
China Can’t Sustain Its Debt-Fueled Binge, Moody’s Says - JumpCrisscross
https://www.nytimes.com/2017/05/23/business/moodys-downgrades-china-economy-debt.html?em_pos=small&emc=edit_dk_20170524&nl=dealbook&nl_art=5&nlid=65508833&ref=headline&te=1
======
ryandamm
I think the best model to understand this is Michael Pettis's balance sheet
analysis. He covers it extensively, but here's his latest digest of the model:

[http://carnegieendowment.org/chinafinancialmarkets/66221](http://carnegieendowment.org/chinafinancialmarkets/66221)

It really makes clear how stark the choices are for China. The debt binge of
the last ~10 years has masked the flattening out of productive investment, and
there will need to be a reckoning. Hopefully it's a soft landing, but that
will depend on politics as much as anything.

~~~
drcode
It seems like smart people have been predicting that China's growth is
unsustainable on a regular basis for at least 15 years... it's tough for an
average HNer like myself to take the time to tell which "expert" is just
blowing smoke and which expert truly has a handle on the salient facts- Guess
all I can really do is simply wait and see who ends up being right...

~~~
hackuser
Agreed, to an extent (though not every 'expert' is equally reliable). Two ways
I look at it:

1) Generally, the nature of a bubble is that nobody knows when it will pop.
People knew about the U.S. asset bubble in the mid-2000s for years, but even
those not caught up in the bubble mass psychology couldn't accurately predict
when it would collapse. The same was true of the dot-com bubble around 2000.
You can be right that there is a bubble, but be far wrong about when it ends.

2) There was a stock broker looking for new business. He cold called 512
people (he must have been a quant); half he told to sell X stock, half he told
to buy. The next week he called the 256 for whom he'd made the right
prediction and did the same again: Half he told to sell, half to buy ...
several weeks later he was down to 16 people. He called all of them and said,
'look, I was right 5 times in a row ...'.

~~~
zeusk
> There was a stock broker looking for new business. He cold called 512 people
> (he must have been a quant); half he told to sell X stock, half he told to
> buy. The next week he called the 256 for whom he'd made the right prediction
> and did the same again: Half he told to sell, half to buy ... several weeks
> later he was down to 16 people. He called all of them and said, 'look, I was
> right 5 times in a row ...'.

Except, what you just described is a scam and not something a registered
broker can do.

~~~
ars
It sounds more like a parable, not an actual story.

The point is that if enough people make prediction, some of them will right
over and over and over - even though it's all random.

~~~
hackuser
> a parable

Ha, that's a great observation; I hadn't thought of it. On one hand, I'm very
uncomfortable with any implied comparison to the most well known practitioner
of parables. On the other, many others have used the form. Maybe I'll write
all my HN posts in parable form - 'those who have ears to hear' will
understand; the others I won't have to deal with. I could use it for business
emails too.

Coming up with that many parables might be challenging.

~~~
scandox
Gotta say (as a non Christian) nothing wrong with Jesus' reasoning and
storytelling skills. Just a case of one bad axiom I guess.

~~~
hackuser
To be clear, I wasn't uncomfortable with the implied comparison because I have
something against Jesus or the Gospels. I was uncomfortable because I don't
want anyone to think for a moment that I am comparing myself to him. (I'm
not.)

~~~
ars
If it helps, when I said "parable" I had no idea that Jesus would in any way
be implied. I had never even heard of his parables before your reply.

I actually replied to you ask who you were referring to, since I had no idea,
but then another comment said who it was so I deleted my reply.

I clearly am never going to be able to use the word "parable" again. I'll say
fable from now on, even though fables have animals in them, not humans.

------
cletus
China's development has really been fascinating.

10-20 years ago I can remember the analyses arguing China can only continue to
grow with liberalization, even outright requirements for democracy. Perhaps
these pronouncements are still being made.

I've come to believe that what's really useful to people isn't "democracy" or
"freedom" rather rather stability. That means political and economic
stability.

One thing I find fascinating is China's ghost cities. I remember reading some
report that said housing for 64M+ was sitting vacant, largely unaffordable to
locals. Now one can argue that such work is stimulating the economy by
providing employment.

But here's another view. As much as we might (rightly) deride Trump, there are
the (very) occasional nuggets of truth. Some might say even racist clocks are
right twice a day [1]. Whatever the case, the specific issue is
infrastructure.

Infrastructure in the US _is_ crumbling. What's more, a lot of infrastructure
exists now that would be completely uneconomic to build now. Look at the
Second Avenue Subway in NYC that apparently somehow cost $17B+ to basically go
50 blocks. What's more, a lot of this infrastructure has not and is not being
maintained.

So why is this unaffordable to build now? I suspect the answer is that labour
is simply too expensive as is real estate.

So what if China is simply building infrastructure now while it's relatively
cheap to do so? Obviously once built infrastructure depreciates but inflation
also works in your favour (assuming positive inflation).

Now I don't know if that is the Chinese government's thinking but I find it an
interesting thought.

[1] [https://forums.penny-arcade.com/discussion/133477/new-
patv-e...](https://forums.penny-arcade.com/discussion/133477/new-patv-episode-
and-comic-for-monday-december-20th)

------
lucasschm
For this subject I would like to offer this counter view: Why China bears are
wrong: An interview with Andy Rothman ([http://supchina.com/sinica/china-
bears-wrong-interview-andy-...](http://supchina.com/sinica/china-bears-wrong-
interview-andy-rothman/))

As it is likely for someone to mention the Ghost cities, I recommend this
video [https://www.youtube.com/watch?v=AyBBQ-
wF87M&list=PLxh5xkC0W-...](https://www.youtube.com/watch?v=AyBBQ-
wF87M&list=PLxh5xkC0W-vABq5Eq7SL2z9-uD8J2OATf&index=4)

~~~
seanmcdirmid
Ghost cities are weird: first they talk about the ghost cities, then others
say the ghost cities are filling up. If you actually visit, say, Ordos New
Town, you'll really get that, no, those ghost cities really exist.

Some will fill up, like Pudong did, I get Tianjin's new financial district
will also. But those in areas with little economic hope in the near term
(Ordos and dying coal), they really aren't going to happen before the
buildings become substantially rundown (given Chinese concrete overbuilding to
make use of unskilled migrant labor, these buildings require a lot of
maintenance and will look decrepit sooner rather than later).

~~~
whazor
I wonder how much percentage of all buildings are empty in China. In my visit
I saw plentiful empty skyscrapers, especially next to decaying homes where
people would still live.

~~~
seanmcdirmid
Local governments have ways of telling, e.g. By electricity usage. You can
also try counting the lights on at night to get an idea of apartment occupancy
(a fun last time at the apartment complex I used to live in). Someone
definitely knows, but you can be damned sure that this information is
considered "state secrets."or

------
maerF0x0
All the fears around growth is from people not understanding the difference
between absolute growth and relative growth. Which is better growth of 1000 or
3% ? the developed world cannot grow at high percentage points because they're
so large.

This video more or less shows the insanity of trying to grow at a fixed rate
(say being an "emerging market" at 6% per year) for an indefinite timespan.

[https://www.youtube.com/watch?v=sI1C9DyIi_8](https://www.youtube.com/watch?v=sI1C9DyIi_8)

------
paradite
China's response (English):

[http://news.xinhuanet.com/english/2017-05/24/c_136311925.htm](http://news.xinhuanet.com/english/2017-05/24/c_136311925.htm)

------
melling
I hope China can continue their development of high-speed rail. They have
about 12,000 miles of track, more than the rest of the world combined, and
they should have almost 30,000 miles by 2030. They are trying to improve the
performance:

[https://www.rt.com/business/387089-china-high-speed-
trains/](https://www.rt.com/business/387089-china-high-speed-trains/)

They are continuing to maglev trains too:

[https://www.nextbigfuture.com/2017/05/more-high-speed-
rail-a...](https://www.nextbigfuture.com/2017/05/more-high-speed-rail-and-
maglev-lines-in-china.html)

Hopefully, it will encourage other countries to widely adopt the technology.

------
matheweis
Ok, this is probably a silly question, but who holds all the debt now? The avg
US citizen would say China holds much of the US debt, but now it sounds like
China is borrowing their way into trouble too... it's not any of these third
world countries... who is it?

~~~
wu-ikkyu
>The avg US citizen would say China holds much of the US debt, but now it
sounds like China is borrowing their way into trouble too... it's not any of
these third world countries... who is it?

The central banks, obviously. Many of them not being beholden to a nation but
to private individuals.

~~~
JumpCrisscross
> _The central banks, obviously. Many of them not being beholden to a nation
> but to private individuals._

Example? The largest countries' central banks are accountable to their
governments.

~~~
kadfasd4324
They are not. They are legally independent in many countries incl. the US,
Japan, India (de facto), S. Korea, and Thailand.

~~~
JumpCrisscross
> _They are legally independent in many countries_

We're saying the same thing. Most central banks, _e.g._ the Federal Reserve,
were created by law. The Congress giveth and the Congress taketh away. In any
case, the comment I was replying to seemed to imply central banks are
privately owned. That's what I was refuting.

~~~
kadfasd4324
Fair enough.

I think the comment was implying that their policies, not being entirely
democratically accountable - the effectiveness of these instruments themselves
being arguable - are very likely going to be swayed by private interests.

I know there exists a revolving door b/w FDR and major Wall Street banks, but
I'm not sure about other countries. I'd not be surprised if this were the case
everywhere.

Edit:

'Princes of Yen' is a documentary that I found did a good job of illustrating
the dangers of having such high powered unaccountable cabals (without all the
BS that is typical in this genre).

[https://www.youtube.com/watch?v=p5Ac7ap_MAY](https://www.youtube.com/watch?v=p5Ac7ap_MAY)

------
pankajdoharey
Here's the thing about China, if it doesn't pay up, the world at large can't
do anything to China. The world is dependent on Chinese export. If China sinks
it will sink the world economy with it. Too Big to fail actually applies to
China. If China falls short of paying up its mortgages or loans on time it
can't be recovered by anyone. The only thing one could do is wait. So all the
talk is useless, China gas got everyone by the balls. There is no way to
threaten China, nor can any sanction be put on China because the world trade
would suffer. China is indeed the world's factory. In my opinion, Moodys is
wrong this Debt-Fueled growth of China will and has to be sustained for
safeguarding everyone's investments, China cannot be sunk at this point at any
cost. Moodys is not the sole authority on rankings and their opinion matters
less and less in the context of China.

~~~
dgregd
China doesn't import that much goods from the west. So crisis there shoudn't
have big impact on US and Europe. Except real estate market. It seems that US,
European land/houses are the only thing Chinese are interested in.

~~~
kerbalspacepro
It will have an impact on resource-exporting countries though.

------
bitmapbrother
>The Financial Crisis Inquiry Commission estimates that by April 2010, of all
mortgage-backed securities Moody's had rated triple-A in 2006, 73% were
downgraded to junk.

Anything Moody's says must be taken into context given their history of taking
money to lie to and cheat investors. Their executives should have gone to
prison and the company should have been liquidated a long timo ago.

~~~
mistermann
Didn't you hear, no one could find enough evidence to convict anyone.

------
theprop
Moody's also says that bundles of subprime mortgages are a AA+ investment.

~~~
justicezyx
Following that reasoning, that probably means China's economy situation would
be much worse.

~~~
ProfessorLayton
I believe the OP is putting the agency's credibility into question, which I
think is valid, considering their role in the financial crisis.

[https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the...](https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis)

~~~
adrenalinelol
There was a financial incentive to look the other way. That doesn't exist in
this case.

~~~
r00fus
They failed their mission to instead chase profits to the detriment of the
public. What's to say they don't have a financial incentive here?

------
fludlight
Detailed press release from Moody's:

[https://www.moodys.com/research/Moodys-downgrades-Chinas-
rat...](https://www.moodys.com/research/Moodys-downgrades-Chinas-rating-
to-A1-from-Aa3-and-changes--PR_366139)

------
jonyt
Presumably this is the same Moody's that predicted the 2008 crash so well? Why
does anyone even listen to them anymore? They failed miserably at their role.

[https://www.theguardian.com/business/2017/jan/14/moodys-864m...](https://www.theguardian.com/business/2017/jan/14/moodys-864m-penalty-
for-ratings-in-run-up-to-2008-financial-crisis)

------
faragon
In my opinion, china GDP is under-valuated (despite government growth figure
cooking). So, I guess that debt will not be a problem. What could be a problem
is private debt, driving to fusion of similar companies, and public bail-out
of banks in case of Chinese housing bubble popping in major cities. Pretty
much what happened in Japan (1989, [1], [2]), EE.UU. (2007, [3], [4]), and
some places of Europe (2007-2009 [5], [6]).

[1]
[https://en.wikipedia.org/wiki/Japanese_asset_price_bubble](https://en.wikipedia.org/wiki/Japanese_asset_price_bubble)

[2]
[https://en.wikipedia.org/wiki/Lost_Decade_(Japan)](https://en.wikipedia.org/wiki/Lost_Decade_\(Japan\))

[3]
[https://en.wikipedia.org/wiki/Subprime_mortgage_crisis](https://en.wikipedia.org/wiki/Subprime_mortgage_crisis)

[4]
[https://en.wikipedia.org/wiki/United_States_housing_bubble](https://en.wikipedia.org/wiki/United_States_housing_bubble)

[5]
[https://en.wikipedia.org/wiki/Spanish_property_bubble](https://en.wikipedia.org/wiki/Spanish_property_bubble)

[6]
[https://en.wikipedia.org/wiki/Irish_property_bubble](https://en.wikipedia.org/wiki/Irish_property_bubble)

------
daemonk
Do ratings agencies like Moody self sustain on the psychology of the people
who listen to them? People who take them seriously factors them into their
decisions. People who don't take them seriously has to still factor them into
their decision because of the people who do take them seriously.

There might be some kind of tipping point where the amount of people who do
not believe their ratings triggers a downward spiral in confidence?

------
salesguy222
Slightly off-topic, but in 2011 when Moody's downgraded the US credit rating,
we all were saying "well, Moody's is feeling a bit moody".

The US continued to struggle in fits and spurts in some industries. But
lately, it has been all "risk-on" for most traders.

We have been through a few "asian asset bubbles" before. Whether this is the
big one is anybody's guess, but sometimes the broken doomsday clock gets the
time right.

~~~
crdoconnor
That was S&P. It coincided with the SEC and the Justice Department
investigating them for fraudulently overrating mortgage back securities.

~~~
salesguy222
[https://en.m.wikipedia.org/wiki/United_States_federal_govern...](https://en.m.wikipedia.org/wiki/United_States_federal_government_credit-
rating_downgrades)

Moody's downgraded on June 2 2011... or should I say at least "changed outlook
to negative"

------
pasbesoin
What it's going to come down to, is whether the Chinese government has enough
control to tell the general public to eat the loses and to make them take it
(relatively peacefully).

If they do, this sets the basis of the play and outcome.

Yes, elites are escaping what they can of their personal assets -- and
eventually, if necessary, themselves or their next generation.

As I stop to think about it, that could actually prove to be something of a
safety valve, from China's perspective.

Anyway, with the Great Firewall and a thousand other things: It's not exactly
as if they haven't been (at all) preparing for this.

------
turingbook
Reactions from China:
[http://news.xinhuanet.com/english/2017-05/24/c_136311065.htm](http://news.xinhuanet.com/english/2017-05/24/c_136311065.htm)
[http://news.xinhuanet.com/english/2017-05/24/c_136312043.htm](http://news.xinhuanet.com/english/2017-05/24/c_136312043.htm)

------
stevesun21
This kind of article to me sounds like, an outside developer look at all the
charts of a system and tell the developers who are working on the system:
"well, this system's going to crash in a week based on the numbers on the
charts". If I'm going to argue with this "expert", I would say, you saw what
you can see, unfortunately, you are not the engineer see all the sh*t of how
the machine works.

------
theprop
What about the US's debt-fueled government? Sustainable?

~~~
alexbeloi
US debt to GDP ratio is half that of China, not claiming the trend is
sustainable but that (at least according to Moody's) China is more at risk of
a runaway debt-spend crisis than the US is.

~~~
Analemma_
Not only is our debt-to-GDP ratio lower than China's, it's lower than most
(not all) countries in Western Europe.

There is so much uninformed hysteria about the US national debt, it's
incredibly frustrating and blocking the implementation of better policy.

~~~
WillPostForFood
By what measure is the US ratio lower than China's? US is worse in the IMF
measure of gross debt to GDP by far. Looking at total debt (government,
corporate, and household), the US is worse: 331% to 250%. What numbers are you
looking at?

[https://www.theguardian.com/business/2016/jun/16/chinas-
debt...](https://www.theguardian.com/business/2016/jun/16/chinas-debt-
is-250-of-gdp-and-could-be-fatal-says-government-expert)

------
dis-sys
Moody's? Is that the same credit rating agency which intentionally inflated
credit rating for risky mortgage investment and eventually fined almost
$1b[1]? It is just so funny that an agency that has already destroyed its own
creditability is still running around and doing credit rating for others.

[1] [http://www.abc.net.au/news/2017-01-14/moodys-agrees-
settleme...](http://www.abc.net.au/news/2017-01-14/moodys-agrees-settlement-
over-pre-gfc-ratings/8182694)

~~~
mistermann
Surprised this sentiment isn't more popular, they've proven themselves to be
both dishonest and incompetent.

This could also be state propoganda, the modern US being what it is.

~~~
kybernetikos
> Surprised this sentiment isn't more popular, they've proven themselves to be
> both dishonest and incompetent.

Maybe because the question of whether they are dishonest and incompetent is a
less interesting ad hominem (ad companis ?) than the question of whether China
can or cannot sustain its debt-fueled binge.

~~~
mistermann
Whether or not it's "interesting", the trustworthiness of the source seems
rather important.

~~~
kybernetikos
> Whether or not it's "interesting", the trustworthiness of the source seems
> rather important.

Not really. If the question is about the popularity of a sentiment, then of
course the interestingness of the sentiment is relevant.

But as with every argument, it's the quality of the argument that is
important, not the arguer. The only way that the trustworthiness of the source
is important is if you are unable to evaluate their argument based on other
factors and were planning merely to trust them or key information they relied
on based on their perceived authority which I agree would be a bad idea.

~~~
mistermann
Economics is far more complicated than most other fields, and you very often
don't know the _real_ "quality of the argument" until years later. So yes, in
this case prior track record does very much matter.

------
osrec
Large seas of debt made sense when they were somewhat more underdeveloped, and
every additional unit of debt could be used for 'easy' value creation. As it
currently stands, I don't see their rate of value creation servicing their
debt. Similar dynamics, albeit to a lesser extent, are in play in India and
other countries in South East Asia.

------
known
Chinese currency manipulation tricks [http://www.economist.com/news/finance-
and-economics/21717997...](http://www.economist.com/news/finance-and-
economics/21717997-government-has-been-pushing-price-yuan-up-not-down-china-
and)

------
kadfasd4324
Does anyone how much external debt is held by China ? I'd imagine their
generally (well-placed IMO) aversion to IMF/WB folk might help them plod along
with the help of their central bank. Money is fictional you know.

------
nihonde
How can anyone put any credibility whatsoever in Moody's ratings after 2008?

They defended their ratings on terrible debt at the time by basically saying
that no one should rely on them.

------
imron
We Rate These Sub-Prime Mortgage Bonds AAA, Moody's Says.

------
rhizome
You know what I'd like to see? What conclusions China's economics community
have had about the US environment.

~~~
siidooloo
The US economy will see a series of booms and busts. As all economies will. As
will China's. When? Who knows? But I wouldn't be the one to bet on never.

~~~
rhizome
Absolutely, but if the US (Moody's, even!) idea of China's cycle is valuable,
then so must theirs be of ours.

~~~
mistermann
Surely the analysis exists, but China isn't dumb enough to publish such
things.

~~~
rhizome
But Moody's is? I find this unconvincing. Could it simply be that it's
available but remains untranslated?

------
lacampbell
My countries economy is very closely tied to Chinas. I wonder what a Chinese
financial crisis would look like here.

~~~
toomuchtodo
Like a local financial crisis.

On the plus side, tier 1 cities are going to cool off (real estate price wise)
if a lot of Chinese money gets burned up instead of outflowed.

~~~
pfarnsworth
If by cool off you mean crash, then yes you're right. But it won't be a soft
landing by any stretch of the imagination.

~~~
toomuchtodo
Tomatoe tomahtoe. Toronto's RE market is already hitting the brakes within the
last week; buyers are walking from deposits, sales are down, listings have
shot up. Everyone is trying to get out the door at once.

------
JackPoach
I am pretty sure that the statement is free for USA as well. I doubt Moody's
will say that though.

------
ausjke
I will wait and see, China was said to be crashing soon since 20 years ago.

~~~
seanmcdirmid
I guess you weren't around when the stock market really did crash a couple of
years ago?

------
vijucat
The day after the Fukushima nuclear incident, the top-voted article on HN was
an extremely confident-sounding article by an expert about how this was a
minor incident, sure to be contained and forgotten. The comments in the
article were dismissive about alarm. I remember feeling a sigh of relief that
the experts had pronounced it a minor incident. As the days rolled by, the
news about Fukushima turned from bad to worse to horrible. Unfortunately, my
archive.org skills were not good enough to dig up the front page of HN around
that time to show you the article in question.

A closer tale about experts being wrong, and persistently so is the tale of
the Japan Bonds' "widowmaker" trade: apparently, a lot of smart people have
been wrong about this:

[http://www.businessinsider.com/hedge-funds-feeling-
confident...](http://www.businessinsider.com/hedge-funds-feeling-confident-
about-the-widowmaker-trade-in-japan-2012-12)

~~~
zeamaize
But Fukushima was a minor incident...

~~~
skookum
Not sure if you are trying to be sarcastic, but:
[https://en.wikipedia.org/wiki/International_Nuclear_Event_Sc...](https://en.wikipedia.org/wiki/International_Nuclear_Event_Scale#Level_7:_Major_accident)

~~~
xrange
If Fukushima is a major event, with no fatalities, what does one consider the
Banqiao Dam event, with 170,000 fatalities?

[https://en.wikipedia.org/wiki/Banqiao_Dam](https://en.wikipedia.org/wiki/Banqiao_Dam)

~~~
vkou
A sign that we should shut down every single hydroelectric power-plant in the
world.

Or, we could be reasonable about these things, and understand that power
generation at an industrial scale will kill people.

