Yes Virginia...It's a Bubble...

[ProdigyofZen]

Re: Yes Virginia...It's a Bubble...

Can China really continue doubling their money supply every 3 years without a collapse of the Yuan?

Touchring, when the US did the exact same thing China is doing today to England back in the mid to late 1920's which economy eventually emerged as the largest in the world?

1966 Alan Greenspan essay “Gold and Economic Freedom”

“When business in the United States underwent a mild contraction in 1927, the Federal Reserve
created more paper reserves in the hope of forestalling any possible bank reserve shortage. More
disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold
to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it
was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal
Reserve pumped excessive paper reserves into American banks, interest rates in the United States would
fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid
the political embarrassment of having to raise interest rates.

The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in
the process. The excess credit, which the Fed pumped into the economy, spilled over into the stock
market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up
the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the
speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching
and a consequent demoralizing of business confidence. As a result, the American economy collapsed.
Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she
abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of
confidence and inducing a world-wide series of bank failures. The world economies plunged into the
Great Depression of the 1930's.” (end)”

[touchring]

Re: Yes Virginia...It's a Bubble...

If that's the fallen apartment/condominium building that I think it is, it didn't even come close to surpassing the meager five or ten years I was saying China's infrastructure would not last. Tenants hadn't even moved-in to the building when it toppled due to shoddy design!

If the infrastructure is all constructed so poorly, in the event of a bust, not only will China have to wipe out investors and write off bad debt, they'll have to write off the infrastructure as well!

Makes me wonder how long that the Bay Bridge in California is going to last.

This will depend on your tolerance for broken stuff. A building is still livable even if it leaks by the bucket when it rains and all the paint work has peeled off and cement is dropping off the walls. Many Syrians are still living in their homes even after parts of the building has collapsed due to shelling.

Of course, the great test will come if an earthquake close to the urban centers like the Tangshan earthquake that struck in 1976 happens again.

[touchring]

Re: Yes Virginia...It's a Bubble...

Milton, have you ever considered that is China's plan? For example they will build a sidewalk outside an apartment building and after two years tear it up and put a new one in.

This all to keep economic GDP high. If they build a structure that lasts only 10 years well fantastic they can fix it or build another one and continue the imports of iron ore, concrete etc into perpetuity and their population base allows for it.

They could care less if the building falls like the one in the picture, it is not like the citizens are going to sue the builder or government.

The point is they can keep this up longer than you can stay fearful of a collapse.

Can China really continue doubling their money supply every 3 years without a collapse of the Yuan?

[GRG55]

Re: Yes Virginia...It's a Bubble...

lots of others like to quote xie, and leave out the 2012. he's still fixated on 2012. i posted another piece of his this morning. staflation, currency problems, chinese crash: 2012
http://www.itulip.com/forums/showthread.php?t=14211

And like all good bubbles it goes on much longer and inflates to a much greater extent than anyone could have imagined.

Is it finally the beginning of the end? Maybe. Maybe not...

China’s riskiest property market just collapsed. Is this how it starts?

February 25, 2013 at 11:05 am

The real estate market in Phoenix Island, a development project in the Chinese island province of Hainan, was so inflated, so outrageously expensive and unsustainable, that it became known as the Dubai of China. With its palm tree-lined streets, glimmering high-rises and ostentatious sports cars, it even looked a little like Dubai. And now, also like Dubai but maybe more in the vein of south Florida, the Phoenix Island real estate market that drove so much local economic growth has imploded.

Phoenix Island is an extreme case, but it’s in many ways symptomatic of China’s skyrocketing real estate market, which is both a blessing and a curse for China...

...If the national real estate market collapses in China, it would be disastrous not just for China but for the entire world economy, risking a third wave of the global crisis that began with the U.S. financial collapse and worsened with the Euro crisis. Is Phoenix Island an outlier, a crazy market so extreme that it tells us little about China? Is it the start of a major but recoverable setback? Or, in the worst-case scenario, is it the beginning of the end for China’s astounding 20 years of miraculous economic growth?

In some ways (but not all), China is even more exposed to the dangers of a real estate collapse than America was. Washington Post business reporter Jia Lynn Yang pointed out last fall that urban housing stock constituted 41 percent of Chinese household wealth of 2011. The number was 26 percent in the U.S...

...I asked Patrick Chovanec, whose economics teaching at China’s prestigious Tsinghua University has made him a respected and much-cited source on China’s economy, how we would know if the Chinese real estate bubble was bursting. In other words, when do we start panicking?

“As long as the money supply keeps expanding aggressively (15%+ per year), and people (absent alternatives) are willing to plow that money into real estate and hold it, this [real estate market] can persist for some time,” Chovanec explains in an e-mail. “But when the flow of new money slows — either because of the need to rein in inflation, including housing inflation, or the need to roll over and refinance bad debt (often at rising rates of interest) — the whole thing begins to unravel.”...

...It’s very very hard to tell. First of all, because so much financing has gone outside the banking system, the standard measures of money supply (M1, M2) don’t tell us very much any more about the amount of “money” (i.e., credit) in the Chinese economy. Most of the credit expansion we’re seeing is off balance sheet. In fact, a lot of credit growth that we’re seeing is inter-company or buyer credit — companies pretending they have sales when in fact they may or may not ever get paid.

Second, it’s hard to tell how much of that credit expansion is being “eaten up” by the need to roll over bad debt at interest, rather than financing new investment. That’s where the real crunch comes, and why we’re seeing, consistently, the returns (in terms of GDP growth) to credit expansion decline. In other words, it takes more and more credit expansion to deliver less and less economic growth — less bang for the buck.

So it’s an opaque process that depends, in large part, on the willingness of everyone to believe that they will, somehow, get paid in the end. If that ever comes into doubt, credit suddenly disappears and everyone rushes to cash out, and there isn’t enough cash to meet all claims. I don’t know if and when that will happen, but even if it never happens, the dependence on credit expansion to roll over more and more bad debt inevitably puts a squeeze on growth...

Chinese 'Dubai' turns into deserted island
Posted: 24 February 2013 1349 hrs

SANYA, China: It was billed as China's Dubai: a cluster of sail-shaped skyscrapers on a man-made island surrounded by tropical sea, the epitome of an unprecedented property boom that transformed skylines across the country.

But prices on Phoenix Island, off the palm-tree lined streets of the resort city of Sanya, have plummeted in recent months, exposing the hidden fragilities of China's growing but sometimes unbalanced economy.

A "seven star" hotel is under construction on the wave-lapped oval, which the provincial tourism authority proclaims as a "fierce competitor" for the title of "eighth wonder of the modern world"...

...Now apartments on Phoenix Island which reached the dizzying heights of 150,000 yuan per square metre (US$2,200 per square foot) in 2010 are on offer for just 70,000 yuan, said Sun Zhe, a local estate agent.

"I just got a call from a businessman desperate to sell," Sun told AFP, brandishing his mobile phone as he whizzed over a bridge to the futuristic development on a electric golf cart.

"Whether it's toys or clothes, the export market is bad... property owners need capital quickly, and want to sell their apartments right away," he said. "They are really feeling the effect of the financial crisis."...

...On the other side of Hainan, the Seaview Auspicious Gardens boasts beachside villas accessed by artificial rivers and a private library containing 100,000 books. Prices there have fallen by a third from a high of 12,000 yuan per square metre in the last year, and a third of the flats remain unsold...

[touchring]

Re: Yes Virginia...It's a Bubble...

Shanghai circa 2009. I am quite certain I wouldn't feel all that enthused about living in any of the adjacent, identical looking apartment blocks. Maybe that's why so many of them are empty in China? :-)

Ya, but these blocks are worth gold. Millions are dollars $$$.

LOL

[Milton Kuo]

Re: Yes Virginia...It's a Bubble...

Milton, have you ever considered that is China's plan? For example they will build a sidewalk outside an apartment building and after two years tear it up and put a new one in.

This all to keep economic GDP high. If they build a structure that lasts only 10 years well fantastic they can fix it or build another one and continue the imports of iron ore, concrete etc into perpetuity and their population base allows for it.

They could care less if the building falls like the one in the picture, it is not like the citizens are going to sue the builder or government.

This is taking the "broken window" idea of economic stimulus to a whole new level. China might as well have another Cultural Revolution to really ramp-up the amount of reconstruction work available if planned self-destruction is part of their economic growth plan.

So, no, I don't think that is the Chinese strategy. I believe the real story is that China puts a half-assed effort in to an endeavor and hopes that things don't go to pot (which, of course, they always do.) This is based on my own experiences and observations as well as those of my grandparents (who had pretty harsh things to say) who left China when the Communists took over.

Considering that China is kind of third-worldish, they really could spend their money in far better ways than rebuilding the same crap over and over again.

The point is they can keep this up longer than you can stay fearful of a collapse.

I'm not invested in China in any way so they can kick the can down the road as long as they want; I'm merely an amused bystander.

[lektrode]

Re: Yes Virginia...It's a Bubble...

....The point is they can keep this up longer than you can stay fearful of a collapse.

at least until they run out of plentiful natural resources and cheap labor....
and/or ink, 'digital' or otherwise...

this image comes to mind:

[ProdigyofZen]

Re: Yes Virginia...It's a Bubble...

If that's the fallen apartment/condominium building that I think it is, it didn't even come close to surpassing the meager five or ten years I was saying China's infrastructure would not last. Tenants hadn't even moved-in to the building when it toppled due to shoddy design!

If the infrastructure is all constructed so poorly, in the event of a bust, not only will China have to wipe out investors and write off bad debt, they'll have to write off the infrastructure as well!

Makes me wonder how long that the Bay Bridge in California is going to last.

Milton, have you ever considered that is China's plan? For example they will build a sidewalk outside an apartment building and after two years tear it up and put a new one in.

This all to keep economic GDP high. If they build a structure that lasts only 10 years well fantastic they can fix it or build another one and continue the imports of iron ore, concrete etc into perpetuity and their population base allows for it.

They could care less if the building falls like the one in the picture, it is not like the citizens are going to sue the builder or government.

The point is they can keep this up longer than you can stay fearful of a collapse.

[GRG55]

Re: Yes Virginia...It's a Bubble...

To know, really know, what the quality of production in China is like you should have statistical information that could be trusted.
Ipads, Ipods, Iphones and the lot are made in China. So what?
China is a gigantic county: a new electric generating plant (most of them coal fired) is built every few days.
How many apartment buildings are built every week?
Of course, a new apartment building collapsing is big news. The photo deservedly travels worldwide. But what does happen with the photos of the buildings that do not collapse?...

They appear in the background of the photos of the identical structures that did collapse.

In Uruguay most (90% or more?)motorcycles are made in China. Are they comparable to a Honda?. Certainly not. But they work.
Thousands of people (in this 3.3 million country) use them daily.
The same can be said of all types of machinery: metallurgic, cranes, earth movers, utility vehicles, etc.
I am not worried by many Itulipers holding erroneous concepts about many things happening around the world because of political-values (axiologic) issues.
You have the right to think as you like.
...

After finishing the bunker (long time iTulipers will know what that means) in December 2011, I spent the past calendar year as CEO running a junior gold and silver mining company in one of the Central Asian Republics that my partners and I are invested in. I lived there full time. My commentary and opinions about China are formed, in part, from first hand experience dealing, on a commercial level, with Chinese manufacturers, Chinese wholesale suppliers, Chinese banks, Chinese air freight companies, etc. My views come from my own experiences and observations. I often use a lot of anecdotes to explain those on this site. The apartment building is one example of that (I first posted it on another thread back in 2009 when the incident happened). It is a symbol of what is wrong within China and the Chinese economy. So are the collapsing bridges/overpasses, the failures of the high speed trains that have resulted in horrific fatalities, the fatality rates in their coal mines, and so forth.

I have likened China to the USA in the post-WWI-Roaring Twenties era. A rising power that was just starting to exert real influence over global affairs...ultimately displacing England as the predominant economy and reserve currency holder later in the 20th century. Perhaps in this century China might achieve something similar compared to the USA. Perhaps, but at this point far from an assured outcome as many pundits would wish to have us believe.

In some ways China might also be compared to Japan in the 1950s and early 1960s...a producer of low quality goods ("Made in Japan") viewed as a nation that was incapable of creating anything itself, but good at "copying" what others invented (sounds familiar, non?).

I find it interesting that China is behaving in a similar fashion to both the USA and Japan during those earlier periods, internally absorbed and deliberately isolationist in its external politics. China has been described as a dragon at home (aggressive internal political control) and a panda abroad (official policy of political non-interference).

Japan ultimately overcame both the reality and reputation of that time, grew to become the second largest economy on earth, celebrated that success by inflating an internal property and financial bubble of magnificent proportions...and have been trying to recover from the party hangover ever since. Some might think the USA did more or less the same during the Roaring Twenties, and lived to do it all over again, on a bigger scale this past decade. China looks to be following that same pattern...well on the way to creating a new record-breaking mother-of-all-credit-bubbles. Why should it end any differently for it?

As you describe, China today is a third world economy, producing largely third world quality goods for third world consumers. My experiences in 2012 cemented my opinion that I prefer not to have anything to do with Chinese-made products, and I have no respect for their repeatedly untrustworthy business practices (which are by no means unique to China). At this point in time I think their human capital, in the form of engineering and technical services, is their real value proposition to anyone wishing to do business with them.

These are some of the reasons I don't think its as big a threat to the USA as many make it out to be. Yet.

[Southernguy]

Re: Yes Virginia...It's a Bubble...

To know, really know, what the quality of production in China is like you should have statistical information that could be trusted.
Ipads, Ipods, Iphones and the lot are made in China. So what?
China is a gigantic county: a new electric generating plant (most of them coal fired) is built every few days.
How many apartment buildings are built every week?
Of course, a new apartment building collapsing is big news. The photo deservedly travels worldwide. But what does happen with the photos of the buildings that do not collapse?
In Uruguay most (90% or more?)motorcycles are made in China. Are they comparable to a Honda?. Certainly not. But they work.
Thousands of people (in this 3.3 million country) use them daily.
The same can be said of all types of machinery: metallurgic, cranes, earth movers, utility vehicles, etc.
I am not worried by many Itulipers holding erroneous concepts about many things happening around the world because of political-values (axiologic) issues.
You have the right to think as you like.
The problem is that for the sake of economic analysis (which has always a heavy political component inside it) the certainty or which is essential for investing acumen, you should have a much better perception about how the world works.
I have seen here repeatedly said here that Chavez is a dictator.
Well, Mr. Chavez won no less than 8 or 9 free elections in Venezuela from 1998 when he was elected President for a first time.
There is a free press in Venezuela, opposition media are virulent and very agressive. They have a lot of money and bigger audiences than the official press.
Nobody is in jail because of political affiliation-opinions.
Moreover: in 2002 a military coup with the collaboration of the main chambers of commerce deposed Chavez for a couple of days. The President was very near to being killed.
Thousands of people came to the rescue. Chavez was freed and retook office.
After that Chavez did not carry out any repression to be noted.
No one was killed. As far as I remember only one or two civilians were prosecuted and spent some few years in not particularly harsh imprisonment.
A few military officers lost their jobs.
Letīs imagine the same situation in the USA.
How many people would have been subject to the death penalty?
Because deposing the President is the worst possible form of treason here, there and everywhere.
Letīs say it again: What I am telling about Venezuela is just an example of gross misrepresentation of political reality of an important (big oil producing) country.
I am not worried by the moral-political-ideological implications of this kind of grossly false perceptions.
I am worried because I have money in this game.
As far as those misrepresentations donīt touch the essential aspects of economical analysis all is well.
But I think a more leveled approach should be in place of world affairs.
There is a lot of corruption going on in Venezuela.
But it has a free press and elected government.
What can you say to that respect of the oil rich monarchies in the Middle East?
All that has much to do with political stability.
Which is heavily related to nothing as important as oil.
China is the second world economy and it is expanding fast.
To misjudge whatīs going on there is dangerous.
To that respect I am reassured by EJ talking some time ago of the "wall of money".
You donīt have to cheat anybody inflating any bubble if the money to finance investment in infrastructure, industrial production, high education, etc. comes directly from the State printing press.
When the financing comes from private investors who must earn an interest out of the money then there is the need to inflate bubbles and cheat a lot of people.
Some years ago, when the bubble burst in the USA and the "great recession" began I made the mistake of thinking that China was about to a hard landing. History demonstrated I was wrong.
The same happened when Roosvelt financed USA reconstruction with public money. There was no need for anyone to be robbed.
The real constraints for public financing are the national balance of payments, the current account and the supply of essential raw materials.
A so big exporting machine as China is well inside the limits, so far, allowed by economic fundamentals.
Something of the sort happens when Argentina is analyzed.
Following mainstream financial pundits and media many people consider Argentina as some kind of rogue country.
They are mistaken. And they are loosing a good investment opportunity which is Argentina public debt.
It is absurd that a country as Argentina which is paying down itīs public debt out of CB reserves has a 1000 bp risk premium
While Uruguay, which is paying down debt with new emissions and therefore debt is continously expanding has a 100 bp risk premium.
Thatīs the kind of market anomalies that allow to make a buck.
But they depend on a well balanced political as well as economic analysis. Free of propaganda.

[GRG55]

Re: Yes Virginia...It's a Bubble...

What's the deal with the Bay Bridge?

don posted some interesting stuff about the Bay Bridge a while back:

Here: http://www.itulip.com/forums/showthr...and-the-Bridge

And here: http://www.itulip.com/forums/showthr...-Bridge-Update

It's surprising how much good info from the past there is on iTulip. But it does require an "archeological dig" to unearth it sometimes...

[Milton Kuo]

Re: Yes Virginia...It's a Bubble...

Critical components of the new bridge are being manufactured in China.

Yep. And you can bet your boots I'm going to avoid ever using that bridge.

[thriftyandboringinohio]

Re: Yes Virginia...It's a Bubble...

What's the deal with the Bay Bridge?

Critical components of the new bridge are being manufactured in China.

[shiny!]

Re: Yes Virginia...It's a Bubble...

What's the deal with the Bay Bridge?

[Milton Kuo]

Re: Yes Virginia...It's a Bubble...

Shanghai circa 2009. I am quite certain I wouldn't feel all that enthused about living in any of the adjacent, identical looking apartment blocks. Maybe that's why so many of them are empty in China? :-)

If that's the fallen apartment/condominium building that I think it is, it didn't even come close to surpassing the meager five or ten years I was saying China's infrastructure would not last. Tenants hadn't even moved-in to the building when it toppled due to shoddy design!

If the infrastructure is all constructed so poorly, in the event of a bust, not only will China have to wipe out investors and write off bad debt, they'll have to write off the infrastructure as well!

Makes me wonder how long that the Bay Bridge in California is going to last.