Hard Landing Coming Soon? Chinese Officials Set Off Red Alert on Debt, Urge Serious Measure to Contain It

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Ambrose Evans-Pritchard has a must-read article on what may be the beginning of the end of the China-as-economic-wunderkind story. The reason for the hesitancy is that the lengthy article that appeared in early May on the front page of the house organ of the Politboro may either be an official declaration or an effort by a powerful minority to press for a meaningful, sustained effort to stop the growth in debt levels. Particularly since the global financial crisis, China has relied heavily on increases in private-sector debt to keep growth levels up. Mind you, borrowing to invest is not necessarily a bad idea if it goes into projects that are sufficiently productive. But as readers know well, China has had investment at an unprecedented proportion of GDP for years, and most of it has gone into assets created for speculation (housing that sits vacant and is seen by investors as an alternative to the stock market) or unproductive increases in industrial capacity. Consider this extract from a March article in the South China Morning Post:

At the peak of its cement production in 2014, China turned out more cement in just two years than the United States had produced in the previous century.

As the first chart shows, the trend finally topped out last year but it still indicates almost 30 times as much cement production in China as in the US, a much larger economy. Is this huge volume of cement really needed? Is this sustainable?

There is certainly an argument for more cement production in China than in the US, which has largely built its cities and its transport infrastructure. China is still in the process of doing so. Its cement requirements are thus proportionately much greater.

True, but 30 times as great with as much cement production in two years as the US recorded in 100 years? That’s pushing things.

And while economic growth in China is faster than in the US, much of it represents just this pouring of cement. Fixed capital formation accounts for 45 per cent of gross domestic product, about twice the average of the rest of Asia, and higher multiples yet than the rest of the world.
This sort of excess crashes if demand turns sour. And it could take a lot more with it than just cement and steel plants

The story is told in many more sectors than just cement. The second chart shows you that China’s steel production is topping out but is still running at five times the rate of all 28 countries in the European Union combined and almost 10 times steel production in the US.

This steel is still being used but there are reasons to doubt the continued demand. Car production last year of 12 million units, for instance, was three times the equivalent of domestic production in the US.

Yes, I know Americans are importing ever more cars as they begin to share the rest of the world’s doubts about their own Chevrolets and Chryslers and, yes, car ownership ratios are still much higher in the US than in China, but three times as much car production in China as in the US still has a feeling of unreality. China is not rich enough yet to afford so large a car market.

AEP recaps the well-known-if-you’ve been-watching signs that China is in the advanced stages of a monster debt binge. The problem with bubbles, as anyone who has lived through them knows so well, is they typically run much further than clinical observers imagine possible. So the nay-sayers look like gloomy Gusses while the momentum traders party until the whole thing goes kaboom. AEP’s danger signals, from his Telegraph account:

China’s debt is approaching $30 trillion. The fresh credit alone created since 2007 is greater than the outstanding liabilities of the US, Japanese, German, and Indian commercial banking systems combined…

To put matters in context, leverage rose by roughly 50 percentage points of GDP in Japan before the Nikkei bubble burst in 1990, or in Korea before the East Asia crisis in 1998, or in the US before the subprime debacle. This gauge is an almost mechanical indicator of a future credit crisis.

As we all know, China is in a class of its own. Debt has risen by 120 to 140 percentage points. The scale of excess industrial capacity – and China’s power and life and death over commodity markets – mean that any serious policy pivot by the Communist Party would set off an international earthquake.

Yet that is what at least an important group of the officialdom is prepared to do. The logic for a crackdown now is that delaying a day of reckoning will only make the inevitable contraction worse:

China watchers are still struggling to identify the author of an electrifying article in the People’s Daily that declares war on debt and the “fantasy” of perpetual stimulus…

The 11,000 character text – citing an “authoritative person” – was given star-billing on the front page. It described leverage as the “original sin” from which all other risks emanate, with debt “growing like a tree in the air”.

It warned of a “systemic financial crisis” and demanded a halt to the “old methods” of reflexive stimulus every time growth falters. “It is neither possible nor necessary to force economic growing by levering up,” it said.

It called for root-and-branch reform of the SOE’s – the redoubts of vested interests and the patronage machines of party bosses – with an assault on “zombie companies”. Local governments were ordered to abandon their illusions and accept the inevitable slide in tax revenues, and the equally inevitable rise in unemployment.

If China does not bite the bullet now, the costs will be “much higher” in the future. “China’s economic performance will not be U-shaped and definitely not V-shaped. It will be L-shaped,” said the text. We have been warned.

The article also describes how China put its foot on the accelerator in recent quarters, so if this article represents a policy change, it would be a real gear shift:

The latest stop-go credit cycle began in mid-2015 and has since accelerated to an epic blow-off, with the M1 money supply now growing at 22.9pc, by the fastest pace since the post-Lehman blitz.

Wei Yao from Societe Generale estimates that total loans rose by $1.15 trillion in the first quarter, equivalent to 46pc of quarterly GDP. “This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the ‘four trillion stimulus’ package in 2009. The consequence of that stimulus was inflation, asset bubbles and excess capacity,” she said.

House sales rose 60pc in April, despite curbs to cool the bubble. New starts were up 26pc. Prices jumped 63pc in Shenzhen, 34pc in Shanghai, 20pc in Beijing, and 18pc in Hefei. Panic buying is spreading to the smaller Tier 3 and 4 cities with the greatest glut.

There is still some fiscal spending in the pipeline, so the robust times will continue at least through the summer. But liquidity is already starting to dry up despite all the money creation as investors are getting more and more evidence that the government will not rescue wealth management products (which are often invested in real estate projects sponsored by local government entities) or the bond issues of state owned enterprises (SOEs). Again from AEP’s report:

Moody’s warned this month that China’s state-owned entities (SOEs) have alone racked up debts of 115pc of GDP, and a fifth may require restructuring. The defaults are already spreading up the ladder from local SOE’s to the bigger state behemoths, once thought – wrongly – to have a sovereign guarantee…

The rot in the country’s $7.7 trillion bond markets is metastasizing. Bo Zhuang from Trusted Sources said more than 100 firms cancelled or delayed bond issues in April due to widening credit spreads…

Ten companies have defaulted this year, with the shipbuilder Evergreen, Nanjing Yurun Foods, and the solar group Yingli Green Energy all in trouble this month. But what has really spooked markets is the suspension of nine bonds issued by the AA+ rated China Railways Materials, the first of the big central SOE’s to signal default. “This has greatly weakened investors’ long-standing expectation of implicit government support,” he said.

Bo Zhuang said investors have poured money into bonds in the latest frenzy. The stock of corporate bonds has jumped by 78pc to $2.3 trillion over the last year. It is the epicentre of leverage through short-term ‘repo’ transactions, and it is now coming unstuck.

Financial crises are always ultimately credit crises. Even when the proximate cause seems to be a stock market crash, the amount of damage done depends on how much leveraged speculation took place and how that affects critical lending and payment systems. Even though Japan’s payment system was never at risk in the implosion of its colossal credit bubble, its banks and economy have been in a zombie state for a full quarter century. Japan’s massive bubble took place through a mere 11 massive “city banks” and another three “long term credit banks”. By contrast, China has a large shadow banking system. Just like our officialdom in 2007 and 2008, it’s very unlikely that they have a good grasp of the extent and the interconnectedness of the risks. They may find out very soon.

I urge you to read Ambrose Evans-Pritchard’s important article in full. Even with my extensive excerpts, there’s a lot more unsettling information to ponder.

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  1. Kevin C. Smith

    I would be interested to have a physicist or other scientist compare physical bubbles to economic bubbles, looking for differences and similarities.

    In particular I’d be interested in studying the tensile strength and dynamics [evaporation rate, etc] of the skin of the bubble, as this might give us some insight into determining with some accuracy when a given bubble would POP!

    1. Fabian Incerto

      When economists have to push their metaphors into literalism I think it shows the weakness of their science.

    2. Stephen Gardner

      This is kind of humorous. Physical bubbles have a “skin”. Can you tell me what the economic analog of the skin is? Of course not. Metaphors aren’t scientific models. I wish people wouldn’t try to legitimize the pseudoscience we call economics by wrapping it in the language of a real science like physics.

      1. Minnie Mouse

        Physical metaphors de-legitimize the pseudoscience we call economics , not the reverse. Unrealistic assumptions are exposed.

    3. Ignacio

      Ha, ha! economic bubbles are not constrained by physical limits but psychological ones. Revisit John K. Galbraith, please.

    4. craazyman

      It would be hard to make that kind of analysis concrete, but if it can make money then who cares?

      The problem would be how long it takes to make money and how much you’d lose until you did.

      if you can lose money forever without a problem you could end up owning everything, and maybe the Bank of China will!

  2. hemeantwell

    These production figures blow me away. I’m reminded of the recurring documents of agricultural overproduction, newreels of the dumping of milk, the burning of grain. Is there some way for the CCP to just say something like, “Ok, so much for regulating the economy via exchange value. Our economy is up and running and now it’s going to be about use values, we won’t be needing credit any more to underwrite production”? Would this be impossible because it’s now part of capitalist world system, as I guess Wallerstein has been arguing since the 70s?

    1. Jim Haygood

      Second rule: call it “applied MMT,” and you will be terminated with extreme prejudice.

      1. djrichard

        Reading what Yves excerpted, I get more the sense that the issue is private debt, rather than Gov debt. I don’t think anybody would conflate private debt with MMT.

        I think private debt has become more of a pronounced issue in China since capital flight has become an issue. Before capital flight was an issue, the QE being printed by the PBoC to maintain the peg with the US dollar was a great source of inflation. But with capital flight, that QE has effectively come to a stop (PBoC is selling US bonds instead of buying US bonds). So in response, China has had to resort to reduced reserve ratios to stimulate private debt to inflate the economy.

  3. TheCatSaid

    From a website about cement shelf life:

    Q. Is there any shelf life of cement?
    Cement is a hygroscopic material meaning that it absorbs moisture In presence of moisture it undergoes chemical reaction termed as hydration. Therefore cement remains in good condition as long as it does not come in contact with moisture. If cement is more than three months old then it should be tested for its strength before being taken into use.

    I wonder how China plans to use up all that cement before it hardens. Perhaps it’s a new secret weapon: they will drop massive loads of dry cement onto cities or infrastructure in competing economies, preferably at night during damp weather.

    Or perhaps it’s for a quick extension to the Great Wall. Or maybe they plan to sell it to Trump or the Europeans for their Great Walls.

    1. cnchal

      The cement facts from your link are about cement before it’s mixed to make concrete.


      Q. What is concrete?
      Concrete is a mixture of cement, sand, stone aggregates and water.

      As long as it’s kept dry, cement lasts a long time. The concrete that has been poured in China is the main story. Either the Chinese are experts at mixing and pouring concrete and the infrastructure will last a century or so, or it was done so rapidly and crapily that the poured concrete crumbles within a decade or so.

      Jackhammer futures are up this morning.

    2. PlutoniumKun

      There is no evidence that cement is being stockpiled to my knowledge – its all being poured. The problem is that the construction projects just don’t have a productive return any more.

      However, there is a serious point to be made about concrete in China – it is generally low quality. This is ok for regular engineering, but for specialist needs, such as High Speed Rail, it seriously reduces the life span of the structure. I can’t find a link to it now, but a few years ago an engineering journal was estimating that Chinas High Speed Rail network would have to reduce its speed limits by several mpg per year as the structures were degrading very rapidly. It estimated that in 20 years the HSR network would be no faster than a conventional railway network.

      1. Minnie Mouse

        Remember the shoddy construction in schools – earthquake collapse. Then there is the bubble in unoccupied “ghost cities” that go on forever.

        1. PlutoniumKun

          Thats true, but thats more related to local corruption – Chinese building codes are actually ok, and are followed (mostly) in the big cities – its in more outlying areas that builders were able to get away with shoddy building standards.

          1. Chris F

            I lived in China for 20 years. The quality of construction, even in the big cities, is pretty poor. In Beijing, I rented an apartment in an upmarket 8 year old complex developed by one of the biggest property companies in China. Concrete cancer in the buildings, serious water leakage throughout, tiles falling off the externals. Very poor design and execution. The worst are public buildings that include schools, universities, hospitals, police stations etc. Dreadful waterproofing on flat roofs as well as rubbish PVC piping throughout resulting in building rot throughout. Few public facilities budget and pay for maintenance.

            Visited the Wenchuan area just after the huge earthquake. It was striking that almost all public buildings I could identify collapsed (schools, police and fire stations) but few private complexes were down completely (damaged but not collapsed).

            The future cost of maintaining and repairing China’s vast building infrastructure will be truly staggering.

      2. cnchal

        Thanks for the link. If any of it is true, and my suspicion is that most of it is, the high speed rail project is a rolling disaster, and a gross miss allocation of resources.

        Some strange teething troubles that are comical right after opening the first ride, and not related to the trains directly.

        In mid July 2011, Reuters reported: “Two weeks since its grand opening that showed off China’s hopes for a bright hi-tech future, the flaghip high-speed rail line between Beijing and Shanghai has already left passengers stranded for hours on stuffy trains due to power outages. Travellers waiting for delayed trains also found that the gleaming new stations along the line lacked snack shops and comfortable waiting rooms. An attendant told one waiting passenger to walk to a nearby village to buy toilet paper. [Source: Reuters, July 13, 2011]

        And now for some crapify examples.

        . . . In one case the Railways Ministry ordered almost all of a $260 million railway line in northeastern China redone after finding contractors had farmed the work out to unqualified construction companies that filled railway bridges’ foundations with rocks and sand instead of concrete. [Source: Elaine Kurtenbach, AP, March 12, 2012]

        “In announcing the safety checks, officials said that in some places, villagers had built pigpens beneath bridges holding high-speed tracks, causing a potential hazard. They also cited concerns about people and dangerous materials being too close to the tracks, increasing the risk of casualties.” In addition to that, “train line construction requires the use of high-quality fly ash in the concrete. Chinese media reported allegations that some contractors might have used lower-quality ash that had been mixed with other substances.” There have been reports that concrete bases for the tracks used cheap, faulty chemical hardening agents, which don’t allow trains to maintain their current high speeds.

        The rail ministry’s new leaders, brought in after the corruption investigation, contend that safety concerns are misplaced. But they have responded to public anger over fares by announcing plans to lower the top speed on many routes on July 1 “which will not only address safety questions but will sharply reduce the amount of electricity consumed “and pass on the savings through reduced fares.

        The deadly train accident in Wenzhou in eastern China in July 2011 only added to a national sense of unease that safety may have been sacrificed in the country’s rush to modernize ( See Wenzhou Train Crash). After the Wenzhou train crash an editorial with the headline “No Development Without Safety” on People’s Net, the government-run Web site affiliated with the party’s leading newspaper, People’s Daily, pointed out the widespread public dissatisfaction over safety. “From public transport safety to coal mine safety to food safety, these accidents show that theoretically there is no problem with the conception of safety plans,” the influential site said. “But they are not executed properly.”

        The reports of the accident Friday near Qianjiang city in Hubei province, the latest since a bullet-train crash last summer that killed 40 people, rattled share markets in Hong Kong and Shanghai, where major railway company stocks dropped on the news. China Railway Construction Corp. dropped 6.6 percent, China Railway Group Ltd. fell 5.7 percent to HK$2.82 and China Southern Rail lost 4.4 percent. All are traded in Hong Kong.

        China has massive resources and considerable prestige invested in its showcase high-speed railways program, and the news appeared to raise sensitivities over the issue. A local government website ran an article denying that any collapse had occurred. An officer who answered the phone Monday in the information office of the China Railway 12th Bureau Group Co., which is in charge of the project, said he had not heard about the collapse and said no other officials were available for comment. The official refused to give his name or title.

        Corruption, Chinese style

        The huge spending connected with the rail expansion also has been blamed for corruption. In March, the National Audit Office said it had identified 5 billion yuan of financial irregularities in the Beijing-Shanghai link alone.

        Wu Zhong wrote in the Asia Times, “Zhang, 56, an associate of Liu, was regarded as the “father of China’s high-speed railways.” Details of the case are shocking the public. Zhang reportedly has US$2.8 billion stashed away in Swiss and US bank accounts, wealth rivaling that of a small country. This despite his status as a prefecture-level official, with a monthly salary of just 8,000 yuan (US$1,220). In terms of the money involved, Liu’s case pales into insignificance in comparison with his protege – Chinese media estimate that Liu took up to 2.1 billion yuan in bribes. “The protege has outdone his master,” as another Chinese proverb has it. [Source: Wu Zhong, Asia Times, March 8, 2011]

        “In a typical case of a “naked official”, Zhang had already moved his wife, child and presumably a large portion of his ill-gotten gains to the United States some time ago. The term “naked official”, coined by Chinese netizens, describes an official who gradually shifts his family and wealth overseas so he can flee the country at any time…So how did Zhang – such a blatant “naked official” – remain in such a key post? How could he transfer such money out of the country without being discovered? How corrupt is the high-speed railway project, if Zhang took such a big bite off the cake? And rampant corruption is involved, has it affected the quality of high-speed railway projects? [Ibid]

        Question that answer’s themselves as they are asked.

        Technology transfer, Chinese style

        Beijing has long pushed for technology transfer in fields from high-speed rail to clean energy as a condition of contracts or licenses. China’s bullet trains are based on European and Japanese technology but are being marketed in Latin America and the Middle East, prompting complaints it is violating the spirit of such agreements. [Ibid]

        After sharing technology and expertise to help China develop a network of gleaming bullet trains, Japanese and European rail firms now find themselves competing with their former Chinese joint-venture partners for new contracts, both inside and outside China. China has joined overseas projects based on high-speed railway technology introduced from Japan, Germany and other nations. [Ibid]

        In June 2011, China took out patents for its rapid-transit railway technology in places including Japan and Europe with technology that clearly had been borrowed form Japan and Europe. According to a high-ranking Chinese government official, quoted in the China daily, China is applying for 21 patents in Japan, the United States, Brazil, Russia and Europe, including ones concerning train car hulls and bogies. Of the 21, eight have already passed preliminary screenings, the official was quoted as saying. The Chinese government has said its high-speed rail technology was developed completely on its own, with an official at the Railways Ministry saying, “We adopted it [the technology from overseas], digested it, absorbed it and innovated based on it.” [Source: Yasushi Kouchi, Yomiuri Shimbun, June 29, 2011]

        For sure, riding in one of these trains when they go off the rails, it’s going to be a hard landing.

        At mid day, jackhammer futures are at an all time high.

        1. PlutoniumKun

          Yes – its unfortunate I can’t find it, but a few years ago there was a detailed article in an engineering journal on the issue with Chinese railways. It wasn’t so much a safety concern, just that poor quality concrete has a limited lifetime with high speed rail (high speed trains produce a specific type of shock wave which runs through a structure, meaning everything has to be a lot stiffer than a conventional railway).

          I would actually consider Chinese railways to be very safe – the CCP hates high profile accidents, so there is real pressure on operators to keep things fairly safe. But this may well mean lower and lower speeds over time, which negates much of the investment. The Chinese also tended to take a fairly safety first approach to choosing the lines – they avoided routes with anything too complicated, most are straight cross-country routes with few tunnels or big bridges. It was the only way they could do it so astonishingly fast.

          Most of the technology was indeed stolen from the Japanese. The French didn’t sell much of their technology as they knew full well they would lose control of it. The Germans pretty much handed over their Maglev technology, but its so expensive the Chinese only used it for the Shanghai airport link (originally it was to go all the way to Beijing). And a lot of the knowhow was American – Bechtel (SF based) was the original contractor for the Shanghai underground network – they were kicked out as soon as the Chinese learned all about railway tunnelling technology. This is the price every supplier pays for Chinese money – they lose their technology and patents. But then again, this is what the Japanese did before them and the US did to the Brits in the 19th Century.

          1. cnchal

            Regarding corruption, and the “naked official”. Clear evidence of where the money is coming from to buy up multi-million dollar real estate in Vancouver, Toronto and elsewhere. Basically theft of thin air created central bank money, laundered into hard assets, with an endless supply of money. Soft landing for them.

            Wei Yao from Societe Generale estimates that total loans rose by $1.15 trillion in the first quarter, equivalent to 46pc of quarterly GDP. . . or the equivalent of 250 Nimitz class aircraft carriers.

            No price is too high when paying with loot.

        2. different clue

          It makes you wonder how safe and long lasting the Three Gorges Dam will be . . . if that concrete is part of its construction.

  4. David

    Our imports from China fell big last month and the department stores that sell the junk are goon down even faster so if we lost half or 200 billion of their junk I an not sure it would be missed or replaced. I do think that this China implosion is important. I have some questions.
    China has a pork shortage and owns Smithfield but is not iimporting Why?

    Why did Xi burst the bubble. I had suspected the smog and pollution have done more damage in death and disability than admitted. I wonder if the population is even in decline not just the labor force.

    Please keep covering whatever it is that is going on in China.

  5. jsn

    If China is suddenly officially ready to countenance a huge rise in unemployment, one presumes they have some plan to socialize the pain, to take care of the population.

    If this is true, what’s in store may be something like IIRC Lambert proposed in comments the other day: nationalize the financial institution, file the Chinese equivalent of RICO charges, impound the wealth and tie the former elite up in jail/litigation for the next decade.

    I’m a hopeless optimist…

    1. TheCatSaid

      “impound the wealth” –including all the wealth offshore? including the wealth Chinese oligarchs have invested in foreign real estate?

      Are Chinese oligarchs any more likely to go against their own class than Western oligarchs?

    2. PlutoniumKun

      Historically, China deals with huge rises in unemployment by reducing the population through one means or another.

        1. Left in Wisconsin

          Thanks for the link. Have to work through the accounting but really interesting and seems correct to me.

    3. MG

      Nope. It will be a double downing on state security and a war with Japan and/or US likely in the South China Sea.

      If there is a war, people in the U.S. are going to learn real hard, real fast just how much of our production is cut off overnight.

  6. PlutoniumKun

    I missed that Telegraph article – it really is quite alarming. I have to say though that anecdotally, my Chinese friends are no more pessimistic than usual, so I don’t think that ordinary Chinese are feeling worried yet – property prices are still going up, which is reassuring to most middle class there, and there is no evidence I’ve heard of any panic in the various ‘informal’ or shadow investing markets (lots of Chinese run what amount to unofficial banks, borrowing and investing on behalf of friends). As one Chinese friend put it to me ‘everyone in my town owes more money than they have to everyone else’. I’ve always suspected its the informal/shadow system that would show stress before the formal system. The only thing I do know is that a friend of mine who runs a business helping Chinese people move to Europe using ‘investment’ visas has found more and more people of very modest means attempting to do it – its not just the rich who are buying properties.

    The usually reliable Michael Pettis also seems his usual gently bullish, but steady self, I’d expect him to write something if there was something nasty growing.

    AEP suggests that Xi may not be the firm hand on the tiller that everyone assumes – his overt confidence may well be a front for some very confused ideas. I think there is increasing evidence that this may be the case. For all the sound and fury, there is little real evidence of reform from within. But I think the safe bet is that the CCP has enough of a firm hand that they can prevent an outright crash – much more likely is the sort of crippling slow motion collapse that we saw in Japan a quarter of a century ago. But the longer they insist on shovelling fuel on to the fire, the less likely that happens. As Pettis constantly points out, economists consistently underestimate the speed and severity of crashes.

  7. vidimi

    let’s try to imagine the global impact of a chinese implosion.

    as china is the main source of global export demand, if they hit a brick wall it would devastate all but the most diversified or isolated economies. from australia to zaire, the impact would be devastating to employment.
    given the huge amount of foreign investment in china and how much it is likely leveraged, the global financial system will collapse again triggering the collapse of many states. proposals of bailouts would be likely met with violent resistance, even revolution. far right politicians would seize power and, where they haven’t been politically neutered, maybe some leftists would, too. were it to happen before november, we could welcome into office president trump in january.
    domestically, chinese job losses would be enormous causing mass discontent and protests. indeed, the only thing to do with legions of disgruntled, unemployed, unmarried men would be to draft them into the army. but so much fodder requires cannons, and so, the likelihood of war would be very high.

    it’s interesting to think about.

    1. Arizona Slim

      If things in China get really bad, keep an eye on North Korea. Reason: China has been propping that place up for years.

      When the rich uncle next door (aka China) can no longer help NK, watch the Kim regime collapse.

      1. Mark P.

        ‘…watch the Kim regime collapse.’

        Pretty to think so.

        Yet the Kim regime has survived seventy years and last month the Norkeans tested rocket engines that could carry their Musudan missiles 10,000 to 13,000 kms — sufficient range to reach the U.S. East Coast from NK and certainly enough to strike anywhere on the West Coast. Pyongyang also now has at least primitive thermonuclear devices, so as to sufficiently minaturize their warheads to put them atop ICBMs.

        The future of nuclear deterrence is nuclear compellance. North Korea will be its poster child. They could operationalize as early as 2020.

        Also, you share a misperception with D. Trump. China isn’t a rich uncle — and most Chinese dislike Pyongyang more than we do — and Pyongyang regularly thumbs its nose at Beijing and talks crazy to the Chinese just like it does with us. The Chinese have put up with and propped up the current set-up because the alternative — the Kim regime’s collapse — would be more awful from the Chinese POV as it would send 20+ million starving North Korean over the border into China.

  8. Minnie Mouse

    China is the main source of global export demand, but for what? — Everybody else’s commodities, natural resources, energy, endangered species; non renewable stuff and low value added stuff of all kinds. China’s export demand is weak in job creation for the rest of the world but strong in environmental damage everywhere.

    1. vidimi

      a lot of very well-paid jobs in Canada, the US, Australia, etc were kept alive by chinese demand. they have largely propped up the housing markets there. furthermore, as the post explained, china is a huge market for cars and other finished products, not to mention luxury goods.also, chinese tourists were an increasing proportion of global tourism, so any country relying on chinese tourists to keep the wheel turning will also experience a slowdown. about a fifth of the world is chinese so, yeah, their impact will be felt.

    2. TheCatSaid

      “low value added stuff of all kinds” and “commodities, natural resources”–an interview I heard recently said that when the shit hits the fan goods from China will not be available and the impact will be huge. E.g., it will be difficult or impossible to get basic things we rely on like shoes. Or forks.

      Lots of the cheap plastic stuff we get from Asia is not being made at home anymore, so would be difficult to replace.

      And what about all the electronic components, computers etc. made in China? It’s not as if we could magically start manufacturing it ourselves overnight.

      Combine that with disruptions to energy and broadband. . . not pretty. Transformers in the US grid take approx. 2 years to replace, and that assumes that Korea is functioning since that’s where they are made.

      Our way of life is highly vulnerable. We’ve done next to nothing as a society to protect the most basic aspects of local sustainability, in fact we’ve actively promoted dismantling of anything that would reduce risk.

  9. RUKidding

    Thanks for this update on China. It’s important to keep up with their economy, as it has – and will continue to have – such a huge impact globally. I’m a dummy about China, but I do wonder how long their economic “miracle” can continue.

  10. RabidGandhi

    AEP is giddy that he has found fellow monetarists in the CCP. Thus he is able to blame the inevitable Chinese adjustment on all the wrong culprits: 2009 stimulus spending, inflation, M1 expansion… All of which to lead him to blurt out the usual neoliberal Turrets phrases: If China does not bite the bullet now, the costs will be “much higher” in the future. TINA. “Reform” vs “Modernisation” (read: austerity, job cuts)…

    Good on PlutoniumKun (as usual) for linking to Pettis for a less hyperventilated assessment. Pettis agrees China has an historically untenable debt level, and that the landing will depend on how the CCP manages to deflate the debt:

    This doesn’t mean that I think China is likely to experience an economic or financial crisis, let alone political collapse, however, although historical precedents make it very clear that as a country’s balance sheet becomes increasingly fragile, it takes a smaller and smaller adverse shock to set off a financial unraveling. There is nonetheless absolutely no question in my mind that its GDP growth rate will continue to drop sharply – either by 1-2 percentage points a year, or a lot more steeply after two or three years in which it maintains growth rates above 6 percent.

    Meanwhile AEP’s only reason for the sudden immediacy of the situation (“With luck, the rest of us outside China will have three or four more months to order our own affairs before the storm gathers.“) is that he finally found a kindred neoliberal spirit within the CCP to confirm his hatred of China’s keynesian approach to past crises (“the ‘fantasy’ of perpetual stimulus“). Pettis’ bearish but moderate outlook is much more convincing.

    1. jsn

      Agreed, but Pettis is clear that eventually losses will need to be allocated. Maybe the Party can place it on the plutocracy, but that’s not happened since the Regent extracted gold at sword point from the nobility after Law’s fiat experiment in 1720 France.

    2. Fiver

      It’s not about Keynes. It’s about a disastrous strategic commitment to a form of ‘growth’ that couldn’t continue under any circumstances. It was obvious a decade ago where this would lead if not corrected, it wasn’t, and the consequences of that failure, for which the US and West own a good portion of the responsibility, are going to be enormous.

    3. 4D

      Pettis has also stated before that of the 23 financial crises he has studied, even the pessimists were too optimistic.

  11. David

    For Us lets say pollution has given most Chinese l cancer and trade vanished. We lose 100 billion in exports and we have to replace 200 to 300 billion in imports. I an assuming at least 100 billion is stuff we are saturated with or just plain junk so 200 billion . US cost to make double …a one time boost in inflation but an annual add of 400 billion to GDP and 1 or 2 million jobs plus multiplier.

  12. Chauncey Gardiner

    Not to diminish the message or the messenger, but it would be informative to have an update from Michael Pettis of his January analysis of China’s debt issues that was posted here.

    Lots of questions, including: Who are China’s external creditors? What portion of China’s total debt is owed by the truly private sector? Are those debts denominated in yuan or foreign currencies? What is the total amount of offshore debt and what is governing law? Are there subcategories of non-financial corporate debtors; i.e., state-owned enterprises (SOEs) which should continue to be considered as sovereign obligors or should all SOEs now be considered as private sector debtors? Do the “Financial bonds” cited by Ambrose Evans-Pritchard in his chart from “Trusted Sources” include amounts owed by shadow banks? Does the PBC subscribe to neoliberal “solutions” and to what extent is it independent?

    Further, what is the probability that China will drop its $USD peg and allow the yuan to depreciate? If China were to do so, what are the implications for its global trading partners, aggregate demand for and prices of various commodities, and interrelated vulnerabilities of Western financial institutions both directly and under financial derivatives contracts?

    1. PlutoniumKun

      Those are interesting questions, and very important ones. I can’t claim to know the answers to them all, but in general terms I would say that most debts are domestic – there is a lot of evidence that the focus of the corporate sector has been on paying down dollar debts first, because of a fear of devaluation. And there is not a clear distinction in China between ‘public’ and ‘private’ sectors, they interlink in all sorts of complex ways. No doubt there is an internal hierarchy of who gets bailed out first if anything goes wrong.

      My guess is that China will not allow the Yuan to depreciate if it can avoid it in any way – it will opt for one of the other two of the ‘impossible trinity’ options. This is because a devaluation could trigger a mass outpouring of money, something which could run out of control. While the export sector (which is very influential) would like a devaluation, too many powerful people would be against it.

  13. Fiver

    Though I’ve for many years argued China was a major disaster in the making due to embracing a US cowboy capitalist all-in borrow, spend and ‘grow’ mentality at the precise time in history the exemplar of the model was clearly failing in its own ways, I find the story odd – not a typical article for China. It makes me wonder if the real purpose might be a signal to the US and markets to expect some serious moves, some of which they won’t like. The stakes are enormous.

  14. Patrick

    Let’s not blow this out of proportion. Total debt in the US is about 400% of GDP. In China it is about 300% of GDP. I find it odd that Evans-Pritchard neglects this most important bit of context in his article.

    And unlike the US, China has a system government that is capable of macroeconomic stabilization using fiscal and monetary policy in concert.

    “China is doomed” articles just seem like the perennial filler in various periodical rags.

    1. Fiver

      It’s not just a question of debt, it’s what was done with the debt. While China’s ability to do what it has done, essentially to create a built urban/commercial/industrial environment far, far larger than that of the United States in less than 25 years is indeed a marvel, therein lies the problem, as there simply is no project remotely comparable to the building of China with which to follow it up – the one planned outlet for the economy China currently possesses, their land-based infrastructure plan connecting China through south-central-western Asia to Africa is being vigorously opposed by the US, which I believe knows full well we’re talking about adjusting from something that makes the US railroad boom, or dot.com boom or housing boom minuscule blips in comparison. The Chinese are looking at something akin to de-mobilization after a major land war, and frankly, if the US does not help China positively as opposed to forcefully ‘containing’ it, all of those engineering/construction/heavy industry/heavy equipment/materials etc. workers in their tens of millions – the enormous building machine they’ve built – will end up in a fortress-China defense budget by default.

      1. Patrick

        That’s an interesting story, but your metaphor doesn’t really support your point. Postwar demobilizations tend to lead to booms as industrial capital is repurposed to civilian uses. I see no intrinsic reason why China cannot repurpose its capital.

        But also, dinging China on overbuilding in construction again neglects the counterparty in the comparison. The US dedicates a good part of our product to activities on low objective utility(lobbying, advertising, finance, and outright fraud) The bottom line is that a lot of things we spend on in a capitalist economy don’t make a lot of sense and aren’t “productive” in some sense. But it ends up not really mattering that much for reasons that I don’t think anyone properly understands.

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