Why China’s Heading for a Hard Landing

[Dreadnaught]

I was going to post an article I saw about a Chinese real estate developer describing the off-the-books ways he finances projects. I can't find it now, but this is an interesting alternative.

What do you think would be the trigger for an actual Chinese economic crisis? And how badly would it impact the Western economies?

http://www.bloomberg.com/news/2011-0...-shilling.html

Why China’s Heading for a Hard Landing, Part 1: A. Gary Shilling

Few countries are more important to the global economy than China. But its reputation as an unstoppable giant -- as a country with an unending supply of cheap labor and limitless capacity for growth -- masks some serious and worsening economic problems.

China’s labor force is aging. Its consumers save too much and spend too little. Its political and economic policy tools remain crude. Its state bureaucracy seems likely to curb spending just as exports weaken, and thus risks deflation. As U.S. consumers retrench, and as the global commodity bubble begins to dissipate, these fundamental weaknesses will combine in a way that’s unlikely to end well for China -- or for the rest of the world.

To start, China is much more vulnerable to an international slowdown than is generally understood. In late 2007, my firm’s research found that too few people in China had the discretionary spending capability to support its economy domestically. Our analysis showed that it took a per-capita gross domestic product of about $5,000 to have meaningful discretionary spending power in China.
About 110 million Chinese had that much or more, but they constituted only 8 percent of the population and accounted for just 35 percent of GDP in 2009, while exports accounted for 27 percent. Even China’s middle and upper classes had only 6 percent of Americans’ purchasing power.

Why Overconfidence Abounds
With such limited domestic spending, why do so many analysts predict that China can continue its robust growth?
In part because they believe in the misguided concept of global decoupling -- the idea that even if the U.S. economy suffers a setback, the rest of the world, especially developing countries such as China and India, will continue to flourish. Recently -- after China’s huge $586 billion stimulus program in 2009; massive imports of industrial materials such as iron ore and copper; booms in construction of cement, steel and power plants, and other industrial capacity; and a pickup in economic growth -- the decoupling argument has been back in vogue.

This concept is flawed for a simple reason: Almost all developing countries depend on exports for growth, a point underscored by their persistent trade surpluses and the huge size of Asian exports relative to GDP. Further, the majority of exports by Asian countries go directly or indirectly to the U.S. We saw the effects of this starting in 2008: As U.S. consumers retrenched and global recession reigned, China and most other developing Asian countries suffered keenly.

Overconfidence in China’s ability to keep its economy booming is also partly psychological. It reminds me of the admiration and envy (even fear) that many felt toward Japan during its bubble days in the 1980s. As Japanese companies bought California’s Pebble Beach, Iowa farmland and Rockefeller Center in New York, what was safe from their zillions? Then the Japanese stock and real-estate bubbles collapsed, and Japan entered the deflationary depression in which it’s still mired.

Success and Complacency
What’s more, China’s recent successes have been so pronounced that they’ve led many to conclude that its economy is a juggernaut. And, indeed, the Chinese have much to be proud of: Last year, China passed Japan to become the world’s second largest economy, a huge achievement considering China started in the late 1970s with a tiny pre-industrialized economy.

But this success may have led to complacency. I suspect that the 2007-2009 global recession, and the dramatic transformation by U.S. consumers from gay-abandon borrowers-and- spenders to Scrooge-like savers, caught Chinese leaders flat- footed. They probably planned to encourage consumer spending and domestic-led growth, but later -- much later.

Growth Machine
They were enjoying a well-oiled growth machine. Growing exports, especially to American consumers, stimulated the capital spending needed to produce yet more exports and jobs for the millions of Chinese streaming from farms to cities. Wages remained low, due to ample labor supplies, and held down consumer spending. So did the high Chinese consumer saving rate. Because Chinese could not invest offshore, much of that saving went into state banks at low interest rates. The money was then lent to the many inefficient government-owned enterprises at subsidized rates.

In a country where stability is almost worshipped, why would any leader want to disrupt such a smoothly running economy?
But before you worry about China’s becoming No. 1 any time soon, consider the remaining gap between its economy and the U.S. economy. In 2009, China’s GDP was $4.9 trillion, only 34 percent of the U.S.’s $14.3 trillion. Because China has 1.32 billion people, or 4.3 times as many as the U.S. has, the gap in per-capita GDP was even bigger: China’s $3,709 was only 8 percent of the U.S.’s $46,405.

A Wide Gap
Just to maintain this gap at current levels, Chinese GDP will need to grow at double-digit rates for four years before tapering off, or rise sixfold in three decades (assuming that U.S. real GDP increases 2 percent per year on average for the next 30 years, and using government population projections). To close the per-capita GDP gap in 30 years, Chinese GDP would need to grow about 10 percent per year for three decades, or expand to 17.8 times its current size in that period.

Such rates of growth seem close to impossible if the global economy slows.

As the announcer for the Cleveland Indians used to say when the Tribe was hopelessly behind, “They have their work cut out for them!”

(A. Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. This is the first in a five-part series.)

[agamemnus]

Hmm, a bit of a strawman I think. I think the only people arguing for "decoupling" would be journalists or politicians, not economists.

China is steadily importing more... like nuts... you know, the things you grow in the ground.

[Dreadnaught]

China Cities Value Land at Winnetka Prices With Bonds Seen Toxic

By Bloomberg News - Jul 13, 2011

Workers toil by night lights with hoes, carving out the signs for Olympic rings in front of an unfinished 30,000-seat stadium, bulb-shaped gymnasium and swimming complex in a little-known Chinese city.

Loudi, home to 4 million people in Chairman Mao Zedong’s home province of Hunan, is paying for the project with 1.2 billion yuan ($185 million) in bonds, guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year.

In Loudi, people take home $2,323 annually and there are no Olympics here on any calendar.

“The debt isn’t a problem as Loudi is not a developed place,” Yang Haibo, an official at the city’s financing vehicle, says as he sits with colleagues in a smoke-filled meeting room under a No Smoking sign. “It’s an emerging city.”

A 3,300-mile (5,310-kilometer) tour of three cities in China, coupled with reviews of dozens of Chinese-language bond prospectuses that offer an unusually transparent view into local government debt, shows just how widespread such borrowing has become. In China, as in the U.S. before the collapse of the subprime mortgage market in 2007, local debt is backed by collateral that is overvalued, may be hard to sell and, in some cases, doesn’t exist.

Officials in Loudi, whose colonnaded government building is locally nicknamed the White House, value their 18 tracts of land at almost four times what a similar plot sold for in May. In the northeast city of Cangzhou, the man in charge of the assets financing a port expansion can’t locate the land his company posted as collateral for a 1 billion-yuan bond sale. And a spending spree in Yichun, a district on the Russian border covered by ice much of the year, is backed by promises of future land sales that officials acknowledge may never materialize.

‘Huge Myth’

More than 400 billion yuan of municipal bonds sold since 2008 -- part of as much as 14.2 trillion yuan in local borrowing -- show how much local officials rely on their own forecast that land prices will continue to rise. Efforts by the central government to cool the property market so far have had no impact on their bullish estimates.

Residential land sale values slumped 30 percent this year as local officials increased sales to pay back loans, according to Credit Suisse Group AG. (CSGN)

“It’s a huge myth that land sales are going to be able to even support the interest payments let alone the principal payments,” says Stephen Green, the Hong Kong-based head of Greater China research at Standard Chartered Plc. (STAN) His research team assumes that at least 4-6 trillion yuan of local government loans -- and possibly much more -- will ultimately not be repaid by the projects, Green wrote in a June 29 report on China’s debt.

Echoes of U.S. Crisis

Local governments set up more than 10,000 so-called financing vehicles in the past decade to get around laws prohibiting them from taking direct loans. One third of them don’t have cash flow to service their loans, China’s banking regulator says.

The similarities with special purpose vehicles in the U.S. hiding toxic repackaged mortgages from banks’ balance sheets are increasing. Subsequent losses prompted the U.S. government and central bank to lend, spend or guarantee a peak of $12.8 trillion in 2009 to rescue the financial industry, including a $45 billion direct investment to rescue Citigroup Inc. (C), then the biggest U.S. financial services company.

‘Playing with Fire’

“It means that China is playing with fire like we played with fire when we had all those SPVs that took everything supposedly off the books,” says Carl Walter, who retired this year as the chief operating officer in China for JPMorgan Chase & Co. (JPM) “It didn’t take them off the books. Citibank went down.”

Moody’s Investors Service puts overall local government borrowing at 3.5 trillion yuan more than the 10.7 trillion yuan stated in a national audit published June 27. China’s central bank on July 11 backed the official count, saying estimates of 14 trillion yuan were “obviously” too large.

Banks cannot restructure all the local government loans on their books, Yvonne Zhang, a Moody’s analyst in Beijing, says. Recapitalizing the banks by the central government will slow growth in the world’s second-largest economy, says Vincent Chan, head of China research at Credit Suisse in Hong Kong.

The effects would reverberate around the globe in weakening the country’s appetite for U.S. Treasuries and European debt, as well as driving down prices of oil and metals, Fitch Ratings said in a June 28 report.

Touting Western Brands

The building binge fueled by this mound of debt is evident a few hours’ drive into the hills of Loudi from the provincial capital of Changsha. Cranes abound amongst new high-rise apartment complexes with names like Wealthy City, surrounded by billboards showing pictures of Caucasian women strolling through shopping malls featuring brands like KFC and Microsoft.

Loudi City Construction Investment Group Co. plans to use 21 percent of the proceeds from its bonds issued in March for the stadium complex and the rest for a new expressway into town, water treatment facilities and a park, according to its prospectus. The city is one of scores across the country building roads, commercial centers and subways after being urged to spend their way out of the 2009 global recession.

On a sunny day in early June, Yang smiles as he talks of transforming Loudi from an economy dominated by a single state- owned steelmaker into a bustling transport hub, a popular phrase these days with officials who tout projects they say will bring prosperity to their cities.

High-Speed Railway

Set on a lush green hillside, Loudi will be a stop on a high-speed railway spanning more than 1,200 miles from Shanghai in the east to Kunming in the west, near the border with the Southeast Asian nation of Myanmar.

“Every train will stop here,” says Yang, in his downtown office at the company’s headquarters. A Mao statue with a red kerchief draped around its shoulders stands in the lobby.

Outside, Yang points to a vacant plot in a swathe of land already cleared and being drained to build apartment blocks. It’s one of the lots being used for collateral.

The company has pledged to repay debt by selling land it received from the city, leveraging local land prices that doubled between 2007 and 2010, according to the prospectus. The 9.69 million yuan an acre it values its land for the bond compares with a tender price in May of 2.54 million yuan an acre for a city plot zoned for commercial use, according to data from the local State Land Resources Bureau.

Better Than Treasuries

Foreign ratings companies don’t assess China’s local bond market and domestic evaluations vary. Beijing-based Dagong Global Credit Rating Co. rates Loudi’s bonds at its fourth- highest investment grade, one level higher than it gives to U.S. Treasuries. That’s in spite of its own December 2010 report that said: “The city’s ability to balance the general budget is decreasing and the results of the sales of land use rights will impact the company’s ability to invest and do construction.”

Dagong gives a high rating to the bonds of local government financing vehicles because the central government has said infrastructure debt will be repaid by local authorities, chairman Guan Jianzhong said July 11. Rapid growth in local fiscal revenue should enable them to pay debts, he said.

Loudi’s investment vehicle had a negative operational cash flow of 187.1 million yuan in the first half of 2010, a period during which it borrowed 284 million yuan. Beijing-based China International Capital Corp., often referred to as CICC, gives Loudi its third-lowest rating, a speculative or non-investment grade.

The yield on Loudi’s bonds reached a record high of 7.318 percent on July 7, according to data from China Foreign Exchange Trade System.

Yang, the official, isn’t worried. “When we get to the end of our loan we’ll just pay it back,” he says.

Defaults Forecast

Across China, cities increasingly turned to the country’s nascent bond market last year after the national government turned off the spigot for many bank loans. That’s propelled a six-fold increase in bond sales this year from three years ago, according to CICC, an investment bank run by the son of former premier Zhu Rongji.

“We are forecasting a lot of local governments will have to default,” says Jinsong Du, an analyst at Credit Suisse in Hong Kong. About one-quarter of China’s municipal debt is guaranteed with land sales revenue, Auditor General Liu Jiayi said June 27.

Mansions Among Smokestacks

In Cangzhou, almost 800 miles northeast of Loudi, on the shores of the Bohai Gulf, luxury apartment complexes are sprouting up in view of more than a dozen smokestacks at one of China’s biggest coal depots. A billboard for Leader Mansion promises, in English, that it will bring the buyer a “high degree of endorsement of a city life.”

The city is expanding Bohai New Area, a port zone between Tianjin and the border of Shandong province, by building roads and developing unspecified “green” projects with 1 billion yuan in bonds issued in May by Hebei Bohai Investment Co. They’re guaranteed by five tracts of land the company says is valued at more than 1.54 billion yuan, or 462 yuan per square meter. That’s more than three times what it paid the local government in December 2009, according to the company’s land use permits viewed by Bloomberg News.

Ask Lu Chunjiang, a Communist Party member and head of the local investment company’s asset management department, where his assets are and he can’t say.

“It’s somewhere north of town, I don’t exactly know where,” Lu, 41, says in his second-floor office in Huanghua Port, built on saline marshes. “It’s like the land outside the city, you know, with the big piles of salt.”

Inability to Pay

Hebei Bohai’s bonds were skewered by Xu Xiaoqing, head of fixed income research at CICC, in a May 26 report.

“This issuer’s own profit and cash flow is very little, its cash shortage is extremely big, its debt load is very heavy, and it doesn’t possess the ability to pay this bond,” Xu and his team wrote. The local government’s fiscal income “is very limited, there will be a lot of pressure on it to support the payment of this bond,” they added.

Hebei Bohai’s long-term debt of more than 7 billion yuan at the end of 2010, before the bond was issued, was greater than the city’s annual revenue of about 5 billion yuan for that year, according to the prospectus.

The debt-to-government revenue ratio was higher than that of Vallejo, the northern California city that filed for bankruptcy in 2008. Vallejo cited falling revenue from real- estate transactions as a reason for its bankruptcy.

Banks on the Hook

Banks including Industrial & Commercial Bank of China (1398) Ltd. and China Construction Bank Corp. (939), China’s two biggest by market value, may have problematic loans equivalent to 30 percent of their books, says Victor Shih, a professor at Northwestern University in Evanston, Illinois, who studies China’s local government debt.

The banks also are among the leading holders of China’s mushrooming corporate debt according to data compiled by Chinabond, China’s Beijing-based bond clearing house. This year, mutual funds have been the biggest buyers, according to CICC. They’ve snapped up half the corporate bonds issued in the first five months of this year, 70 percent of which were to finance local government projects.

Buyers are attracted to high yields and have faith that the central government will bail out any in trouble, says George Weisi Tan, head of bond investments at Fortune SGAM Fund Management Co. in Shanghai.

“They think the interest is risk free,” says Tan, who says some brokerages leverage themselves as much as three times their capital. “This is really a big systemic risk.”

Crisis ‘Unlikely’

Such pessimism is overblown, says Nicholas Lardy, a senior fellow at Washington’s Peterson Institute for International Economics who specializes in China’s financial system. The buildup of debt is slowing and many local infrastructure projects will raise revenue and add to economic growth, he said.

“A majority of the projects that are being undertaken by these companies are probably projects that have very high economic rate of return,” Lardy says.

Wang Tao, a Beijing-based economist for UBS AG, wrote in a June 7 report that a crisis from bad local debt is “unlikely in the near future.”

Of most concern, she said, is borrowing obtained with no collateral at all.

That’s the case in Yichun, a Maryland-sized area of about 1.3 million people deep inside the birch and pine forest on China’s border with Russia.

Yichun is a poor city in a poor province. Income of Yichun residents was little more than half the national average last year. That hasn’t stopped the government from going on a spending spree. The new local police headquarters has a miniature dome reminiscent of that on the Vatican’s St. Peter’s Basilica.

Shanty Towns

Yichun City Construction Investment & Development Co. sold 1.2 billion yuan in bonds in 2009 backed only by a pledge from the local government and possible future land sales. CICC gave it the lowest debt rating of any city financing vehicle. In contrast, Dagong rates the bonds one level higher than U.S. debt.

Money raised from the sale is being used for the destruction of what the prospectus calls “shanty towns.” Single-floor traditional wooden homes in the valley are being demolished to make way for thousands of low-income apartments. The company has also financed a new reservoir, an airport terminal and parklands, one featuring faux Corinthian columns topped by winged warrior princesses and bronze sculptures of chariot-riding local gods.

Missing Chairman Mao

Wang Zhongbing, 77, a retired factory worker who spends the summer days chatting with friends in a park next to the Yichun River, says the economic development is passing his family by. Only one of his three adult sons has a job, he says.

“I miss Chairman Mao,” says Wang, sitting on a red plastic chair in front of a billboard for newly built Pinaster Town, featuring a picture of a woman in high heels stepping out of a Rolls Royce. “The common people cannot afford these houses.”

The Yichun financing vehicle would have lost money every year from 2006 to 2008 except for direct government subsidies. At its offices above a local bank branch in the center of town, Sun Yunlan, 49, who according to the prospectus is deputy general manager of the company, referred questions to the city’s finance department, which, in turn, referred questions back to the company.

The prospectus promised that land from the city “will provide a more substantial cash flow.” Two years on, that hasn’t come to pass, according to Wu Liangguo, the head of the Yichun City Bureau of Land and Resources and its Communist Party secretary.

“The land market in Yichun isn’t that great,” says Wu, 49, who jogs even in minus 30 degrees Celsius (minus 22 degrees Fahrenheit) chill of the Siberian winter. “The local government financing vehicle may get land in the future but it isn’t a certainty.”

http://www.bloomberg.com/news/2011-0...een-toxic.html

[GGT]

The over-confidence sounds more plausible than decoupling.

Overconfidence in China’s ability to keep its economy booming is also partly psychological. It reminds me of the admiration and envy (even fear) that many felt toward Japan during its bubble days in the 1980s. As Japanese companies bought California’s Pebble Beach, Iowa farmland and Rockefeller Center in New York, what was safe from their zillions? Then the Japanese stock and real-estate bubbles collapsed, and Japan entered the deflationary depression in which it’s still mired.

That's also reminiscent of the US housing and financial bubbles that popped. They should be trying to avoid our mistakes, not repeat them.

Echoes of U.S. Crisis

Local governments set up more than 10,000 so-called financing vehicles in the past decade to get around laws prohibiting them from taking direct loans. One third of them don’t have cash flow to service their loans, China’s banking regulator says.

The similarities with special purpose vehicles in the U.S. hiding toxic repackaged mortgages from banks’ balance sheets are increasing. Subsequent losses prompted the U.S. government and central bank to lend, spend or guarantee a peak of $12.8 trillion in 2009 to rescue the financial industry, including a $45 billion direct investment to rescue Citigroup Inc. (C), then the biggest U.S. financial services company.

‘Playing with Fire’

“It means that China is playing with fire like we played with fire when we had all those SPVs that took everything supposedly off the books,” says Carl Walter, who retired this year as the chief operating officer in China for JPMorgan Chase & Co. (JPM) “It didn’t take them off the books. Citibank went down.”

Moody’s Investors Service puts overall local government borrowing at 3.5 trillion yuan more than the 10.7 trillion yuan stated in a national audit published June 27. China’s central bank on July 11 backed the official count, saying estimates of 14 trillion yuan were “obviously” too large.

Banks cannot restructure all the local government loans on their books, Yvonne Zhang, a Moody’s analyst in Beijing, says. Recapitalizing the banks by the central government will slow growth in the world’s second-largest economy, says Vincent Chan, head of China research at Credit Suisse in Hong Kong.

The effects would reverberate around the globe in weakening the country’s appetite for U.S. Treasuries and European debt, as well as driving down prices of oil and metals, Fitch Ratings said in a June 28 report.

edit: Didn't we have a thread about whether bubbles, booms and busts were good for a nation, or if that kind of roller coaster up-and-down growth was too risky? Maybe it was at Atari. Shilling doesn't paint a very optimistic picture for the US either, dealing with our aftermath of consumer debt and credit as "wealth" that didn't really produce much.

[CitizenCain]

“I miss Chairman Mao,”


I don't know if that's a bigger indictment of the current state of China, or humanity in general, that someone would miss the guy responsible for the deaths of over 40 million of his own people. Either way, it sounds like China's in the same boat the rest of the world's in, with everyone buying things they can't afford with money they'll never have and no one seeming to care about any of it.

Hell, now that I think about it, that's the history of the world, as aired on cable TV (with the violence and nudity censored out).

[GGT]

[...]Either way, it sounds like China's in the same boat the rest of the world's in, with everyone buying things they can't afford with money they'll never have and no one seeming to care about any of it.

Hell, now that I think about it, that's the history of the world, as aired on cable TV (with the violence and nudity censored out).

That'd be the history of consumerism and commercialism, thanks to cable TV product placement ads trying to sell us useless shit we don't really need. The Chinese aren't big consumers (yet), maybe because their media is censored? If they had Madison Ave convincing them to open a new deposit account for free toasters, or charge cards with frequent-user "rebates", they might start buying a bunch of useless shit, too.

[CitizenCain]

Right, people never wasted borrowed money on frivolous crap before TV came around, and this problem is a recent one caused by electronic advertisements.

I love how you can (with a straight face, even) blame problems that are literally as old as history itself on whatever the big bad scapegoat du jour is.

[Loki]

Everyone knows people bought "elixirs" in the Wild West because of TV advertisement.

[CitizenCain]

Everyone knows people bought "elixirs" in the Wild West because of TV advertisement.

Well, obviously, but the really interesting question is how the world's oldest civilizations (in Egypt and the "Fertile Crescent") managed to get TV ads on their parchment and stone tablets, and thus codify laws and advice about borrowed money and the rampant consumerism that might cause one of the ancients to need more money than he had.

It really is fascinating how peoples with such limited technological ability were able to achieve feats unmatched by even modern engineering. Damascus steel, the Great Pyramids, The Hammurabi Home Shopping Network ...

[Dreadnaught]

That'd be the history of consumerism and commercialism, thanks to cable TV product placement ads trying to sell us useless shit we don't really need. The Chinese aren't big consumers (yet), maybe because their media is censored? If they had Madison Ave convincing them to open a new deposit account for free toasters, or charge cards with frequent-user "rebates", they might start buying a bunch of useless shit, too.

The Chinese consume plenty. And they would consume more, but their living margins are being eaten up by inflation.

Plus culturally they are at that phase where they will blow their life savings on a new BMW, then drive it around for 30 minutes to avoid paying 3 yuan more for a convenient parking space at the mall. They are also at that phase where the Hong Kong airport is swamped with luxury fashion outlets and it's almost impossible to buy snacks. Though the Hong Kong experience is obviously slightly different.

[wiggin]

The Chinese consume plenty. And they would consume more, but their living margins are being eaten up by inflation.

Plus culturally they are at that phase where they will blow their life savings on a new BMW, then drive it around for 30 minutes to avoid paying 3 yuan more for a convenient parking space at the mall. They are also at that phase where the Hong Kong airport is swamped with luxury fashion outlets and it's almost impossible to buy snacks. Though the Hong Kong experience is obviously slightly different.

Actually on average the Chinese consume far less than they should. Their savings rate is ridiculously high, and their GDP growth is being driven by investment, not consumer demand. If they want to have a stable, balanced economy, then average Chinese consumption must increase (this would help alleviate some of the global trade imbalances as well). There may be isolated cases of conspicuous consumption, but for the majority of Chinese in their rapidly growing middle class, consumption simply doesn't happen.

I think this has a lot to do both with cultural mentality and the state of Chinese government services. For most middle class Chinese, they are one emergency away from bankruptcy. There is no safety net, whatsoever. This uncertainty (and very large risks) means that the rational choice is to save incredible portions of your income to insure against a calamity, since in real terms it still isn't that much money to deal with emergencies.

[Dreadnaught]

I was talking more about whether a culture of consumerism exists, not whether their net savings as an economy is balanced towards consumptive growth. Obviously the cultural inclinations are tempered by the lack of safety net that you describe.

On the plus side, they seem to be investing their surpluses in occasionally-crummy infrastructure and hideous buildings.

[wiggin]

Hmm. I'm not sure how you're defining a 'culture of consumerism'. If you mean that newly rich Chinese will go a bit crazy - with a ridiculous emphasis on expensive branding - then I'll agree. But if you mean that the average Chinese household consumes rather than saves as a matter of course, I disagree. The US has a culture of consumerism, where every element of society has a heavy emphasis on consumption; I'm not sure the same is really true of China. Even if there's some ideal of luxury, the vast majority of Chinese don't even go for cheap knock-offs of this ideal (let alone going into debt for this).

*shrugs* I guess it doesn't really matter much at the end of the day. We both agree on the data, just probably have different definitions for a culture of consumerism.

[Dreadnaught]

They don't go into debt for consumer items, but they will covet them and sometimes spend large chunks of their limited resources to buy them (or knock-offs).

[GGT]

Right, people never wasted borrowed money on frivolous crap before TV came around, and this problem is a recent one caused by electronic advertisements.

I love how you can (with a straight face, even) blame problems that are literally as old as history itself on whatever the big bad scapegoat du jour is.

Everyone knows people bought "elixirs" in the Wild West because of TV advertisement.

I mentioned consumerism and commercialism rising in China, as their society entered the global markets of buying/selling "stuff", becoming exposed to advertising and credit like never before.....and you two jump on things I didn't even say, and take it all out of context. WTF

By all means, keep posting about Chinese culture, consumerism, and commercialism with Dread and wiggin. Kindly leave me the hell alone.

[CitizenCain]

I mentioned consumerism and commercialism rising in China, as their society entered the global markets of buying/selling "stuff", becoming exposed to advertising and credit like never before.....

Is that also why the Americans in the "Wild West," the nomadic Jews, the ancient Babylonians, and the dozens of Pre-Roman Mediterranean trading civilizations had what the Chinese now have? Their exposure to TV adverts and free credit cards?

and you two jump on things I didn't even say, and take it all out of context. WTF

Those are examples of these same spending and debt issues in societies that didn't have access to television, charge cards, or free promotional toasters. That they, too, had issues with debt and spending more money than they had, but did not have TV, easy access to electronic lines of credit or even toasters strongly implies that the cause of these issues is unrelated moving images, small pieces of plastic or convenient methods of toasting bread.

[GGT]

Hmm. I'm not sure how you're defining a 'culture of consumerism'. If you mean that newly rich Chinese will go a bit crazy - with a ridiculous emphasis on expensive branding - then I'll agree. But if you mean that the average Chinese household consumes rather than saves as a matter of course, I disagree. The US has a culture of consumerism, where every element of society has a heavy emphasis on consumption; I'm not sure the same is really true of China. Even if there's some ideal of luxury, the vast majority of Chinese don't even go for cheap knock-offs of this ideal (let alone going into debt for this).

*shrugs* I guess it doesn't really matter much at the end of the day. We both agree on the data, just probably have different definitions for a culture of consumerism.

They don't go into debt for consumer items, but they will covet them and sometimes spend large chunks of their limited resources to buy them (or knock-offs).

Is that also why the Americans in the "Wild West," the nomadic Jews, the ancient Babylonians, and the dozens of Pre-Roman Mediterranean trading civilizations had what the Chinese now have? Their exposure to TV adverts and free credit cards?

Those are examples of these same spending and debt issues in societies that didn't have access to television, charge cards, or free promotional toasters. That they, too, had issues with debt and spending more money than they had, but did not have TV, easy access to electronic lines of credit or even toasters strongly implies that the cause of these issues is unrelated moving images, small pieces of plastic or convenient methods of toasting bread.

[Dreadnaught]

Hum hum...

BUSINESS | OCTOBER 11, 2011

China Props Up Bank Shares

Move Comes as Investors Fret Over Accounting of Chinese Companies, Bad Debts
By DINNY MCMAHON And JAMES T. AREDDY

BEIJING—China stepped in Monday to buy shares of the country's battered banks, which have been caught in a selloff that analysts say reflects a broader loss of trust in the integrity of corporate earnings and government statistics.

The skepticism of investors comes as China has become increasingly exposed to global markets, largely through stock listings of its state-owned enterprises and other companies, but more recently through its currency and bonds, which are now traded in Hong Kong.

The market rout began among a group of small U.S.-listed companies accused by investors of misrepresentation and has quickly spread to other Chinese assets available to overseas investors. Stock investors are fleeing China's state banking giants partly on fears that they aren't coming clean about their bad-debt problems after several years of blow-out lending.

Investors also are selling highflying Internet companies such as Baidu Inc. amid questions about obscure ownership risks. And they are fleeing property stocks on fear that Beijing's inflation-fighting efforts have left developers and buyers in hock to illegitimate financiers.

Sentiment has even turned more cautious on China's currency, the yuan. Though it hit a high Monday, its unusual volatility has reinforced to some that yuan appreciation is less a sure thing than had been thought.

Enthusiasm is waning for Chinese bonds issued in Hong Kong, so-called dim sum bonds, that Western bankers have been touting as the next big story.

In Monday's intervention, China's sovereign-wealth fund purchased shares in four big Chinese banks. The fund took similar action after the 2008 collapse of Lehman Brothers, buying bank shares as part of a year-long effort to prop up the domestic stock market.

Chinese bank shares had plunged after the financial crisis began. But unlike their international peers, the Chinese banks were climbing again by late in 2008 as Beijing used the institutions to engineer a big stimulus program.

This time, fewer analysts believe China's government can repeat that kind of economic magic. And indeed, investors are wondering if market stumbles highlight fundamental trouble in the No. 2 global economy.

Analysts say that after years of downplaying risk, some investors now appear fearful that other aspects of China's economy may not be as they seem. They are questioning the credibility of official numbers that show continued rapid growth in one of the last remaining major engines of the global economy.

Pessimism about China's prospects has grown so deep that some investors are betting against not only its stocks but its government debt, which by all accounts is safe. The net value of credit default swaps on Chinese government debt doubled at the end of September from a year earlier, according to data from New York-based Depository Trust & Clearing Corp.

"People don't trust the government statistics, they don't trust corporate earnings, they don't trust [comments] from government officials," said Daiwa Securities Ltd. economist Sun Mingchun.

Skepticism about Chinese statistics isn't new, and over the years Chinese stocks listed overseas have been hit by periodic bouts of selling as waves of China euphoria turned to anxiety about the government's ability to sustain rapid growth.

Many Chinese and foreign economists forecast Chinese economic growth of around 9% this year and say the selloff is overblown. They are confident banks could cope with a spike in nonperforming loans, and if necessary Beijing could bail them out.

China keeps a tight control on capital flows across its borders, and foreigners have only limited access to stocks and bonds listed on mainland Chinese markets. That means an investor selloff overseas doesn't pose a direct risk to the domestic economy.

Still, the sudden turn in investor sentiment could be costly for both China and the global economy. At stake is the prestige of a rising economic superpower that aspires to turn its companies into global leaders, and its currency into a rival to the U.S. dollar and the euro.

China's private sector has long relied on international markets to raise funds. The tumble in banks' shares complicates their options to raise additional funds if their profits fall short.

Global investors are exposed to the world's second-largest economy as never before. Chinese companies dominate new listings in Hong Kong and have a big role in New York. China's voracious demand for raw materials as it rolls out infrastructure and builds new cities helps set the price of everything from copper to emerging-market currencies.

The slide in confidence in China investments began to pick up momentum late last year when investors who had taken short positions in overseas-listed small Chinese stocks—and thus stood to gain if the stocks fell—started sharing with the public their on-the-ground research.

Dozens of small Chinese firms that listed in the U.S. through a backdoor method—buying an already-listed shell company—have since been delisted or suspended amid probes by the U.S. Securities and Exchange Commission. That has spooked investors in more Chinese companies.

"The fear of accounting fraud is very real," said Shaun Rein, managing director of China Market Research Group.

Before Monday's bank-share intervention, Industrial & Commercial Bank of China Ltd. had dropped 22% since the end of August, and Agricultural Bank of China Ltd. had fallen 31%. The Hang Seng, Hong Kong's benchmark index, fell 14% over the same period.

Central Huijin Investment, the domestic investment arm of the sovereign-wealth fund, said it had started buying shares in those two banks, plus Bank of China Ltd. and China Construction Bank Corp. The fund, already a major shareholder in the state banks, said it would continue buying.

The move sent Chinese bank shares up and spurred a 1.6% late-day rebound in the Hong Kong market. Huijin bought Shanghai-listed shares, announcing its purchases after the Shanghai market closed but when Hong Kong was still trading. The banks are dual-listed in Shanghai and Hong Kong.

"The government clearly sent a message that it wants to boost confidence in the market," said Wu Dazhong, an analyst at Shenyin Wanguo Securities.

Some are skeptical. "Unless market participants can get a more credible picture of balance-sheet risks…we expect share prices to remain quite volatile," said Sarah Wu, an analyst with UBS, in a note before Monday's intervention. She said banks face a "credibility gap" between what they "are actually reporting and what the market is willing to believe."

Chinese Internet stocks, once darlings of U.S. investors, have cratered on new worries about complicated legal structures that don't give foreign investors an ownership stake in key Chinese assets. Baidu is off 27% since its peak in July. Sina Corp. is down 40% from a July peak.

"Pessimism about China is close to being at an all-time high," said Andy Mantel, chief executive of investment advisory Pacific Sun Advisors, who has been investing in the country for 20 years.

Longstanding suspicions about Chinese statistics, rooted in political pressure, were reinforced late last year when WikiLeaks published a U.S. Embassy cable citing now-Vice Premier Li Keqiang as saying that Chinese economic statistics are "man made." The memo quoted Mr. Li as saying that in 2007, when he was head of Liaoning Province, he preferred to look at provincial figures on electricity consumption, rail traffic and bank loans as more reliable than gross domestic product.

Write to Dinny McMahon at dinny.mcmahon@wsj.com and James T. Areddy at james.areddy@wsj.com

http://online.wsj.com/article/SB1000...105946716.html

[wiggin]

The Economist has a nice piece up about how shorting Chinese stocks (mostly through Hong Kong exchanges) has become a huge fad this year. There's a lot of valid concerns there - about iffy bookkeeping, 'shadow' loan markets, high local gov't debt loads, truly cray real estate markets, etc. - but I think the 'hard landing' people still have a long ways to go before I'll be convinced. There's no doubt China is headed for economic turbulence in the future - I'm convinced they're going to fall into a middle income trap - but I just don't see a hard landing as being that likely in such a tightly managed economy.

There's one advantage to tight Chinese control over the yuan-dollar exchange rate; they can carefully (and slowly) manage their appreciation against the dollar to match prevailing economic circumstances/inflation/etc. to help ease the contractionary effects on their markets. It's not perfect, and they've got lots of issues, but I'm unconvinced about a hard landing.

[Dreadnaught]

80% of the time I'm inclined to agree with you. Except that authoritarian control can only go so far with some of these massive off-books debts lurking around. If there were to be a hard-landing, it may not be an all-out crash as much as a very sudden contraction relative to what the Chinese have experienced over the past few decades (which in turn will cause other debts to go sour).

[wiggin]

Yeah, I can see that. To be honest, even nominal growth in the 2-3% range would be a huge shock to the economy, given their inflation rate and other issues.

There are lots of projections bandied about for when China's GDP will be bigger than that of the US. There's no question they'll get there, and relatively soon, but a lot of the projections assume that China will be able to keep up its scorching growth rates in the current economic climate. I find it unlikely - much of their consumer base (the developed world) is deleveraging, they've got a bad case of middle-income trap and demographic disaster looming, and they're facing increasing calls for currency wars and protectionism that can't do anything good for an export-oriented economy. But an absolute economic crash is probably unlikely in such a tightly managed economy that still has a remarkable amount of underlying strength.