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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

China Notes

Posted by WARREN MOSLER on May 21st, 2012

>   
>   (email exchange)
>   
>   Attached is an interesting article from the FT discussing the investment slowdown in China.
>   While the official picture remains one of a gradual slowdown, more anecdotal data on
>   electricity production and bank loans suggests that the slowdown is much more severe – this
>   is likely to negatively impact the EM and the Asian suppliers to China such as Australia and
>   Korea.
>   

Full article: China Investment Boom Starts to Unravel

26 Responses to “China Notes”

  1. Paul Palmer Says:

    I spent about a year traveling and doing business in China, ending about 9 months ago.

    The ease at which companies could get loans to build factories for export products was phenomenal. I would tell them there was no way export markets could absorb all the capacity they were putting in place, and they would look at me like I was from Mars. This was for a product category NOT marketed under a Western brand name.

    For Western brands, those companies have been busily moving capacity elsewhere. Number one, labor prices have gone up fairly dramatically, except well inland, where business practices leave a lot to be desired. Second, there have been many instances of intellectual property being pirated. Most companies want to hide this under the rug, but if you want to see a good example of what can happen, follow the story of a US company called American Superconductor. Blatant piracy from its Chinese “partner” and non-enforcement by the Chinese courts.

    Put those two together, it’s not surprising there is a real slowdown underway.

    Reply

    Save America Reply:

    @Paul Palmer, Paul what were the pollution levels you saw? As big a problem as I often read? Warrens old debate buddy Rickards say china would destroy itself from within with the amount of pollution they were not controlling.

    How about the help for the old or infirm? Also of far more importance, relating to me wanting to follow in facebook zuckerbergs chinese wife footsteps, did all the chinese women throw themselves at you just because you were foreign businessman? Or is that another asian myth? ;)

    http://www.businessinsider.com/wanda-group-buys-amc-2012-5

    China (wanda) buys AMC movie theaters, so now if Movies are pirated, it is going to hurt the Chinese too, so maybe they will do something about it (if they can) Also this move allows them to start seriously influencing the propoganda we see in our movie theaters, but today I hear Jackie Chan is quitting the action movie business.

    Reply

    Paul Palmer Reply:

    @Save America,
    Pollution is mind-bogglingly bad. Cannot see the end of the block most days, the air is so thick. At my annual physical my doctor was shocked at how bad my health was. Jogging is actually a detriment to your health over there due to the increased intake in your lungs.

    Reply

    WARREN MOSLER Reply:

    good stuff, thanks!

    Reply

    roger erickson Reply:

    @Paul Palmer, Everything you say matches early biotech feedback from the 2000-2001 mini-boom. There were a lot of Maryland-China biotech ventures & entrepreneurs that got burned for exactly the reasons you name.

    Quite a few, however, with Chinese co-owners are still doing ok catering to Chinese demand. Like the Wild West, it’s hard to saturate their desperation. There’s literally a billion customers wanting to get a step up the development ladder.

    Reply

    SteveK9 Reply:

    @roger erickson, ‘Pirating’ was apparent from day one. I worked for Schlumberger ’85-’87 and it was the same story then. Is it getting better? Maybe. People keep trying because (that potential gold still glitters in the eyes of our fearless leaders) and there is success as well … GM is doing very well in China.

    Reply

  2. Ralph Musgrave Says:

    Chinese are also slowing down their purchases of raw materials. See:

    http://ibnlive.in.com/news/china-buyers-defer-raw-material-cargos/259761-70.html

    Reply

    Save America Reply:

    @Ralph Musgrave, Ralph on Cspan this morning they had US AID talking about development in Africa and one of the callers say why don’t we let china or middle east do more AID to rest of world since USA is broke.

    He said China was going into africa and indeed helping them develop some farmland, they have lots of good farmland in many parts of africa, but he said they would then send the food back to china, cheating the local starving africans of most of the development efforts. He said the lost economic output of 1 billion people that are starving or children dying or not being able to effectively fight disease from mal-nutrition and therefore not able to learn much in school was inexcusable, and for china to go in and steal thier food seems sad, but some posters here tell me china has no imperialistic goals, they are above simple human needs like food and sex and such!

    Reply

    krish Reply:

    Imperialism is an unproved myth. China is going into africa to feed the hungry africans because they dont know how to grow food. Pretty much the same way the americans are going into some of the oil rich countries to bring in democracy and freedom because the locals dont know how to do it. And didnt you know both the chinese and the americans are above food, sex and money, what trash have you been reading all this while.

    Reply

    Ed Rombach Reply:

    @Ralph Musgrave,

    Strange how the AUD was so strong on Monday.

    Reply

    WARREN MOSLER Reply:

    euro up dollar down oil up gold up aud up ;)

    Reply

  3. Ryan Says:

    Chinese leaders have said that they will transform the country into a modern service economy with stronger consumers. Analysts continue to focus only on the old metrics that drove their industrial growth through construction and infrastructure. But if you look at service sector growth it remains strong, at least as of last month. Employment in the service sector rose at the sharpest pace since November 2011, extending the current period of growth to 39 months. Optimism among service providers rose to the highest level in 12 months, backed by expectations of strong new order growth and better economic conditions. Over capacity among a large swath of the Chinese manufacturing and industrial economy will create hard time for some parts of the country. Beijing is targeting a 4 percentage point rise in the service industry’s contribution to GDP by 2015, up from 43 percent in 2010, so at least part of what we are seeing might be the grand plan to slow heavy industry.

    Reply

    Save America Reply:

    @Ryan, http://www.businessinsider.com/china-buys-us-treasuries-directly-2012-5

    China has special computers to bypass the primary dealers to recycle thier green currency units. What a waste of time and resources.

    Why should they slow thier heavy industry? It is a huge economic engine that could be used to build stargate atlantis cities, cities that float, cities that fly around, cities underwater, space tethers with space hotels, moonbases, pre fabbed mars cities etc etc

    I was at a china conference at berkeley where they were talking about all these migrant chinese construction workers who will be facing tough times when the hard landing comes, I asked the china girl why don’t they export all these skilled workers to build cities in africa with africans. Underground cities (think of the energy savings of not having to heat or cool) We have very skilled military engineers in the USA now doing pizza delivery, what a total waste. Where is the leadership and vision in this world. Colins that have nothing better to do with thier time than stalk people on the internet and continually uselessly insult them without advancing the debate, this world can be a sad place sometimes.

    Goodness at the lack of vision of human beings on this planet, killing the golden goose before it can do some really amazing things.

    Reply

  4. Adam (ak) Says:

    From the FT article:

    “But the huge flood of easy credit and government-backed investment unleashed after the global financial crisis has left Beijing with limited firepower this time round amid concerns about resurgent inflation and bad loans at the state-owned banks.”

    Does anyone on this site think that the Chinese leaders believe in mainstream economics as the author of this comment does?

    My comment:
    There is a slowdown in China and it may seriously affect Australia. But the rest is American “wishful thinking”. I hope that I haven’t violated anybody’s intellectual property by using that term and while the term “thinking” is owned by Lenovo/IBM, the world “wishful” is still not patented.

    Reply

    Save America Reply:

    @Adam (ak), You do realize the chinese own Lenovo/IBM right? At least if you are going to attack someone/something, make sure you can clearly see the enemy ;)

    Reply

  5. Anon Says:

    Never fear – I’m down here in Australia and I have it on good authority (from all our sell side analysts, including my own global firm) that its just a seasonal slowdown and it will ramp up strongly again very shortly.

    Reply

  6. Alexander Says:

    The banking criminals Geither and Clinton personally delivered to China a few hundred billion in US Treasury paper certificates in exchange for a few hundred billion paper USD certificates.

    Google Clinton and Geither go to China

    Reply

  7. dan Says:

    This really mean anything?

    http://www.reuters.com/article/2012/05/21/us-usa-treasuries-china-idUSBRE84K11720120521

    Reply

    Save America Reply:

    @dan, The algorithmic arms race!

    http://www.reuters.com/article/2012/05/21/us-trading-blackbox-idUSBRE84K07320120521

    “It’s a bit like a war … you have to keep on upgrading your armaments,” said Philip Treleaven, a professor at University College London and head of its Financial Computing Centre, which works with some of the leading banks and fund managers. “You’re looking for ever-newer algorithms and so you’re using broader sets of data and non-traditional data.”

    Winton, now the biggest player in the industry, sucked in a large chunk of that – $1 in every $8 poured into hedge funds globally last year – overtaking its chief rival AHL for the first time. Some of the keenest investors have been pension funds, seeking diversification and assets that move in different ways from stocks and bonds.

    BLOW-UP

    But growth has brought new challenges. Today there are more than 500 rival CTAs, often using the same methods to play the same markets. Even high-frequency traders are trading where trend-followers previously made profits, and moving much faster.

    One problem is that most firms use similar data. Good, computer-ready historical price information only goes back to the 1970s or ’80s and some CTAs focus on this because they believe the rise of computer trading makes price movements in older markets irrelevant today.

    The risk is obvious. Funds might all follow the same trend, and “something happens which forces a reversal in that trend,” said Alex Allen, Senior Portfolio Manager at London-based Sciens Capital, which invests in hedge funds including CTAs.

    Think of it as a slow-motion flash crash.

    “It’s hugely risky,” says UCL’s Treleaven. Imagine, “everything is going fine and they are all trading fine and then you go through some particular event and all the funds lock onto it, and they all go down together.”

    The company’s London offices display charts tracking the prices of commodities going back hundreds of years, old maps and bank notes and even a dividend cheque from the 18th-century South Sea Company.

    Winton sends researchers to libraries and archives across the world to find numbers held in books and on microfilms. It has found barley and sesame prices from ancient Babylon, and English wheat prices going back to 1209.

    It now employs more than 90 researchers, including extragalactic astrophysicists, computer scientists and climatologists. The company hired a meteorologist who had researched the “El Nino” phenomenon. The physics graduate – Winton wants to keep his name secret for fear a rival might poach him – works in London correlating weather data to crops such as corn, wheat and soybeans. That data can be used to forecast how prices might fluctuate with the weather.

    A computer system that can measure fear is at the centre of Harris’s thriller, and actually not far from reality. Derwent Capital Markets, a London-based hedge fund firm, uses a program that mines millions of comments made on Twitter to ascertain sentiment, examining the results to predict stock movements.

    Correlating data from social media websites to markets is one of the hottest topics among this year’s quantitative finance students, UCL’s Treleaven said. Several other hedge funds are also studying how they might incorporate such data.

    The funds’ methods can be arcane. A large trend-follower reputedly hired a memory champion to look at, and memories, the numbers displayed in old reference books that cannot be photocopied or removed from libraries, according to one CTA investor.

    Sometimes I genuinely have pangs of guilt that we’ve created an alternate channel for these brilliant young physicists to come into when frankly they should be finding the Higgs-Boson,” says Martin Lueck, the ‘L’ in AHL, and founder of Aspect Capital, a $6.8 billion trend-follower based in London,

    Warren, you should call these people up and shame them for taking good minds from really productive uses and putting them to work in this financial abstraction BS that serves no good purpose.

    Reply

    roger erickson Reply:

    @Save America, Brilliant analysts sitting up nights working assiduously on flawed concepts.

    Reply

    WARREN MOSLER Reply:

    no

    Reply

  8. Piero from Italy Says:

    China cannot tollerate a too strong slowdown..
    because massive social riot of billion o people are too dangerous..
    son.. other new Chinese QE will arrive..

    Reply

    vincent Reply:

    @Piero from Italy,

    article from a couple of years ago–interesting piece on geography and how they think it affects outlook. bullish on US; bearish on china.

    http://www.stratfor.com/weekly/20090602_geography_recession

    Reply

  9. perpetual neophyte Says:

    What percentage of China’s “private” debt is loans by the (state-owned) banks to the local & regional governments? What is the insolvency risk of a local government defaulting on a debt owed to a central government?

    What level of capital do the (state-owned) banks need in order to absorb loan losses on property that is mortgaged at 50% LTV?

    How many cities in China with a population over 2.5 million do not have a single airport? How many cities today that have a population over 2 million had less than half that a decade ago? How many US cities of comparable size have doubled their population in the same time frame?

    Compare Madoff’s sentence to Wu Ying’s.

    I can’t tell you if there is going to be a recession in the next 6 weeks or 6 months, but I can tell you a global rebalancing makes a lot of sense and China in 2012 looks in many ways like the USA in 1956 with massive government-sponsored infrastructure buildouts that could lead to huge productivity increases and a growing middle class.

    And that is all before you even talk about adding social safety nets.

    Reply

    Save America Reply:

    @perpetual neophyte, Paul Palmer in the comments up above says the pollution is so bad it was literally killing him to take a jog around the block in china. Was USA cities in 1956 so polluted?

    Rickards says china will self-destruct because of all this pollution. Was USA pollution in 1956 going to cause USA to self-destruct?

    Chinese hero’s grandson says china has so many humans, 90 million surplus of men, that china price of LIFE is so cheap, instead of sending robots in to clean up oil spills, they just throw live breathing human beings into the middle of the oil spills in china (with no protective geat) knowing full well they will die soon from the exposure, did USA in 1956 have so much CHEAP human life we could just throw human beings into the middle of some pollution spill willy nilly? Maybe, 1956 was a long time ago and maybe many bad things happened, but maybe not.

    Did USA in 1956 have 90 million MEN surplus because of short term looking birthing policies?

    Paul Palmer said he used to be in china, I asked him what the women situation was like and he dodged that question, I wonder why he didn’t stay in China if it was 1956 USA?

    Reply

  10. Save America Says:

    http://usa.chinadaily.com.cn/business/2012-05/23/content_15360897.htm

    As part of income-distribution reform, government agencies, at both central and local levels, will be urged to pass legislation to cut taxes and regulate executive pay in high-profit monopoly industries and private companies, Yang said.

    The framework will see an enlarged middle-income group and high earners will pay more in tax.

    It is time for common prosperity, Yang declared, although one government plan is not going to provide all the answers to the thorny issue of income distribution in a society of 1.3 billion people.

    This is not just about individual tastes or lifestyle, economists point out. It reflects a yawning gap between rich and poor that is hindering the world’s second-largest economy from making further progress and perhaps eroding its very social fabric, Yang said.

    Gini coefficient

    The framework may use the Gini coefficient, an internationally accepted gauge of income inequality, or adopt a mix of indicators, such as urban-rural income disparity or wage differences among various industries.

    Targets would almost certainly be more powerful than persuasion, he said.

    The country’s Gini coefficient has already reached a high, if not dangerous level. It is close to 0.5, he said, a point that “is threatening” social security. Little room is left for the index to grow.

    The last time the government reported the Gini coefficient was in 2000, when it stood at 0.412.

    Chi said the state capital and revenue should be a major source of social welfare and state-owned operations should contribute more to public welfare.

    More revenue should be taken from state-owned companies, from the current 10 to 15 percent to about 25 percent in five years, he suggested.

    “After 30 years of reform and opening up, the country is facing a second round of market reform driven by fairness and sustainability, which is more challenging,” Chi said.

    “Consumption will be a major force to keep rapid economic growth in the coming 10 to 20 years, and narrowing the income gap is a precondition to release the great consumption potential,” Chi said.

    Reply

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