Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

The China Syndrome 2009

Posted by Larry Doyle on November 17, 2009 11:53 AM |

I am typically reluctant to merely link to articles which I find extremely compelling and newsworthy. I thoroughly enjoy referencing other’s works while adding my own thoughts and perspectives. That said, every once in a while an article comes along which truly deserves to be highlighted in its entirety for its depth of detail and global perspective. I find it interesting that the article I find so compelling is produced not here in the United States, but in the United Kingdom. I thank KD for bringing it to my attention.

From the Telegraph.co.uk, China Has Now Become the Biggest Risk to the World Economy:

China has now become the biggest risk to the world economy

President Obama said before going to China this week that Asia can no longer live by shipping goods to Americans already in debt to their ears Photo: AP

“The inherent problems of the international economic system have not been fully addressed,” said China’s president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.

While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. “I’m more worried about deflation,” he said.

Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – “stealing American jobs”, says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.

At some point, American workers will rebel. US unemployment is already 17.5pc under the broad “U6” gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should.

President Obama said before going to China this week that Asia can no longer live by shipping goods to Americans already in debt to their ears. “We have reached one of those rare inflection points in history where we have the opportunity to take a different path,” he said. Failure to take that path will “put enormous strains” on America’s ties to China. Is that a threat?

It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.

Mr Hu sounded conciliatory last week. China is taking “vigorous” steps to cut reliance on exports, still 39pc of GDP. “We want to increase people’s ability to spend,” he said.

Beijing is indeed boosting pensions and extending health insurance to the countryside so that people feel less need to save, but cultural revolutions take time. All we have seen so far are “baby steps”, says Morgan Stanley’s Stephen Roach.

The reality is that much of Beijing’s $600bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.

Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.

Pivot Asset Management said lending has touched 140pc of GDP, “well beyond” levels that have led to crises in the past. With the revolution’s 60th birthday out of the way, the central bank has begun to tighten. New yuan loans halved in October. So be careful. Pivot said a hard-landing in China could prove as traumatic for world markets as the US sub-prime crash.

The world economy is still skating on thin ice. The West is sated with debt, the East with plant. The crisis has been contained (or masked) by zero rates and a fiscal blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough demand to compensate. It is adding supply.

My view is that markets are still in denial about the structural wreckage of the credit bubble. There are two more boils to lance: China’s investment bubble; and Europe’s banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle.

Plenty of food for thought in this comprehensive review of the China Syndrome 2009: inflation, deflation, growth, bubbles, international trade, domestic consumption. Suffice it to say, there remain plenty of risks embedded in our markets and global economy.

LD

  • coe

    LD – What an interesting article. Couple of my thoughts:
    o – I was talking to the CEO of a US business yesterday that has a fairly pronounced presence in India and Pakistan. Why? Because the labor costs in India are 17% of those in the US, and the same costs in Pakistan are pegged at 11%. Is that cause to say that Asia is stealing jobs? I’m sure that offers room for economic debate;
    o – I might add the prospect for some additional pain in the US commercial mortgage sector as yet another boil to lance – i.e. the structural wreckage of the credit bubble isn’t nearly finished here in the US. Consider the fact that the Feds have closed 123 banks when the ultimate tally should crest at 1500 or so. What happens to all those employees and their families and their communities? What about their small business customers – who steps up in the vacuum created?
    o – Europe’s banking two-step has been similarly fascinating to watch unfold. Take note of Barclay’s recent acknowledgement of some serious credit write-downs. Was this a eureka moment? a second coming of the enlightenment? Does anyone believe they haven’t been manipulating the recognition timing over the past two years? What about the German Landesbank system? and the two or three big Spanish banks? keep crisscrossing the UK and the Continent and the saga doesn’t end. By the way, many of these European firms have huge operations here in the US. What will become of ING Direct? Should RBS be forced to divest Citizens Financial?
    There are many plot lines to play out and a world of additional pain to absorb; and lastly,
    o – Shouldn’t we pay very close attention to China on every imaginable level? They have nearly 4x our population, are funding us way beyond healthy levels and still there is talk of asking them to get more involved in providing liquidity for our domestic mortgage industry! The political and cultural chasm on many key issues (trade, human rights,…) seems intractable…

    Yes, LD, there certainly is plenty of food for thought. Keep at it with your challenging posts!

    • Larry Doyle

      Coe,

      The article itself is interesting but your added perspectives and insights further aid us as we navigate the economic landscape. Thanks for your wisdom and assistance!!






Recent Posts


ECONOMIC ALL-STARS


Archives