China's economic crisis, explained

[Hellraiser007]

China's economic crisis, explained - San Jose Mercury News

SHENZHEN, China - To understand China's economy today, a local financial journalist recently told me, you need to picture a stool with three legs. We were having dinner, and he took a toothpick and one of the chopsticks from a serving dish to demonstrate.
One leg is investment, he said, propping up the chopstick. One is exports, he said, standing up the toothpick. And the other is consumption.
But the investment leg is too big, he continued, the export leg is broken, and the consumption leg is just a stump.
"The stool is very imbalanced," he said.
Simple as it is, this illustration gets at the heart of what's worrying many people about the future of the world's second largest economy.
After 30 years of meteoric, double-digit GDP growth, China's economy is at a crossroads. The main drivers - exports and infrastructure investment - have lost their punch. Meanwhile, low wages and high housing costs have made it impossible for Chinese consumers to fill the gap.
As a result, China's growth in 2012 fell to its slowest pace this century, and 2013 looks like it could be even slower. Last month, the International Monetary Fund lowered its projection to 7.75 percent growth from 8 percent, and UBS, Standard Chartered, and Bank of America have likewise lowered their predictions for the year.
Michael Pettis, professor of finance at Peking University, sees an even darker scenario, saying in a recent newsletter that his "expectation for long-term growth is that it shouldn't average much above 3-4 percent annually."
"Not only will China's real GDP growth drop as China shifts towards a different growth engine, but it will drop even more as China is forced to recognize the hidden losses buried in its debt levels," Pettis said.
China's leaders are well aware of these challenges, and have sought to manage expectations. In a speech at the end of May, Premier Li Keqiang told senior Communist Party officials that economic "complications are increasing," and that the government will have to step back and allow the private sector more power in the market.
"Scientific approaches are needed to ensure this year's social and economic goals," Li said, reiterating the government's target growth of 7.5 percent this year.
Yet even with these lowered expectations, the latest data have disappointed. In May of this year, China's exports, industrial production, and lending data all fell below analyst predictions.
In other words, the stool is starting to look shaky, and it's unclear what Beijing can do to fix it.
Take exports. With labor costs rising nearly 20 percent every year for a decade, China is no longer a low-cost paradise.
Add in an aging workforce and an appreciating yuan, and Chinese factories have become much less competitive. Labor intensive industries have begun to shift to Vietnam, Indonesia, and Thailand.
Then there's investment. China has long been the land of big government projects, especially after 2008, when Beijing deployed an estimated 4 trillion yuan ($652 billion) in spending to ward off a slump from the financial crisis. The countryside exploded with new train stations, airports, and apartment complexes. Analysts say many of these projects were ill-conceived. And now that they are built, there's even less the government can do to spur growth without risking additional waste.
"Across the board you've got overcapacity. Overinvestment. What that translates into is bad debt," says Patrick Chovanec, a longtime China watcher and chief strategist at Silvercrest Asset Management. "You can pump more money into the economy, but it's getting less and less of a result."
Or take consumption. China's middle class will eventually become the engine of its economy - as in America. But that transition is happening slowly, and insanely high housing prices in cities have suppressed people's ability to spend. At the same time, any fall in the real estate market could be catastrophic.
China's economic stool looks even shakier when you consider other factors. Debt is ballooning, and banks are being squeezed for cash. Last month, the inter-bank lending rate shot up to a high of 25 percent when the central bank warned that it would not step in to flood the market with liquidity.
Across China, city governments have issued dubious, high-interest-rate bonds to fund projects. The total amount of credit in China may now be more than twice the size of the economy, according to the China Securities Journal - nearly eight times what it was a decade ago. As a result, credit-rating agencies Fitch and Moody's both recently downgraded China's sovereign credit rating.
Remarkably, the mood among many Chinese remains very optimistic. Nearly 90 percent of Chinese people feel that the economy is doing well, according to a new survey of global attitudes by Pew. But Chinese analysts warn against complacency. Hu Shuli, the editor-in-chief of the financial magazine Caixin, recently argued that China should not wait for a crisis to start reform.
"To many Chinese, the fact that China managed to escape the worst impact of the global financial crisis is proof that its economic system is perfect," she wrote in an op-ed.
"This kind of view is harmful, because it blinds us to the deep-seated structural problems of China's economy, and how truly urgent comprehensive reforms and a transformation of China's economic model are."

 

[beijingwalker]

those so called economic experts have been predicting China's economic crash for at least 3 decades,they are very persistent but results always dismay them,lol..at least some of them had switched from predicting China's crash to when China will overtake US in recent years,and some keep on predicting both.

 

[Chinese-Dragon]

San Jose Mercury News?

China is a $8.3 trillion economy growing at 7.8%.

India is a $1.8 trillion economy growing at 4.5%.

You do the math.

 

[Hellraiser007]

China's worker revolution: If only Mao could see this - San Jose Mercury News

DONGGUAN, China - Wei Huahai had the biggest smile of anyone I met in this grim, southern Chinese city.
Giggling between questions, the bushy-haired 27-year-old furniture assembler told me that his goal in life was very simple.
"To make more money and save more money," he said.
Six years ago, Wei came to Dongguan from Guangxi, a poor neighboring province. At the time, Dongguan was booming: thousands of factories making everything from buttons to high-tech electronics were hiring workers from all over China. Millions of migrant laborers lived in the city. Wei's whole family came to work in the factories.
Now, Dongguan's economy is sputtering.
The global downturn killed the demand for exports, and many factories have closed or moved to cheaper inland provinces. Free education and bus services introduced in parts of Dongguan during the boom years have been rolled back. And roughly 60 percent of Dongguan's villages are believed to be the verge of bankruptcy due to declining rental income.
In the middle of the day near the Alex Macedon furniture factory, a once-busy boulevard showed few signs of life. A handful of uniformed workers on break played pool at an outdoor table. Most storefronts, formerly restaurants and convenience stores, were quiet or closed. A manager of the furniture factory remembered that just a few years ago the street was teeming with people.
But for a migrant laborer like Wei, the downturn is somebody else's problem: what matters is his personal story of progress. When I asked him how he had seen Dongguan's economy change over the last six years, he said he saw a "huge difference."
Wei says that six years ago, his monthly salary was the equivalent of $326. He makes $734 each month now.
But what about the slowdown in China's economy, I asked, does he worry about that?
"I have no idea about the Chinese economy," he shrugged. "I only care about myself."
Across China average wages for migrant workers have risen nearly 20 percent a year for the past decade, putting them almost equal now with the wages earned by college graduates. From the factory boss's point of view, rising labor costs in China are a disaster. From the migrant workers' point of view, it's a miracle.
Wei told me happily how he and his wife have even begun to contemplate buying a flat. The prices in Dongguan were a bit steep, he said, but they wanted to stay.
"It really depends," he said. "Staying [in Dongguan] is possible, or we could go back to Guangxi if my income doesn't go up enough."
Another migrant worker at the factory, Liu Lunming, 41, has already bought his own home. Originally from Sichuan province, Liu built a house in his hometown of Chongqing, some 750 miles northwest of Dongguan. His parents and two children still live there, so he plans to move back to Chongqing after he saves up a bit more money.
Asked if he worried about the changes in China's economy, he became thoughtful.
"I have very humble expectations for my life," he said. "Since I already built a house, rising prices don't hurt me. I'll just follow the stream of the economy. The main thing is to survive."
Humble as their goals may be, Chinese workers' rising wages are leaving the country in a financial pinch, and making life difficult for men like Johnny Wu, whose furniture business now struggles to compete.

 

[kena]

San Jose Mercury News?

China is a $8.3 trillion economy growing at 7.8%.

India is a $1.8 trillion economy growing at 4.5%.

You do the math.

You have still not addressed any of the points in the article. All you can do is to quote some statistics and chant - we are growing...we are growing. No Chinese is able to answer how even the present industrial overcapacity can be kept occupied if the consumers of your good in US /EU have gone in a long freeze. So you are growing for what? They is receding demand for your products from the world and you build more and more. You have built ghost cities to keep your steel mills and cement plants occupied and you have more infra than will be needed in medium term. strange strategy.

 

[Hellraiser007]

You have still not addressed any of the points in the article. All you can do is to quote some statistics and chant - we are growing...we are growing. No Chinese is able to answer how even the present industrial overcapacity can be kept occupied if the consumers of your good in US /EU have gone in a long freeze. So you are growing for what? They is receding demand for your products from the world and you build more and more. You have built ghost cities to keep your steel mills and cement plants occupied and you have more infra than will be needed in medium term. strange strategy.

Former Soviet Union also followed the same strategy and they suffered because of economic slow down.

 

[beijingwalker]

let them predict and fail,they 've been doing that for 3 decades and the whole whold has been used to them long time ago..

 

[kena]

let them predict and fail,they 've been doing that for 3 decades and the whole whold has been used to them long time ago..

3 decade back you had not even started.

 

[beijingwalker]

and that's also Forbes 'experts" preditions saying China is to overtake US in 3 short years,haha,which experts should we believe..

By The Time Obama Leaves Office, U.S. No Longer No. 1
By The Time Obama Leaves Office, U.S. No Longer No. 1 - Forbes

 

[Chinese-Dragon]

You have still not addressed any of the points in the article. All you can do is to quote some statistics and chant - we are growing...we are growing. No Chinese is able to answer how even the present industrial overcapacity can be kept occupied if the consumers of your good in US /EU have gone in a long freeze. So you are growing for what? They is receding demand for your products from the world and you build more and more. You have built ghost cities to keep your steel mills and cement plants occupied and you have more infra than will be needed in medium term. strange strategy.

Because I'm tired of repeating myself hundreds of times.

OK, one more, just for you:

China unlocks right kind of growth - Financial Times

China has never lacked for growth over the past decade but it has suffered from the wrong kind of growth, developing a dangerous reliance on investment.

Tucked into its latest economic data was evidence that the country has finally started to address this problem. Consumption clearly surpassed investment as China’s biggest growth engine, reinforcing a trend that emerged earlier this year – and something that has rarely happened over the past decade.

In the first three quarters, consumption accounted for 55 per cent of growth, while investment contributed 50.5 per cent. With external demand weak, net exports actually subtracted 5.5 per cent, according to data from the national statistics bureau.

Consumption is now the LARGEST component of Chinese economic growth, followed by Investment.

Net exports actually SUBTRACTED 5.5% from our GDP growth. And that's not uncommon, in the past few years Net exports have been a negative component of our GDP growth.

So this "dependent on exports" idea is ridiculous. It doesn't contribute anything to our GDP growth at all, in fact it subtracts from it.

Even historically, exports have not contributed much to our GDP growth, check this chart from the Economist:

Pedalling prosperity | The Economist

Of course, this is very easy to figure out with a bit of thinking. Why is India's getting hurt more by the Eurozone crisis than China?

Because even though we suffer, we have built up such a massive forex reserve (from our annual trade surpluses) that we have the financial firepower to boost our economy and our currency. Same reason why Germany did well during the Eurozone crisis, despite being Europe's biggest exporter.

 

[beijingwalker]

3 decade back you had not even started.

China started the economic reform in 1978,you do your math.

some say China crash,some say China No.1 in a couple of years,oh,come on ,experts...

 

[Hellraiser007]

China’s great economic leap forward hits the wall - Telegraph

This was supposed to be the Asian century, but the Eastern boom is dying of exhaustion

So here’s how it looks. Years of unsustainable, credit-fuelled growth are brought to a halt by a crushing financial crisis which exposes deep structural flaws at the heart of the economy. Rarely has the assumption of ever-rising living standards looked so vulnerable, with younger generations forced to pay not just for the crippling legacy of debt their parents leave behind, but for the mounting costs of an ageing population and the consequences of decades-long environmental degradation. Economic decline, austerity and inter-generational recrimination seem to beckon as populations adjust to the true mediocrity of their circumstances.
I’m referring to the tired old “developed” economies of the West, right? Actually, no: it’s China where these observations seem more appropriate, and perhaps other emerging market economies said to be about to eclipse the hegemony of the old world, with its lazy ways and sense of entitlement.
Western “declinism” of the sort described by Dambisa Moyo in her book How the West was Lost, and more recently by Stephen King, chief economist at HSBC, in When the Money Runs Out, is still the narrative of our times. But sometimes a sense of perspective is demanded; compared with the challenges faced by China and the rest of the developing world, the relatively minor adjustment to expectations that needs to be made in the West is a stroll in the park.
Forecasts that China will overtake the US as the world’s largest economy over the coming years already look like yesterday’s story as once-explosive development in the East slows to a stall amid growing fears of a Chinese credit crunch. The Asian boom is dying of exhaustion.
As ever, public perceptions trail the reality. For the first time in more than a decade, international investors and business leaders are regularly heard referring to the US as a more attractive proposition than China. Investment flows are going into reverse, and while the US banking system is reviving fast, China’s is heading in the other direction after a period of credit expansion that makes our own look positively pedestrian.
Nor is it just the economics of unbridled, politically directed development that are beginning to fracture; for many Chinese the promise of industrialisation and prosperity is turning into a nightmare of ill health and curtailed life expectancy. The social deprivations of China’s one-child policy meanwhile threaten a demographic time-bomb of far worse proportions than that of the supposedly bankrupt West. There is now every likelihood that China will indeed grow old before it gets rich. One shocking story from the past week vividly demonstrates the massive costs that China’s centrally directed dash for growth is fermenting for the future. According to a study in The Proceedings of the National Academy of Sciences, air pollution has caused an average five-and-a-half year reduction in life expectancy for the 500 million people living north of the Huai River, where use of coal in the home and for electricity generation is most prevalent.
The latest study, pretty much undisputed by the Chinese authorities, adds to mounting evidence of industrial poisoning on a hitherto unimaginable scale. The 2010 Global Burden of Disease Study found that outdoor air pollution caused 1.2 million premature Chinese deaths in 2010, or nearly half the global total.
The fumes are so bad that a growing number of Chinese emigrate, setting in train a potentially devastating brain drain. In a recent interview in the New York Times, the mother of a child made sick by the smog refers to the difference between Britain, where she had studied as a student, and China as heaven and hell.
All industrialisation exacts a heavy human toll in its early years. The miseries of Britain’s industrial revolution are well chronicled. But the speed and scope of China’s attempted catch-up are in a league of their own.
There is also a world of difference between the market-determined development that drove the British and American economic miracles and the state-directed variety of China’s great leap forward.
Politically sponsored advancement rarely occurs without gross misallocation of capital, and in China it seems to be happening on an epic scale. The latest example of China’s capacity overhang is Rongsheng Heavy Industries, the world’s largest private shipbuilder. The collapse in the market for new ships has forced Rongsheng to go cap in hand to the government for a bail-out. It’s said to be an important test of China’s resolve to move from the old, unsustainable, investment-led model of economic development to a more balanced form of advancement, but it is almost certainly one that China will fail. Political connections will ensure Rongsheng survives, and the resulting capacity glut will, in time-honoured fashion, simply be dumped on the rest of the world.
On a global scale, the resulting imbalances require that the deficit nations of the West keep spending to absorb the Chinese surpluses, even though they can no longer afford it. The tragedy for China is that when countries and individuals spend beyond their means, it is always the creditor, and not the debtor, that ends up paying. China’s vast, accumulated surplus of foreign exchange reserves will simply be devalued to oblivion.
By relentlessly pursuing the goal of industrial supremacy, China has made itself into the world’s environmental waste dump, and a hostage to back-door default by Western debtors to boot. Once admired for its dynamism, state-directed capitalism is turning out to be a monstrous anomaly. Chances are that this will be another American century, not the much-predicted Asian one.

 

[kena]

Because I'm tired of repeating myself hundreds of times.

OK, one more, just for you:

China unlocks right kind of growth - Financial Times



Consumption is now the LARGEST component of Chinese economic growth, followed by Investment.

Net exports actually SUBTRACTED 5.5% from our GDP growth. And that's not uncommon, in the past few years Net exports have been a negative component of our GDP growth.

So this "dependent on exports" idea is ridiculous. It doesn't contribute anything to our GDP growth at all, in fact it subtracts from it.

Even historically, exports have not contributed much to our GDP growth, check this chart from the Economist:

Pedalling prosperity | The Economist

Of course, this is very easy to figure out with a bit of thinking. Why is India's getting hurt more by the Eurozone crisis than China?

Because even though we suffer, we have built up such a massive forex reserve (from our annual trade surpluses) that we have the financial firepower to boost our economy and our currency. Same reason why Germany did well during the Eurozone crisis, despite being Europe's biggest exporter.

You missed my point by miles. Please read my post carefully. Even your data clearly indicates that GDP growth in a large part is due to investment - exactly what I was getting at. You already have obscene overcapacity in Industry / real estate / infra and you keep adding more because that is the only way you can maintain a plus five 5% growth. So the gap between your capacity and production requirements will increase year after year. You can't cut back because you are now riding a tiger and any precipitous fall in growth will trigger massive unemployment. This and your real estate bubble..... doesn't look too good.

 

[Hellraiser007]

Major Exporters To China [CHART] - Business Insider

China's June trade numbers shocked the world earlier today. Exports unexpectedly plunged 3.1% year-over-year, missing expectations for a gain of 3.7%. Imports declined by 0.7%; economists were looking for a 6% increase.

Fears of a major slow down in China will have the country's major trading partners on edge.

The countries with the most exposure are obviously its Asian neighbors.

Here's Morgan Stanley on the Asian countries with the most to lose:

China has played a key role in the region’s development over the last three decades. The region’s dependence on China has also increased sharply over the past five years as China emerged as a key source of end demand at a time when the US, Europe and Japan slowed significantly post the credit crisis. The slowdown in China’s growth will be transmitted to the rest of the region largely via trade and financial linkages.

Korea and Taiwan: Impacted by Direct Trade Linkages

In the case of Korea and Taiwan, our economist, Sharon Lam, believes that Korea is likely to be affected more than Taiwan in a China slowdown scenario because Korea’s exports to China are mainly for China's domestic consumption and investment. Taiwan, on the other hand, as a global major tech component supplier, uses China as a re-export base. While Taiwan has heightened its cross- strait economic and commercial ties with China after the signing of the Economic Cooperation Framework Agreement, we believe that such a relationship and its positive economic impact will be less affected by the domestic situation in China.

Australia: Impacted by Weaker Commodity Prices

Slower growth in China will imply a slower rate of consumption of key commodities such as iron ore, steel, aluminum, copper and coal, putting downward pressures on prices. In this context, the net commodity exporters in the region such as Australia, Indonesia and Malaysia will be most impacted. Australia has been a key beneficiary of higher commodity prices over the past few years. The rise in commodity prices has lifted Australia’s terms of trade, and exports growth has also been rising on the back of a rise in mining exports. This, in turn, has led to a rise in mining capex, which combined together has provided support to the growth rates in Australia. Hence, as commodity prices remain weak, we believe that the Australian economy could face some challenges in maintaining a strong growth trajectory.

 

[beijingwalker]

By The Time Obama Leaves Office, U.S. No Longer No. 1

China's economy will surpass that of the United States in three years, estimates the OECD in Paris.

By 2016, the United States will no longer be the world’s No. 1 economy. That title will be handed over to none other than the current No. 2: China.

The Organisation for Economic Cooperation and Development in Paris said in report published this week that China was on course to surpass the U.S. economy in just three short years.

That’s about the time President Barack Obama will end his second term. The next president will potentially be the first one since World War II that didn’t govern the world’s most powerful economy. Most forecasts, however, have China’s economy at No. 1 in 2020.

“From a long-range perspective, China has now overtaken the Euro area and is on course to become the world’s largest economy around 2016, after allowing for price differences,” OECD said in its China report released this week.

China still has a lot of growing to do. By comparison, it’s per capita income is three and a half times less than that of the U.S., and even less than Brazil. But most economists forecast that China’s rapid urbanization — now at 50% and seen rising to 70% within five years — coupled with higher incomes will change the way China operates. As it is, China is moving from an export driven economy to a more Western one that is geared to its local consumers.

Its new leadership has made social programs a focus of its five year plan as well. China, for all its wealth in the Eastern cities, is still a poor country. And an aging one. China will spend billions building out its social safety net over the next few years, improving the livelihood of retiring and elderly Chinese.

The country is also focusing more on high tech, value-added production. Green energy is a strategic focal point of the country’s 12th five year plan and that means investments in new sectors — from electric cars to lithium batteries, to alternative energies designed to eradicate China’s pollution problem. All of this investment is seen as a further catalyst for rapid growth in China. In theory, new social policies should be able to spread the wealth in this nation of 1.3 billion.

There’s no hard landing coming in China, the OECD attests.

By The Time Obama Leaves Office, U.S. No Longer No. 1 - Forbes