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China's Subprime Crisis Is Here (bloomberg.com)
258 points by RaSoJo on Feb 17, 2016 | hide | past | web | favorite | 215 comments

The American media seems to jump at any opportunity to dismiss China as an economic threat. It makes us feel more secure but leads to a public informed only about one side of China's story. Namely the part our ego can handle. China has regularly surpassed the US in number of cars sold since 2009. China also holds more US debt than any other country. Another way to put that is the US government owes China over 1 trillion USD. This, I believe, is the real reason the American media trips over themselves to write stories that sooth away the nagging fear that China is, or even already has surpassed us economically.

Edit: more interesting facts.

- China's percent GDP growth is more than twice that of the US. (7.4% vs 2.4% in 2015)

- China's government has $3.9T in cash reserves vs the US' $434B.

- China has twice as many children enrolled in primary and secondary school and 50% more undergrads than the US.

We can only say but, but, but for so long.

It's interesting that all of the numbers in your post seem to be significant, but really aren't.

The US "owes" China a trillion USD because the Chinese, investing on a national scale, need a safe investment that can support trillions and trillions of yuans. And in that regard right now, the US is the only game in town.

China's GDP growth is high, but that's because they're starting from a GDP that's much lower than that of the US. As with any logarithmic curve, growth starts quickly and then becomes harder over time. China has a ways to go.

The number of cars sold and the number of children enrolled in school are indicators that China does indeed have a much larger population than the US. Almost all of the BRIC nations have large populations, but are still in the process of turning that into wild economic growth. We'll see.

Other than the missing context for the numbers you provide, I agree with your general sentiment. There is a bit of schadenfreude among the US media whenever China struggles economicallly. This is probably because China is the US's biggest economic and military rival now that the Soviet Union is gone. It's natural to cheer for your team and boo the other team. I wouldn't take too much offense.

> It's natural to cheer for your team and boo the other team. I wouldn't take too much offense.

It is a primitive behaviour because it fosters racism and hatred for others instead of cooperation. The one thing we do not need more of right now is hatred, there's enough of it in the world.

Edit: It is also one thing if a private person holds his opinion (however detestable it might be - I don't care) and if we get this shoved down our throats on a large scale via all types of media and politicians. The latter is what I feel is offending.

Even from an artificial game theoretic perspective, cooperation is often not the optimal choice. I'd say that in real life, even more so.

Especially from an artificial game theoretic perspective. Real life observations of human beings consistently show higher levels of cooperation than rational choice theory predicts alone. You are taking for granted the vast amount of cooperation and trust that goes into your society. It's so seamless that nobody notices it. People notice competition because it's more obvious when people are in conflict than when they are in harmony.

If you want predictions that hold in reality, you really shouldn't look at rational choice theory...

I used the modifier even, because I can trivially fabricate a game where cooperation yields a negative outcome for both (or all) players -- so I was discounting those kinds of games. Real life and games based on real life tend to be less artificial, but your point is well-taken.

Sure, if your view is that of a sociopath. Without cooperation you'd be sitting on a tree.

There'd be no society, institutions, states, healthcare, education, families and friendships without cooperation.

I think you grossly misunderstood my point.

Furthermore, entire social theories are built on the idea that selfishness is the driving force behind all human behavior. I could quote Nietzsche or Schopenhauer, but there are also contemporary examples (Dawkins and Singer, to name a few). I don't know if I agree with them or not, but there's plenty of conceptual drilling to do before dismissing them as "sociopaths."

Why would growth be "logarithmic"? Growth is exponential, with rates that yes, probably decrease over time. It's not logarithmic.


An exponential curve, by definition, does not decrease over time.

Sure, but a piecewise-linear function on a log-log graph is still qualitatively "exponential growth", with a rate which changes over time.

Are you serious? As they start reaching the upper levels of wealth the ability to keep catching up decreases dramatically. When they are an impoverished country and a wealthy partner throws money at and around them, they will start catching up fast because that amount of wealth is massive compared to what they had.

Logarithmic growth would literally be sub-linear growth. Historically countries growth looks something like a piecewise-linear growth in a log-log graph.

Are you sure you're not thinking of "logistic".

Another thing is Americans have very little understanding of their own history; particularly how America went through the same type of tumult as China in its early economic development. Financial crises were the norm (and still are) and it was a wild place with loads of corruption and vast ungoverned / autonomous regions.

Yes, soon China will have a financial crisis. It will have to undergo restructuring and debt forgiveness. It isn't going to evaporate from the earth.

As an interesting side note, the US has the largest shadow banking sector (as % of all financial assets) in the world: https://www.imf.org/external/pubs/ft/gfsr/2014/02/pdf/c2.pdf

One big difference: there's been a lot more research on economic matters since America's early tumult. There have been warnings about China's debt issues since the issues started.

Hey thanks for the link.

  China also holds more US debt than any other country
... except the US and domestic sources, which hold 2/3rds of all our debt. In other words, domestic sources hold over 9x the debt that China does.

It's pretty typical for institutions to buy their own government's bonds.

I don't have any formal education in economics, but...

The reason that a bank holds government bonds is different than the reason a private investor would do so. Government bonds are the strongest type of reserve a bank can hold. Less safe reserves require a discount from face value. So for a bank there is a balance of risk between cheap and safe reserves like Treasuries and more expensive but better returning paper. A bank is always going to hold a mix of paper as a reserve[1].

China? China hold's US debt in order to be able to stabilize their currency against the dollar. And to backstop the value of their currency on the world market.

I don't see anything abnormal about any of this.

[1] For a bank, if the ratio of loans outstanding vs reserves in hand gets too low they can't loan out any more money. And since a bank makes money on fees inability to make loans is bad bad bad.

everyone touts this as if it makes a difference. as if the US defaulting would be fine because it's defaulting to US based creditors vs. foreign ones.

The US can't default because it prints the currency it's debt is denominated in.

the US can default if it wants to.

Oh silly, why would anyone want to...


Oh yeah, now I remember why our credit rating was lowered.

Think of it this way. Your parents borrow $10000 to throw a big party--one that you were not allowed to attend. After they die, their wills are read, bequeathing unto you $10000 in festivity debt, plus 50 years of interest. They never paid for the party, despite having such a great time at it (or so you assume, not having been there to judge).

Now you have a choice. You can try to maintain the postmortem reputations of your parents, by accepting their debt and making the payments. Or you can tell the creditors to FOAD.

For some reason, not only did our parents do that to us, but our grandparents did it to them, they chose to inherit the debt, and they still borrowed more money to throw their own party.

With government debt, the generational boundaries are not so clear, and the inheritance of debt smears together across thousands of deaths. But essentially, previous generations have been paying forward their debts instead of paying them back, to the point where almost everyone in the society is essentially born owing money to someone else. We already have so much inherited debt that we just can't afford to borrow the money for our own party. Also, we can't opt out.

That's not altogether untenable. I'd be willing to save up money and wait to throw my party until after the budget requirement is met. But it's hard to save anything when so much of your income is being sucked up by your elder generations' debt payments. And it is especially galling when people the same generation as you appear to be enjoying a party to which you were not invited.

That's the most persuasive rhetoric I know of in favor of repudiating national debt. To not do so is to reward the gross fiscal irresponsibility of our forebears.

The rhetoric against it, and also against mere default, states that it would devastate the ability of the current government to borrow more money. In other words, it would require the government to be more prudent and rational in regard to its budgeting. How is that a negative?

But that wasn't why the House Republicans threatened default. They were sending a big "F U" to the Obama administration, and playing a juvenile game of Chicken to do it. And they were only going to force some missed interest payments, without questioning the principal. Repudiating the debt would mean no more interest payments, and no repayment of principal, either. That would also, of course, cause a massive financial catastrophe that would preclude any partying for a long, long time, but at least it would temporarily stop the vicious cycle of kicking the snowball further down the mountain until it is so large that it starts killing any people unlucky enough to get in its way.

I'd love to have the national credit rating lowered. It would help stop the party-goers from running up another trillion that the non-invitees are ultimately tasked with paying off.

There's another way of looking at it. Debt can be an investment. Compare the rates of inflation vs. the interest rates on bonds. Please let me know if I'm wrong, but... isn't the government making money with them at this point?

Today, maybe.

Don't presume that the government is necessarily using the sale of lower-interest bonds to pay off the principal on its higher-interest debts.


As long as the principal on the bond cannot be repaid out of actual revenues, every bond you sell at a negative yield is one that may have to be refinanced at a positive yield later.

>Bass, whose Hayman Capital Management LP has a multibillion-dollar bet that the yuan and Hong Kong dollar will fall, told clients in a letter that his firm estimates that China’s liquid foreign reserves are $2.2 trillion at most. That compares with the $3.23 trillion reported by the People’s Bank of China, the central bank, for the end of January.

>Bass said in his letter that some of China’s reserves already are tied up in institutions such as policy banks and one of its sovereign-wealth funds.

>“The view that China has years of reserves to burn through is misinformed,” Bass wrote. “China’s back is completely up against the wall today, which is one of the primary reasons why the government is hypersensitive to any comments regarding its reserve levels or a hard landing.”


It only seems like that because journalists like to write the same things as every other journalist. For almost 20 years I read stories about how China would surpass the United States in both economic and military power.

There are a lot of underlying facts to China's investment driven growth cycle that can be explained in math and global trade balances. Their reserves can be spent very fast. GDP growth doesn't matter so much if it's being spent on infrastructure that won't be maintained and will fall apart. In the past year or two, a giant piece of the GDP growth may have been from financial tricks as insolvent companies try to shift money around, offering high interest rates in the process (continous economic growth for a really long time mean no recession to shake out the leveraged companies which are surviving by finance alone, or outright scams.)

In the very long term, I think what will matter is the messed up demographics (shrinking population off balanced by too many males) and lack of diversity.

Japan had a similar death of growth situation after their investment driven model ran out of steam and their demographics shrunk. The big difference being their population was nearly all living a first world lifestyle by that time. China's isn't.

China can still be an important country. They can make a ton of stuff. They can wield outsized military influence globally thanks to nuclear weapons.

What does lack of diversity have to do with economic growth?

The suspicion is that diversity of ideas and experiences allow groups to more easily evolve and solve problems. Even in a room full of males, if some come from different industries, they may more easily be able to pull together best practices each other had never heard of. Does this also apply to age, gender, ethnic, and cultural background? May be it doesn't.

At the least I believe that this gives the US a huge advantage in attracting talent because the best from around the world can feel more at home here.

This needs to be observed through long term economic endurance rather than measurements of shorter term investment-driven growth like China, Japan, or Brazil experienced.

US treasuries are at historically low rates -- if China dumped 'em all it probably wouldn't move the needle that much. And the reason they hold so many is not as some control play against the US -- its because it was the best way to devalue their currency enough to support exports.

The research that I did on this for my grad school project with the GAO suggested that there was generally enough liquidity in the secondary bond market to absorb even a mass sale from China over the time period required to do so.

When you say there's enough liquidity, do you mean there's enough for the price not to move at all, or enough that there isn't a temporary overreaction in the price?

Won't let me respond to the comment below this one, but China doesn't determine the volume of the secondary market for UST. It's mostly in New York and in London.

Right but that market's volume changes over time and China gets to choose, with in some limits, when to sell off their bonds. This gives them potentially much more leverage than a static view of the situation might imply.

Yes but they would have to sell it on a secondary market. Those only exist in New York and in London, and what our research found was that the liquidity in those markets was enough to handle a selloff. The short version is that the Chinese are limited by the markets that they are able to sell these instruments, and not vice-versa.

That may be true in the current environment, or in that which you measured in your study, but might be totally different in a struggling economy. Say they decide to have a massive sell of at a strategic moment. Combined with other factors it could have a larger effect. The value of one play matters in checkers but in chess it's the combined value of your moves that win the game.

>Say they decide to have a massive sell of at a strategic moment.

You can't sell into a vacuum. Hence, if they are "selling-off" at a strategic time, then there is someone "buying up" at the same strategic time.

A struggling economy is when demand for U.S. Treasuries is the highest, because people flee to safety in troubled times, and financial instruments don't get much safer than U.S. Treasuries. There would be no shortage of buyers if China decided to sell off in a struggling economy.

China chose to put their own wealth into U.S. Treasuries, and therefore China will do everything it can to ensure that it can extract at least that much wealth out of U.S. Treasuries. They don't have a $1 trillion of free money that they can burn up just to hurt the U.S. by selling low. They need that money back!

The amount of U.S. debt held by China is often viewed as a negative thing, but it actually does a lot to stabilize our relationship with them. They want us to succeed financially, so that they can get their money paid back, and so that they have a place to sell the products they make.

Strong economic ties are the major reason we do not have a Cold War with China the way we did with Russia. Neither country wants to change that.

Edit to add: This is why there is so much U.S. reporting on China's economy. Not because Americans want it to fail, but because Americans want it to succeed, and have concerns.

Fed can buy all the bonds it feels like so there is no way to 'flood' the market with T-Bills. Net result would be China selling off it's reserves at a huge discount which would be good for the US.

Last time I looked, the daily trading volume of U.S. Treasuries was about $1 trillion.

"US treasuries are at historically low rates -- if China dumped 'em all it probably wouldn't move the needle that much."

Rates (i.e. yield) and price have an inverse relationship. If China were to sell their bonds, this should reduce the price of bonds (i.e. increase their yield). So, regardless of what we think about the likelihood of this happening, or the magnitude of the impact, 'historically low rates' do not provide any backstop.

Historically low rates means people are buying up us bonds even at crap returns. If China dumped us bonds and depressed the price, it would only make the value proposition that much better for the current bond investors so they would gobble them up and push the price right back up.

> And the reason they hold so many is not as some control play against the US -- its because it was the best way to devalue their currency enough to support exports.

Can you explain how that devalues a currency? Isn't a simpler explanation that the reason they hold so many is because US government bonds were and still are the safest way to invest your money?

China exports a lot to the US, and exporters get paid in dollars. To use that money in China, they need to exchange it, increasing demand for yuan. There aren't enough imports into China to counterbalance this. Buying treasury bonds instead means they don't need to exchange the money and can keep on exporting. It also happens to be a very safe investment.

You could worry that someday the Chinese might want to cash in on this investment, but increasing US exports to China isn't actually a problem. Increased demand for US exports would improve the US economy.

People like to try to figure out which side is exploiting the other, but both sides are largely getting what they want out of this deal.

To buy US bonds you need dollars to pay for them. So you have to buy dollars, paying with your own currency. Which changes the exchange ratio in favor of dollar by means of the supply/demand law. That's how buying bonds devalues juan.

Sure...we would just print more money and pay them back.

QE programs have been propping up Wall Street for years now, and it would be just more of the same.

No need, there are so many others looking for yield who would buy the bonds.

How it looks depends a lot on your bias. The fact remains that China can soak up $1T of US liquidity.

Yes, they 'can' soak up $1T of liquidity the way I 'can' lock myself into my house and set it on fire. Common sense suggests they will never actually do so.

I'm not very familiar with this issue but could you please explain how China can soak up $1T of LIQUIDITY when most of this $1T is, as I understand it, in bonds. Wouldn't this debt being in bonds mean that 1) there is a schedule of payments that have already been accounted for in the budget and 2) that they cannot "call in" the debt?

Certainly China could refuse to buy additional bonds that we put out which may impact liquidity but there are always buyers for US debt - Japan was the largest foreign holder of US debt just last year.

China can sell US bonds to buyers for slightly less than the US government. This would actually create more liquidity in the US bond market but effectively reduce the US government's ability to finance more debt. The US government would have to sell bonds even cheaper to finance more debt. Whether this would have a big effect would depend on a lot of other factors but it's a significant playing card in the Chinese hand.

Replied above, but the secondary bond market is liquid enough to absorb this event over the time period required.

$1T is a joke for US economy. The fed pumped how many more than that with QE programs?

China's GDP is misleading, everyone including the government themselves doesn't trust it fully(see keqiang index), but odd enough, anyone else's method is more problematic. Then again, it is not reliable, but doesn't mean it is blatantly lying, you need to decide yourself to which degree you would bet on it.

If anything the GDPs of relatively poorer countries are underestimated.

everyone's gdp is slightly misleading.

Those are strange metrics of success you chose: number of cars produced annually, amount of public debt held.

I'd have gone with GDP, military strength, set of advantageous alliances, or some other measure of economic, military, or political power.

China's alliances are with the youngest regions with big growth potential - much of Africa, Asia, Iran, and now central Asia and Latin America. US has hitched its wagon to the declining western Europe.

> has hitched its wagon to the declining western Europe.

We are declining? I wish someone had told me.

You read it wrong. It's cash in hand not public debt they have more of.

No, I read it right. It's American public debt they hold. They don't have 1 trillion dollars in cash sitting in a vault. They are holding U.S. Treasury bonds.

And again, I don't understand why having 1 trillion dollars in a reserve bank is a useful measure of economic power. The Chinese economy has a GDP of $10tn compared with the U.S. economy of $17tn. That is an example of a meaningful metric of power.

^^^ the parent commenter edited his entry after I submitted my original comment, which changes the relevance of my comment.

I think it is more like economic long term insurance than power.

They have $3.9T worth of cash reserves sitting in a vault in addition to holding over $1T in US debt.

No, they don't. There's only 1.4 trillion dollars in circulation.


Not all of their cash reserves are denominated in US dollars.

There's around 5 trillion US dollars worth of hard currency in the world. http://gizmodo.com/5995301/how-much-money-is-there-on-earth 80% of it is not sitting in a vault in China.

Those are some nice metrics you have there. Shame if something were to...happen...to them...

You simply cannot trust Chinese government statistics at face value. Every level of government lies to make itself look better, because they are not accountable to the people but instead to punitive development goals that could have moderately successful bureaucrats uprooted and replaced in a nanosecond if they fall short anywhere.

China is the Titanic of nations: huge, ostentatious, and easier to snap than it looks.

A few points to ponder:

- Money spent counts toward GDP, even if the money comes from a bank loan that will never be repaid (Example: big real estate project in a third-tier city that will never sell for its listed price)

- China's foreign reserves can not be used to pay back debt denominated in Chinese Yuan (foreign currency reserves are the result of people/institutions giving the Chinese government foreign currency in exchange for Chinese Yuan -- you can't do the conversion twice)

- China has a shrinking workforce due to demographic shifts. Specifically, they have moved from an agrarian birthrate to an industrialized one.

You are correct that China has a huge population and workforce. Their wages are rising (which is good for China!) which makes them less competitive as the factory to the world. The Chinese are making progress at moving up the value ladder to help justify those higher wages, but they aren't quite at the top yet. And the workers are very much getting squeezed between high living costs and soon-to-be higher costs to service all that debt and pay benefits to those not in the workforce. These are some reasons why experts are suggesting that China needs a new and more sustainable growth model.

The Chinese government will not allow the Chinese banks to fail the same way the USG did for Bear Stearns. They will likely buy the bad loans from the banks at face value and put them in government-owned asset management companies who will attempt to restructure them.

The cynic in me expects it will probably go worse than Japan since the '90s.

Also China had a positive current account balance of 347 billion dollars in 2015, while the US ran on deficit each year since 1989 and had one of 460 billion dollars in 2015.


What you linked is about the federal budget not the current account, which is something totally different: https://en.wikipedia.org/wiki/Current_account

China can do things at a scale the West in general, and the US in particular can't even fathom.

I was in Tibet with some friends in October. At one point, our tour bus was detoured, because the bridge on our scheduled route wasn't big enough for it, so we drove a couple hours out of our way, and just happened to pass a 10MW solar plant. In the middle of Nowhere, Tibet. A thing we wouldn't even have seen if we hadn't had to detour down a dirt track road, still under construction (to the point that we had to stop and wait for the equipment that was carving the road bed out of the mountain face to clear enough room for our bus to pass). Who knows how many other such hidden infrastructure gems there are, down other roads that tourists don't get permission to use?

Later, we passed a seemingly endless convoy of dozens of fuel tankers and flatbeds loaded with construction equipment — all military green — headed south, as we were returning to Lhasa from Mt. Everest base camp. Doing some digging, it turns out this materiel was all accumulating at the Nepalese border.

See, just a week or two previously, Nepal had passed its new constitution, which favored closer ties with China over India. India, used to being Nepal's big brother and pushing it around, subsequently closed their border with Nepal — the border which, by treaty, was the only route through which Nepal could import fuel. Consequently, Nepal was starting to experience a ridiculous fuel shortage. (Talking with a taxi driver in Kathmandu a few days after having seen this convoy, the petrol rationing was down to 7L per family per week. Our flight from Kathmandu to Lhasa — about a 90 minute flight, going the long way, so people could get a view of Everest — was on an Air China A340, because they needed to send a plane that could carry enough fuel for the round trip, as there wasn't enough Jet A at KTM for the return.)

These convoys of fuel and construction equipment were waiting for a new treaty to be signed between Nepal and China, allowing emergency fuel imports from China. The purpose for all the construction equipment? The Nepalese side of the road that runs from Kathmandu to Lhasa was still destroyed from the Gorkha earthquake. The estimates I was reading suggested that, once the border was opened, the Chinese would be able to rebuild the road from the border to Kathmandu in about three days, and have fuel continually running down the repaired road as long as Nepal needed it.

China just happened to have the materiel on hand, in Tibet, to respond within days of India closing the border and Nepal going into crisis, with sufficient manpower, equipment, and fuel to rebuild a hundred-odd kilometers of mountain road in a few days and keep a city of a million people, and who knows how much of the rest of Nepal, from collapsing.

But they're completely backwards and corrupt, and have no idea what they're doing.

That's a neighbour so there's an obvious local power advantage. It's not unimpressive though and I completely agree about there being a scale and general surplus of engineering prowess that the rest of us just can't comprehend.

What is perhaps more alarming is their development of Africa. I passed through a few African countries last year and China was everywhere. They're in the up-and-coming metropolises like Addis Ababa, they're in despot states like Zimbabwe and they own vast numbers of resource mines in places like Zambia (copper) and Namibia (uranium).

Now almost every sub-Saharan African country has Chinese mining activity.

And the story is the same in all these places. China promises roads and power stations for mining rights, then they do all the work. They ship everything over, including workers. If there is any untrained scrot work for locals, they get paid a tiny fraction of what a Chinese worker would —let that sink in— but anything else is Chinese. There's no local training, no real number of local jobs.

They're investing hundreds of millions in exchange for the infrastructure they use to strip-mine a country.

While we're all fretting about how much cash China has, they have built a resource network that covers half the planet. They have millions of engineers and ton of resources and the political power (the debts of every other major power) to get away with nearly anything.

It's staggering, isn't it?

> They're investing hundreds of millions in exchange for the infrastructure they use to strip-mine a country.

They aren't even investing that much. The equipment is all being bought — from government-owned companies — with government grant money.

They're playing a very long game, and they're incredibly good at it.

It's hard to value the actual investment, given all the stuff and people they're investing is all theirs to begin with. There's very little actual cash changing hands. Tax and royalties on mining is often dodged or offset too.

But the "hundreds of millions" is what it would cost a western country to buy [from China]. You're right though, China isn't losing hundreds of millions for the investment. Probably only a tiny fraction of that.

>They're playing a very long game, and they're incredibly good at it.

People underestimate the ability of a country like China to utilize decades of modern economic thought and their willingness to apply it.

Interestingly, this is a voluntary form of colonialism. An external power comes in, builds a bit of infrastructure, and massively exploits natural resources, with minimal improvement for the local people. Macroeconomically, it also lets them recycle their huge current account surpluses. But this is done without the hassle and expense of a military invasion. The Chinese have it down.

It somehow reminds me of a letter written by Francis Galton, one of the founders of statistics and coiner of the word "eugenics", about the potential for the Chinese in Africa. http://galton.org/letters/africa-for-chinese/AfricaForTheChi... Note that by today's standards his views are pretty barbaric, so it's not easy reading.

well, and now let's look what their "competitor" (west) have done during those hundreds of years of presence there...

Yes Chinese are not saints but pure capitalists, I see no evil in their actions. On the other hand, white man's actions there were evil on quite a few occasions

What's more evil: China following unethical economic practices to lift hundreds of millions out of poverty, or China following the rule book and letting hundreds of millions languish in poverty?

From where I stand, China NOT being pure capitalists for the good of their citizens is more evil.

It's well and good when a developed country talks about ethics and capitalism - they have the luxury to. But when a country where millions live in humiliating poverty, don't have enough to eat, and have no hope for the future, it would be far more evil to follow the book and let down these millions.

What kind of poverty is going to be left after the investments are done and the resources are extracted?

Should the people living there leave, like they are leaving Alberta and North Dakota now? Is your country going to take them?

You might as well argue that two wrongs make a right.

They don't though. We should all be helping underdeveloped African nations reach a basic level of education, economy and healthcare so they can decide their own future in the world.

As it is, they're being economically suppressed.

Help them how?

The best way I can think of to help a developing nation is to buy the exports of its domestic companies.

Foreign investment into resource extraction sends money in when the goods come out, but then it goes all the way round in the revolving door and comes right back out to pay the foreign investors. (Foreign investment in infrastructure at least leaves the roads/wires/pipes behind when the money goes.)

You want to help Africa? Buy African goods and services from African-owned companies, whenever they are competitive in the world market. Treat them like economic grown-ups, and eventually they will shake off the memory of living in their colonial power's basement apartment and getting a weekly allowance.

Stop sending free money. It just ends up fueling corruption and making local business less competitive.

Africa, like everywhere else, is perfectly capable of addressing and solving its own problems when outsiders aren't constantly intervening in its affairs.

You see no evil, yet. I don't want to know what happens when the latest wannabe dictator comes along and nationalises all the Chinese infrastructure...

A pretty short war? I don't see where China would be too worried about a small time dictator? Or was that your point and I missed it? It could be good for Africa for that to happen, have China step in and assume some order, rather than the Chaos that is keeping many of these countries economically down.

And then we're back to the bad old colonial days which the west gets so criticised for...

>> Nepal had passed its new constitution, which favored closer ties with China over India

Nepal passed the constitution barring a large section of its own population (Madehsis et al) from participation in the government function.

This has been the bone of contention. The barred ones are culturally tied to Indian state of Bihar, almost to the extent of having common identities.

There were violent protests in southern Nepal, and slowly the situation got out of control for Nepal government to handle. The same protesters were blocking the major connecting roads from the Nepalese side of border. While on the Indian side there were long queues of trucks lined up.

It is rumored that Indian government helped orchestrating these protests, just as much as it is rumored that Chinese government influenced to keep the Madhesis out.

But at the end of day a that constitution is certainly failing in many aspects.

new constitution, which favored closer ties with China over India.

Really? They have it ingrained in the constitution? If Geo-political situation changes, and they need to re-balance their ties? They are going to need constitutional amendments?

The US view of the constitution as a sacred document is quite unusual by international standards. For many people in many countries the constitution is just another law.

Sacred is the right word. It is seen as an almost religious document written by men who were inspired (as seen by some) by "Christian values" (read God) and it enshrines and protect the most basic moral values.

They look back to the men that wrote it hoping to divine their intent much like those who read the bible.

Well, yes. It's the basis for the machinery of the US government. As time goes on, how do you know what a document means if it uses words and textual shorthand that are no longer in common parlance?

If the document is that far out of date, its meaning likely is too. The founding fathers were human too; skilled legislators to be sure, but we have skilled legislators today too. Rather than try to stretch a document written for a very different time to apply to modern disputes, why not hold a new convention, with a remit not to figure out what people were thinking 200+ years ago, but to figure out the best answers to the questions we have today?

>If the document is that far out of date, its meaning likely is too. The founding fathers were human too; skilled legislators to be sure, but we have skilled legislators today too.

I don't see how a constitution can go "out of date". It's the founding document for a nation - the individual states that compromise the US ratified a document that forms the basis of their association. Individual words and phrases have gone out of common parlance, but to change the meaning of the document would require the agreement of the parties, i.e. the states. Is it ever reasonable for the other party to tell you "Now that you've signed this contract, we're going to change it"?

The genius of the US constitution is that it sets up a mechanism for a system of government without getting into policy. Policy is decided by the legislature, and the legal code changes all the time.

But the structure has served us well and is better than, or at least no worse than, that of anyplace else. Human nature hasn't changed, after all, and there hasn't been any real advancement in government for thousands of years.

The lawyering over language happens because a document is just a means of communication, after all - there's no purpose in a written agreement if you're going to allow the meaning of the words in that agreement to change.

> Rather than try to stretch a document written for a very different time to apply to modern disputes, why not hold a new convention, with a remit not to figure out what people were thinking 200+ years ago, but to figure out the best answers to the questions we have today?

Because you don't need to change the structure of a government to change policy. The legislature is there to provide "the best answers to the questions we have today".

That view of the US Constitution is eroding quickly, if it's not gone already. People are more interested in magically finding new things in the Constitution than amending it to correct oversights.

So, what, India closed the border to a country of 30 million people — the border through which not just fuel but pretty much everything is imported — because LOL?

Southern Nepal — the part of the country that is very closely tied, culturally and economically, with India — went on a general strike for weeks, to the point that there were police killing strikers and strikers lynching police, because they were bored?

Sorry, I didn't read the constitution, myself. I took the word of our local guide, an incredibly bright, aware Nepali gentleman and professor of anthropology in Kathmandu, and pretty much everyone else in the country with whom I spoke about the situation. (The exceptions being people who either didn't understand the situation well enough to comment, or didn't feel comfortable discussing it with a foreigner.)

When was this? I just searched for India and China in their 2015 constitution and it's certainly not there.


Meanwhile, Wikipedia claims, "The promulgation of the new constitution was immediately followed by virtual blockade of all checkpoints at Nepal-India border." but without any citation.

turtles all the way down...

They "can" do those things because they're a tyrannical government that can do whatever it wants without answering to the people. They will be able to implement self-driving cars at a huge scale because they can just say "fucking do it" and outlaw human-driven cars and there's nothing anyone can do about it. Such amazing scale!

"But they're completely backwards and corrupt, and have no idea what they're doing."

What do you mean by that?

(Your story seem to tell quite the opposite.)

I believe it was sarcasm making fun of a commonly held view.

Ok - :-)

>India, used to being Nepal's big brother and pushing it around, subsequently closed their border with Nepal

No we did not close any border. This is false information.

Dude, I was there. 30 seconds' googling yields citations from Time, the BBC, the NY Times, The Guardian, Wikipedia, and others.

How about the guy whose hands were cut off when he tried to smuggle fuel across the border that wasn't closed?

Or did that also not happen?

EDIT: To be fair, I do remember noting a rather curious difference in tone and content in the reporting about the Nepali constitution's passage and the subsequent border situation between Indian media and everyone else's.

>How about the guy whose hands were cut off when he tried to smuggle fuel across the border that wasn't closed?

What? I've never been anywhere near the Nepali border, but have spent enough time in India to know that it's not lawless anarchy. I'll have to ask you for a source on this please.

Quite a few times I've read of mass lynchings in India:


lawless? not at all. police corrupt to unbelievable levels and doing basically what they want in some places? hell yes

The biggest economic lie is the idea that somehow the US owns China something because of treasury bonds. When you sell bonds you are making a financial exchange at a particular interest rate. It is a trade where each side is getting what they need. And a treasury bond is very favorable for a country that issues bonds as the USA, because the US controls the value of the currency. In other words, in this case the US has far more control over the financial transaction.

Originally I was going to question your math - I thought your trillion was off by three zeroes. Then I did the math myself and realized that you're right. :-) If you count US mortgage debt that they hold, the number may be even higher.

A couple quick comments:

1 - We'll feel the economic threat of China when they have a crisis. The world was less interconnected in the 90s, yet troubles in Mexico, Thailand and Russia caused global damage.

2 - The GDP growth #s are suspect, and off of a smaller base. Hard to make an apples to apples comparison.

3 - Hard to compare absolute #s of cars or people in school - given that it's a country of a billion people, they should have a lot more cars and people in school. (If anything, it should be 3X)

> (If anything, it should be 3X)

More then half of china lives in very poor farming villages - and the government intends for them to continue living that way.

The fair comparison you want to be making is the American urban vs Chinese urban population (Which is now close to the total population of America).

True. It's very tough to make apples to apples comparisons across countries and cultures.

Not sure what you mean. People are trying to explain this down turn (e.g. Jan 1 to Feb 17; SPY -5.21%) and the possibility of a recession on the horizon and Oil/China are currently big reasons for that. China not having imploded yet means that right now the movements in the market are mostly speculative and psychological factors at play. This article is saying "Yes the down turn is coming. And yes it's because china is in trouble. And yes it will be big. And yes it'll happen soon enough because it's getting to critical mass."

> China has regularly surpassed the US in number of cars sold since 2009


oh wait, a country with a much higher population is able to sell more cars. Carry on.

I'm wary of such massive growth, they might not reach a stable structure. Also shit happens. But maybe mass trumps everything else and they are massive.

Except for all of the times we see articles going on and on about how China's growth and dominance is a threat to us.

I agree the articles we see are biased, and there's an undercurrent of fear in trying to downplay China's rise.

That said, I feel that the forces trying to explain away or ignore China's outright fabrication and lies about its growth are more, how shall I say, insistent.

Interesting interpretation. I hadn't thought about it that way. Instead, I got a very different impression from the article -- more that this is the next big scare for the global economic system. Like the US subprime mortgage crisis in the previous decade, or the Russian/Asian debt crisis that sank Long Term Capital Management in the late 90's.

Not to mentioned they dedication to green energy.


I don't understand why a "real reason" is necessary when we may have shared interest. Why not report on China? There are just as many—like you—eager to report how invested we are in each other.

I don't really know whether the media is biased against China, it's certainly plausible, but in any case you said literally nothing about the actual situation the story is describing.

Other posts in this thread refuted the arguments in the article quite well I didn't see a need to repeat them.

>If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.

>J. Paul Getty

we have powerful enough printing presses to print $1T USD.

After years of jumping at any opportunity to build up China as an economic threat.

OPEC oil is sold exclusively in US Dollar, not Chinese Yuan;

Just to let you know, that rule does not apply for Iran (an OPEC producer). Not surprising given US sanctions, but there are exceptions to the rule.

Believing China's GDP growth rate blows all the credibility out of your argument.

Please provide the estimates for its GDP then. Dismissing the work done by others (which provides an actual figure, right or wrong) is lazy.

Oh god, if you want concrete numbers, buy a report from a market research firm. Believing the official numbers for their growth is like believing in Santa Claus. The consensus among professionals is that they haven't hit their 7% target since the beginning of this century.

This doesn't seem like a particularly compelling argument. Bad loan volumes have risen, but not above historical highs.

As a percentage of total debt, the article says bad debt is at 1.67%. This is up 51% from 1.25% in the last year. Considering the amount of margin that's been wiped out as a result of the stock bubble popping, this doesn't seem terrible. In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing.

Maybe Chinese banks are consistently increasing the amount of debt they issue and the risk they take per unit debt as a rational response to increasing productivity of Chinese businesses. This implies a greater amount of leverage for the Chinese economy, but not necessarily extreme irrationality.

Maybe there's something here (I actually think there are structural problems in the Chinese economy) but this article does not make a compelling case.

The number is not that bad. Comparing to US Bank Nonperforming loans ratio,

Quarter Total Loans Nonperforming Perc 2013 Q1 7,658,238,093,000 261,202,393,000 3.41 2013 Q2 7,732,341,313,000 239,430,499,000 3.10 2013 Q3 7,802,034,024,000 221,209,596,000 2.84 2013 Q4 7,893,109,125,000 207,256,779,000 2.63 2014 Q1 7,930,820,793,000 195,236,127,000 2.46 2014 Q2 8,109,181,723,000 181,567,784,000 2.24 2014 Q3 8,160,095,554,000 171,922,840,000 2.11 2014 Q4 8,309,545,800,000 162,654,076,000 1.96 2015 Q1 8,362,016,000,000 152,966,093,000 1.83 2015 Q2 8,546,950,627,000 144,686,145,000 1.69 2015 Q3 8,642,299,288,000 139,164,401,000 1.61 2015 Q4 8,839,565,653,000 137,835,965,000 1.56

Source: http://www.bankregdata.com/allAQmet.asp?met=NPL

Isn't the bigger issues China's structural draconian limits to freer movement of capital, external investment, the imaginary/real value of ghost cities and scale of holding illiquid foreign debt?

One by one:

1. Freer movement of capital. This is a false herring in my opinion. Virtually no countries outside the US/EU offer completely free movement of money. The thing that matters is whether this prevents foreign capital investment (because people are scared of not being able to get their money back). In China, I don't think it does based on the last few decades of foreign investment.

2. External investment. As above, I don't think people are discouraged by the rules. Yes, you have to make a 50% joint venture, bribe government officials, share technology, have no copyright/IP protection, and risk your partner entering the market as a competitor once they learn your business (see Asus). But, you can still make so much money that it's probably worth it (or so American corporations seem to believe).

3. Ghost cities. I don't know much about this one honestly. I've been hearing about this since 2009, but consider that China is increasing their urbanization rate by 1 percentage point per year (~10M people/yr). If I were asked to manage that as a central planner, having excess inventory of housing would be critical to prevent slowdowns and allowing for some burstiness. Yeah, there's probably ghost cities, but how long do they remain before becoming occupied. Are the same cities hanging around forever (and people complaining about them forever), or is it new stock every year?

4. Illiquid foreign debt. Most of China's debt is in two categories: 1) Popular debt (US/EU) or 2) strategically important countries. For (1), there's likely some market. You're right that they can't sell too much, but they've already notified the world that they will begin selling their holdings over the next decade and since central banks in the western world are trying to increase the reserve interest rate there should be people willing to buy this stuff (or the government can buy it and reissue at a higher interest rate to make people want it). For (2), don't think of it as debt, but operating expense, never to be recovered.

A few counterpoints.

From your original comment

> In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing.

That is the overall percentage of bad debt increasing linearly, meaning accumulation of bad debt is accelerating faster than growth of "good" debt. This was also the case in the US mortgage crisis.

From this comment

1) It would be less of a concern if China had less liquidity while Chinese companies were also getting less access to liquidity. Shadow lending from wealth management product (WMPs) is a massive structural issue for the Chinese economy. When the underlying assets fail, you have a recession. It also means a centralized economy with lots of the downsides (bribes, joint ventures, etc.) but without the control.

2) American corporations believe there is tons of money to be made, but not many have been successful. In the event of a Chinese recession, those experiments will be vastly drawn back when Chinese consumers become pessimistic. In the event of an American correction, they'll pull back to invest in proven markets.

3) I haven't seen evidence that these ghost cities are the result of central planners building slack for expected growth.

4) Internal private debt (see 1) is a much larger problem. Most of that is owned by the central government, which means either a bailout when companies fail, continued lending until a bailout, or letting their economy correct.

Linearly increasing: True. I misread the axis. It still doesn't seem to have the form of something in a bubble or clearly unsustainable.

1. That's a fair point. But I suspect this has more to do with less developed capital markets in China than systematic weakness. I wonder if local supply of capital will be able to step up in the next American recession.

2. I think many have been successful in lowering their manufacturing costs. Not sure how an American correction would affect the Chinese economy.

3. Fair.

4. I'm generally skeptical of this argument. US corporations and households have maintained a high level of debt for more than 50 years without significant effect. I guess the Federal gov hasn't been the holder of that debt, but it actually seems better that way because they have the ability to print cash and add a stabilizing effect.

I guess my point is that none of these individually seem extreme enough to cause a problem. Maybe in aggregate there could be a storm.

Interesting point on (1). I wonder if that could trigger relaxed repatriation taxes for corporations in the US. Bringing a few hundred billion home would be great in a liquidity crisis.

I wasn't thinking of (2) that way, but in that case you're right that southeast asian competition is a bigger factor. If cheap manufacturing leaves, China would need to shift to consumer growth, which American companies thus far haven't really cracked (except Apple to an underwhelming degree.)

An interesting aside on (2) would be if a trade-protectionist president is elected in the US. This would re-prioritize from cheap manufacturing overseas to better jobs at home—triggering or accelerating what you were talking about. The New Yorker had a great piece today on how both Sanders and Trump are of that mindset.[1]

(4) might be a case of six in one hand, half dozen in the other. Turned out that the US government did (indirectly) hold all that mortgage debt when it bailed out the banks. That said, it looks better externally to institute QE to bailout companies who backed bad debt than to print money to pay off your own debt.

Either way, I'm not sure we are or aren't at a crisis yet, but they also haven't fixed some basic structural problems.

[1] http://www.newyorker.com/magazine/2016/02/22/trump-sanders-a...

>I haven't seen evidence that these ghost cities are the result of central planners building slack for expected growth.

I think this reveals some bias. The evidence is the cities themselves. Or do you think that it's central planners merely trying to improve GDP numbers, but completely oblivious to the fact that Chinese citizens are urbanizing at a scale not seen before in human history?

If you are talking about Ordos New Town, it is local governments and tycoons trying to do something with their coal money. This isn't really central planning, more like investment options suck, and we can't just park our money in the bank, so let's build a city in the middle of nowhere! Ordos is filling up slowly, but it's clear at this point that many of the buildings will be torn down before they are ever occupied (Chinese constructed buildings only last around 20-30 year before they are completely derelict).

China is urbanizing, but it is not clear those poor farmers can afford the $200k+ apartments being built...even if they come down by half or more. Not only that, but these farmers can't even get hukou, making them second class citizens in the cities they might move to, ineligible for schooling for their kids or even subsidized healthcare. China needs to do a lot of reforming before this massive urbanization can happen, and they haven't really prepared for it (e.g. By focusing on luxury apartments vs. mass social housing with schools and hospitals enough to give those farmers proper urban hukou).

Finally, farmers can't even sell their land to buy an urban apartment. Instead, they have to wait for it to be appropriated by the local government (if near a growing urban area) or otherwise, they are just SOL. It really is quite a mess.

Exactly. Wealth transfer and mobility for some, but not growing a middle class sufficiently to realize these artificial investments. China could invest more in better equiping people to make and earn more value, so they can afford cleaner/nicer cars, homes, factories, etc.

>Yes, you have to make a 50% joint venture, bribe government officials, share technology, have no copyright/IP protection, and risk your partner entering the market as a competitor once they learn your business (see Asus). But, you can still make so much money that it's probably worth it (or so American corporations seem to believe).

All legitimate companies have strong rules against bribing officials, and it's illegal, so don't expect the company to have your back if you get caught.

The ghost cities are indeed filling up, at least last time I read about it. You'll probably still have problems with misplaced building sprees when you build at that scale, no matter what. But it doesn't seem like a real crisis

Isnt there an entire replica of Paris with barely 1k people?

How can value be justified with whole half-finished cities with no customers?

Sounds like deferring a real-estate crash is only making a future event even more painful when that paper value evaporates and takes real comparables along with them.

>>Are the same cities hanging around forever (and people complaining about them forever), or is it new stock every year?

I guess, googling "ghost cities in China" may bring out many interesting statistics about this. From the top links you get there one can fairly say that the "ghost cities" are in reality a biggish problem. Of course, we cannot get more complete picture just from these sites, but that is true for any communist regime: they will never allow any independent market study to happen in the first place.

I think the bigger issue is that China faces labor competition on the lower end of the unskilled market from South East Asia and India and is trying to enter the lower end of the skilled labor market but finding out that the Americans, Europeans, and Israelis are fairly competitive.

I'm generalizing and neither list of countries is exhaustive.

China is miles ahead of South East Asia and much of India. Chinese tourists go to places like Vietnam and are seen as wealthy and sophisticated by the locals. From the Western perspective it may seem like China, SEA and India are on a level playing field but that is far from the truth.

Bangkok is a much more cosmopolitan city than Beijing or even Shanghai. I get the feeling that Thailand is a bit richer than China per capita. That's about it though.

Beijing takes the cake for both craziest bus drivers and bicyclists, beating Hanoi and Davis, CA.

This is so true. No matter what city I go to (Manila? Bangkok? Delhi? Kunming? Changsha?), it never feels as bad as home.

There's a conjecture, in economics, that out of a fixed exchange rates, free capital flows and a sovereign monetary policy, a country can only pick two. This is known as the Impossible Trinity [1].

The United States plays strategy b, relinquishing a fixed exchange rate. Greece plays a, trading away its monetary-policy sovereignty within the eurozone.

China is trying to move from c (ex free capital flows) to b (ex fixed exchange rates). In the process, it's caught in the Impossible Trinity. Either coördinated decisiveness or some combination of a currency and/or capital-outflow will force them into a stable configuration.

[1] https://en.m.wikipedia.org/wiki/Impossible_trinity

This article is good, but it underscores how fast and catastrophic China's collapse is.

- China's total debt risen to 346% of GDP in 2015. http://seekingalpha.com/article/3852886-chinese-debt-problem...

- China exports fall 11.2% in January, imports down 18.8% http://www.cnbc.com/2016/02/14/china-releases-trade-data-for...

- China’s $6.7 trillion bond market is flashing the same danger signs that triggered a tumble in stocks http://www.thestar.com.my/business/business-news/2015/10/10/...

- China Capital Outflows Rise to Estimated $1 Trillion in 2015 http://www.bloomberg.com/news/articles/2016-01-25/china-capi...

- China's Net Capital Outflows Probably Hit $113 Billion In January http://www.actionforex.com/analysis/daily-forex-fundamentals...

- "Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10 percent of assets" (all of its reserve would be gone) http://www.cnbc.com/2016/02/10/kyle-bass-china-banks-may-los...

Michael Pettis is one my favourite China commentators, with a big focus on the shifts necessary in the balance sheet and composition of growth, and whether that can be done smoothly or necessarily through some catastrophe. Not to mention a broader view of the political economy of the change.

Here's a recent post he did that's worth a read (at least through the nine point summary): http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-...

Pettis is the man. Essential reading for understanding China's economy.

The root cause of 08 financial crisis is not simply 'subprime loans' that can't be repaid. It's because of trillions of derivatives that those banks hold, and lack of liquidity when banks are making wrong bet.

China doesn't have many complex financial engineerings as US did in 07/08.

It was broader than subprime and derivatives even. It was a general real estate (housing) bubble. Home prices became massively inflated and the various investments tied to housing came crashing down. A similar result can be expected in China when the music eventually stops.

When price go up it doesn't mean a it's a bubble.

Getting loans is way harder/regulated in China than 06/07 US. Currently 25+% down payment or 70% for 2nd home is required. -- Comparing in 2007 banks only asks for 3% down.

China have aggressively lowered the requirements the last years. At the moment it should be 20% for first and 30% for 2nd home. Still some way to go for US levels ofc.


Prices going up for no good reason (increase in demand or decrease in supply) means there is a bubble. This is what happened in the US. Bubbles are the cause of speculation, such as building cities that sit empty.

Any thoughts on what that will mean for the US real estate market given continued Chinese investment here? My current guess is we'll see more money pour in as people attempt to shelter their Chinese funds.

FWIW, George Friedman (of STRATFOR) predicted this, except he believed the implosion of China would be on a truly catastrophic scale. So they could still be at the edge of a much deeper hole.

See: The Next 100 Years: A Forecast for the 21st Century https://www.amazon.com/dp/0767923057

He also predicted Mexico and Poland would become world powers soon. Although there are some interesting insights, I take his predictions with a whole shaker of salt.

Not really "soon" — more like towards the middle of the century for Poland, and end of the century for Mexico. I'm curious about his predictions on Russia and Turkey in particular.

If you keep saying China has economic crisis, finally you are gonna be right some day.

There should have been a crisis a few years ago but the government has chosen to keep the bubbles from popping. $1 million for a 90 sqm apartment in Beijing that rents form $1500/month is pretty frothy.

But the CPC repealed the law of gravity, so it doesn't apply to the Chinese economy. Maybe it's really different this time. But probably not. The only question now: will they inflate the currency turning all those savers into losers, or reign in credit and bad debts, choking the economy and growth. They won't be able to just hide behind growth now.

That, or you were finally right last summer.

Ahhh the old' China crisis again! The dog that didn't bark. The Charlie Brown football that never got kicked. The constant and unending crisis that is on its way any day now.

As I have explained over the years in many previous comments, China's banking system is partially privatized central planning, the government prints it's own money. Thus, when there is a credit crisis the government just recapitalizes the banks with freshly printed Yuan and sells off the bad loans at a discount. Bankers who behaved badly get executed or disappeared and the whole thing starts over.

Don't believe me? Let's take a trip down memory lane on HN:

China: Crisis Gauge Rises to Record High 2 points Cless 2 years ago 0 comments (http://www.bloomberg.com/news/2014-02-26/crisis-gauge-rises-...)

China Interbank Rates at Record High (think Lehman Bros.) 1 points teawithcarl 3 years ago 0 comments (http://m.theepochtimes.com/n3/118747-china-banking-crisis-in...)

China's Brewing Crisis Is a Thousand Times Greece's 8 points ytNumbers 6 months ago 4 comments (http://www.forbes.com/sites/panosmourdoukoutas/2015/08/25/ch...)

Skyscraper index points to elevated risk of financial crisis in China, India 2 points cs702 4 years ago 0 comments (http://www.scribd.com/doc/78470886/Index-Bubble-Building-100...)

China fears bond crisis as it slams quantitative easing 1 points chaostheory 7 years ago 0 comments (http://www.telegraph.co.uk/finance/newsbysector/banksandfina...)

China hit hardest by US Downgrade 2 points ca136 5 years ago 0 comments (http://gulfnews.com/opinions/editorials/us-crisis-hits-china...)

China’s Coming Economic Crisis? 3 points kercker 2 years ago 0 comments (http://www.nytimes.com/roomfordebate/2014/04/08/chinas-comin...)

Why China Will Have an Economic Crisis 1 points eande 4 years ago 0 comments (http://business.time.com/2012/02/27/why-china-will-have-an-e...)

Confidence of China VCs drops to new low 2 points ilamont 7 years ago 0 comments (http://www.thestandard.com/news/2008/10/29/global-economic-c...)

> the government prints it's own money. Thus, when there is a credit crisis the government just recapitalizes the banks with freshly printed Yuan and sells off the bad loans at a discount.

This has been tried by many governments and has a well-established track record as a disasterous solution. I believe the following is a well-established consensus in economics (though I may misremember some details):

Printing money on this scale doesn't add wealth to the economy, it just vastly increases the number of yuan available to buy each unit of actual value, increasing prices. For example, if you were in a universe of 10 people with $50 each in currency, and one day that increased to $500 each, you wouldn't be any wealthier: You couldn't buy any more; the numbers on the price tags would merely increase by a factor of 10 - inflation.

It creates high inflation, even hyperinflation, which has further consequences for savings (whose value is greatly reduced as prices shoot up - your $10,000 no longer can buy anything), receivables (which lose their value just like savings), people on fixed incomes (your pension's value drops just like savings), investment (what good is an investment that loses value quickly just from inflation?), interest rates, exchange rates, and international trade (when your currency is worthless, and is expected to lose more value tomorrow, few will take it as payment for anything).

Inflation doesn't happen here. Bad debts actually take money out of the system. Recapitalizing the banks just add back the destroyed money.

Modern monetary policies don't "print" money anymore. Debt creation and destruction are used as the primary mean to create and destroy money. Below is a very simplified version of money creation, skipping many other aspects.

The banks lend their deposit out to the public and money is created out of the thin air and starts to circulate in the system. The banks are regulated by the central bank to maintain a certain reserve ratio on the deposit so there is a maximum level that can be lent out and that becomes the limit on the money supply. When loans are paid back, the money is destroyed but the returned money can be lent out again thus the money supply is not changed.

Central banks can influence the money supply by setting the interest rate. Lowering rate causes more loans to be made thus expanding the money supply, conversely for raising rate.

Now when a loan has gone bad, there is no money paid back to the bank. The bank is short of that amount of money. It still has to maintain the reserve ratio and can't lend that much out again. The money is gone; essentially it has been destroyed from the system.

So a bad loan actually shrinks the money in circulation, lowering the money supply. Too many bad loans would cause a credit crunch - the banks simply can't get the loan money back to re-lend them out and thus there's not enough money to go around.

Here's where the central banks step in. They recapitalize the banks (fancy word to create money out of the thin air), by either giving created money to the banks to write off the bad loans, or in the U.S. case in 2008 the Fed buying the bad debts from the banks with new money it created out of the thin air. In either case the banks get money for getting rid off the bad debts and can lend again, re-balancing the money taken out of the system due to bad debts. Thus the money supply is back to normal and life goes on.

The bad debts held by the central banks are simply some numbers on some papers, whose value are questionable. Someday it might be decided that they are worthless and, puff, they are gone.

The Chinese central bank is basically using the same mechanisms to deal with bad debts.

Bravo, someone who gets it. The subtle difference with China is when the bailout happens, the government doesn't go into debt to do it and stick the taxpayer with the eventual interest bearing burden of the bailout. Instead, they print the money. This creates moral hazard. I think China's political system is better at dealing with banker moral hazard than ours is unfortunately.

Well, their bankers making the bad loans and the people failed to repay the loans might go the jail or got executed when illegal lending involved. Here bonuses are reduced.

I was just about to say, your OP was a great quick summary, but glossed over the loss of risk/punishment inherent in the system. Consider the loophole closed.

Couple of points...

- There has been no economy that has been able to grow debt as fast as China has without accumulating a large amount of bad debt. This is just as true for the US in the 1920's, Japan in the 1980's, Greece, Spain, Iceland, Portugal, Brazil, Mexico, etc.

- China has grown debt to GDP at a breathtaking pace.

- Savings and debt are opposite sides of the same coin. Once a loan goes bad the debtor's promise to provide economic value is broken. At this point somebody has to bear the loss through a reduction in future consumption, there is no free lunch.

- There are choices in how those costs are allocated. For example they can be through the bankruptcy courts, inflation, reduced interest in savings, taxes and reduced social services (by taking it on the government balance sheet) and external default.

- How those losses are allocated are politically sensitive. They can and often lead to revolution and war.

- Savy investors are aware of these trade offs and will attempt to position themselves to avoid losses.

- The central bank has its own balance sheet which aren't just numbers on that can be written off. A central bank which bought bad debt and then wrote it off would be insolvent and would require recapitalization itself.

- Giving money is the prerogative of government. A central bank who gives money in the guise of a loan would quickly find themselves in conflict with the government. That is why the US had both TARP and QE.

- Even if the government gave permission for the central bank to montetize the bad debt Savvy investors would know that monetization of bad debt would lead to inflation. Investors would respond by hoarding commodities, capital flight and leveraging assets (which is happening now). This is happening now (capital flight, accelerating debt growth, hoarding of gold)

Fair points. There will certainly be turmoil and pain in a downturn.

The main thrust of my comment was to dispel the notion that recapitalizing banks or QE to write off non-performing loans would cause uncontrolled inflation. This misconception is a misunderstanding of how fiat money creation and destruction work in the modern economies. The oppose is true. Not doing those would cause credit crunch. The Great Depression at 1929 was the result of credit freeze when banks saddled with bad debts could not function at normal money creation.

I'll address one of your points. Central banks writing off the debt it bought would not go insolvent and don't need recapitalization by others. Central banks can create all the money they need at will. Insolvent is when you can't pay back the debt. The central banks don't owe debt. They own the debt; they can do however they like with them, including forgiving the debtors.

The mandate for central banks, at least in the U.S., is to keep inflation at a modest low rate window and keep unemployment low. Everything else is secondary.

The thrust of my comment is that resolving bad debt isn't merely a painless exercise in monetary policy. Resolving the bad debt requires somebody to absorb those losses through reduced future consumption. Who absorbs those losses is essentially a matter of public policy, not monetary policy.

The only thing that is special about a central bank is that their special relationship with the government exempts them from the regulations that apply to other banks. However, they still have a balance sheet with debts, which are deposits with the central banks and federal reserve notes (cash) and assets which are assets and loans that have been purchased on the open market.

The central bank also has a small amount of capital which is the ownership stakes of the member banks. Half of which is on deposit with the Federal Reserve and half of which isn't invested but can be called if required. That ownership stake has a guaranteed 8% return (and an effective 16% return) which is a nice deal if you can get it.

Due to its special status a central bank can't be subject to bank runs or be forced into receivership by regulators but it can still be balance-sheet insolvent. And a balance sheet insolvent central bank is a wounded central bank because it loses some of it's ability to control monetary policy through reducing its balance sheets.

In severe deflationary conditions a central bank may take more risks that may put it in a position of being balance sheet insolvent. For example, through the purchase of long term zero coupon government bonds at face value. The effect is to tell the markets that the central bank is putting a ceiling on interest rates long term regardless of inflation which encourages speculation.

Ultimately if a central bank has a consequence free way of creating all the money they needed at will their would be no need for taxes because the central bank could just give the government all the money it wanted.

The bad debt was used for capital creation. The capital created may be wasted. The restriction of consumption has already happened during the boom when the investment of the money in creation of capital goods caused individuals to restrict consumption for other reasons.

As an example, consider that perfectly good farmland in the central valley was being used to construct houses that would later be marked down to half their value during the bust. The land, labor and capital were being drawn away from other uses during that period of investment. So your argument that the payment must be made later in the real economy ignores the disruption that the initial boom created. The boom is not the free lunch that must later be paid for, the boom is the destruction of the existing structure of the economy that will hopefully increase efficiency enough to provide for increased consumption of consumer goods at a later time to make up for the restrictions during the boom.

In China, instead of creating a period of reseting to the previous price relationships that existed before the boom and returning all the property back to the lenders or those who lend new money from them, they simply warp the economy in yet another direction that the central planners and their partially privatized counterparts in the bank think will improve production capacity.

The government in China regularly lets very bad investments fail, and many important hedge funds and such have failed completely where in the west they would be saved.

The U.S central bank has a balance sheet but they can create unlimited liabilities. Federal Reserve Notes are debt of the federal reserve that is redeemable for 1 for 1 with other federal reserve notes and has the handy and unique property that it is the only valid legal tender for paying federal taxes and must be accepted for settlement of any debt, which is what gives its intrinsic value.

Going to the farmland example and assuming it is a closed system.

The default process isn't painless as losses have to be allocated between the banks investors, farmer, suppliers and construction workers. While the question of who takes the loss is worked out there is considerable uncertainty. Who's going to make large purchase decisions when they aren't sure how much purchasing power that they have?

The result is that while losses are being allocated the velocity of money slows which lowers GDP and as those effects ripple through the economy it creates deflation.

I see you have a theory. So do the guys who write all these China crisis articles, but the empirical evidence proves them wrong and they don't care. They just write another article every six months. I'm sure I'll be back here in another six months arguing the flaws in the antiquated quantity theory of money.

Briefly, the problem is that you are only looking at the supply of money and not the demand. If China increases the money supply 2x and goods and services output increases 4x there will not be inflation and this has been roughly the case during China's economic expansion. A country like Venezuela or Zimbabwe that has falling output will have hyperinflation if they tried the same thing.

Uh, based on what evidence? Empirically speaking, the Chinese stock market has, observably, lost enormous value in the past year, with probably further to fall.

>Printing money on this scale doesn't add wealth to the economy

Ceteris Peribus...

But when vast amounts of wealth vanish in a broad deleveraging you are merely replacing money. Case-in-point, the US pumped over $1TT into the economy since 2008, and yet the value of the dollar has gone through the roof, despite the cries that hyperinflation was around the corner.

Probably something to do with the safe haven status of the dollar. Whenever there is a sign of trouble in the global economy, investors dump soft/emerging economy currencies and buy dollars, yen and Swiss franc

You don't generally get much inflation in a credit crisis so your points tend not to be the main issue.

Would you mind changing the links to the HN threads rather than the original news articles? I think that will better illustrate your point. But, if those threads were all zero comments, then I'm not sure they count as memory lane. Nevertheless, this does sound a bit like "suits make a corporate comeback".

I too have grown tired of shitty articles with shitty headlines that make some misunderstood argument on why China is about to have a bad time. It's at the point where I'm wondering if these publications are just fishing for clicks.

We've been in constant crisis mode since 2000 (just as I graduated college). This crap kept me from buying a home, delayed marriage and children, etc. In my mid 30s, I have no job security, almost no retirement and no home. I had no idea life in the 21st century was going to be so miserable for young people in North America. I guess this is globalization in action :(

I've heard others say that, but I don't understand: Other than the 2008 recession, which was a much worse one than its predecessors, what is any worse than earlier periods?

If you are thinking of 9/11, before that we had the Cold War, against an enemy many orders of magnitude more dangerous and damaging.

I almost think that conservatives who sell crisis, to justify all sorts of things from civil liberties restrictions to wars, have unfortunately been believed.

I do think our government has functioned extremely poorly since 2000, as the GOP has put ideology before responsible governence. I know people will think I'm partisan, but how else can you characterize voting, multiple times, to not only shut down the whole government but actually trying to make it default on its debt?

Those of us who grew up in the '90s naturally compare to that. No Cold War, "the end of history", little in the way of foreign wars (and a remarkably successful one in Serbia where it felt like we were the good guys and were successful with it), an economy so successful that the Clinton administration was having to make plans for what would happen if the Treasury stopped issuing bonds, what felt like a hopeful technological future...

It's amazing that one small organization and one isolated, small event (in terms of world history; it wasn't the fall of Rome or WWI) changed so much.

I would argue that our reacttion is what changed us, not what they did.

> but how else can you characterize voting, multiple times, to not only shut down the whole government but actually trying to make it default on its debt?

A last ditch effort to try to bring some sanity to a budgeting process so broken that the the national debt has doubled since Obama became President.

> sanity

Defaulting isn't sanity and would make our economic and fiscal problems far, far worse.

Why do you think it's globalization in action?

I think we can safely say that globalization kicked the knees out of the manufacturing sector in the West.

And, as a consequence, destroyed much of its middle class. The new service jobs that replaced them are largely... Not very good ones.

It's not globalization, it's our awful government and inter-generational and inter-class theft.

The beauty of being a professional doomsayer is that people will remember one time you were right and forget the 99 times you were wrong. Then you can weave your career through books and TV shows that will pitch "the [only] expert who predicted X".

cf Peter Schiff, Meredith Whitney, Ron Paul.

Assuming this headline is correct, what effects would that have on the global economy?

I wonder how much of investment in, i.e. Apple, is presently based on assumptions of future Chinese domestic consumption.

Probably small. China's financial system isn't entwined with the US/European system as much (the Fed buys bonds from the ECB, and vice versa). Commodities will be hit the hardest, because China will stop importing them.

Alan S Blinder estimated that a very severe recession in China would affect the US GDP by .2% So that kind of gives you an idea.

Famous last words, we live in a global economy now.

China holds more US treasury bonds than any other country. How are we not intertwined?

The US holds vastly more US treasury bonds than any other country. But look at the data: http://ticdata.treasury.gov/Publish/mfh.txt

China holds about the same amount as Japan, and if you count Europe as a region, then Europe holds more than either of them.

Furthermore it doesn't really matter: it's not like they can 'call the debt.' China has to wait for their bonds to mature just like everyone else. Really it's rather nice of China to loan us the money.

Just piping in to say that this is correct.

You're right it doesn't matter that China has loaned us tons of money. You can talk your way around it and Wall Street and the American media outlets have done this for years but it does not change the facts. China continues to grow as an economic threat to the US and we don't want to believe it.

What exactly is an "economic threat?"

You've been saying that across this thread, but let's say that Chinese banks start to go bankrupt because of nonperforming loans. The Chinese central bank holds large amounts of US treasury bonds. What would be the effect of the bankruptcies? A sell-off to bail out Chinese banks? How would that work; they'd get dollars for their tbonds; then what? Would it depress tbond yields? They can't go much further before you have to pay to hold them... I don't understand the reasoning behind the 'but the Chinese hold lots of US debt!' argument. This isn't like a mortgage where the lender can call in the loan at any point, and if you don't pay they'll repossess your house; or a loan from a loan shark who'll break your kneecaps if you don't pay up. What would happen with or because of these debts?

I answered this question elsewhere in this thread.

Buy bitcoins and ammo

Having lived in Beijing for 3 years, I try to pay more attention to the country's "hidden" or at least somewhat non obvious debts.

The Chinese soil is dying or dead.

The population as a whole and the younger generations in particular are facing future health issues of cataclysmic proportions.

The pace at which the country moves is sure to leave dozen of millions of people in the dust. Those already left in the dust endure, because their living conditions are better than those of their parents. Yet their kids' might not be, and they will choose to endure or not (and vent in a way they think appropriate). That, added to the dearth of females, and the Confucianist view of a man's place in society are already proving explosive.

China has a lot of potential, but it also faces challenges of epic proportions. To me, the economic problems are more a symptom of the problem rather than the problem to worry about.

Everytime a piece about china is posted the comments are quickly the same in tone, "oh but China already surpassed US" uh no it fucking didn't not even close. Especially when the Chinese minister admitted China's GDP is complete fiction. Nobody in China even knows the score because it's super tough with all the corruption to get anything done with accuracy.

It's like there's no room for a China that is fallible. China is perfect the all knowing all seeing for these crowd. China is the future they claim.

Not with that ugly ass communist nanny state system suppressing free speech and censoring media you don't.

Is it right that China owns a lot of its own debt AND a lot of US debt as well? And also heard that China supposedly has the largest gold reserves in the world, dwarfing any other country in comparison. Could that count for something?

They would probably have to spend at least a good chunk their dollar reserves in order to manage a truly catastrophic currency decline.

At some point, some percentage of those loans will default.

Financially China can handle it, though when those loans default, the chain of events will also have some global consequences.

The question is, when the loans do default, and with it some effects to the real economy/people, what happens to the public perception of the government in China? There is a good chance of social unrest

One factor not discussed in this article is the demographic headwinds that China is heading into. Their one child policy is only now resulting in greatly distorted working age ratios, which means that their non-working elderly population is increasing faster than the population of workers to support them. With a safety net in place that relies heavily on existing familial structures rather than government programs, there are reasons to be concerned about declining aggregate demand over the next several years, precisely as China is trying hardest to transition from export-led growth to a larger, domestically-focused economy.

China's situation is a bit different to the US's in that given it's socialist leanings it will probably just keep lending and bailing out.

How is that different from the US situation? Isn't that exactly the US situation?

Yes, basically. Home owners were given mortgages they couldn't afford except under beyond-ideal circumstances. They then would refinance and take out other mortgages, until the whole house of cards came down.

The Saudis could maybe handle a situation like this, given their natural resources. As the current price of oil has shown, however, being rich in natural resources has its own issues.

The same principles apply across China, Saudi Arabia, and startups: at a certain point, you have to make money.

Good point...

I would have to believe that within China there are many brilliant economists who knew that their "expansion" could not continue forever...

Further, I think government officials were informed of the same...

We have a vague idea of their "reserves"...that vagueness is a bit troubling...

I think mr. Madoff need to be let out of jail to educate Chinese government.

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