I find this horribly convincing:
Chang argues that inconsistencies in Chinese official statistics – like the surging numbers for car sales but flat statistics for gasoline consumption – indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined.
This, Chanos and others argue, is happening in sector after sector in the Chinese economy. And that means the Chinese are in danger of producing huge quantities of goods and products that they will be unable to sell.
The Pivot Capital report was extremely popular in Chanos’s office and concluded, “We believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the U.S. subprime and housing boom.”
To me the moral of the last couple of decades of world economic history is clear. The world was indeed somewhat released from the dead hand of politics. In particular, the making of stuff was released into the wild. Consequently, during the last two decades, stuff has just got better and better.
But the world’s financial systems remained under rigid political control, everywhere.
Stuff-making roared ahead. But then the financial systems started collapsing, and China looks like being next. Managed capitalism has indeed only been a very partial success, but which word in that phrase will get the blame?
I say that the stuff-makers, the truly honest capitalists of the last two decades, should not be blamed. They did, and continue to do, a fabulous job. On the contrary, the politician/financiers should, instead of trying to shift the blame and the burden onto them, be looking to the stuff-makers for lessons in how to make an honest living.
I find it rather worrying as to how many bankers, investment gurus and the like are singing the praises of China, and yet I have this gut feeling that sooner perhaps than they appreciate, things are going to turn pretty sour. There has been huge misallocation of capital via state-directed banking.
Not that that happens in the West, of course. (cough).
This may be my old Cold War paranoia, but the way China’s “covering up the flaws in their economy” could also be easily confused with “getting ready for a long disruption in certain supplies due to a war for resources.”
I have no idea what is going on in China – even pre Marxist history is hard to understand.
One minute everything looks wonderful, for example there were great iron mills in China on a vastly greater scale that anywhere else in the world, then the “will of heaven” suddenly changes and enterpries built up over a long period of time are suddenly taken over by the state (and, no suprise, civilization stagnates and then goes into decline).
The thing is that China can develop well for a long period of time – and then get turned upside down without warning.
What is happening in China now and what is going to happen? I repeat I have not got a clue – Mr Chang could be right or he could be wrong.
It is not a racial thing as I have no problem understanding South Korean politics.
Still I agree Brian.
If China does come crashing down (and I repeat I do not know if it will) it will be nothing to do with the manufacturers (the stuff makers) – although they are likely to be blamed.
It will be the financial system – which unlike the British and American one does not even pretend to by anything to do with private ownership, free enterprise.
Von Mises illustrated how and why a socialistic economy would have such excess of production in some things, but complete insufficiency in other things. It has to do with the complete inability for non capitalistic business models to understand the relationship between cost, demand and supply. In America, we’re about to have this very economic model thrust upon us in the form of nationalised health care.
There is also some serious merit to the idea of long term preparation for war. There are signs of such preparation in some sectors of China.
If it does all go tits-up in China, how will the media blame it on the failure of capitalism?
Brian
The Chinese economy is heavily reliant on the capitalist economies to buy their goods, therefore if China turns tits up the failure of capitalism will have been the cause?
I could probably do a bit better but I think that’s pretty good as a first pass
The problem is that calling the top, the moment when everybody realizes that the PRC must crash is a psychological event, something that nobody knows how to predict.
All we can do is to understand what a collapse would look like, what to do to prepare for it, and try to get everybody who know and love to be similarly prepared, then wait. It might be a longer wait than we think. A good number of collapse predictions have already failed because they misunderstood the willingness of people to suspend disbelief and let the PRC bubble get bigger.
MarkE,
I hadn’t thought of that, although it brings to mind that we are constantly told the refusal of the capitalist United States to trade with Cuba is responsible for the failure of Socialism in that unhappy country.
The problem will have been caused by China forsaking its reliable and honourable socialist ways and entertaining the mad dog and paper tiger of capitalism. I think that is how capitalism would get the blame.
But indeed. The less free a market is the less efficient it is. Because the market is nothing more than people making and exchanging things.
We are still so far from a free production and exchange system, and since the crash (el crisis) it has been getting steadily worse. In fact the world has basically gone into super crash mode as it has now turned its back on the few free bits that Reagan, etc, managed to pull through the tangle.
But. The world is a big place and the crash could take some time but eventually I guess we are all going to wind up like Zimbabwe if centralist control is the order of the day. And it seems it is.
When parts fail ever more severe draconian measures will be used to prop things up, but you can’t keep a sick man going on speed forever. Shortages and deprivation will set in.
I suppose the currencies will be the aspect of the situation that will be hardest hit. And possibly that is the reason for it all, to shift the wealth towards those who print the legal tender.
The exact figures I do not have but in around 1979 a Zimbabwe dollar was about one to one with the US dollar. I think so far it has had about 15 zeros added to that number.
Sorry, I think its more like 30 zeros. Not sure.
“…how will the media blame it on the failure of capitalism?”
Well, you know, China started market-friendly practices, it goes belly up, nothing bad ever happened in Mao’s China, and so on. The editorial in The Guardian writes itself.
I read or heard some extraordinary figure quoted for the proportion of China’s GDP which has been spent on their stimulus. It really was quite extraordinary.
I can only assume that China is headed for the mother of all crashes.
But the world’s financial systems remained under rigid political control, everywhere.
Close. It’s actually “But the world’s financial systems exercised rigid political control, everywhere.”
Yes indeed. Some utterly spurious reporting coming out of China.
One specific area in which I have a little expertise in is commodities – particularly metals. As a fabricator, China would normally consume copper to produce electrical and electronic assemblies, air conditioners etc. Their ‘consumption’ of copper cathode (the term used for the raw billets of copper that are delivered) is way, way up for reporting year 2009. Based on the relationship between consumption of raw materials and exported goods, we would expect to have seen all subassembly inventory replenished and something of the order of a 12% increase in finished items – and the demand isn’t there. Certainly not domestically, and I’m sure we’ve all seen the reports on those huge corrals of container shipping sitting idle; so there’s clearly less export activity too.
Somewhere, there’s either a LOT of copper cathode, subassemblies, or consumer electronics sitting in some brand new (probably concrete) warehouses.
The answer is almost certainly that the Chinese are hoarding cathode – indeed, there’s plenty of evidence that some business consortia (government-backed firms? oligarchs? rich individuals?) are stockpiling copper cathode in a simple flight-to-physicals way of avoiding holding paper.
Whatever the actual situation is on the ground, the government figures don’t seem to stack up on a macroeconomic scale, and on the microec-scale I’m conversant with, the government reports are pure flights of fancy.
Brian in London states that the Chinese are comsuming more cement that the rest of the world combined. I certainly hope they have a high percentage rate of being able to feed babies the correct porportion needed in order to not make their babies too heavy. That melamine kind of got out of hand. I am not Sarah Palin, honestly.
China’s bubble is a huge concern. I don’t think the world economy is going to enjoy the painful readjustment when it bursts.
Why oh why, is nobody listening to us?!? I am currently engaged in a huge running debate on the impending failures of the socialised healthcare system in the US with virtually all my classmates in my public policy course. They all seem stuck on miracle-thinking – legislation will solve everything!
Visited Beijing a year ago and looking back at the available data, I concluded that its main cities do not fully reflect the reality of China. I am not sure who would be blamed if the growth suddenly stopped but any sensible person knows that its “economic miracles” notwithstanding, China needs to make enormous policy changes to maintain growth and stability. So catastrophe may be at hand but what worries me is how the Party would respond because the flexibility of an open system is lacking.
There are people in higher places trying to make discreet noises about this. Whether they are making such noises in the right places, however, may very well be another matter.
The biggest harbour in Africa, now, would seem to be Mombassa, Kenya. Exporting all that African wealth to China?
I suppose as long as you keep the goodies coming, the heck with the financial system/exchange medium. It’s stuff that people need, not bits of paper with some numbers on them.
I know no more about china than anyone else. However, I’d be wary of this number:
“Chang argues that inconsistencies in Chinese official statistics – like the surging numbers for car sales but flat statistics for gasoline consumption – indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth. ”
China recently reduced the subsidies for gasoline.
I’ve been mulling over a post to discuss this issue for quite some time, but since Brian’s beat me to it, I’ll post my thoughts here.
China’s economy is still as dodgy and opaque as it was when I last wrote about it. The signs of this are everywhere and easily identifiable if you’ve lived there for a decent spell like I have. For a start, the GDP figures are almost certainly shonky. When the GFC started breaking, Wen Jiaobao kicked off a propaganda campaign called “Defend 8” (8% annual GDP growth). Just recently we discovered that, surprise, surprise, annual GDP will – just – breach 8%.
Really? A Canadian guy I know in Beijing is part-owner of what was a very successful import-export company, which sources almost any consumer good for clients in Europe and North America. He told me about how, for the last three months of 2008, there were only two orders placed. Things aren’t much better now. Furthermore, the majority of factories he sourced products from (and that’s many hundreds of different factories, some state-owned, some private) went out of business very quickly. And he’s not the only one I spoke to who told a similar story. How is it possible for an economy to grow, let alone at the rate posted, when huge chunks of its industrial heartlands have basically ground to a halt? When demand for what drives its economy – exports – dries up in its largest markets? On-the-ground experience certainly contradicts the official statistics.
Epic misinvestment continues to be made throughout the country, and is evident almost everywhere. For example, Chinese cities – especially the top tier cities (Beijing, Shanghai, Chongqing etc) – are stuffed full of gleaming new office towers which stand largely empty. And new ones continue to be built.
It really is only a matter of time before the house of cards that is China Inc starts unravelling messily and probably catastrophically.
Methinks Africa will be the dog that China kicks when the bubble pops.
What concerns me is that the traditional way to deal with such situations is war. A distraction domestically, an excellent cover to throw over economic problems and an opportunity to gain treasure.
I’ve seen similar “empty” cities in China for the last 15 years. And over a few years, these cities have (so far) inevitably filled up.
The Tsinghua professor quoted in the original news report is exactly right in that regard. All of the previous rounds of physical infrastructure in China has paid off economically and socially.
There are two numbers which define China, and is far more important than GDP in any given year:
1) population: 1.3 billion and counting.
2) urbanization rate: 45% and climbing.
China’s urbanization rate will rise to 70% by 2035. If you do the math, that means 325 million Chinese currently living in rural villages will move to urban cities within the next 25 years.
And if you do the math again, that means:
– for every square foot of real estate currently in existence in China… it’ll be doubled over the next 25 years.
– it also means building 15 New York’s from scratch over the next 25 years.
George Nadler what you are describing would be the greatest economic expansion in human history.
Possible, but if the Chinese economy depends on this expansion taking place….
However, as none of the basic economic stats can be relied on I can not make any prediction.
For example, what has been the rate of growth of the money supply in China over the last serveral years?
Either the monetary base (notes and coins). Or of broad money (bank credit).
No one here knows this – as none of the statistics can be trusted.
So we may as well be arguing about the internal affairs of the Planet Zog in another galaxy.