China: After The Credit Crisis Comes The Economic Crisis

[JayAtl]

China is now experiencing a monumental credit crisis. Loans are basically not available because confidence in repayment has vanished.

This is how the last global crisis started in 2007. I warned about it in my 2007 book, Prelude to Meltdown. The warnings were ignored in 2007, and my observations in this article will probably also be ignored by most people. “Denial” is always a defense mechanism, but not very useful.

China has already seen a significant decline in export growth these past two years because of the deepening European recession. Now the country is also being confronted with the effects of Japan’s massive stimulus programs. Japan has orchestrated a record decline in the value of the yen, with the purpose of making its goods relatively cheaper in the global market. In addition to being of better quality, Japanese goods are now getting price competitive with Chinese goods.

The negative repercussions are already being felt. In June, China reported that both its exports and imports had fallen, a phenomenon that hasn’t happened since October 2009, in the midst of the global recession.

The decline of 3.1% in exports shocked analysts, as they had been expecting a 3.7% gain. Amazingly, they still reported a GDP growth of 7.5%. Anyone who believes that number is likely to also believe in the Easter bunny. I predict that the decline in export growth will now accelerate downward. Only a sharp economic recovery in Europe and the U.S. could stop that.

Normally, in order to compete with Japanese goods, China would likely follow Japan’s lead and devalue its currency. In the 1990s it did just this, with a one-time, 50% devaluation. However, such action is not possible under current circumstances. Now, just the hint that a devaluation was being planned would cause a massive outflow of foreign capital from China and deepen the credit crisis.

Thus China is now between a rock and a hard place, as they say. On the one hand, not devaluing will cause a deeper decline in exports, worsening the current private sector recession. On the other, devaluing will cause a greater outflow of capital than the People’s Bank of China might be able to handle.

The worst is still ahead. As economic opportunities turn to high risk, foreign capital no longer flows in, and in fact flows out. The China Securities Journal, which is published by the governmental securities regulator, had a front page article that warned of a reversal of foreign capital inflows. (By the way, that’s exactly what I predicted one year ago in my e-book, The Coming China Crisis.) When foreign capital flows out, it has many repercussions.

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The China regulator warned: “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens.” The Journal referred to the U.S. Federal Reserve’s quantitative easing. Here we can see that Federal Reserve policy has important international repercussions.

Outflows from Chinese equity funds in early June were the highest since early 2008. Total credit in China’s financial system has reached epic proportions. The world has never seen such debt acceleration. It has increased eight-fold the past 10 years and is now 220% of GDP.

According to the government, Chinese firms will have to pay $1 trillion in interest this year. Therefore, corporate cash flow is primarily used for debt service, not for growth. When economic growth turns to contraction, the bankruptcy avalanche starts. And that is happening now. The largest China shipyard is already in severe financial trouble. It can’t borrow money, so the latest word is that it will sell bonds. Who will buy them?

Some large shipyards and other large firms lend their excess operating cash out in the “shadow banking system” in order to get a higher return. Now those loans are defaulting. So, the operating cash goes up in smoke.

Western economists are sure that the communist dictatorship can resolve all these problems, including the estimated $10 trillion of shaky loans in the ‘shadow banking’ system. How naïve! Is there any example in history where a command economy can stop the collapse of a debt pyramid? Ignoring reality cannot make it vanish.

China: After The Credit Crisis Comes The Economic Crisis - Forbes

 

[Genesis]

Why do you keep posting these things?

Instead of China getting rocked wouldn't India being better be more appropriate?

Put it to you this way, Floyd Mayweather the boxer, pound for pound, best, almost never talks about how other fighters fight unless someone asks him to, because he's got so much good stuff going and him being the best.

But those under him, keeps talking about him losing a step here and there.

Guess what, 44-0 dude. If each dude is believed than he should have been killed by now.

Don't talk negative about your competitors unless asked about it and then talk truthfully. Otherwise it makes you look weak and desperate.

 

[Kloitra]

@JayAtl
In your opinion, what will happen to other economies if Chinese economy starts to slow down? It is the second biggest economy and currently a big market to many western companies.

 

[Chinese-Dragon]

Why do you keep posting these things?

Haven't you seen any other posts by JayAtl (or his alter-ego "Korean") before?

He is our resident Indian troll who posts 5-6 anti-China threads in one go, and then disappears, usually banned.

 

[StarCraft_ZT]

I would like to know your @JayAtl explanation about your PMI.

 

[Chinese-Dragon]

I would like to know your @JayAtl explanation about your PMI.

Forget PMI, check out India's base export growth which is almost shrinking.

It's weird, the Rupee is collapsing, yet their exports are going down and their trade deficit is soaring through the roof!

You would think that a falling currency would help their exports. The problem is that they don't have a good supply chain, and they have to import all the components before they make anything. And due to the falling currency those imports are suddenly more expensive.

 

[Kloitra]

Forget PMI, check out India's base export growth which is almost shrinking.

It's weird, the Rupee is collapsing, yet their exports are going down and their trade deficit is soaring through the roof!

You would think that a falling currency would help their exports. The problem is that they don't have a good supply chain, and they have to import all the components before they make anything. And due to the falling currency those imports are suddenly more expensive.

But would not imports balance out with exports?

Lets take an example of gems. India imports gems, polish and export them.
Now a falling rupee would still mean a constant price in dollars to import, cheaper labour in dollars, and thus cheaper export, again in dollars. So how does strong dollar negatively affect such export chain?

 

[Chinese-Dragon]

But would not imports balance out with exports?

Lets take an example of gems. India imports gems, polish and export them.
Now a falling rupee would still mean a constant price in dollars to import, cheaper labour in dollars, and thus cheaper export, again in dollars. So how does strong dollar negatively affect such export chain?

Because a weaker Rupee means that ALL imports are more expensive in India.

And imports are a necessary part of life. Look around you right now, how many of the products around you are imported? I'd bet the majority of them were manufactured overseas.

And if those imports become more expensive, then the cost of living goes up, inflation goes up. Costs in the entire economy go up.

So your workers need more pay in order to live the same way they did before. And if they need more pay, the costs of your entire operation go up. All the inputs you need (the big thing is oil and raw materials) will be more expensive. In the end, you haven't gained.

That's why in China we always try to set up our supply chain within the country. From raw materials to finished product. Of course it's impossible to avoid being reliant on imported raw materials, but it does provide better control over costs in these situations.

 

[StarCraft_ZT]

Forget PMI, check out India's base export growth which is almost shrinking.

It's weird, the Rupee is collapsing, yet their exports are going down and their trade deficit is soaring through the roof!

You would think that a falling currency would help their exports. The problem is that they don't have a good supply chain, and they have to import all the components before they make anything. And due to the falling currency those imports are suddenly more expensive.

They import everything....maybe they disdain to rely on themselves. Taken in this sense, India is more international than China Once western economy collapse, they will definitely involve and suffer much more damage than China.

Yes, the whole business life cycle for India companies is not as effective as Chinese companies. I don't think there is a business friendly climate in India, given their less efficient government, lazy labor...

 

[Abhishek_]

^the two biggest sources of import bill is Oil and Gold. India must find ways to make internal energy production more profitable.

 

[Kloitra]

Because a weaker Rupee means that ALL imports are more expensive in India.

And imports are a necessary part of life. Look around you right now, how many of the products around you are imported? I'd bet the majority of them were manufactured overseas.

And if those imports become more expensive, then the cost of living goes up, inflation goes up. Costs in the entire economy go up.

So your workers need more pay in order to live the same way they did before. And if they need more pay, the costs of your entire operation go up. All the inputs you need (the big thing is oil and raw materials) will be more expensive. In the end, you haven't gained.

That's why in China we always try to set up our supply chain within the country. From raw materials to finished product. Of course it's impossible to avoid a reliance on imported raw material but it does provide better control over costs.

Actually only imports that really hurt the economy is oil and gold. Major Indian imports are oil, gold, and gems, in that order. Rest are quite small relatively. Gems get exported. It is oil that actually causes inflation.

India's trade: full list of exports, imports and partner countries | News | theguardian.com

Out of $235 bn imports in 12', almost 155 bn is petroleum and 62 bn is gold/silver. Remaining 18 Bn was shared by rest, which included high %age of gems. Except for oil, which is heavily controlled, rest do not effect so much. Not only is petroleum subsidised, it is also one of the major exports. What hurts India most is the gold (an unnecessary import), which is major cause of CAD.

 

[Chinese-Dragon]

They import everything....maybe they disdain to rely on themselves. Taken in this sense, India is more international than China Once western economy collapse, they will definitely involve and suffer much more damage than China.

Yes, the whole business life cycle for India companies is not as effective as Chinese companies. I don't think there is a business friendly climate in India, given their less efficient government, lazy labor...

India's growth was hit worse by the Credit Crunch and the Eurozone crisis than China's growth was.

I hate this weird idea that a lot of Indian members on this forum have, that "exporting countries" will always do worse in recession.

Look at the best performing country in Europe... Germany! They are the biggest exporter in Europe and they have done the best in both the Credit Crunch and the Eurozone crisis.

The reason is because Trade surplus nations will always build up very large currency reserve earnings from the exports. And that gives exporting nations a lot of "fiscal firepower" in case of a recession. Which is why China and Germany did the best in Asia and Europe respectively, after the recessions.

Actually only imports that really hurt the economy is oil and gold. Major Indian imports are oil, gold, and gems, in that order. Rest are quite small relatively. Gems get exported. It is oil that actually causes inflation.

But out of the majority of consumer products in an average Indian home (like electronics etc.) those are either imported, or their components are imported and then assembled.

So more costly imports have an impact on the entire economy as a whole. The prices of all those products will go up, making life more expensive. Living costs, transport costs, everything goes up.

 

[Kloitra]

But out of the majority of consumer products in an average Indian home (like electronics etc.) those are either imported, or their components are imported and then assembled.

So more costly imports have an impact on the entire economy as a whole. The prices of all those products will go up, making life more expensive. Living costs, transport costs, everything goes up.

As the data in my previous post shows, imports other than oil/bullion are only 18 bn dollars. This includes every thing else. Heavy machinery, aircrafts to cheap mobiles. How much would this imports affect?

 

[Chinese-Dragon]

Here Kloitra:

No signs of turnaround; inflation up, industrial production and exports down - The Times of India

The trade data released by the commerce ministry shows India's exports contracted by 4.6 per cent, for the second consecutive month, to USD 23.79 billion in June 2013 compared to those registered during the year-ago period.

So even though the Rupee is falling, Indian exports are not being boosted.

In fact Indian exports shrunk by 4.6% for the second consecutive month. This is why it's really important to sort out your supply chain.

As the data in my previous post shows, imports other than oil/bullion are only 18 bn dollars. This includes every thing else. Heavy machinery, aircrafts to cheap mobiles. How much would this imports affect?

They have a knock-on effect to the rest of the economy, especially oil.

 

[StarCraft_ZT]

India's growth was hit worse by the Credit Crunch and the Eurozone crisis than China's growth was.

I hate this weird idea that a lot of Indian members on this forum have, that "exporting countries" will always do worse in recession.

Look at the best performing country in Europe... Germany! They are the biggest exporter in Europe and they have done the best in both the Credit Crunch and the Eurozone crisis.

The reason is because Trade surplus nations will always build up very large currency reserve earnings from the exports. And that gives exporting nations a lot of "fiscal firepower" in case of a recession. Which is why China and Germany did the best in Asia and Europe respectively, after the recessions.



But out of the majority of consumer products in an average Indian home (like electronics etc.) those are either imported, or their components are imported and then assembled.

So more costly imports have an impact on the entire economy as a whole. The prices of all those products will go up, making life more expensive.

Yes, China should learn from Germany, balance the export structure and export more value-added or high-tech products and capital product. When the whole world cannot live without our product, we will be on the advantageous side.

And more importantly, our export is based on a competitive manufacturing industry, which should always be the core department in one economy. Indian members always despise manufacturing, that is totally wrong.

For example, if it were a country, Texas will be the 15th biggest oil producing country, which equals to Kuwait. Texas produce 700 billion barrels oil every month. The worlds 1/4 oil equipment were produced and transported by Texas. Everyday, I can see super big trucks on the road...A sign of powerful manufacturing...So the manufacturing sector brings much more opportunities than any other states in US.

Austin in Texas has the fastest job growth rate in US, 7 of the top 10 fastest growth cities are in Texas, all thanks to its export and powerful manufacturing. I even heard some Texas residents want to get independence from US.. Although in developed countries, service industry has the most share in economy, but that should be based on a competitive manufacturing sector. Now, Indians ignore it, they will regret.