China's Impeding Economic Collapse

[CaptainNemo]

^(should be "impending" <- Freudian slip?!)

China's Infrastructure Trap

By James Rickards

June 11, 2012 RSS Feed Print
James Rickards is a hedge fund manager in New York City and the author of "Currency Wars: The Making of the Next Global Crisis" from Portfolio/Penguin. Follow him on Twitter: @JamesGRickards.
One of the most infamous remarks ever made by a westerner returning from a visit to a Communist society was that of journalist Lincoln Steffens. After a 1919 visit to Soviet Russia, Steffens proclaimed, "I have seen the future, and it works." Of course, the future Soviet Union did not work at all, and after decades of slave labor, show trials, purges, and famine, it finally collapsed in 1991. Ever since Steffens, visitors to Communism have been well advised to take apparent progress with ample grains of salt.
Last week I visited Shanghai and Nanjing in China. This included travel on the new high-tech train between Shanghai and Nanjing, which reached a top speed of 305 km/hour. Some of the progress I saw was monumental, even breathtaking. Yet, there is room for serious doubt.
In 2009, China was reeling from the same collapse in global demand that had affected the United States after the Panic of 2008. China's policy response was a ¥4 trillion stimulus program (equal to about $600 billion) directed mainly at investment in infrastructure. The United States launched an $800 billion stimulus program at the same time. However, the U.S. economy is more than twice as large as China's. On a comparative basis, China's stimulus was the equivalent of $1.2 trillion applied to the United States.Three years after the program was launched, results are now visible.
[See a collection of political cartoons on the economy.]
They are spectacular. The new trains are not only fast but also comfortable and quiet. The Nanjing South Railway Station where I disembarked is almost beyond words. It has 4.9 million square feet of floor space, 128 escalators, took more than 20,000 workers to build, and generates over 7 megawatts of power from solar panels. Ticketing and entry to platforms are highly automated and efficient.
The Nanjing station is not unique but one of thousands of stations, airports, subways, highways, container ports, railroads, and other infrastructure built or under construction all over China. There is no question that all of this infrastructure works. The question is whether I was seeing the future, or if something else is in store.
The problems begin with the fact that much of this infrastructure binge is debt financed. It is not clear at all that empty buildings, excess manufacturing capacity, and subsidized transportation will generate anywhere near the revenue needed to pay the loans.
[See a collection of political cartoons on the budget and deficit.]
More troubling is that China's addiction to growth through infrastructure shows no signs of abating. For example, a new master plan is now being implemented in the Jiangning Development Zone south of Nanjing. The land has been cleared and graded and foundations, roads, man-made lakes, and a subway system are already in place. Soon to follow will be seven or so medium sized cities each with its own office towers, high-end shopping, luxury hotels, and housing linked by roads, rail, and telecommunications with an adjacent airport built expressly for the zone. Development projects like this are springing up all over China.
One high-tech laboratory I visited was massive with spacious offices, conference rooms, and lab sites surrounded by attractive grounds and good transportation. For the time being it was empty, but officials assured me that 1,500 experts would soon arrive. This puts the concept of "if you build it, they will come" on steroids.
[China's Healthcare System Thrives Despite Slowing Economy]
Yet, the most talented tech experts need more than nice offices. They want an entrepreneurial culture, close proximity to cutting edge university research, and access to the kind of start-up financial mentoring that comes with more than just a checkbook. Whether these x-factors can be supplied along with the buildings is an open question.
This points to the second weakness in China's plans, after the financing issues. Where will the businesses, people, and commerce needed to make these projects viable come from? No doubt some business will relocate from existing less attractive locations. However, the scale of these projects is so massive it is difficult to see how the service, technology, and luxury sectors can use the capacity. This is especially true if a high Chinese savings rate is needed to prop up the bank lenders thus stifling consumption.
If the United States has fallen into a liquidity trap, China may have fallen into an infrastructure trap from which there is no easy way out. Those 20,000 workers who labored on the Nanjing South Railway Station may well be employed in Jiangning today, but where does this end? The bad debts are piling up, the excess capacity is piling up and China has no consumption model to replace its infrastructure model despite such proposals in its 12th Five Year Plan.
[See a collection of political cartoons on energy policy.]
In the short run, China can continue its infrastructure binge because it has unused borrowing capacity to finance new projects and paper over losses on the old ones. Economic growth in the second half of 2012 may well exceed expectations as China tries to smooth over political turmoil and keep its corrupt party officials, cronies, and financial warlords happy.
However, there is a limit to this kind of expansion and the Chinese leadership know it. In the end, if you build it, they may not come. Then the hard landing begins.

source: China's Infrastructure Trap - Economic Intelligence (usnews.com)




(I would put it in issues, but everyone knows that issues are not discussed in issues, but everywhere else, and "issues" is just a thread graveyard).


I've been advancing the "divergent phugoid" thing for more than a couple of years now, and I still maintain that the bottom of this depression is around 2016, and the potential for a further monstrous peak and trough coinciding with pressure on the fossil fuel supply mid-century is a nasty possibility. The Asian infrastructure binge is a symptom of a naive economic culture that sees assets as purely physical.
The undoing of China will be it's culture; rather than simply it's population (which doesn't help). One can only wonder whether the south Atlantic might be the better longer term bet.

[Albert Shagnastier]

China has to suffer a litle, no way the western collapse won't affect it as it's a factory-buyer relationship.

[Tom Sawyer]

(I would put it in issues, but everyone knows that issues are not discussed in issues, but everywhere else, and "issues" is just a thread graveyard).

Every time I try to post an analysis piece like this from a bona fide magazine, etc, it gets stuck into Issues. Can't see why this should escape the TD censors even if it is a good read. My main point is that it should be here - not Issues. Because otherwise every Bangkok Post editorial should also be in Issues. The decisions seem arbitrary.

[BobR]

The problems begin with the fact that much of this infrastructure binge is debt financed. It is not clear at all that empty buildings, excess manufacturing capacity, and subsidized transportation will generate anywhere near the revenue needed to pay the loans.

So what, repudiate the loans. Sovereign debt serves no other purpose than enslaving 99% of the population to the 1% that own banks. The World economy is nothing more than a ponzi scheme at this point anyway. The majority of people benefit from keeping the show going at any cost, so it should be a simple decision, of course it's not.

[Zampan0]

China has to suffer a litle, no way the western collapse won't affect it as it's a factory-buyer relationship.

We here in the U.S. realize that having the Chinee suffer is good for them in the long run. We care. We buy their stuff on the cheap then pay them back with next to worthless T-bills. lol. They have put themselve's into the position of having to accept them for at least another -barring the Anunaki visiting us- 10 years. lol. "Never underestimate the intelligence of the American people"- H.L. Mencken. (Mencken neglected to say that the American people are actually every people in the world). "Never underestimate the American ingenuity and ability to bleed a country dry one way or another." -Zampan0

[jamescollister]

China is a big place and with Asia next door they are not going down. May have some problems in the future. but they are on an up and as they start from a low base, there is only up or revolution. Unless the west gets to grips with it's faulty banking system we are on the down, As of yet I have not seen anyone in the west come up with an idea to fix our system, Jim

[nostromo]

Now, I want to read your piece. Any pointers where it is then. Or did I get it wrong and there is Issues board here. I am watching great British Comedy.
¨¨

(I would put it in issues, but everyone knows that issues are not discussed in issues, but everywhere else, and "issues" is just a thread graveyard).

Every time I try to post an analysis piece like this from a bona fide magazine, etc, it gets stuck into Issues. Can't see why this should escape the TD censors even if it is a good read. My main point is that it should be here - not Issues. Because otherwise every Bangkok Post editorial should also be in Issues. The decisions seem arbitrary.

[crocodilexp]

China can borrow from its citizens at a negative real interest rate (i.e. they need to pay back less money when they borrowed when you adjust for account inflation). This way they can sustain massive corruption as well as a lot of state spending. Debt is not a curse for them as it is for Western nations that must pay back interest in real terms.

Macroeconomics of Chinese Cleptocracy is a decent article giving more detail.

[Neo]

(I would put it in issues, but everyone knows that issues are not discussed in issues, but everywhere else, and "issues" is just a thread graveyard).

Doesn't really matter where you put it as long as you can be bothered to put some paragraphs in it people will read it, unfortunately you couldn't be bothered so only the terminally bored will bother reading the article.

[nostromo]

very much of China hate here, i do not see china collapsing, and they are fastest growing country, which as in the growing bit is now very unusual, europe just goes down and you can say that about 28 times in within a minute. Aus fortunes are with China so good luck

[Butterfly]

The problems begin with the fact that much of this infrastructure binge is debt financed. It is not clear at all that empty buildings, excess manufacturing capacity, and subsidized transportation will generate anywhere near the revenue needed to pay the loans.

and that's the core of the issue here, we have seen this before in other countries like 40 years ago. Infrastructure is nice but when you are surrounded by idiot monkeys, it's pointless. Maybe we could all move to China one day and use those wonderful infrastructure.

China has no consumption model to replace its infrastructure model

again, hit the nail here. China is a supplier chain play, not a consumer play (although it is starting now). The consumer play is only happening by support of the supplier chain, but that's it. Basically nouveau riche and corruption.

In the end, if you build it, they may not come. Then the hard landing begins.

indeed, something we always forget. Best option eventually would be for us to colonize China

[Cujo]

This China's impening collapse' story getts trotted out every couple of months, I can't be bothered reading them any more because guys like this

James Rickards is a hedge fund manager in New York City

Who've visited China and suddenly got it all worked out, haven't really got a clue.
How many magazines are there? Every week or month they've got to fill themselves with something, there are so many magazines and websites with so many stories most of them are dross repeated.

[Cujo]

The problems begin with the fact that much of this infrastructure binge is debt financed. It is not clear at all that empty buildings, excess manufacturing capacity, and subsidized transportation will generate anywhere near the revenue needed to pay the loans.

and that's the core of the issue here, we have seen this before in other countries like 40 years ago. Infrastructure is nice but when you are surrounded by idiot monkeys, it's pointless. Maybe we could all move to China one day and use those wonderful infrastructure.

China has no consumption model to replace its infrastructure model

again, hit the nail here. China is a supplier chain play, not a consumer play (although it is starting now). The consumer play is only happening by support of the supplier chain, but that's it. Basically nouveau riche and corruption.

In the end, if you build it, they may not come. Then the hard landing begins.

indeed, something we always forget. Best option eventually would be for us to colonize China

By 'us' who do you mean?

[sabang]

If you want a case study in 'economic collapse', then read about the 1890's financial collapse in the USA. Like the USA before it, any 'financial collapse' will be shrugged off by China short term, because what is happening there, and the growth, is real. Unlike the 1890's USA however, China is not a big foreign debtor- au contraire, it is the worlds largest creditor, and we are in hock to them.

[socal]

China has to suffer a litle, no way the western collapse won't affect it as it's a factory-buyer relationship.

At least China is a creditor export nation with the worlds largest forex reserves. The US is the worlds largest debtor.

[socal]

China has to suffer a litle, no way the western collapse won't affect it as it's a factory-buyer relationship.

We here in the U.S. realize that having the Chinee suffer is good for them in the long run. We care. We buy their stuff on the cheap then pay them back with next to worthless T-bills. lol. They have put themselve's into the position of having to accept them for at least another -barring the Anunaki visiting us- 10 years. lol. "Never underestimate the intelligence of the American people"- H.L. Mencken. (Mencken neglected to say that the American people are actually every people in the world). "Never underestimate the American ingenuity and ability to bleed a country dry one way or another." -Zampan0

So the US imports 3.6 billion worth of stuff a day that it pays for with paper. When this stops, the US will be in a world of pain. Not that they are not in some pain already...

[Cujo]

We buy their stuff on the cheap then pay them back with next to worthless T-bills.

I really don't know what you're talking about, and apparently neither do you.
my friend that makes toys sells them to the U.S and gets PAID (not 'paid back') in U.S. dollars. not 'T bills'.
he's become very rich. Drives a nice new audi Q7, both wives live in luxury and all his kids go to the best schools.
You don't seem to understand the reality on the ground.

[nostromo]

[QUOTE=Butterfly;2127613][QUOTE="
Best option eventually would be for us to colonize China[/QUOTE]

Insane, Butters? You think your European Union can do that? Belgian Special Forces? You know, Chinese Intelligence services already read your message, and filed it under "harmless euroshite idiots"

[daveboy]

......

We buy their stuff on the cheap then pay them back with next to worthless T-bills.

I really don't know what you're talking about, and apparently neither do you.
my friend that makes toys sells them to the U.S and gets PAID (not 'paid back') in U.S. dollars. not 'T bills'.
he's become very rich. Drives a nice new audi Q7, both wives live in luxury and all his kids go to the best schools.
You don't seem to understand the reality on the ground.

"Never underestimate the intelligence of the American people"

[Cujo]

......

We buy their stuff on the cheap then pay them back with next to worthless T-bills.

I really don't know what you're talking about, and apparently neither do you.
my friend that makes toys sells them to the U.S and gets PAID (not 'paid back') in U.S. dollars. not 'T bills'.
he's become very rich. Drives a nice new audi Q7, both wives live in luxury and all his kids go to the best schools.
You don't seem to understand the reality on the ground.

"Never overestimate the intelligence of the American people"

Fixed that for you.

[socal]

We buy their stuff on the cheap then pay them back with next to worthless T-bills.

I really don't know what you're talking about, and apparently neither do you.
my friend that makes toys sells them to the U.S and gets PAID (not 'paid back') in U.S. dollars. not 'T bills'.
he's become very rich. Drives a nice new audi Q7, both wives live in luxury and all his kids go to the best schools.
You don't seem to understand the reality on the ground.

Where does he make them ? Because if he's not making them in the US then he's not getting paid in USD.

When something worth $10,000 is exported to the US from China, the American pays for it in USD but the US dollars go to the Chinese central bank. The Chinese central bank then prints the equivalent value of Yuan and gives it to the Chinese businessman. The Chinese central bank still has the $10,000. That 10g can only be spent in the US. The Chinese CB has to put the money somewhere so they usually buy US T bills.

So , he is right. Normally if the export/import of real things balance out between 2 countries then there is no issue. But Americans run a 50 billion dollar a month trade deficit. They are paying for real things with nothing but paper IOU's. And to top it all off, the Americans get the money that they spent back, lent back to them. That is why they can deficit spend a trillion a year on military and shit.

[FlyFree]

It's da people, stoopid.

Chiina has a ceiling, and it is hitting it right aboot, well, now.

They do have a surplus of technically educated robots. Good for? Copying stuff.

To copy stuff like good, you gotta understand the designer's intentions. Else you gonna copy stuff bad.

And you need a culture where your parents whacked you against the head to like do quality ya know.




Things don't just happen cos you got a few bucks.

[Tom Sawyer]

The materialistic world will need to be overthrown. That won't happen (IMO) until China has had it's full run - so maybe another 50 years at least. If we stick to our individualist thought, with an understanding that we need to complement that with a look out for each other, and if we stay the course - we'll lead the world back to a post-consumer golden age. Not in our lifetimes though - I think that's fair to say. Teach your children well.