Can China continue its astonishing growth?

[CanOz]

You hear everyone talk about the amazing growth rate in China. But when your here and you look around, you sense that it’s not sustainable at this rate. The majority of growth they say is from fixed asset investment. You can see this too, in the new apartments going up everywhere. The other thing that you can see is how empty the apartments are. Every city is full of empty apartment buildings. So where and when are they going to start to get the income to pay back the loans to build all of these new structures? My apartment is 5 years old and only 50% capacity. I can see a new building less than 1000 meters away, 35-40 stories tall and just a shell, not even looking like being finished. I visited Hainan, and it still bares the scars of a fixed asset over heating in the '80s. Building shells everywhere, empty.

Will history repeat itself with the rest of China? Will the central Gov't manage to slow things down enough, and will see capacity rates change, income start to flow in from the investments?

The Chinese are buying 1000 new cars every day. If the U.S. slows, where will they get the income to buy the new cars, that use up the resources from Australia and other countries?

What happens if they really let the Yuan go?

Brazil, Russia, and India all face the similar growing pains.

At some point there must be a pause. The pause i fear could be very painful in the short to medium term.

I'm very curious to your thoughts?

 

[nizar]

You hear everyone talk about the amazing growth rate in China. But when your here and you look around, you sense that it’s not sustainable at this rate. The majority of growth they say is from fixed asset investment. You can see this too, in the new apartments going up everywhere. The other thing that you can see is how empty the apartments are. Every city is full of empty apartment buildings. So where and when are they going to start to get the income to pay back the loans to build all of these new structures? My apartment is 5 years old and only 50% capacity. I can see a new building less than 1000 meters away, 35-40 stories tall and just a shell, not even looking like being finished. I visited Hainan, and it still bares the scars of a fixed asset over heating in the '80s. Building shells everywhere, empty.

Will history repeat itself with the rest of China? Will the central Gov't manage to slow things down enough, and will see capacity rates change, income start to flow in from the investments?

The Chinese are buying 1000 new cars every day. If the U.S. slows, where will they get the income to buy the new cars, that use up the resources from Australia and other countries?

What happens if they really let the Yuan go?

Brazil, Russia, and India all face the similar growing pains.

At some point there must be a pause. The pause i fear could be very painful in the short to medium term.

I'm very curious to your thoughts?

Great post from sum1 right in the midst of things there in China...

I heard China has been growing at 8%+ for the last 27 years... so this growth is not at all new phenomenon at all as to what many people thing... but just acceleration..

I heard that China is only using 0.7 barrels of oil per person per year; whilst in Korea its like 20...

- "When, not if, the residents of the coastal cities of China, that's 165 million people, have the same percentage of automobiles as South Koreans have today, we'll need two new Saudi Arabias operating flat out."

From: http://www.canada.com/nationalpost/news/story.html?id=e1184a08-779d-4427-aeab-be4c04268e59

All the above is just from my reading; but as somebody living there, u would be able to see whats happening there...

 

[Julia]

Can China continue its astonishing growth"?

Well, I certainly hope so, even if somewhat modified. The Australian economy (and that of the US) will deteriorate rapidly if China reduces its demand from us.

Julia

 

[Realist]

So there are some empty apartment buildings in China..

No problem, there are 1.2 Billion people ready to fill them.

Yes China will continue to grow faster than most countries, probably for longer than we all live...

 

[CanOz]

From you of all people Realist, i was expecting a bit more......

 

[Realist]

I was politely saying that you visiting China and spotting some empty apartments is in no way of any help in determining China's future. And I find it hard to believe they will stay empty for long.

It's future growth prospects are greater than almost any other country I would have thought, based on nothing more than common sense.

China will grow quicker than Europe and the US. If we are lucky Aus may leverage off China to grow even quicker than China - having 1.2B people is both and advantage and a disadavantage. Having 20M people is pretty much only an advantage when selling resources The wealth is spread thickly - I'm hoping.

 

[Smurf1976]

Long term I see China continuing to grow until it becomes the dominant world superpower, replacing the USA in that role. Ultimately that means militarily as well as economically. With China building its' ties to Russia etc that could come sooner than most expect.

But at some point it's inevitable that they will undergo a major bust IMO. China isn't that different to the rest of the world that they would avoid normal business cycles. In the short term, their fortunes are heavily tied to consumption in the west - watch those faltering house prices in the US for a clue as to where the short term direction of US consumption and Chinese exports lies.

 

[CanOz]

Finally some discussion related to business cycles. Great point! Anyone else?

 

[lewstherin]

To me China's growth has been fuelled by a few key factors:

1.) Low world interest rates has made borrowing extremely cheap. Having loans on tap like this has enabled the West to plough tons of money into China.
2.) Loosened economic conditions within China, enabling some degree of free enterprise and foreign involvement.
3.) Very poor industrial and environmental laws, meaning industry can be spawned with little concern for meeting international standards, and thus very little capital cost in terms of compliance.
Cheap labour and low enviro standards mean a major cost advantage.
4.) State control remains in force, enabling the government to convert/resettle whole village populations at will.

China does not appear overly self-sustaining economically - they are very dependant on overseas buyers for their products. Until such a time arrives that China's internal market can consume more of their products than they export, this situation should remain.
Hence, China remains linked to the US/European business cycle.

I think the US is starting to hit a wall as their massive consumer credit burden has to catch up with them at some stage. The trigger could be interest rate rises, coupled with a downturn in housing and stock markets - as paper wealth gets wiped away, many will find themselves paying off their very real debts at a higher cost.
If this were to run through the whole US economy, consumption and investment will fall as businesses and consumers focus on getting free of their debt load. All of this would mean China's market would contract, and on top of that foreign investment would slow, creating a distinct slowdown for the Chinese.

At the moment China has an industrial setup that mirrors conditions in the early days of the Industrial Revolution in Russia. Low wages, unfair working conditions, very poor environmental standards etc.
As the manufacturing base matures, and as the work-force becomes more empowered economically, I would envisage that Chinese industry will be progressively forced to improve conditions in the face of public discontent.
Legislation like minimum wages, working hours, leave allowances etc will inevitably drive costs of labour upwards.

On top of that, the state cannot ignore the mass poisoning of rivers and other environmental disasters that are occurring due to the current lack of stringent environmental laws. At some point, measures will have to be introduced to kerb the pollution - and these measures will similarly push up manufacturing costs.

The big question is when/if the above things will happen...

 

[hissho]

in the long run, YES.
in the short term, NO.

and the situation will get worse before it can get better.

 

[wayneL]

in the long run, YES.
in the short term, NO.

and the situation will get worse before it can get better.

I think that encaspulates the question very succinctly.

 

[Bobby]

I think that encaspulates the question very succinctly.

Nice Wayne I like your reply

Bob.

 

[Uncle Festivus]

Ah yes, where were we?. The China syndrome phase 2 continues........

~~~~~~~~~~~~~~~~~

March 21 (Bloomberg) -- Deng Yijun, a cargo freight agency manager in Shanghai, faced a dilemma last December.

``I needed a car, but I didn't want to use up my savings as the stock market was booming,'' she says. ``So I used credit cards.''

Deng, 32, was eyeing a Ford Focus that cost about 200,000 yuan ($25,815), roughly equal to her savings. Maxing out three cards, she put 140,000 yuan on plastic and gained 56 days of interest-free credit. She paid the rest herself. Most of her remaining cash went into stocks, including Sichuan Swellfun Co., a distiller whose share price more than tripled in the past year.

Deng is typical of Chinese who are using easy credit to fuel a stocks boom only briefly deflated last month by government threats to crack down on illegal lending. The willingness of banks to break the law to finance stock trades shows the blunt tools regulators wield as they try to manage China's markets.

snip

Deng says she was able to buy the car for three times her annual salary and purchase stocks after card issuers Bank of Shanghai, China Merchants Bank Co. and China Construction Bank Corp. gave her credit over the phone. While Deng broke no laws, many investors are illegally buying stocks with borrowed money.

snip

Some 300 billion to 500 billion yuan of bank loans, almost all refinanced mortgages and revolving consumer loans, may have gone into the stock market in the past year, Yin estimates.

http://www.bloomberg.com/apps/news?pid=20601084&sid=a5F_DOqtJDjA&refer=stocks

 

[Sean K]

Just keeps running...

China expands a blistering 11.5% in Q3
October 25, 2007

CHINA's economy expanded at a blistering pace in the third quarter, the government said today, even as it declared the immediate overheating risk had receded thanks to a series of control measures

The world's fourth-largest economy grew by 11.5 per cent in the third quarter and the first nine months of 2007, compared with the same periods a year earlier, the National Bureau of Statistics said.

“Due to the macrocontrol policies adopted by the central government, we have prevented the economy shifting from speedy growth to overheating,” bureau spokesman Li Xiaochao told a briefing in Beijing.

“The energy supply situation has improved markedly, the transportation systems have expanded, and the bottleneck problems have been eased.”

As evidence of the slight slowdown, he pointed out that economic growth in the second quarter had been 11.9 per cent.

Inflation, too, was down in September, standing at 6.2 per cent compared with 6.5 per cent in August, he said.

Even so, China is all but certain to experience its fourth consecutive year of double-digit growth in 2007 and is expected to soon overtake Germany as the world's number three economy.

 

[jonojpsg]

I saw somewhere recently that China's national savings (by which I assume are dposits by people in banks?) are in the order of 5 trillion yuan!! I think that puts things in perspective a bit as far as people taking out loans to put in the stock market. I would be interested to see what the per capita savings of some different countries are, eg Oz, US, China, Japan, if anyone has that data??

 

[KIWIKARLOS]

prob is China is growing of the back of the US consumer and they are almost completely tapped out and up to their eye balls in debt. Funny thing is that China is funding most of this debt.

If the US consumer spending plummets China can't make up the demand at home so it will have huge excess capacity and noone to sell their dodgy wares to. If the US consumers start defaulting on debt the Yuan goes higher the US dollar goes lower and China losses alot of its buying power.

In my opinion the US is screwed then China will follow.

 

[2020hindsight]

http://www.abc.net.au/news/stories/2007/10/26/2071042.htm

Costello warns of market 'tsunami'
Posted 6 hours 23 minutes ago
Updated 6 hours 21 minutes ago

Federal Treasurer Peter Costello says international markets will be hit with a "tsunami"-like effect when China eventually adjusts its currency.

China has been under strong international pressure to float the yuan. Mr Costello agrees it should do so but he expects that when it does there will be major volatility.

"The day they decide to float their currency you are going to get huge reversals of financial flows around the globe, which will affect all exchange rates, that's why I compared it to a tsunami," he said.

Mr Costello says his comments have nothing do with the prospect of the Reserve Bank lifting the benchmark interest rate after they meet on Melbourne Cup day.

"This has nothing to do with the Reserve Bank and its meeting. This is an observation about the global economy, looking out over the horizon," he said.

"And the point I made yesterday when I was asked about Chinese growth is I think Chinese growth will continue. It will go in fits and starts. It won't be even growth.

"It has a long way to go but the Chinese at some point will have to make a decision on their exchange rate."

He says as China becomes more open and democratic, it will be good for the world - but there will be a lot of dislocation along the way.

"This is not something that's going to happen in the next couple of weeks. This is something that could happen in a year's time or in five years' time," he said.

"But you are seeing a lot of volatility in international financial markets at the moment. I think during the period I've been Treasurer, the Australian dollar has been as low as 47 cents against the US dollar, and now I think it's as high as 90. That's doubled in recent years."

Mr Costello also says the US subprime crisis is sending ripples through the global economy.

Perhaps after the Olympics ??
I seem to recall several Olympic cities (possible exception of LA?) seem to have "hit a wall" after the Games

 

[2020hindsight]

here's another post from the ABC archives..
George Friedman predicted (back in Feb) that China would have problems this year

Only 8 weeks to Xmas folks

Best Xmas present would be that he was proved wrong I guess.

http://www.abc.net.au/rn/counterpoint/stories/2007/1849915.htm
In the case of China, the most important thing is that China has, contrary to what many people think, severe economic problems. It is certainly a dynamic economy, but like any economy what goes up must eventually come down, to some extent. 2007 is a year in which that's going to happen, and many of the optimistic assumptions about the Chinese economy are going to prove themselves to be untrue.

So while certainly the US-Islamic war is going to be very important, to some extent it's already been redefined as the US-Iranian conflict and we expect negations to take place that will, if not fettle the war, certainly contain it in 2007 in some ways. We're really looking at Russia and China as more interesting and more dangerous places.


Paul Comrie Thomson: You mention in your report that what goes up must comes down in terms of China, and you talk about this ongoing problem of bad loans. Can you enlighten us a bit on just how bad the non-performing loans problem is in China?


George Friedman: The conservative count of non-performing loans is $600 billion in non-performing loans. A more realistic estimate that comes from companies like Ernst & Young are $900 billion in non-performing loans. There are some who say that non-performing loans are in the $1.2 to $1.3 trillion range. However you look at it, we're talking about somewhere between 30% and 60% of the Chinese GDP being bound up in bad loans. To benchmark it, when Japan reached about 15% non-performing loans of GDP it began its severe generation-long recession.

When East Asia, particularly South Korea, for example, reached about 20%, 22% it began to tumble. So looking at those two prior Asian benchmarks, we look at China's bad debt problem, its non-performing loan problem, and it is already substantially exceeding that, and we're already seeing the precursor events that we saw in Japan and East Asia; profitless export surges, tremendous growth, demand for commodities, money leaving China for investment in other countries. These are things we saw from Japan in 1990, we saw it in East Asia in 1996 and we're seeing it again here.

 

[Uncle Festivus]

China will bust from 2 angles - falling consumption from it's customers, mainly the US, and the corrupted, shamble of a financial system the internal economy is based on due to the communist ideology.

This is the crux of the problem -

George Friedman: The conservative count of non-performing loans is $600 billion in non-performing loans. A more realistic estimate that comes from companies like Ernst & Young are $900 billion in non-performing loans. There are some who say that non-performing loans are in the $1.2 to $1.3 trillion range. However you look at it, we're talking about somewhere between 30% and 60% of the Chinese GDP being bound up in bad loans. To benchmark it, when Japan reached about 15% non-performing loans of GDP it began its severe generation-long recession.

The Shanghai stock market is telegraphing that Chinese appetite for gambling on shares is on the wane -

 

[Wysiwyg]

This is something you won't see in Western countries. A whole modern city constructed to domicile Chinese citizens. But no one lives there ... yet.