu's predecessor, Jiang Zemin, aggressively promoted the view that China's government must feed rapid economic development and that explosive growth in the country's eastern cities would fuel China's rise. Jiang's supporters, many of them based in Shanghai, have profited mightily from this strategy. But Hu warns that the social costs have now become unacceptably high.
Gaps are widening between rich and poor, and between residents of the eastern boomtowns and the slower-to-develop interior provinces. Rapid industrial development has resulted in enormous levels of environmental damage. The "creative destruction" generated by the ambitious restructuring of the economy has put millions of Chinese out of work and forced millions more to abandon rural villages for the cities.
Hu has built his base of domestic support on promises to solve these problems. To ensure that China's future growth is "balanced" and "harmonious," he has ordered that some of China's newfound wealth be redirected toward the provinces that Jiang's policies overlooked.
Jiang himself has largely retreated from the political stage, but many of his loyalists remain within the government. Some have criticized (even obstructed) Hu's reforms. To consolidate his authority, Hu believes he must win the reform argument and purge the party of as many as possible of his predecessor's allies.
That's where the statistics come in. Jiang's government didn't publicize data on social unrest. When Hu assumed the presidency, protest statistics began to appear. To force policy changes through China's labyrinthine bureaucracy, senior officials are often forced to generate a crisis atmosphere that lends urgency to the implementation of their plans.
Data suggesting that unrest is growing as quickly as the country's GDP bolsters Hu's case for reforms. If successfully implemented, these reforms might consolidate the strength of Hu's political position, inspire loyalty from excluded segments of the population, and dismantle the growth-at-all-costs model. It's probably no coincidence that protest statistics appeared in time for the release of Hu's new five-year development plan.
But the president's inability to end the year-long debate suggests that he's increasingly vulnerable. After four years in power, Hu still has not managed to monopolize control of core positions in the party hierarchy.
Failure to consolidate control may embolden Hu's rivals to challenge the very basis of his authority by pushing a leadership conflict into the open. Up to this point, Hu has moved cautiously. But if he is to assume full control before the 2007 party congress, he must move against some still-powerful senior officials. Attempts to appease all sides may simply signal that his position is weak and encourage his rivals.
Though the numbers that document domestic unrest may not be reliable, the problem of domestic unrest is real - and Chinese officials know it. Last August, the central government assigned special police units to 36 Chinese cities. In December, police fired on angry farmers and fishermen in the southern village of Dongzhou, killing as many as 20. The incident was probably the worst example of such bloodshed since the assault on Tiananmen Square. Reports of demonstrations appear each week.
Social unrest clearly threatens China's long-term stability. But it's the unrest within the leadership that now has Hu Jintao's attention.
Ian Bremmer is president of Eurasia Group, a political risk consultancy. |
http://www.iht.com/articles/2006/07/14/opinion/edbremmer.php |
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4 months left
Joined: 07 Feb 2003
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| Posted: Sun Apr 22, 2007 6:04 am Post subject: |
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| It is China and who knows what figures to believe. The widening gap between rich and poor is growing in every country. And of course communism and capitalism mixes like oil and water so it will be interesting to see what happens, nobody knows. There is really nothing to compare it to. Many different people have many different opinions and only time will tell who is correct. Go long on metals and place some tight stops if you are worried!! |
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thepeel
Joined: 08 Aug 2004
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| Posted: Sun Apr 22, 2007 6:18 am Post subject: |
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| The commodity boom (including metals) will continue as long as the market has faith in the Chinese economy to sustain itself. No? |
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vertical loser
Joined: 08 Jan 2006
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| Posted: Sun Apr 22, 2007 6:21 am Post subject: |
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The problem is that China's model of development is probably the most unbalanced in the history of the planet. It's money first, and to hell with everything else. (there are official policies to counter this, but the reality is it's money all the way, honey). It's a runaway locomotive alright, but one loaded with dynamite. The reason there is so much social unrest is that half the population has nothing, and has no reasonable hope of getting anything - no skills, no education. Also no access to health care or decent education. 50% of the people cannot afford to see a doctor when they are sick. Millions die at home when they have a serious illness. So much for the trillions in reserves. Half the schools have a piece of chalk and a blackboard and nothing else. Many in poorer areas cannot afford to turn their lights on. Where is all the money going? Corruption is rife. The whole thing is run on greed, and that includes foreign investors. China is being raped from inside and out. The Chinese are doing themselves from the front end, the foreigners are doing her from behind. And the stats. Forget it! There are lies, damned lies, statistics� and then Chinese statistics. China is the most polluted and corrupt nation on the planet, full stop. Just read any Chinese History to see how lies at every level of every system become compounded until actual national stats are a complete fraud. The country thrives on lies and cheating from kindergarten right though to the President�s office (wherever that is � nobody knows because, well, that is China). China wil, I suspect, be the country which demonstrates onece and for all how shallow are dominant economic models and economic theory in general. You cannot talk about prices of oil, steel, copper cement or whatever when the entire model is inherantly corrupt. These things don't exist in a vacuum. In terms of a United Nations index on development which includes such factors as well-being, health care, ethical development, human rights etc (as well as money), China is about 80th in the world of all nations in terms of "development" - and that is with Chinese stats. GDP tells only a tiny fraction of the story.
Other than that, it�s not too bad.
Last edited by vertical loser on Sun Apr 22, 2007 6:45 am; edited 3 times in total |
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4 months left
Joined: 07 Feb 2003
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| Posted: Sun Apr 22, 2007 6:21 am Post subject: |
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| BJWD wrote: |
| The commodity boom (including metals) will continue as long as the market has faith in the Chinese economy to sustain itself. No? |
That's what I'm counting on, copper, zinc, moly but uranium will be needed no matter what. |
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