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China'S Speculative Boom Is In The Global Economic Recession

2014/4/14 19:21:00 77

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1. Chinese dream

For more than a century, foreigners have been thinking about how to make money from China's huge population, P.

Today, the Chinese dream is more vivid than ever.

China has more than 1 billion 300 million of the population. It is the most populous country in the world.

China's rural population is gradually shifting to cities.

In the next ten years, about 300 million of the rural population will move to cities, and the population of the United States will be 300 million.

It is widely expected that China will maintain a growth rate of around 8% in the next few years.

In recent months, China has surpassed Germany to become the world's largest exporter, and surpassed Japan as the second largest economy in the world in P.

China is also the largest market for global commodities. It has recently surpassed the United States to become the world's largest auto consumer market.

The wages of Chinese workers are 1/10 of that of their counterparts in the United States, but they will be in line with western countries in the future.

This is the case in Japan in the 30 years after 1960.

China will rise to become the world's largest economy. Recently, there are many books on this view, such as Martin Jacks's "when China ruled the world."

Confidence is very high.

the expectation of urbanization and economic growth has made China the darling of Wall Street.

If they are right, the demand for Chinese industrial and consumer goods will increase exponentially over the next few years.

However, as expected in the 90s of last century, this is likely to be exaggerated.

"P" is like the Internet craze, and investors seem uncritically accepted by China's growth expectations.

For example, the population of the city will be increased by 350 million by 2025, and it will be close to 1 billion by the time.

But at present, China's urbanization rate is likely to be underestimated, because in accordance with Western standards, the population density of many rural areas in China is actually very high.

More complex is that many rural migrants to cities may not be included in official statistics because they do not have residence permits.

Per capita GDP is an indicator of local government officials, so they have the power to underestimate population figures.

many new urban residents do not have an account and have a small income, and real wages have not increased in the past 10 years.

These people form a cyclical labor force, find their way to the city when they are alive, and find no way to leave the city when they live.

These migrant workers have provided cheap labor for China to support China's export growth and infrastructure construction.

However, as Chinese demographers and scholars say, "the growth of urban population growth equals to the middle class is one-sided."

Wall Street tends to downplay the dark side of China's population story.

China's population will decline by 2015.

At the same time, the number of labour force is also at the top.

The new labor force will also decline rapidly. However, it is these people who come to the cities to provide a steady stream of cheap labor.

if the number of migrant workers is reduced, real wages will probably rise, which will increase the consumption power of workers.

But for an export oriented economy like China, this may be a double-edged sword, because the country's international competitiveness may be hurt.

In recent years, urbanization has always been the main source of China's productivity growth.

If it is reduced, the future economic growth will only depend on improving the efficiency of the use of production factors.

2.. We believe that the Chinese government /p >

Less than 20 years ago, it was argued that "Japan is different" and Tokyo's economic policy is superior to that of the West. P

Many bestsellers praise the land that the sun rises.

A book called "Japan first" is now notorious.

Today, many people also say that China's economy is special, and that China's policies are superior to those of other countries.

Similarly, many people expect that China will seek economic hegemony.

The pition from planned economy to market economy in China is much more successful than that in the former Soviet Union (P).

In the past 30 years, China's economy has grown miraculously by nearly 10% per year.

At the beginning of this century, the government successfully solved the huge bad debts of banks under the premise that the economy did not stop.

In recent years, China has established a huge foreign exchange reserve of US $2 trillion and 400 billion, making it an invincible aura.

P China seems to have successfully avoided the global financial crisis, which has further enhanced the reputation of policymakers.

With the collapse of the export market, 2009 China's economy still easily surpassed the GDP growth target of 8%.

a famous British investor recently announced that he had abandoned his retirement to run a Chinese fund in Hongkong.

One of the reasons is that it is optimistic about the effectiveness of the central plan. One of the wonders of modern China is that it has made some of the world's most ardent capitalists enthusiastically into the socialist economy.

however, both economic theory and history prove that central planning is not the best mode of economic development.

China has been developing rapidly for thirty years, but under the command of the central government, the economy has become deformed.

Before the financial crisis, China's economy depended to a large extent on export growth.

China's exports to the West have been two times that of Japan's most prosperous period.

Without trade protection, the country has been unable to maintain its trade surplus.

This threat has become particularly acute since the great recession.

a very high investment level also brings the risk of capital mismatch (which is discussed in more detail below).

And the government's participation in economic activities is too high.

The central government formulated the GDP growth target and decomposed it to local governments.

The problem is that local governments can fool the central authorities.

Gutihart's law points out that whenever economic indicators become policy objectives, it loses the role of information.

In China, GDP growth is no longer an outcome of an economic process, but rather a goal.

rumors have proved that many decisions of local governments, both new infrastructure projects and real estate development, are needed to achieve growth goals.

In many ways, this reminiscent of the revenue growth target set by American companies during the bull market in the late 1990s.

Whether the government or enterprises, when the goal of resource allocation is for a string of numbers, the bad results are predictable.

The policy of P central also seems to stifle domestic enterprises.

Although the role of state-owned enterprises has declined, loan concessions from state controlled banks are still available.

Compared with private enterprises, state-owned enterprises have been given preferential treatment because private enterprises have to get high interest rate financing outside the banking system.

A recent study by the Hongkong Monetary Authority said that if state owned enterprises had interest loans on the same terms as private enterprises, profits would disappear. The study also found that more than half of private enterprises had no opportunity to borrow from banks.

Huang Yasheng, a professor at Massachusetts Institute of Technology, wrote that China is shifting from corporate capitalism to state controlled capitalism in the 80s of last century, focusing on large investment projects (such as the development of Pudong Financial District in Shanghai), foreign direct investment and exports.

China built many good infrastructure during this period, but economic development was accompanied by an increase in income inequality, a decline in consumption share in GDP and a reduction in innovation (measured by new patents in Shanghai).

Professor Huang believes that China's rapid growth is fraudulent because the state can invest faster than the private sector.

However, the quality of investment is low.

strong > 3. < a href= "http://www.91se91.com/news/index_c.asp" > investment < /a > craze /p >

In the market economy, when p is unstable or chaotic, investment should drop.

However, in 2009, China's fixed assets investment increased by 30%, contributing 90% to the 2009 economic growth.

Investment rose to a record 58% of GDP.

These are all bad numbers.

The key question is: how about the money?

infrastructure investment accounts for more than 2/3 of the economic stimulus expenditure of 2009.

About 1/4 of the projects are government led.

Many projects are clearly designed to meet the government's GDP growth target.

A short video of YouTube (broadcast from Al Jazeera) shows that there is a new ghost town in Ordos City, Inner Mongolia.

Some respondents believe that the empty city can accommodate 1 million people just to meet the government's growth target.

Compared with its economic development, P has already developed highly developed infrastructure.

2009, the utilization rate of China's expressways is estimated to be 12% of the average level of OECD countries.

Many smaller airports use only half of the capacity.

The plan to build a high-speed rail network seems impressive, but the return on investment will be a problem.

A pport researcher at the national development and Reform Commission warned that the proposed 18000 kilometer high-speed railway will face the problem of "cost can not be recovered". "It may not be able to achieve the minimum passenger volume to achieve balance."

However, most Wall Street analysts remain optimistic.

If China continues to grow at the speed of the past, they say, all these new roads, bridges and railways will also be crowded in a short time.

Similar problems in P can be seen everywhere in China's heavy industry.

When the recession came, non export sectors were asked not to lay off workers.

Many industries continue to invest despite low capacity utilization.

manufacturing industry, which is less than 1/3 of the fixed assets investment of the whole society, and drives up the capital expenditure account of 27% by January 2009 (from October 2009 to October 2009).

A report by the European Chamber of Commerce shows that in the 200911 month, the surplus capacity included shipbuilding, flat glass, steel, cement, polysilicon and wind power.

For example, capital expenditure in the cement industry has increased by 2/3, but capacity utilization is estimated to be 78%.

Excess capacity is justified by the expected time for high growth in China's investment.

"P > with high savings and investment and huge trade surplus, China has always followed a critic's" Asian growth drive model ". However, the drawback of this growth pattern has proved Japan's ills in the past 20 years.

In a famous article in 1994, Paul Krugman, a Nobel prize winner of the "miracle of Asian mythology", believes that Asian tiger economic growth relies on increasing capital investment.

However, this kind of investment is still affected by the law of diminishing returns.

this analysis is also applicable to China, where investment efficiency (GDP is measured by incremental investment per unit) has a downward trend.

For the tigers (Japan), the investment scope of the poor was exposed to the impact of the financial crisis in 1997.

China has a bigger problem because it has potential investment in GDP, which is higher than any other Asian economy in history.

4. corruption > /strong > /p >

all of the huge speculative mania are accompanied by rising fraud.

Only in depression can we see the whole situation of "monster", such as the exposure of Enrons, WorldComs and Madoff (Madoffs).

The rebound in China's real estate and infrastructure spending has provided a periodic incentive for dereliction of duty.

China recently dropped to seventy-ninth in the 2009 international corruption index ranking, slightly below Burkina Faso.

real estate prosperity provides great opportunities for corruption.

The land is often taken away to the developer, and the compensation for the demolished is insufficient.

The financial sector is addicted to kickbacks.

Infrastructure spending gives local officials the opportunity to pocket their money and turn a blind eye to inferior building materials.

China is the fastest growing luxury market.

However, New York Times estimates that up to half of sales are related to bribery.

China provides a proof for Professor Pei Minxin's "divide food".

Systemic corruption has reduced the quality of China's economic growth, as in some other Asian countries, most notably in Indonesia before the 1997 crisis.

Pei wrote that "epidemic corruption" steadily raised the systemic risk of a country.

As a result, its financial system is fragile, its environment is degraded and sensitive, its enforcement is corrupt and invalid, its infrastructure is unsafe, its public health service is insensitive and its regulatory system is crumbling.

5. loose > a href= "http://www.91se91.com/news/index_c.asp" > currency < /a > /p >

Nobel winner Friedrich Hayek is different from his great rival Keynes's theory.

Keynes argues that the bubble is a chaotic "animal sentiment" while Hayek claims that the low interest rate has pushed up asset price inflation.

Hayek said that loose money generated through monetary and credit expansion has led to inflation in general price or asset prices.

When interest rates are below their "appropriate" level, firms tend to invest in projects that will only return in the distant future.

This leads to resource mismatch or "improper investment."

no matter what is the appropriate interest rate.

But the rule of thumb holds that interest rates should be compatible with the medium-term growth of the economy.

In the US, the prime rate is on average higher than the nominal growth rate in the past 40 years by one percentage point.

In contrast, China's best lending rate has averaged about nine percentage points lower than GDP growth since 1990.

low interest rates are part of the central policy to promote investment and subsidize state-owned enterprises.

Low interest rates also encourage Chinese families to speculate on stocks and real estate.

China's loose monetary policy has led to inflation and capital market ups and downs in the past ten years.

In the latest bubble, the Shanghai composite index increased more than four times from early 2006 to October 2007, and then dropped more than 70%.

2009, the money supply has increased by nearly 30%, while interest rate is much lower than the nominal growth rate of the economy.

Once again, Chinese depositors find themselves trapped in fear and fear of high returns.

Once again, bubbles form in China's capital market.

strong > 6. fixed < a href= "http://www.91se91.com/news/index_c.asp > > exchange rate < /a > capital inflow /p >

RMB is pegged to the US dollar.

The undervalued exchange rate promotes exports and lowers interest rates.

It also encourages large capital inflows, mainly in the form of foreign direct investment.

Capital controls restrict hot money inflows, but speculative capital inflows have recently risen.

many emerging market crises are caused by their currencies. Therefore, many Chinese commentators feel safe when they see China's huge foreign exchange reserves of up to 2 trillion and 400 billion.

However, such a large amount of US dollar should be worrisome.

It reflects the profound imbalance of a loose international monetary system.

The standard of US dollar makes some countries, especially the United States, consume more than output, thus accumulating huge external debts.

Other countries, mostly in Asia, enjoy sustained trade surpluses and huge foreign exchange reserves.

some people think that China's huge foreign exchange reserves make China's economy invincible, which is actually not right.

These reserves can be used to buy foreign assets, to import or to defend against currency attacks.

But there is a problem that can not be solved, for example, after the asset bubble burst, bad debts of banks appeared in large numbers, and bad investments were everywhere.

As one commentator points out, compared with global GDP, only two countries have accumulated such huge foreign exchange reserves before. They were the US in 1929 and Japan in 1989.

7. credit boom > /strong > /p >

In order to deal with the global financial crisis and the collapse of export orders, China ordered banks to lend money, P.

In 2009, the new bank loans increased by nearly 10 trillion yuan, equivalent to 29% of GDP.

Most of these loans go to infrastructure, real estate, and state-owned enterprises.

This makes the economy seem to be greatly stimulated, similar to epinephrine rescue cardiac arrest.

However, most analysts did not consider the aftermath of the credit boom.

Our own recent experience has proved that the sequelae are obvious.

the scale of credit expansion itself is worth worrying about.

Credit is expanding so rapidly that it may not be strictly following the standards.

In fact, many people believe that China's banking system will be in danger of another sharp rise in non-performing loans, as happened at the end of 1990s.

However, traditional wisdom believes that as long as China keeps pace with economic growth, 2009 of loans will not deteriorate.

8. moral hazard

the main Chinese banks are controlled by the state.

They had a history of spamming loans.

However, the market believes that banks will not be in trouble now.

China's leading banks have the largest market capitalization and are too big to fail.

They are the main tools of the central economic policy.

Not bad.

P is no stranger to the evil effects of moral hazard on the banking system.

In 1980s, Japan's big banks were also seen as a tool for the Ministry of finance to fulfill its policy objectives, while protecting profits.

At that time, the market value of Japanese banks ranked first in the world.

Later, this belief was proved wrong.

In the "lost ten years", Japanese banks generated losses equal to two times their initial capital.

During the Asian financial crisis in 1997, several Asian countries exposed the danger of moral hazard to the financial system.

Policy loans to state-owned enterprises (P) have caused trouble to Chinese banks.

At the turn of the century, S & P estimated that China's bad loans accounted for about 50% of outstanding loans.

Banks are being reinjected, and bad loans are packaged to Asset Management Co.

The rescue operation is relatively painless.

Some people estimate that China may have the same old trick.

Others argue that there is no need to worry, because the Bank of China has modernized and can apply modern risk management.

If China's banks really pursue profit maximization, why do they need to carry out large-scale policy loans under the guidance of the central government?

9. risk < a href= "http://www.91se91.com/news/index_c.asp > > lending behavior < /a > /strong > /p >

The credit crisis of the P 2007-2008 years has exposed many bad loan decisions of the US and European banks.

While the music is still ringing, these banks have lowered their lending standards.

Many loans can not be repaid with cash flow. In order to keep the loans intact, they need further asset price appreciation.

When the market falls, these financial tricks are coming true.

Many of the recent loans in China seem to belong to this category.

for example, loans flow into infrastructure projects, such as new railways, toll roads and bridges.

These projects are sponsored by local governments.

However, local governments are prohibited from lending guarantees.

Instead, they set up a platform for financing platforms, which are funded by local governments, and the rest is provided by banks.

It is estimated that 2009 of half of bank loans go to these local government financing platforms.

Many of these infrastructure projects have only a small amount of cash flow, or even no cash flow.

how will these loans be returned? If the economy continues to grow at the speed of the past, it can be assumed that these new airports and toll roads will generate profits in the future.

Or, local governments can rely on future land sales to repay.

The trouble is that land sales account for half of the revenue of local governments.

Therefore, if the real estate market falls, local governments may not be able to fulfill these implicit obligations and return the infrastructure loans smoothly.

Wall Street analysts said that because China did not subprime loan securitization, China's loan system was normal.

But China's banking industry has its own unique suspicious practices.

According to Fitch Ratings, many banks have repackaged their loans and sold them to retail investors, other financial institutions and businesses.

Fitch wrote, "the bank that sells the loan promises to repurchase the loan at some time in the future. In this case, the loan may not appear in the financial statements of the seller or the buyer."

By placing loans on account, banks are able to keep the loan growth rate within the limits set by the government.

China's banking sector seems particularly reluctant to report problem loans, so no one can measure the health of its credit system.

Ernst & Young published a report in 2006, which estimated that China's non-performing loans amounted to $900 billion. The report was subsequently withdrawn.

Even in the 2008 stock market crash and export shock, the official report of non-performing loans continued to decline.

Fitch points out that China's banking industry is accustomed to constantly turning the problem loans back.

Bank employees also conceal the motives of bad loans.

If a loan officer reports that he has issued a problem loan, his salary will be deducted to less than the wages of migrant workers.

It seems that few people care about concealing bad loans, because the general belief is that as long as the economy continues to grow rapidly, bad debt will improve in the future.

10. foam > /strong > /p >

credit boom has rekindled the spirit of Chinese investors.

In the first half of 2009, the Shanghai stock market recovered strongly.

One day in late July 2009, the turnover of A shares in Shanghai exceeded that of the three major stock exchanges in New York, London and Tokyo.

In the third quarter of 2009, China's IPO accounted for 2/3 of the world's market value.

The world's 10 largest IPO, China has seven.

New shares are often oversubscribed, and soared on the first day of listing.

In October 2009, the Shenzhen growth enterprise market was launched.

On the first day of opening, 28 GEM listed companies rose from 76% to 210%, and the P / E ratio averaged 150 times.

high turnover rate, large number of new shares issued, new stocks being listed on the stock market, and the establishment of new exchanges, all these are classic signs of speculative fanaticism.

In the summer of 2009, when the market peaked, the PE multiplier of the Shanghai composite index was 38 times.

The high valuation of Chinese stocks is based on a vision of China's economic future.

However, the stock market is just an episode. The real drama is in China's frenzied real estate market.

many red alert signals discussed in this article can be seen everywhere in China's frenzied real estate market: there is a remarkable growth story (ongoing urbanization and high economic growth rate in the future); the construction boom has helped China achieve the goal of GDP growth; low cost credit has entered the real estate sector; corruption is everywhere; moral hazard is widespread; it is believed that the government will not let the property market collapse; asset prices overestimate and speculation prevails; Keynes's "animal spirit" is everywhere.