Do you think China will crash soon?

August 5th, 2010

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Today, we will be doing something a little different. Instead of us doing the talking, we will let you discuss and brainstorm this question.

A little background about this question. In many of the interviews with Marc Faber, he correctly predicted that China will slow down. Furthermore, he suggested that there’s a possibility that China may crash, though he stressed that he’s not predicting that it will happen. Interestingly, he mentioned about “loan-sharking” creating credit problems in China:

Well, I?m not sure. Because if [the Chinese government]? ease off again, the speculation [of property] will go on. But we have credit problems in the property market undoubtedly. We have Ponzi schemes like of loan sharking operations all over China. That?s a very dangerous, and so forth.

We find the word “loan sharking” very interesting. It seems to imply something about the Chinese credit market that is by definition, underground. That is where Black Swans lie.

On the other hand, one of our readers, Paul, who lives in Beijing, has different views about China (see Concerns about China?s slowdown):

It takes years to understand the Chinese psyche, and it’s virtually impossible to get even close from outside the country. Yes, there’s a correction going on, but it’s controlled at the core. Outcomes and reactions will of course be wild and woolly, such as the steel production slowdown.

As for ghost cities, well of course, if you don’t understand how the chinese work, you will think they are ghost cities. But that’s how they do things here – they build the whole damn thing, then move the people in. As I said, you have to understand the Chinese way of thinking.

Put this in your diary. The restrictions will last until November. By December this year, production of key items such as steel and cement will be returning to full pelt.

So, do you think China will crash soon? Please vote below and feel free to contribute your opinions.

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  • Ted

    I agree with your reader Paul quoted above. I find that a lot of the speculation about China crashing is just wishful thinking on our part. The reasons are quite simple and can be expressed in three words: Chinese people save. The enormity of this statement and its implications are entirely lost on most of the Western pundits who have lived their entire lives in a system explicitly geared to penalize savers. Once upon a time everyone in the West saved too but this mythological time is now quite forgotten. Therefore most of the opinions about China come from the wrong economic assumptions.

  • Schaafbusch

    Usually, strikes are a good sign of an economy close to crash. Look at Foxconn strikes. At the same time, BMW?s sells like crazy to China. Lots of buildings empty, all signs of overinvestment. Of course the Chinese government tries to hide the crash, but this will not work much longer.

  • Temjinck

    As to whether China will crash / hard land, it's a very difficult one to predict. I wouldn't pick “Yes” or “No”, but instead “Possible until more information arises”.

  • Castor

    I'm not sure about that, Ted. The 'savings' are high for the government, but the people in the big cities are as spendthrift and indebted as Westerners.

  • Pete

    That's a decent point. Although I wonder if the strikes are more a sign pay conditions not matching the growth of an increasing standard of living, rather than wages not being high enough to live on?

    Speculation of course. It will be interesting to see what the Chinese Government will do in response to it all.

  • Pete

    It seems that way. Not only do we not get enough information from China, but we also don't trust the information that we are given.

    All that tells us is that we don't know much…

  • Paul in Beijing

    Castor, Ted is right. Chinese people are savers. They have to be, because things like old age pensions are not available. As an employer here in Beijing, I am required to pay into a Housing Fund for each employee, a rate of 12% of their salary. I also have to deduct 12% from their gross salary. So although wages are low (the average salary in my office is about RMB4000 = AU$650 a month), 24% of that is going into a housing fund. That's on top of the pension fund.

    As for the Government being savers, you need to distinguish between local, provincial (state) and federal governments. As in Australia, local governments have limited ability to raise revenue. Hence the deal with the land developers. Land is the one commodity that the local governments can trade.

    So much for Chairman Mao's edict that the land belongs to “the people”, therefore individuals cannot buy or own land.

  • Paul in Beijing

    Do not underestimate two things that seem to be escaping the attention of most commentators I read.

    The first is that the 11th 5-year plan is now just a few months away from concluding. As in all political situations, it is of paramount importance for the current leadership to return an unblemished report card at the next Plenary meeting of the Communist Party. Hence the attacks on inflation, energy intensity and other issues.

    The second point is that the 12th 5-year plan has not yet been promulgated. Already there are rumblings as to what it might include. The China Nonferrous Industry Association, for instance, has drafted a plan that would limit the capacity of alumina, aluminium and copper over the next 5 years. If such a plan were to be introduced, it would have massive repercussions for the world (buy UC Rusal shares for a start!).

    In hand with this is the fact that the current leadership has only 18 months left in their tenure. The next generation of leaders has apparently been tapped and is being groomed. But unlike the present pair, the next generation come from opposite factions within the CPC. their ability to lead harmoniously may well be sorely tested! (Should they fall out, it would leave the Howard-Costello schism, or the Gillard-Rudd antagonism, for dead.

    In a nutshell, I don't see any immediate issues with the Chinese economy. The leadership is doing exactly what good leaders anywhere should do – they are working the levers to achieve the best result. But I do see issues potentially looming as we move into 2012 and beyond.

  • Paul, what do you make of Professor Patrick Chovanec's view ( he also lives in Beijing and is at the Tsinghua University's School of Economics and Management) at Leverage and China?s Property Market:

    That brings us to the second main point I?d like to make today, that China?s property markets are leveraged, just not the same way Western observers might be used to. I would argue that, despite the all-cash payments being put down for housing, there is plenty of property-related credit exposure, both within the real estate sector and outside it. I discussed this briefly on China Radio International, but to explain it fully, I need to describe how real estate projects are funded in China, and draw some distinctions between the residential and commercial markets.

    In his other articles, he has concerns about the Chinese banking system.

  • Pete

    Wow, a very interesting post Paul. I can't speak for everyone, but I very much enjoy your insight into these matters.

    So political change may drive structural change in the near future…?

  • Arthurrobey

    It is very simple really. A 10% growth rate implies a doubling time of 7 years.
    2,4,8,16 times as big as it is now in 7,14,21,28 years.
    To assume that China will keep growing at 10% for 28 years leads to absurdities.
    Imagine China importing 28 times as much oil as it does now.
    Or burning 28 times as much coal.

  • Pete

    That is very true. I think that fits with the rule of 72:

    So, that creates some further questions:
    Was China under-developed and ready to handle such growth before the boom? Or was China starting off a stronger base? The reason this is asked is because then we could get a better idea of whether growth has been 'excessive'.

    But the real issue I see is that we can't be sure that the growth figures China have provided to the world are actually factual. If there has been less growth than stated, then the doubling will take more time (naturally). Growth of such magnitude is still a problem.

    I wonder if the growth was in response to excess western demand (due to credit)…or actually something else? I guess there are many opinions on that.

  • Paul in Beijing

    It's the same in Australia. Politics trumps economics.
    Perhaps there's a whole new political system waiting to be promoted. The world has tried monarchy, oligarchy, democracy, communism, socialism, totalitarianism, anarchy; maybe it's time we let the economists rule the world. Econarchy? Perish the thought.

  • Paul in Beijing

    There's no question but that the Chinese banking system is home to some severe credit problems. I did a study for an American risk manager and found the following.
    A developer comes to the bank with a plan for a new property development or steel mill or aluminium smelter. The developer has one rule at work – do not use my own money, use somebody else's.
    The officer at the bank has the job of approving loans. He has a target amount of money to loan out. The brown paper bag that the developer gives him is much bigger than his pay cheque from the bank. So he approves the loan.
    A different person in the bank has the job of collecting the money. His brown paper bag is also bigger than his pay check, so he defers the repayments and pushes the loan into accounts and ledgers where it is no longer his problem.

    A third person has the job of preparing the banks financial position. He sees the bad loans and pushes them into years where the bank's profits allow them to be hidden or absorbed. Failing that, they go to the Government and get a bail-out.

    Simplistic, but essentially this is how the banking system works at the corporate level.

  • Ted

    Just a couple of general points:

    Background: I think it is fair to consider 1980 as year zero for China – by that time Deng Xiao Ping had gained just enough strength to start repudiating the 'actually existing socialism' and open the country up. Keep in mind that China was mired in deep barbarity in 1980. Not a single kilometer of highways, no infrastructure of any kind, agriculture was a total disaster, virtually the entire population was on the verge of starvation or starving. This is from where they started. Always keep this in mind when you hear about a 'China bubble'.

    People: When I was last in China this January on a trek (Guangdong-Guangxi-Hunan-Sichaun-Yunnan), I had the opportunity to talk to peasants and solid middle class folk. Both 'classes' seemed to prefer to keep their savings in cash or gold, and when asked what they are saving for all as one gave as reasons both old age and son/daughter's education. Conspicuous consumption this is not.

    Infrastructure: The highways – of which there are now tens of thousands of kilometers – are mostly privately owned, toll-operated, and extremely profitable due to the explosion of cars [check out Sichuan Expressway – HKG:0107 – its 50% up for the last year].

    Despite all of this crazy growth, most of the country is still years behind the coastal provinces. Go to the interior and you enter another world, which they are only now starting to develop.

  • Plornt

    Great posts everyone.