China is in deep trouble; it has a total debt to GDP ratio of 282%, the highest compared to the other big gdp countries. (http://bloom.bg/1evYSQ5). The housing bubble has already burst in the 3rd and 2nd tier cities in China, and the 1st tier cities are close to bursting. And the shanghai stock market is close to retracing back to 2000, since the current stock market has a p/e ratio that's 41% higher than that of US's 2000 dot com market. (http://bloom.bg/1HNgqA4)
When (not if) the china's stock market collapses, and the capital flight from China accelerates (estimated 600 Billion a year currently http://bit.ly/1NJQuIX), then China is going to be permanent decline for the next 10-20 years. It would be anyone's guess what China will do then, since it will inevitably suffer massive internal unrest, due to the fact that it's ruled by a bunch of dictators.
EDIT: China seems to be following the same path as Japan in 1990, except China has really screwed up their environment and rich people really want to leave the country.
There's a lot of hyperbole in this post. The graph you link to of debt-to-GDP is actually very similar in China (282), South Korea (286), Australia (274), USA (269), Germany (258), and Canada (247). And for the record, South Korea's is higher than China's according to that graph. China's is more heavily weighted in "non-financial corporate" which is interesting.
You're assuming both a continued free-fall at the same rates and also that p/e ratios in China mean the same thing as they did for .com companies in 2000 in USA. Any market newbie will tell you that what a "normal" p/e ratio is will differ greatly by sector even within the same economy. China's may be out of whack, but it's not fair to make an arbitrary comparison.
I'm no China apologist, but making predictions of 10-20 years of decline with an authoritative tone is wrong given the facts you presented.
I think hysteria would be warranted if the Chinese government were to take a Schumpeter/Hayek/Mellon liquidationist response to the collapse of the market bubble (see the US/Europe circa 1929). Why yes then you would have contagion spreading out into the real economy and a long depression.
I'm thinking not. Instead I the Chinese central bank will inject liquidity again, much to the horror of the WSJ Editorial board who will again sternly warn that such actions, mark their words! come to an bad end!
Why do people continue to use aggregate debt (including domestic bond debt and outstanding liabilities) to present GDP ratio as though it is a meaningful harbinger?
Any non-superficial analysis of what that entails and means should show you this is - while not entirely irrelevant - mostly meaningless as an indicator of economic health.
Well, you have to know at what interest rate the country borrows, and have an idea about the country's deficit and rate of GDP growth to know how sustainable the debt is, I suppose, but it's a pretty important number nevertheless...
I think there's a ton of economic incentive for the rich to leave China and move to the US. In fact, I'd argue it's happening now already, regardless of the performance of the Chinese economy.
Some observations:
- The luxury goods that the rich in China are looking for are much cheaper here in US. The international students I know at school go on insane shopping sprees at the Apple/Sony/Microsoft stores since how "cheap" all the products are compared to the 1.5-2+X markups they have to pay back home. I've seen some classmates fill their suitcases with luxury brand clothing, Apple computers, iPads, Playstations, Xbox, to all bring home and share with their families.
- Assets in the US are much more appealing options in terms of investments, especially real estate/property. There's been a lot of stuff written up in NYT about this. I've seen the same things here in South Bay (Mountain View, Cupertino) where brand new townhouses get snatched up instantly by wealthy families from China that can commit that much $ in such a short amount of time. Being able to pay for your house in cash moves you towards the front of the line.
- Avoiding the whole "corrupted officials with lots of $ in bribes" anecdote (despite it being somewhat true from the crazy stories that I've heard from friends in China), it is much easier to spend the money here without worry of alerting the Chinese government. Especially if you're paying for a lot of your things in cash. Spending money in a lavish manner in China raises a lot of eyebrows.
- Not too knowledgable on this aspect, but apparently there's the loophole where if you bring aging parents in China over to live in America, they can qualify for senior benefits from the US government. They come, despite never having worked in the US, and get monthly checks to cash that are substantial enough to live on. Don't know enough about this to elaborate and I'm a little skeptical about this, but have heard a lot about this.
- America is so much more attractive than China. A lot of the wealthy international students I met in college had very tracked and relatively stress-free lives growing up. They never had to study for or take the gaokao, which is the infamous college entrance exam, since they knew from early on that they would be coming to the US for their college education. A lot of them do try and swing for jobs here after graduation as well, since the pay is substantially higher than in China. Heard this sentiment from a lot of Hong Kong residents.
There are various currency controls that do make it hard to get money out of the country. Clearly it's possible, but if this starts happening in mass just watch as the top leadership makes that essentially impossible.
Sadly don't think it's stopped anyonw. Friend told me it's 50,000/person at any one time, but given the amount of money I've seen being being spent, I doubt that is stopping anyone.
Going to dig into if there are any loopholes for this. I think it's fascinating how so many people in China suddenly became self-made millionaires/billionaires + can spend that money so extravagantly in the US without much consequence.
There was a classmate from China last semester who came to class every day in a new custom sports car. Mondays was Lambourghinis, Tuesdays was R8, Wednesday was McLauren, Thursday was wrapped Panamera turbo, etc. And this kind of spending/demographic is pretty noticeable in Boston/Allston.
I don't think anyone will respond out of fear of being labeled a -------? I will only comment on buying realestate in the U.S.? I believe realestate should only be bought by U.S. citizens. Right now all a foreigner needs is a individual tax number, and money. We have no real idea how that foreign money was obtained?
Sure. Although I do think if people don't respond out of fear of being labeled, then it's a shame because it is possible to discuss this topic without being portrayed as a xenophobe/racist. A lot are just observations I've heard and seen, especially when I was a chaperone for children from some of China's elite a few years ago.
Interesting on limiting real estate to only citizens. Although I doubt homeowner(s) who are selling care about where the money comes from, especially if it's upfront and comes in cash. And if you look at some of the prices for these townhouses/homes in South Bay suburbs, I imagine it'd be hard to say no.
On the contrary, I think that any foreigner being able to buy real estate in the US is a big plus for the country. Think about it, real estate is one of the few things that can never be exported. When foreigners buy in the US, they're divesting money from other possible expenditures in their home country to be invested for a long time in America. This in turn improves the value of real estate, generates jobs on construction, agents, plus local fees, and so many other things that will end up in American pockets. If anything else I would make it easier to sell real estate to internationals.
If outside buying of real-estate isn't controlled, then you can get into the situation where locals and citizens cannot afford to buy property because its driven up by outside investors, especially ones who buy using large sums of cash.
It is true that it creates jobs and and local fees but ultimately the local populace should be able to afford houses. This situation becomes worse in areas where there is no new housing being built.
"A foreigner". Why do you care where they were born? If where someone was born is so important to you, why not extend it down to the state level and only let people buy in the state in which they are issued papers from?
This is indeed thinly veiled nationalism/racism.
In a properly functioning society, you should have no real idea how the domestic money was obtained, either. It's none of your business as a seller.
I think the more accurate assertion should be residents only. Or no long term unoccupied properties so people rent them out. Or you get my home town of Vancouver[0] or you get London[1], which is even more complicated. If your not a resident, then you can deal with just renting. In asian countries where they limit ownership to only citizens or residents, and your not china, you don't see such huge property value booms, and the average citizen there can afford a property.
I think the only reason why the bay area has become another Vancouver yet is because it has the huge tech industry surge to help support the prices somewhat. Also wide anti-NIMBY regulations could help a lot too.
The consequences of autocratic regimes and their capital flight is being felt around the world [2][3].
New york also suffers this to some extent with empty highrises owned by who know what.
In normal places where they aren't supply shocked I don't think it matters, but if your NIMBY enough a place where the price of a property doubles in 2-4 years, it can get pretty nuts.
And I'm not saying you cannot rent a place, just not own one unless your a full time resident XOR you have a high tax on long term unoccupied properties that encourages property owners to rent out their spaces. I would actually just prefer a long term unoccupied property tax. The key is unused empty properties, not who owns it. Increase supply, and remove perverse incentives to not just sit on supply.
Unfortunately we cannot just pick on SF's landlord unfriendly laws here, because the supply shock applies to the entire bay area. Removing those laws to encourage landlords to rent out their empty properties would be an improvement.
While it may not make sense, there are quite a few counties where there are restrictions to buying land and real estate.
Not sure about the reasoning, some are well off countries, others middling to low achieving countries. Still, it's not out of the ordinary to have restrictions.[1]
Greece, Mexico, Taiwan, Thailand, China and others.
I don't think it's racism. I do think it has to do with nationalism. Perhaps misguided. In some cases it's ideological (China, Vietnam, for example.)
While citizenship is conferred primarily based on where one was born (a fact that has little or nothing to do with a person's capabilities, ideas, loyalties, or qualifications) it is in almost all cases serving as a thin veil over institutionalized racism.
I don't think a persons capabilities, ideas, loyalties or qualifications are innate to ones birth either. I don't understand how it serves to institutionalize racism, could you please explain?
I mean a stopped clock will still be correct at least twice a day so I'm sure the naysayers will be correct eventually too.
Anyway, I doubt China will suffer massive internal unrest, because those dictators aren't as dictatorial as you might believe and because most of the Chinese population generally support their government, at least in principle, and see instances of abuse and corruption as 'bad apples' spoiling the bunch rather than any sort of problem with the system or government itself.
In fairness, the tacit Sino-American currency union has propped up Chinese industry since the Nixon Era. Predicting that the U.S. would eventually fatigue of this arrangement wasn't totally insane. Those folks just didn't appreciate that the U.S. and China were going to keep trucking along until China's population was well and truly urbanized. China just cracked the 50% urbanization ratio in the last couple of years, so who knows if the government there will remain motivated to drag peasants into the cities, or not.
That is one outcome, assuming China tries to repay their debts. And as you are aware that hasn't worked out very well for Japan. If I was China and shit hits the fan, I would declare bankruptcy. It would hurt everyone but a shock like that probably has less chance of triggering a revolution than 20 years of decline.
In the case of both Japan and China, most of their debt is held internally.
That's why Japan is debasing the Yen, instead of performing a traditional default. They're unable to afford their debt, but if they just outright default, that will hammer their economy in one big hit - the creditors are the Japanese people. The Yen debasement hits them as well, and reduces the real value of the debt, but the premise is it's a gradual process they can adjust to over time (and the politicians get to lie about what's happening, another reason they all universally prefer inflationary schemes).
China's stockmarket is sufficiently weird to defy most normal analysis though: there are heavy restrictions on who can list and who can invest, plus China in general has lots of money sloshing around looking for a decent place to invest, because the usual mainstays like bank deposits have zero to negative returns. So the bubbles and pops there (and this is far from the first) don't have a lot of correlation to the health of the overall economy.
"China in general has lots of money sloshing around looking for a decent place to invest, because the usual mainstays like bank deposits have zero to negative returns"
Umm... this is the situation everywhere right now. This is one of the reasons that big money from hedge funds etc. has started moving to riskier bets in venture capital territory.
An expensive prediction. Sure, they are now right, but the index grew from 4250 at the time of that article to over 5000 before this latest crash. Anyone shorting the market on their prediction would have most likely been wiped out before they could make a profit.
Calling the top of a market is difficult, and to be fair, the Economist hasn't done too badly here. However, you've got to call the bottom too. Will the Economist be able to say if the current market price is now 'correct' or not? Has the bubble burst or is there more to go?
>there are heavy restrictions
And don't forget the fact that short selling was illegal until earlier this year, and even now only a limited number of stocks are allowed to be shorted.
"And don't forget the fact that short selling was illegal until earlier this year, and even now only a limited number of stocks are allowed to be shorted"
... which means the crash will be even faster and more brutal.
Remember, short positions close by buying the shorted security. This means that in a healthy (albeit declining) market there is always buying at every level down as shorts cover.
Limiting short selling is a misguided feel-good move ... a PR stunt that only serves to make the pain worse.
The chart in that article is grossly deceptive. It shows only the last six months of the Shanghai index. Here are the past ten years.[1] That tells you a lot more. For one thing, that index hasn't come back to its 2008 high. That's more significant than the current correction.
The other interpretation (that I stole from ZeroHedge) is that a collapse of the Shanghai index will again correlate with the collapse of the US markets.
Ignored is the fact that market was up 150% in the preceeding 12 months of its top. It's an extremely volatile market and a large selloff would be expected, probably inevitable. It's still up for 2015. Not exactly a crisis.
It's lost 30% of its value, was that to be expected? Are you saying it won't fall any further? To me, it seems that you are glossing over a large stock market crash.
Talking about it being 'to be expected' is a nonsense. If the market is so predictable, kindly enlighten us about what happens next, rather than being wise in hindsight.
They call them corrections for a reason. Extreme moves in one direction increase the likelihood of extreme moves in the opposite direction. You can chart volatility just like you can chart the price. Volatility is high right now.
Corrections are not the same as crashes that wipe out 20 or 30 years of gains. The index is still up for the year. It is very disturbing that the govt. rushes in to attack short sellers and prop up the market artifically, funneling money into it. They show no enthusiasm to attempt to curb the bubble as its growing as the mkt is on the way up. In that way they are the same as the western world.
They are called corrections some time after the event, once we've all had our fill of hindsight. Are you trying to predict the market by claiming that it won't fall any further? If you aren't, then how can you be sure that this is a correction and not a crash?
Even by your extreme measures of what a crash is, you have to realise that they don't happen instantly... who knows how long the market might sink for... Or rebound?
Just eyeballing the chart in the story, it's still up 10% from January 2015. That's not a bad return. This looks like a correction of a ridiculous overvaluation spike to me.
No market is predictable. That is why you don't try to do it. Invest regularly, i.e. dollar cost averaging. The couple who invested their entire savings in one shot during an obvious run-up made an all to common emotional mistake.
OC I haven't studied the situation there in any depth.
But you're implicitly making a prediction or an assumption here, namely that there has been a correction. That there has been a correction. Are you sure that the market won't fall another 30% in the coming weeks?
Something that goes up for no good reason (spurred by margin), will come back down for a very good reason: it should have never been up there to begin with.
Whether it's a week, a month, or a year, their market is going a lot lower yet. It'll retrace back to where it was, no matter what the central government does today. Trillions of dollars in real wealth will be lost in the debacle, as the event sets off dominoes.
Unless you were implying that this will continue, "Are you sure that the market won't fall another 30% in the coming weeks?" is simply a non sequitur. As of now this is something that could be called a correction; it could develop into something that could be called a crash.
As of now, if you invested the index four months ago, you haven't lost a penny.
As an isolated case I would agree, but I'm still betting that this combined with the eurozone events will be the final straws for reversing investor sentiment to precipitate another large global recession.
The underlying causes of the 08 crash in America were never addressed (consumer debt, real growth), and the Fed's interest rate games and QE only served to force investors into riskier and riskier assets, which only hurt productive real investment. All the valuation and volatility metrics have been screaming louder and louder for a long time now.
You can get problems if the market goes up, people borrow a bunch of money to buy stock and then it goes back down again. The winners aren't much affected, the losers cut their spending / lending and so the economy (as in total spending) dips.
Here is the latest reporting from Reuters on the opening of the stock markets in China, where it is already Monday 6 July 2015: "Chinese stocks jump after Beijing unleashes emergency support"
The article notes, "Oliver Barron, China policy research analyst at NSBO, said it wasn't just faith in the markets at stake.
"'After the market continued to fall despite myriad support measures, the government reached peak panic mode and must have worried that investors would not only lose confidence in the markets, but in the government itself,' he said." This is the new issue in China, that now any weakening in the market is seen as a vote of no confidence in the central government. We'll see how the next week or so of trading goes.
From what I understood, the biggest problem is that lots unsophisticated investors (families) invested when the prices were already up, as it usually happens with bubbles, and now they are in deep trouble. This in turn could create big troubles in the "real economy".
That was intentional on the part of the Chinese government. They haven't been subtle about it.
Chinese households are the only sector with a healthy balance sheet. Their corporations are carrying epic amounts of debt in relation to GDP. The premise was to transfer wealth from households to corporations, to improve the corporate balance sheets (via share issuance).
To be honest, I spend much more energy studying the economy of my country (USA) than China.
In the USA, we will probably have a major market corection to current "bubble-ism" soon, and in my opinion a 20 to 25% drop in prices would deflate bubbles and probably make things more stable. A good thing in the long term, I think.
The other good thing about the current problems like we see in China, Greece, etc. is that it will hopefully slow down the trend of the elites making massive amounts of money with financial transactions instead of BUILDING THINGS and other productive activities. When the elites make money by pulling it from the lower classes that is a bad thing; they need to go back to building infrastructure and becoming more decent world citizens who care about the world that their children and grandchildren will be living in.
The problems that China is facing are bad, but they do have high savings rates and an increasingly better educated population in their favor.
It will be really interesting to see how things shake out in the next few years. I am fairly optimistic, but we will see what happens.
> hopefully slow down the trend of the elites making massive amounts of money with financial transactions instead of BUILDING THINGS and other productive activities
The Chinese already do this, but many of the projects are white elephants, or infrastructure that isn't useful (as opposed to useful infrastructure, which it still needs in many areas). How many steel plants do you need?
What China really needs is to get consumers consuming. People have to save lots of money to buy an overpriced house or to prepare for health emergencies, they can't afford to buy many things beyond that.
Western media has a tendency to see China through a pair of gloomy glasses, and thus often are so certain that next Tuesday is China's doomsday.
Here are ALL the headlines (contains the word "China" ) from Yahoo News in the last 3 days. 12 out of 13 have negative words in the headline:
-------------------
Xi Jinping has run into the one thing in China he __can’t control__
China's Boom Has World Bank __Worried__
The South China Sea is now a 'core interest' of Beijing — and that's a __problem__ for its neighbors
China’s __aggressive__ posture toward the South China Sea has been __stirring tensions__ in the...
China hunts for "manipulators" as stocks __tumble__
Is ‘China in Africa’ something to __fear__?
China __angered__ by new U.S. military strategy report
China says tourists __attacked__ in Turkey during __anti-China protests__
China Has World’s Fastest Trains, U.S. Lags
China’s __insatiable appetite__ for power
Zeroing in on __empty homes__, China throws developers a lifeline
S. Korean official falls to __death__ in China
China's __Unsettling Stock Market __Collapse__
-------------------
I wanted to record the headlines for a month, produce a fancy chart and demonstrate how extreme and rampant the bias is, but I keep forgetting about doing it. Besides, it's probably well known that most media outlets from any country (including the USA) are shit, so why beat a dead horse? Before you shout "foul", I agree we can debate all day on whether a particular word really has negative connotation. Oh, China's media outlets are shit too, even shittier.
As long as we get information from as many diverse sources as possible, we should be fine. The problem is majority of folks has been fed biased information since childhood, and once a system of beliefs and images is established it's nearly impossible to shake it off.
This is only insightful if you do the same thing for other countries as headline subjects and then compare the relative rates of negativity to see if China is an outlier.
News headlines tend toward the negative in general, because it's not newsworthy when things work like everyone expects them to.
my original plan was to pick 5 news outlets from each of the top 20 powerful countries, grab headlines for a consecutive 30 or 60 days, and come up with a negativity value from country N towards country M, so the final result would be a 20X20 matrix. Too much work, so it's not done yet.
But based on my years of experience in consumption of news from major media outlets in the world, the relative rates of negativity towards China is in the vicinity of 12/13, i.e., extremely high and very much an outlier. Of course it's just my guesstimate and gut feeling.
Every pseudo-economist-nerve of mine tells me that one day China inevitably will crash and when it happens it will hurt us all.
But please, enough with the nitpicking in search of ideology affirmation.
Why this is not the crash everybody's waiting for? It's a stock market that is about to crash-out it's volume that was gathered just months prior. Not enough time for most of the worlds shareholders to incorporate Chinese prices into their portfolios.
The Chinese stockmarket's prior boom was mainly driven by the HK-SH stock-market link, allowing foreign investors to buy Chinese stock. Combine that with
- the assumption of risk-takers that the world would flock in gazillions to buy Chinese stock
- and the lack of investment options the ordinary Chinese people have to put their savings in
and you got your self a little bubble going.
But that bust (which is not close to eliminate the prior gains yet, btw) is not the bust we're rightly fearing. Not every economic accomplishment of China can be discredited just by the immorality of its leadership.
That bust could set off a domino chain reaction, which is why the leadership is so desperately and shamelessly trying to prop it up. There aren't many other signs of optimism for the "new normal", and I'm a bit worried about what will happen next.
Every crisis starts in the same way: it is called a bubble because everybody thinks that things are going so well, and they will probably continue the same for a long time. I think China investors are in this complacency bubble, and they are probably coming to a rough awakening.
Hard to tell with the noise out the Eurozone. Together, the next week will be a bit of a bumpy ride.
Definitely agree with your first statement; maybe you should look towards Australia as an example country that over the past 5 years has been increasingly following Chinese financial markets (Commodities and now property).
vast majority of Chinese firms trading on the Chinese stock exchange offer no transparency, and with the recent scandals involving phantom companies valued at billions and "anti-corruption" moves is causing sell offs and capital flight.
But this is hardly the concerning part, what is apparent is a loss of market trust in the system from the public and abroad. If China is to become a superpower, it cannot play by it's own rules.
Yes in that a superpower does bend the rules to suit themselves.
No in that a superpower is suddenly held to a higher standard than the rest of the world. You'd need to resort to expansionism if you wanted to continue the way that China is right now.
There is only one superpower at the moment and likely for quite some time. A few can claim it's status but cannot enforce or confront the one superpower directly.
When (not if) the china's stock market collapses, and the capital flight from China accelerates (estimated 600 Billion a year currently http://bit.ly/1NJQuIX), then China is going to be permanent decline for the next 10-20 years. It would be anyone's guess what China will do then, since it will inevitably suffer massive internal unrest, due to the fact that it's ruled by a bunch of dictators.
EDIT: China seems to be following the same path as Japan in 1990, except China has really screwed up their environment and rich people really want to leave the country.