Is China heading for a crash?

[outcast]

"I've heard people predicting a crash since at least 2000. If you predict it every year, eventually you'll be correct "

Forget just economic crash, I've heard "China will collapse imminently for XXXXX reason" since the mid 90's, with Gordon Chang and his "Coming Collapse of China" being one of the leading proponents. And of course "economic crash" theories are often paired with some kind of massive social unrest theories leading to military adventurism (aka the "China Threat") against one of its neighbors to distract the people. This ended up appearing in the media via several different ways, like The Bear and the Dragon or more recently the hit video game Operation Flashpoint: Dragon Rising. Of course pretyy much all of it is China bashing, but there you go. Hysterics at their finest.

[Guest realmayo]

I don't think it's fair to label all or most bearish views on the Chinese economy as "China bashing". The country has a long list of problems, including inequality, civil unrest, corruption, a looming top-heavy (age-heavy) demographic nightmare, pollution etc etc, there's no harm in pointing out these could lead to problems for the economy. I also think the claim that there is a bubble in Chinese real estate is worth taking seriously. A few months ago Andy Xie wrote about it, more recently the FT's blog quoted another piece: here.

[animal world]

I certainly didn't intend to bash China by starting this thread. If anything, i'm extremely down on capitalism and the very undemocratic way the US economy is run.

The other day i heard an interview on Fresh Air, NPR, with the author of The Buyout of America. He talked about leveraged buyouts that have managed over the last three decades to destroy quite a few good companies. These leveraged buyouts ONLY make sense because of a tax loophole, i.e. a tax deduction is allowed for the interest on the debt to buy a company. This tax deduction was created for a good reason, i.e. to give companies the means and the impetus to expand by building new factories and such. With the leveraged buyouts, the equity investors buy solid, but boring, companies, streamline them by laying off lots of people and putting the debt of purchasing the company on the company's books. Then, the investors walk away with their fat fees and the company is straddled with all this debt. The default of these companies exceeds significantly the national average of defaults. The author also warns that a lot of this type of debt will be coming due in the next few years and might cause more trouble for the economy. The Obama Administration is looking into closing this loophole. The reason all these loopholes exist is that politicians are financed by big business and once they leave government they get cushy jobs at private equity firms or investment banks.

One of the greatest loopholes in the US is the capital gains treatment for lots of "investments" that would not make sense without this loophole. It's crap like this that is destroying our economy. We need to become productive again instead of focusing on crazy financial "products" that create a few fat cats and bubbles whose inevitable collapse can be financed by the taxpayers.

Jeez, i'm glad i got this off my chest at 6 a.m. on a Monday morning!

[outcast]

"I don't think it's fair to label all or most bearish views on the Chinese economy as "China bashing". The country has a long list of problems, including inequality, civil unrest, corruption, a looming top-heavy (age-heavy) demographic nightmare, pollution etc etc, there's no harm in pointing out these could lead to problems for the economy"

That wasn't what I was referring to, just the over reaching "analysis" that leads to some rather rediculous conclusions (like it's collapse it imminent).

[imron]

The country has a long list of problems, including inequality, civil unrest, corruption, a looming top-heavy (age-heavy) demographic nightmare, pollution etc etc, there's no harm in pointing out these could lead to problems for the economy. I also think the claim that there is a bubble in Chinese real estate is worth taking seriously.

I agree that China's list of problems is long and varied and worth taking seriously. I was just pointing out that people have been predicting China's downfall because of these issues for a long time and no-one has been correct yet. China will crash eventually because that's just the way of things and economic growth never continues forever. Does that mean China is heading for a crash? Probably, but no more than it was last year, or the year before, or the year before, or the year before etc, and I don't think people will be able to accurately predict when it will happen.

[outcast]

Come to think of it, it is kind of funny you should say "since 2000" because the year before that China's economy actually did crash.

[imron]

Haha, well, I actually said that because that was around the time I started taking more of an interest in China.

[Outofin]

What's the definition of "crash"? As I understand it,

soft landing: GDP growth declines, mostly an unavoidable economic cycle.

hard landing: GDP growth rapidly drops to 0 (hard: rapidly, landing: 0 growth)

resession: negative GDP growth.

depression: long lasting deep resession.

"Crash" sounds like a sudden ressesion.

[outcast]

"Crash" sounds like a sudden ressesion.

What happened in '99 was China had a major financial crisis, because the banks had too many non performing loans from hideously inefficient SOEs. One of the results was many SOEs were privitized and/or allowed to go brankrupt, others layed off millions of workers. In all tens of millions of former SOE workers lost their jobs. Unlike the migrants who lost their jobs during this financial crisis, most of those SOE workers were unemployable.

One of the upsides to it was there were many major reforms allowing for more private entrepenuership, allowing the economy to REALLY take off from 2000 until recently.

[gato]

If by "crash", we mean a decline in GDP, then China probably won't be crashing any time soon.

See the table below listing China's GDP growth by year from 1986. Something happened in 1989-1990, but other than that it's been smooth sailing, 8-14% growth a year.

Yet, China's GDP per capita is still less than that of Algeria, El Salvador, or Albania, depending on whether you listen to the IMF, World Bank or the CIA (or if you use PPP vs. nominal).

Take a look at the 7.1% growth in 1999, too.

http://www.chinability.com/GDP.htm

PRC Real GDP Growth Rate By Year

1986 8.8

1987 11.6

1988 11.3

1989 4.1

1990 3.8

1991 9.2

1992 14.2

1993 13.5

1994 12.6

1995 10.5

1996 9.6

1997 8.8

1998 7.8

1999 7.1

2000 8.0

2001 8.3

2002 9.1

2003 10.0

2004 10.1

2005 9.9

2006 11.1

2007 11.4

2008 9.0

1st 3 quarters 2009 7.7

[animal world]

In the US, the official definition for a recession is two consecutive quarters in which the economy shrinks, i.e. GDP incurs negative growth.

That's an impressive list, Gato. What happened in 1989, 1990 (besides the little event that didn't happen) that caused the precipitous drop in growth?

[gato]

Yes, that little party in the square. My point is that short of large social disturbances (or wars like in Africa), poor countries will have higher growth in GDP than rich countries. It's called the "late mover's advantage" by some, I think. You can grow pretty fast by copying others' technologies and business models, for example.

And don't people find the fact that China's GDP per person is still lower than or about the same as that of powerhouses like El Salvador and Albania a little surprising? I personally don't because China is still a third-world country as a whole, with large variations across the country, though it may be a first-world nowadays when it comes to the issue of Iran and North Korea. It's basically replaced the Soviet Union on the world stage.

Crashing, not crashing. That's just semantics. There is a real estate and stock bubble in China today. And Chinese investments are contributing to a bubble in the gold market. Have you seen the price of gold recently?

Edited November 26, 2009 at 05:25 PM by gato

[Guest realmayo]

And a garlic bubble!

A combination of H1N1 virus fears and dwindling supply has increased the price of garlic in China 15 times since March, Morgan Stanley economists have told Reuters.

In some parts of the country, the price is up 40 times.

"Moving garlic from one warehouse to the other, you make millions," Morgan Stanley China strategist Jerry Lou told The Washington Post. "Basically, what you do is try to arrest as much supply as possible, then you bid up the price."

Garlic speculators aren't the only driving force behind the surge, which has seen garlic outperform gold and stocks as China's most enhanced commodity this year, Reuters said.

The China Daily reported that a high school in Hangzhou, eastern China, had bought 200 kilograms of garlic and required students to eat it for lunch every day as a way to ward off the flu.

China Business News, meanwhile, reported that the people who run coal mines have been hoarding garlic to drive the price up.

link

[Don_Horhe]

I love this country!

[crazy-meiguoren]

If the predictions of an impending crash in China are exaggerated, are the predictions of future economic domination just as exaggerated?

About the book "The Bear and the Dragon"... the fiction was based on faulty assumptions that did not pan out. Relations between Russia and China are better today than they were several years ago. The economies in both countries have improved over what they had been before. (not perfect - there's still a long ways to go in both countries) Political analysts think that China would be more prone to set its sights on reunification with Taiwan than to try to plunder some so-called "Northern Resource Area" (as the novel calls the Russian area that borders China). I've seen better works from the author.

[gato]

If the predictions of an impending crash in China are exaggerated, are the predictions of future economic domination just as exaggerated?

Yes, they are. But I've stopped taking either tendency seriously. See "How I Learned to Stop Worrying and Love the Future".

[mcgau]

I didn't go for details for the article, but for gasoline consumption, gov't has recently imposed a road maintenance fee for every litre of gasoline. Possibly it explains the reason why the consumption remains the same.

In my experience in China, people love to buy a car because it's an identity card of a middle class, but they don't necessarily drive it every day. Think of a mobile phone market, when you're in china, you'll see a lot of people, no matter how much they earn, use a very nice mobile phone. They're always surprised to see an American who still use a mobile with a black & white screen.

[adrianlondon]

Yes, they're not so much status symbols but simply something you should be buying once you can afford it. I live in the centre of London and sold my car a few years ago (well, scrapped to be accurate) as I don't need it. I can cycle, use public transport, or hire a car when needed. It's cheaper and makes life much easier for me. No need to worry about maintenance or what happens to the car when I spend time abroad.

When I tell people in China that I don't have a car the only conclusion they come to is that I'm poor. I explain that it's a choice - a lifestyle choice even - but I can tell they don't believe me one bit.

[mcgau]

the similar contrary is that when my Canadian cousin told us that he was raised up in a poor family but he managed to have a house with a parking lot enough for accomodating 4 cars, I was really surprised to ask "wow, then you have 4 cars?"

"no , only 3 cars, because my sister is too young to drive. " he said.

Haha, life is just different. In my place, having cars doesn't mean a lot, but having 3 cars and a big house means that you're Richard Li, the son of Li Ka Shing.

[outcast]

About the book "The Bear and the Dragon"... the fiction was based on faulty assumptions that did not pan out. Relations between Russia and China are better today than they were several years ago. The economies in both countries have improved over what they had been before. (not perfect - there's still a long ways to go in both countries) Political analysts think that China would be more prone to set its sights on reunification with Taiwan than to try to plunder some so-called "Northern Resource Area" (as the novel calls the Russian area that borders China). I've seen better works from the author.

I know, it was just an example (along with that video game that came out recently) of the fear mongering going on. You know "Red Dawn" is being remade, this time instead of the Soviet Union invading the US it is.......China.