The engine of global growth is missing, the end of money...

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xraymike79's picture
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The engine of global growth is missing, the end of money...
The Market May Rally, but What is Reality


The biggest gaping hole for the world economy is this:

There is no country, not China, India, Europe or any other, that is in a position or has the financial resources to pick-up the slack left by the retrenching, tapped-out US consumer. The engine of global growth is missing. This is a fact.

China has been looked to as the one to pull the world up and out of the collapse, but China's growth has been based on its exports and the FDI (Foreign direct investment) and not its consumers. Exports are the true engine of the Chinese economy, equal to more than 30 percent of GDP. Exports fell 17.5 percent in January, compared to the same month a year earlier. They plummeted 25.7 percent in February, 17.1 percent drop in March, and 23% in April.

The private-consumption share of developing Asia's overall GDP fell to a record low of 47% in 2008, down from 55% as recently as 2001. In other words, Asia remains an export machine. Developing Asia's export share rose from 36% of pan-regional GDP during the financial crisis of 1997-98 to a record 47% in 2007. And recent research by the International Monetary Fund shows that Asian exports continue to be underpinned by demand from consumers in the industrial world, especially from the U.S. Despite a surge of trade within Asia, the bulk of these intraregional flows have been concentrated in parts and components that go into finished goods eventually consumed by developed economies.

When the international market shrinks, China shrinks no matter how much artificial stimuli sugar they through at the problem.
May 30 '09(Bloomberg) -- World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe.
"The bottom line (for China) is that almost none of the official stimulus package is actually going to help China’s industry, faltering as it is due to lack of export orders. China’s vector for that effort originates not in direct government spending, but in loans from the various state banks. From January to April, Chinese bank loans exploded to more than triple their already high rates. Nearly $1 trillion was lended during that period — more than in all of 2008 — in order to force-feed the capital necessary into the system to keep China’s legions of factories from releasing armies of unemployed citizens.
But a policy shift that sudden and holistic cannot be done with much oversight — and it wasn’t. China is more concerned about maintaining employment than about ensuring that money is used efficiently. And the result of such a sudden surge in loan-granting will inevitably be a mounting of nonperforming loans that will eat at the very heart of the Chinese financial system (a similar problem is what brought down Japan in 1991).

....The government has offered tax breaks and rebates to help exporters keep exporting whether profitable or not. It is offering incentives and threatening punishments for companies to retain workers whether necessary or not. And it is urging banks to loan more money — and the first four months have seen a massive increase in domestic loans to companies (though primarily to state-owned enterprises, not the private sector) to help them fulfill their employment and export requirements — whether profitable or not. At the same time, real estate prices are falling. On the surface, this may seem positive for those looking to buy. But it may have a major impact on Chinese companies that have been using inflated real estate as collateral for loans. So even as China is showing economic activity, it may be digging a deeper hole than before the current crisis.

The problem for Beijing is that the days of 12 percent and 13 percent GDP growth look to be over for quite a while. Moreover, China’s recovery remains heavily dependent upon a major recovery of global consumption (particularly in the United States). But that is by no means guaranteed. While there are signs of hope for the U.S. economy, they do not necessarily mean consumption levels will surge again as if nothing has happened. Even a U.S. recovery in the second half of 2009 followed six to 12 months later by Europe would leave China’s recovery another year or more in the future. Which leads to the dilemma Beijing faces."

Analyst Michael Pettis has recently proclaimed that "future historians will mark 2008 as the year that the development model that has driven much of Asia’s rapid growth for the past two decades went bankrupt." He argues that China is not making the difficult structural changes needed to its economy in order to develope internal consumption.

Analysts who keep close tabs on how China is faring at creating a strong domestic consumer market warn that the country faces serious obstacles on the road to Western-style consumerism, and it could be decades before these are cleared away.
“There's nothing that really supports a consumer society in China right now,” said Jennifer Richmond, China director with Stratfor, a global intelligence company. “In 10 years, we might see the seeds of it. But the likelihood of the Chinese supplanting the American consumer is quite slim.”
China's consumers account for about 35 per cent of GDP and just over 3 per cent of the global economy. By contrast, U.S. consumers still account for two-thirds of the vastly larger U.S. economy and about 17 per cent of global GDP. “The mathematics are daunting,” said David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates in Toronto. “For every 1 per cent decline in U.S. consumer spending, Chinese consumer spending has to grow by 5 per cent just to keep things where they were.”

There are those who have been trying to warn us for a while now that China's middle class was merely an illusion. In a 2007 article for BusinessWeek, Arthur Kroeber, editor of China Economic Quarterly, stated blankly that, "China doesn't have a middle class.". He blamed deceptive figures released by the Chinese government for our misperception of the situation, and estimated that total purchasing power in China to be half of what was being reported at the time. And such purchasing power was concentrated among the well-off in a few privileged urban areas. "As far as significant retailers are concerned, out of China's 1.3 billion people, 1.2 billion simply don't count," he stated.

Such views were recently echoed by David Goodman, professor at the University of Technology in Sydney. Goodman argues that the "middle class" that we see in China's urban centres are an exclusive elite forging ever-closer links with the ruling Communist party. "They are neither independent of nor excluded from the political establishment, which on the contrary seeks actively to incorporate them," he states. He attributes this development to former party leader Jiang Zemin, who "opened the doors for capitalists to join the party."

While everyone seems to have an opinion about China, these arguments seem to be supported by recent events. As China's manufacturing sector has witnessed a significant drop in foreign demand, its earnings, as well as the money that in turn pours into government coffers, have dropped substantially. As a direct result of this, the growth of China's domestic economy has plummeted."

It's an open question if China can change it's economic model:
I am just not sure that China can change its model. This is the same reason why I am not sure that what economists often look at as great fundamentals necessarily translate into sustainable economic growth.
Latin America's per capita income in the 50’s was 25% of the US. Asia’s was 10%. It was thought that the mineral wealth, sophisticated society, education, and people would allow Latin America to catch up in 30 years. Today Asia’s per capita income is 25% of the US, while Latin America is 20%.
Africa has enormous potential and had had since I was born almost 60 years ago. It has never lived up to it.
Economists are just beginning to understand something that I think is crucial. The rules. (see Good Capitalism, Bad Capitalism, Power and Prosperity). Good government is the magic ingredient that helps all of the other assets actually produces wealth. It’s like two business firms. One succeeds. The other doesn’t. Good management is the difference.
Still however good a manager is, it is rare that they are always right all of the time. The average age of a Dow company is only 40 years. The average tenure of a CEO is 10 years. Half that for a Fortune 100 company.
The question is whether China can change with the same set of leaders. I am not sure if it can. When leaders everywhere get into power they compensate the people who keep them there at the expense of the economy as a whole. As time goes on the situation becomes worse.
To change, China will have to change its model or the W will turn into an L."--William Gamble,9171,1901366,00.html


xraymike79's picture
Status: Diamond Member (Offline)
Joined: Aug 24 2008
Posts: 2040
Re: The engine of global growth is missing, the end of ...


Jim Chanos: China Is Headed For A Huge Crash


Politico reports that Jim Chanos is a big China Bear:

But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.

A Chinese collapse, of course, would have profound effects on the United States, limiting China’s ability to buy U.S. debt and provoking unknown political changes inside the Chinese regime.

The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos. Read the whole thing >

Chanos is reportedly attempting to short the entire Chinese economy. What's fueling the short case against China?

  • The $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.
  • China seems to be cooking its books. For instance, it reports that car sales are surging while gasoline consumption is flat. Is that realistic? Or are state run Chinese companies just stock-piling cars?
  • China may have too much capacity. The central planners built out productive capacity for a booming economy but China is stalling.  In nearly every sector of the economy, China is in danger of producing huge quantities of goods with no buyers.
  • China's economic and political posturing signals that its leaders have no idea what is in store for them. The result may be a surprising economic collapse, akin to what happened when the housing bubble popped in the US.
docmims's picture
Status: Platinum Member (Offline)
Joined: Jun 17 2009
Posts: 644
Re: The engine of global growth is missing, the end of ...

The chinese already defaulted on their derivatives contracts, and everybody just shrugged.  the country is still run by communists with central planning.  That their books are cooked is no different than rosey green shoots coming out of our own US government.


It is not the end of money, sorry.  Hard times to be sure, but not the end of money.  We have just begun the great depression, it will eclipse the 30s by this current mismanagement, but money will still be money -- just worth less.

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