Posted by Steve Markowitz on March 31, 2015
This Blog has often referred to the real and potential problems associated with the growing debt in the United States and Western Europe. However, the unsustainable growth of debt is a worldwide phenomenon that includes the fastest-growing major economy, China.
The Wall Street Journal reported on China’s growing debt. According to the International Monetary Fund, China’s debt is growing quicker than that of Japan, who has a debt to GDP ratio of over 200%. It is also growing faster than the debt of the United States and South Korea.
A significant portion of China’s debt is being created by local governments who borrow to finance projects in their areas. The Journal reports that these local governments have accounted for 25% of China’s total debt since 2008 and in 2013 reached 36% of GDP, double the rate of five years earlier. At this rate it is estimated that local borrowing will increase to 52% of GDP by 2019.
Incredibly, there are approximately 8,000 local quasi-government finance organizations throughout China. This huge number and the large amount of debt lend themselves towards corruption and inefficient usage of the debt. Also, since these finance organizations are related to the government, they are able to sell bonds with high risk at subsidize rates as lenders incorrectly believe that default is not possible.
This lose money policy in China lends itself to financing ventures that do not make economic sense, thereby increasing the likelihood of defaults. This is eerily reminiscent of the lose money policies of the West and the United States in particular that led to the economic meltdown of 2008. It is likely that China’s flawed financing practices will lead to similar results in that country. Given the size of the Chinese economy, that will lead to contagion in economies worldwide.
Posted in China | Tagged: borrow, China, Debt, GDP, municipalities | Leave a Comment »
Posted by Steve Markowitz on March 5, 2012
US equities markets are booming. The Dow Jones Industrial Average is teetering on 13,000, a mark not seen since prior to the financial meltdown of 2008. Even the ongoing financial difficulties with Europe’s sovereign debt has not slowed the markets’ upward trajectory.
Today, US equities when a bit negative for the first time in a few sessions. However, this pickup was not due to concerns about Greece or European sovereign debt issues. Today, the potential of a slowdown in China’s economy came front and center. With Europe and Japan bordering on recessions, China has been one of the few worldwide growth areas. In fact, the Wall Street Journal reported that China’s average GDP has grown in excess of 10% annually for the last 30 years. This is a remarkable number, but one that cannot be sustained.
Late last month the World Bank and the Chinese government issued a draft report with some significant, if not startling findings. The report indicated that China will face an economic crisis without significant reforms. Specifically, the authors are concerned about the gargantuan state-owned enterprises in China. These firms are run inefficiently and without appropriate regard for supply and demand, which has led to growing bubbles including in China’s real estate markets. The significant conclusions in the report, called “China 2030”, include:
- The huge government owned corporations need to be managed by private managers, not the government.
- China faces the possibility of rapid the acceleration in its economic activity. This is a phenomena seen in other high-growth emerging economies in the past including Brazil and Mexico.
- The government run corporations and Chinese banks are so intertwined that a downturn might spiral out-of-control quickly.
As this Blog has proffered many times, governments have proven to be poor allocators of capital. While most of this Blog’s attention focuses on the weaknesses of the American government in this area, the Chinese government is likely even more inept. While China has shown remarkable growth, this is come because of the use population and cheap access the labor. Neither of these attributes will protect China from the inevitable corrective actions that all markets must take to keep supply and demand in balance.
We have all seen the results of governmental government in the United States. It was such interventions that help create the housing bubble and subsequent financial meltdown. China will not be immune from these inevitable market forces. The danger for the West and the United States is that we have come to depend on China to lend us money at low rates. Should China stumble, this will have ramifications many Western economies.
Posted in China, economics | Tagged: China, China 2030, GDP, Growth, World Bank | 1 Comment »
Posted by Steve Markowitz on November 11, 2011
With the many economic challenges facing Europe there is the hope that China with its huge US dollar surplus will be able to come to Europe’s rescue. This is based on a wish rather than reality.
The economic crisis that resulted in the financial meltdown of 2008 caused challenges for all countries including China. China has fared better than many Western economies because of its huge currency surpluses created by exports of prior years. When the meltdown occurred, China used some of this surplus to finance large infrastructure projects in country to not only act as stimulus, but to get a larger share of its population moved from rural areas to the new cities that have been built.
China’s concerns are social, as well as economic. Its rural population has historically been poor and the epicenter of social discontent. China’s creation of huge new cities is part of a larger effort to decrease the potential of future rural discontent. Its chances for success are questionable. Governments worldwide have dismal records for grand social planning projects. In addition, there are reports that some of the new Chinese cities remain empty, along with thousands of apartments. This opens the possibility of a Chinese bubble that will pop creating negative economic consequences. The bottom line is that China will need to focus on its insular economic issues, rather than the ongoing European crisis.
Stratford.com has posted and video, link supplied below, that offers a concise look at the core Chinese social/economic issues.
Eurozone Debt Crisis Reveals China’s Economic Weakness
Posted in China, European Union | Tagged: Bubble, China, Europe | Leave a Comment »
Posted by Steve Markowitz on February 18, 2011
On February 8, 2011 this Blog posted an article titled China’s Central Bank Raises Interest Rates. At that time China raised its central bank lending rate by 0.5%. to 3.0% in an effort to fight the growing inflation. Today, China’s central bank announced another round of belt-tightening increasing the bank reserve requirement by 0.5%, the second such increase in 2011.
While much of the United States’ attention is focused on events in the Middle East and the teacher’s revolt in Wisconsin, other strategic events continue to march on. China’s efforts to fight inflation have ramifications for the United States. First, it indicates that inflation worldwide is a more significant problem than the figures published by the U.S. government. In addition, China’s increasing interest rates will lead to higher rates in the U.S.
While the U.S. dollar is currently the world’s reserve currency, that advantage will not insulate the United States from Adam Smith’s invisible hand of the market. As the U.S. continues to print dollars, at some point excess supply will ruin the value of the dollar. China’s current interest rate moves are likely precursors to this reality.
Posted in Adam Smith, China, Deficits | Tagged: Central Bank, China, Inflation, Interest, invisible hand of the market, Rates, U.S. Dollar | Leave a Comment »
Posted by Steve Markowitz on February 8, 2011
The Wall Street Journal has reported that China’s central bank will raise its interest rates by 0.25% in an effort to curb inflation. This follows rate increases in October and December of last year. That will result in the one-year Yuan lending rate increasing to 6.06%, with one-year deposit rate increasing to 3.00%.
China’s concern about inflation stems from its consumer-price index rising at about a 5% per annum rate. At the same time the U.S. government published inflation rate is much lower, although this figure is determined by using different metrics form China.
China’s tightening monetary policy is in stark contrast with that of the United States where the Fed rate remains at near zero and consumers receive only about .7% interest on savings accounts. The imbalance is out of place in a world economy and cannot continue in the long term. Either China’s rates will decrease to match that in the United States or more likely U.S. rates will go up.
The current discrepancies between interest rates in the United States and China have been created by the Fed’s policies of pursing artificially low interest rates and Quantitative Easing. While these policies offer short-term benefits, they create dangerous imbalances including bubbles and inflation that will have consequences going forward.
Posted in China, economics | Tagged: Central Bank, China, Fed, Inflation, Interest Rates, quantitative easing | 1 Comment »