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

[GRG55]

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

That's assuming the infrastructure was built well enough to not fall apart after five or ten years. Tall order.

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? :-)

[GRG55]

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

There is another way to look at it.
The "American method" is to pour money into new things with no clear idea of how it will all turn out. The classic examples are US railroads and US internet infrastructures. In both cases manias developed, most investors were wiped out, and much fraud occurred. But in both case we ended up with something tangible and valuable for the nation -a transcontinental rail system 150 years ago, and widespread IT systems 15 years ago.

Perhaps something similar will happen in China -investors wiped out, bad debts written off, but a host of new cities and roads that will somehow be put to use in the coming decades despite no clear view today of how anyone might employ them productively.

Certainly.

The US Interstate Highway system might be another example, sans bubble, in between the two you cited.

The question is whether China is at a similar point in its development and influence on global economic affairs as the USA was in the period between the end of WWI and the massive collapse of its financial system credit excesses in 1929, or has China already made the great leap forward to a place similar to the USA in the 1950s?

The title of this thread gives away my long standing view on this question...

[vinoveri]

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

There is another way to look at it.
The "American method" is to pour money into new things with no clear idea of how it will all turn out. The classic examples are US railroads and US internet infrastructures. In both cases manias developed, most investors were wiped out, and much fraud occurred. But in both case we ended up with something tangible and valuable for the nation -a transcontinental rail system 150 years ago, and widespread IT systems 15 years ago.

Perhaps something similar will happen in China -investors wiped out, bad debts written off, but a host of new cities and roads that will somehow be put to use in the coming decades despite no clear view today of how anyone might employ them productively.

And this is the one point of "success" that Austrian economists have not been able to answer. While I agree with many of their tenets, what they fail to seem to see is just this; the gov creates money and pumps it into creating tangible wealth in the form of infrastructure, etc. Fiat capital (i.e., capital created ex nihilo not having previously been saved) can in fact result in productive ends as long as confidence in the monetary unit is maintained.

If we lived in a world of philosopher kings, I would not have much problem with fiat currency b/c it would be used for the benefit of all. This is a dramatic contrast to our current environment of course where it benefits a select grout vastly more than the society at large.

[Milton Kuo]

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

Perhaps something similar will happen in China -investors wiped out, bad debts written off, but a host of new cities and roads that will somehow be put to use in the coming decades despite no clear view today of how anyone might employ them productively.

That's assuming the infrastructure was built well enough to not fall apart after five or ten years. Tall order.

[thriftyandboringinohio]

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

... Gordon Chang...says the country is pouring more money back into infrastructure and property again, something Chang says is ''exactly the wrong thing to do" because it takes China away from its "only sustainable growth model which is a consumption based one."...

There is another way to look at it.
The "American method" is to pour money into new things with no clear idea of how it will all turn out. The classic examples are US railroads and US internet infrastructures. In both cases manias developed, most investors were wiped out, and much fraud occurred. But in both case we ended up with something tangible and valuable for the nation -a transcontinental rail system 150 years ago, and widespread IT systems 15 years ago.

Perhaps something similar will happen in China -investors wiped out, bad debts written off, but a host of new cities and roads that will somehow be put to use in the coming decades despite no clear view today of how anyone might employ them productively.

[gwynedd1]

Re: Another Alternate View - Stephen Roach

The value system is at the whim of the sovereign unless it decides to leave it to the market. So I am not sure if there will be a shock like crisis unless they try market corrections. Was there a pyramid bubble so long as the sovereign set the price? So who knows how long China can go on with a value system set by China.

[GRG55]

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

...And he said "it won't happen, the government won't allow it"

The belief in a perpetual motion machine economy probably goes back almost as far as the belief in unicorns. :-)

I am sure your friend in Shenzen has lots of company. Inside and outside China.

[Southernguy]

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

"Chinadoomers" "Synologists", etc
Look at the article below:
Amidst the revelry and aspirations that the Year of the Snake will bring prosperity to China, some might argue it already has. The country's various stock indexes (FXI) are all sharply higher over the past few months, and reports of economic improvement abound. The latest data point, for example, showed a four-fold increase in imports as well as the best month of exports in nearly two years.

And yet, one veteran observer of the country is not all that impressed. Gordon Chang, author of The Coming Collapse of China, paints a much more dour picture that could see this Snake party turning into a Snake bite.
"Yes there will be an uptick. It won't be pronounced though and it won't last long," Chang says in the attached video, "because China is not solving its fundamental economic problems."
For example, he says the country is pouring more money back into infrastructure and property again, something Chang says is ''exactly the wrong thing to do" because it takes China away from its "only sustainable growth model which is a consumption based one."
Add in the fact the he feels the new Communist party conservatives will continue to make the environment very difficult for investors. "Chinese leaders will talk reform but they're not actually going to implement reform," he says.

Chang is also monitoring the impacts of a "negative feedback loop" which he says is hindering growth too. "You have a slumping economy causing a crisis of legitimacy (which is) causing Chinese leaders to fall back on nationalism, which means increasing friction with other countries, and that friction is aggravating China's economic problems," he explains.
Despite its problems, a bad year of Chinese growth would still be a great year for most countries and even Chang concedes that some companies will still do well there. "But not the big ones like Caterpillar," he says, which has already begun downplaying the importance of its business there after taking a big, costly hit."

Well: there is a particularly idiotic comment:"Add in the fact the he feels the new Communist party conservatives will continue to make the environment very difficult for investors. "Chinese leaders will talk reform but they're not actually going to implement reform," he says."
A country with a 45% of GDP investment rate has "very difficult environment for investors". What would the investment rate be if there were not such very difficult...for investors?
This is the average quality of China bashing propaganda.
The other funny argument is "misallocation of capital"
Infrastructure and housing are "wrong" allocations of capital...Instead the Chinese should invest in domestic consumption...
What does housing be if not "domestic consumption"?.
History is demonstrating that China doomers are systematycaly wrong.
I think the real limits for Chinese growth have nothing to do with financial measures-policy.
The limits are up to the availability of natural resources. Oil, iron, water, etc. For the time being there seem to be enough all over the world to sustain Chinese high growth economy.
The rest is shoddy economics. Please beware, my intentions are not to support China privileged and corrupt rulers.
Simply put you can´t make good investment decisions out of poor economic analysis. And China is to big a part of the world for one to afford to misunderstand it.

[ProdigyofZen]

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

From the FT:

February 8, 2013 2:23 pm

Surge in Chinese credit raises fears

Chinese credit issuance surged to a record high in January on the back of a boom in shadow banking, stoking concerns that the economy could overheat.

Total new financing in January reached Rmb2.5tn ($400bn) – up more than 50 per cent from December and more than double the figure a year ago – eclipsing even the start of 2009 when China unleashed stimulus spending to battle the global financial crisis.

Analysts warned that the credit jump could lead to a sharp rise in Chinese inflation and debt levels if left unchecked and said that regulators would be forced to intervene to contain the excesses...

...“In itself this practically guarantees policy tightening in the immediate future,” he added. “This year can be exceptionally risky for markets.”

The explosion in financing was only partly driven by banks, which made Rmb1.07tn in loans. The rest of the new credit – 60 per cent of the total – came from corporate bonds, loans by investment companies, direct lending from companies to other companies and bankers’ acceptances, a popular form of short-term financing in China.

These non-bank sources of lending, which are collectively referred to as shadow banking in China, are controversial. Regulators say they have good oversight of the situation, but ratings agencies have cautioned that the risks are mounting...

...The big increase in credit issuance stems from last year when China slouched to 7.8 per cent growth, its weakest in more than a decade. To revive the economy, the government stepped up the pace of infrastructure investment and gave a green light to banks to provide more funding, including through off-balance-sheet channels.

This succeeded in fuelling a recovery in the final quarter of 2012 and the momentum of that upturn has continued through into the start of this year...

...But the flows have started to take on a life of their own. When the government tried to clamp down on investment companies known as trusts, securities brokerages emerged as new conduits for lending.

In the short term, the surge in credit could lead to impressive economic growth. Zhang Zhiwei, an economist with Nomura, said his forecast of an 8.2 per cent expansion in the first quarter faced “upside risks”...

...Analysts called for caution in interpreting the trade and inflation figures because companies tried to cram as much business as possible into January before work comes to a halt during next week’s Chinese New Year holiday...

...The jump in financing, however, was far more unusual.

“A part of the money and credit surge likely was related to the holiday, but the scale made all past holiday shifts pale in comparison,” Mr Peng said.

Even if they don't roll over the debt, the Sovereign has 3 trillion in US dollars to pay down the debt if need be.

Not only that but the interest rate is at what 6.25%? Plenty of room to get to ZIRP and lower the overall cost of the debt.

One of my good friends is Chinese from Shenzen. I asked him what would China do if there was a collapse?

And he said "it won't happen, the government won't allow it"

[jk]

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

it is easy to get on the tiger, but very difficult to get off.

[GRG55]

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

From the FT:

February 8, 2013 2:23 pm

Surge in Chinese credit raises fears

Chinese credit issuance surged to a record high in January on the back of a boom in shadow banking, stoking concerns that the economy could overheat.

Total new financing in January reached Rmb2.5tn ($400bn) – up more than 50 per cent from December and more than double the figure a year ago – eclipsing even the start of 2009 when China unleashed stimulus spending to battle the global financial crisis.

Analysts warned that the credit jump could lead to a sharp rise in Chinese inflation and debt levels if left unchecked and said that regulators would be forced to intervene to contain the excesses...

...“In itself this practically guarantees policy tightening in the immediate future,” he added. “This year can be exceptionally risky for markets.”

The explosion in financing was only partly driven by banks, which made Rmb1.07tn in loans. The rest of the new credit – 60 per cent of the total – came from corporate bonds, loans by investment companies, direct lending from companies to other companies and bankers’ acceptances, a popular form of short-term financing in China.

These non-bank sources of lending, which are collectively referred to as shadow banking in China, are controversial. Regulators say they have good oversight of the situation, but ratings agencies have cautioned that the risks are mounting...

...The big increase in credit issuance stems from last year when China slouched to 7.8 per cent growth, its weakest in more than a decade. To revive the economy, the government stepped up the pace of infrastructure investment and gave a green light to banks to provide more funding, including through off-balance-sheet channels.

This succeeded in fuelling a recovery in the final quarter of 2012 and the momentum of that upturn has continued through into the start of this year...

...But the flows have started to take on a life of their own. When the government tried to clamp down on investment companies known as trusts, securities brokerages emerged as new conduits for lending.

In the short term, the surge in credit could lead to impressive economic growth. Zhang Zhiwei, an economist with Nomura, said his forecast of an 8.2 per cent expansion in the first quarter faced “upside risks”...

...Analysts called for caution in interpreting the trade and inflation figures because companies tried to cram as much business as possible into January before work comes to a halt during next week’s Chinese New Year holiday...

...The jump in financing, however, was far more unusual.

“A part of the money and credit surge likely was related to the holiday, but the scale made all past holiday shifts pale in comparison,” Mr Peng said.

[vinoveri]

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

Yes, I think this touches on one of the reasons EJ thinks Jim Chanos is wrong. The Chinese don't need to nationalize their banks to bail them out. The People's government already owns all the Chinese banks that really count. As you say, they can keep this game going for quite some time to come. But not "forever"...

I'm really surprised that most pundits and analysts don't grasp this, especially in light of what has happened over the past few years across the globe.
Wonder if it willful ignorance, cognitive dissonance, or more cynical in that they "know" but need to constantly stoke the "wall of worry"?

[GRG55]

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

To me this whole roll-over concept is merely a facade and accounting trick that if done right can go on for decades. In state run china and fiat currency there is nothing to prevent bailout for years to come and system will continue at least Medium-term.

...

Yes, I think this touches on one of the reasons EJ thinks Jim Chanos is wrong. The Chinese don't need to nationalize their banks to bail them out. The People's government already owns all the Chinese banks that really count. As you say, they can keep this game going for quite some time to come. But not "forever"...

[vinoveri]

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

Misallocated capital? Imagine that. Who could have known...

January 29, 2013 1:55 pm

China averts local government defaults

By Simon Rabinovitch in Beijing

Chinese banks have rolled over at least three-quarters of all loans to local governments that were due to mature by the end of 2012, an indication of the immense challenge facing China in working down its debt load.

Local governments borrowed heavily from banks to fuel China’s stimulus programme during the global financial crisis and are now struggling to generate the revenue to pay them back, a shortfall that could cast a shadow over Chinese economic growth.

Banks extended at least Rmb3tn ($482bn) – and perhaps more – of the roughly Rmb4tn in loans plus interest that local governments were to have paid them by the end of last year, according to Financial Times calculations based on official data...

...Nevertheless, three separate economists said the numbers confirmed that Chinese banks had implemented rollovers on a massive scale to stave off defaults.

“That’s a correct observation and explanation,” said Stanley Li, a banking analyst with Mirae Asset Securities. “Based on the payback period for the infrastructure projects [started by local governments], it will take more than 10 years to pay these loans back.”...

...Stabilising the level of local government borrowing from banks has been touted by the Chinese government as an achievement. “The government debt level is under control, and is safe,” Wen Jiabao, the outgoing premier, said at the national parliament last year...

...With banks all but refusing to lend to local governments, cities and provinces have turned in increasing numbers to non-bank financial institutions, especially trust companies, and to the bond market to raise new debt.

“As the regulators have gotten more careful, they have been able to shift the risk to other sources of financing such as trusts and bonds,” Mr Peng said. “The risk has not gone away. It’s just been spread.”...

To me this whole roll-over concept is merely a facade and accounting trick that if done right can go on for decades. In state run china and fiat currency there is nothing to prevent bailout for years to come and system will continue at least Medium-term.

Same with the US. All this talk about student loan debts, states insolvent, etc.. The feds with their fiat can bail-out anyone they choose with little or no consequence (in the near-medium term). There appears to be no accountability, and why should not our politicos be more emboldened to continue - it appears the magic of printing works (at least until it doesn't - and by then we'll all be dead).
Incredible

[GRG55]

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

Misallocated capital? Imagine that. Who could have known...

January 29, 2013 1:55 pm

China averts local government defaults

By Simon Rabinovitch in Beijing

Chinese banks have rolled over at least three-quarters of all loans to local governments that were due to mature by the end of 2012, an indication of the immense challenge facing China in working down its debt load.

Local governments borrowed heavily from banks to fuel China’s stimulus programme during the global financial crisis and are now struggling to generate the revenue to pay them back, a shortfall that could cast a shadow over Chinese economic growth.

Banks extended at least Rmb3tn ($482bn) – and perhaps more – of the roughly Rmb4tn in loans plus interest that local governments were to have paid them by the end of last year, according to Financial Times calculations based on official data...

...Nevertheless, three separate economists said the numbers confirmed that Chinese banks had implemented rollovers on a massive scale to stave off defaults.

“That’s a correct observation and explanation,” said Stanley Li, a banking analyst with Mirae Asset Securities. “Based on the payback period for the infrastructure projects [started by local governments], it will take more than 10 years to pay these loans back.”...

...Stabilising the level of local government borrowing from banks has been touted by the Chinese government as an achievement. “The government debt level is under control, and is safe,” Wen Jiabao, the outgoing premier, said at the national parliament last year...

...With banks all but refusing to lend to local governments, cities and provinces have turned in increasing numbers to non-bank financial institutions, especially trust companies, and to the bond market to raise new debt.

“As the regulators have gotten more careful, they have been able to shift the risk to other sources of financing such as trusts and bonds,” Mr Peng said. “The risk has not gone away. It’s just been spread.”...