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  • Be Very Afraid of The China Bubble

    [B][FONT=Georgia]Monday, Oct. 31, 2011[/FONT][/B]

    [B][FONT=Arial]Be Very Afraid of The ChinaBubble[/FONT][/B]

    [B][FONT=Georgia]By Ken Miller[/FONT][/B]

    [B][FONT=Georgia]Time Magazine[/FONT][/B]

    [B][FONT=Georgia]October 31, 2011[/FONT][/B]

    [FONT=Georgia]What'sthe most important economic question in the world today? One contender iswhether the euro will collapse. Another is whether the U.S. will plunge into adouble-dip recession. But a third, and possibly the most important over thelong term, is whether China can save the world--or whether the entire countryis a $6 trillion bubble that's ready to pop.[/FONT]

    [FONT=Georgia]That'sthe size of the Chinese economy, now the second largest in the world, after theU.S.'s. China contributed 19% of global economic growth in 2010, and that'sexpected to increase to 24% this year. China's strength is essential to therecoveries of both the U.S. and Europe; if Beijing crashes, the reverberationswill be felt from Boise to Brussels.[/FONT]

    [FONT=Georgia]Andplenty of smart people are worried that it will. It may seem strange toAmericans who hear so much about the rise of Asia and the pressure of Chinesecompetitiveness, but there are big questions about China's future. For morethan 30 years, the Chinese miracle has been built on cheap labor, cheap landand cheap capital. But the model is starting to break down. China's banks,which have doled out too many bad loans, are perhaps as troubled as those inthe West. The frothiness of the real estate market in major Chinese citiesmakes the U.S. housing peaks of 2007 look positively staid. Inflation isgrowing, as are unemployment--particularly among the middle classes, for whom,as in the U.S., there aren't enough high-level jobs--and social unrest. China'sown Premier, Wen Jiabao, calls his nation's economy "unbalanced,uncoordinated and unsustainable."[/FONT]

    [FONT=Georgia]Nowhereare the problems more evident than in the real estate sector, which has been atthe core of the country's growth and development. Like Republicans in the U.S.who try to "starve the beast" by cutting government spending, theChinese Communist Party has been attempting to put a damper on the nation'sdebt-fueled real estate boom. This is part of a deliberate attempt to rejiggerthe economy into one that relies more on domestic consumer spending and less onmanufacturing and exports. To ensure its future growth, China must move frombeing the world's factory to being one of its largest consumers. If, however,the party's efforts to take the country in that direction result in aprecipitous drop in real estate values, the entire economy could crash.Multinational corporations whose revenue and earnings growth are tied to Chinacould be hit hard. And the U.S. could be thrown back into recession.[/FONT]

    [FONT=Georgia]Whilevery few economists doubt that China's growth is going to slow eventually, it'sa question of how much and how soon. Will the landing be hard or soft? So far,the signs are mixed. GDP growth has moderated slowly in the past few quartersrather than falling off a cliff (though it's worth noting that Chinese economicfigures, as released by the government, are a notorious black box). Yet in manyparts of the economy, the bubble continues to expand. Local-government debtgrew about 30% in 2010 from the previous year. In the first six months of thisyear, Chinese investment in real estate was up 33% from the same period in2010.[/FONT]

    [FONT=Georgia]Inorder to understand the potential fallout from a China bubble, it's importantto understand how the bubble began. The popular narrative is that China's risefrom nowhere in 1978 to its position today has been fueled mainly by aninexpensive and massive labor force. That's part of it, but equally importanthave been low-cost capital and land. Most Chinese, who are huge savers, havelittle choice but to put their money in bank accounts that pay interest rateslower than inflation; in a country with a relatively undeveloped financialsector, there are few other options. These funds are then channeled intostate-owned enterprises whose capital expenditures create the factories andskyscrapers on which the Chinese miracle has been built.[/FONT]

    [FONT=Georgia]Butthe Chinese are pretty smart about money. They see the fortunes the elites havemade by buying land at bargain prices and developing it. Ordinary individualscannot get in on the ground floor to reap the obscene profits made bywell-connected officials who broker--often by force--these purchases from theproperties' historical owners, but they are permitted to invest in real estateat later stages of development. And so housing is where much of the wealth inthe Middle Kingdom ends up. Anyone who's spent more than a day or two in Chinaknows that real estate is a popular preoccupation. Apartment flipping is allthe rage; real estate prices have tripled in the past five years.[/FONT]

    [FONT=Georgia]Thequestion is whether the bubble--not only in housing but in commercial propertyas well--is about to pop. Everywhere you go in China, you see new airports andhigh-speed-train lines under construction; glass-fronted apartment buildingswhose empty units loom unilluminated in the night; underutilized roads, bridgesand tunnels; and entire towns waiting for occupants. One such town, Kangbashiin Inner Mongolia, has everything a city needs, including investors who havebought apartments on spec. Yet it remains largely vacant.[/FONT]

    [FONT=Georgia]Whydoes China keep building? Because building creates jobs and wealth for thosewho are associated with all that development. Right after Mao Zedong came topower in 1949, the party dedicated the country to a massive social-industrialcomplex under direct control of the government. Many of the earlygovernment-controlled institutions were dismantled in the post-1978 DengXiaoping era, and the focus for the past 30 years has been on production andexports fueled by state capital expenditure--something the party could control.Eventually, those investments created factories that churned out made-in-Chinagoods, an infrastructure that supported the factories and a building boom thathas culminated in a glut of high-rises all over the country.[/FONT]

    [FONT=Georgia]Theproblem today is that this model, which has worked so well for over threedecades, is showing signs of fatigue. Chinese factories are aging, and theircounterparts across Asia are now poised to compete. Returns on investment havebeen declining. At the same time, wages are slowly rising, which is one reasonmanufacturing jobs are trickling back to the U.S., as the labor costs betweenthe two countries narrow.[/FONT]

    [FONT=Georgia]Thegrowth-at-all-costs model followed for the past three decades has exactedenormous costs on Chinese society. Yet despite undrinkable water andunbreathable air in many parts of the country, the party continues to enjoywidespread support; its p.r. machine emphasizes its efforts to redress China'shumiliation at the hands of the West in the 19th and 20th centuries. Evenintellectuals who gripe about personal-freedom and civil rights issues seem todo so through a filter of sincere patriotism. Unfortunately, the strains causedby hell-bent growth are starting to show up everywhere. Mass protests of partyabuses--often the taking of land without just compensation--have beenmultiplying so steadily that the government, departing from past protocol, didnot publish the number of them last year. At government facilities in manyregions of the country, there have been explosions set off by citizens sodisaffected that they didn't care about the consequences.[/FONT]

    [FONT=Georgia]Beijingknows it's time to change strategy. The party's latest five-year plan showsthat it wants to shift away from the old export-and-building-boom model to onethat relies more on domestic demand for goods and services. But as China isfinding out, this is easier said than done.[/FONT]

    [FONT=Georgia]Ifthe party's attempt to rein in the easy money flowing to state-ownedenterprises results in a dramatic decline in property values, the outcome couldbe an earthquake in the Chinese financial system that would be felt in the U.S.In the past, loans made by state banks to big government-related businessescreated a significant amount of bad debt that had to be written off. In 1998and 2004--05, loans totaling about $500 billion were classified asnonperforming, and state officials transferred them to special investmentvehicles in an attempt to create the appearance of containing the problem. Butbecause the state, which owns the biggest banks--and thus the people'ssavings--ultimately pays the price of any write-off, households bear the costof the cleanup. Chinese banks are the original too-big-to-fail financialinstitutions.[/FONT]

  • #2
    [FONT=Georgia]Part 2 of China Bubble article:[/FONT]
    [FONT=Georgia][/FONT]
    [FONT=Georgia]There are rumors across the country that another big round of write-offs is imminent.The amount might be equal to or greater than the sum of the two previouswrite-offs. If Beijing is serious about moving its economy to a consumptionmodel, imposing the cost of these bad loans on citizens again will be a seriousimpediment to its goal. Household income as a percentage of GDP has beendeclining in China for almost a decade, and it's hard to see what the people aregoing to use to buy stuff, even if wages rise, if they have to keep paying forbailouts and can't earn anything on their savings. It is one thing for thegovernment to lower taxes on consumer goods, as it recently did, but unless itcan reverse the decline in household income as a percentage of GDP, the peoplewon't spend.[/FONT]

    [FONT=Georgia]Anotherproblem Beijing has in moving to a new growth model is local and provincialgovernments' addiction to revenue from land sales. According to the Ministry ofFinance, land sales totaled $500 billion in 2010, more than double the amountin the previous year. Because provincial officials are promoted on the basis oftheir GDP-growth figures and because land sales are an important part of localrevenue, it's difficult to curb the enthusiasm of local officials for projectdevelopment.[/FONT]

    [FONT=Georgia]Ofcourse, nothing is ever a bubble until it bursts. Even an empty city is not aconvincing warning to those who remember that it took Shanghai many years tobuild its now booming Pudong business district. Although some of those pristinenew bridges, roads, tunnels and buildings may be underused today, they mightprove to be just the catalyst needed to keep the economy driving forward whendemand catches up, as the optimists vehemently argue.[/FONT]

    [FONT=Georgia]But if the bubble pops, it will have serious consequences in America. The U.S. sold$92 billion in goods and services to China last year. If China succeeds inmoving away from its model of cheap land and cheap capital and makes a smoothtransition to an economy based more on domestic demand, hallelujah. But ifChinese land prices plummet, there will be less demand for raw materials and asteep decline in world commodity markets and global trade in general.[/FONT]

    [FONT=Georgia]That could very easily lead to even higher unemployment in the West. The U.S.economy is already in the strange position of having cash-rich companies thatare not spending or hiring. Imagine how much less inclined they will be tospend and hire if they are frightened by a Chinese economic slowdown,especially given that so many of them have pinned their future growth prospectson China. And the U.S. government, already shedding jobs in the aftermath ofthe 2008 crisis, will be in no position to ride to the rescue.[/FONT]

    [FONT=Georgia]Whatever GDP figures might suggest, senior Chinese officials, a number of whom I speakwith regularly, are quite worried about a hard landing. Many observers say asharp economic decline won't be permitted to happen before the next change ofparty leadership, in 2012. But the Chinese stock market was not supposed to beallowed to crash in the run-up to the 2008 Beijing Olympics, and it did.[/FONT]

    [FONT=Georgia]As the Chinese Communist Party tries to engineer this delicate shift in thenation's economic model, the U.S. could do a lot to help. It could, forexample, avoid starting contentious squabbles over things like trade andcurrency at a time when populist political sentiments in both countries arehigh. Rather than bash China, it could focus on encouraging the export of servicesand goods to the Middle Kingdom. (U.S. exports there have already grown 468%over the past decade.) It could also remember that China's transformation froma poor developing country into a richer one with a larger middle class has beentricky--both economically and politically. China is, as Deng would have put it,"crossing the river by feeling for stones." It's a process in whichsome scrapes are inevitable. The key will be avoiding a fall.[/FONT]

    [FONT=Georgia]Milleris managing partner of Keylink Capital International and a member of the StateDepartment's advisory committee on international economic policy[/FONT]

    Comment


    • #3
      Dandy, another issue that could affect the commodities. Makes you want to sell all your land and equipment and move to FL. Then just sit on a beach with one of those drinks that has a little umbrella in it.

      Comment


      • #4
        Beaner: Excellent post. US SB farmers should look at how much of their production is exported to China and how vulnerable they are and switch more acres to corn where it is needed anyway.

        Comment


        • #5
          Originally posted by IA CORN FARMER View Post
          Dandy, another issue that could affect the commodities. Makes you want to sell all your land and equipment and move to FL. Then just sit on a beach with one of those drinks that has a little umbrella in it.
          Belize would be better with your money in a Swiss Bank. Check out "Live and Invest Overseas."

          Comment


          • #6
            Two things, China can print money forever and China can write it off forever. My point is this isn't the fed and it isn't the international banking cartel.

            They may just have the perfect economy so why compare it to free enterprise mixed in with a little federal reserve with a pinch of ****ed up attorneys running the federal budget.

            Comment


            • #7
              Originally posted by 48 View Post
              Belize would be better with your money in a Swiss Bank. Check out "Live and Invest Overseas."
              Pretty good there 48! Yea, I was just letting off a little steam, the market has been a little frustrating lately trying to figure it out. Wish I had a crystal ball. Although selling everything and living as a FL beach bum seems pretty good sometimes, not a care in the world. LOL
              Both Faust and I can rent a tiny 2 bedroom apartment close to the beach and live together to keep our expenses low!! LOL

              Comment


              • #8
                Originally posted by IA CORN FARMER View Post
                Pretty good there 48! Yea, I was just letting off a little steam, the market has been a little frustrating lately trying to figure it out. Wish I had a crystal ball. Although selling everything and living as a FL beach bum seems pretty good sometimes, not a care in the world. LOL
                Both Faust and I can rent a tiny 2 bedroom apartment close to the beach and live together to keep our expenses low!! LOL
                ICF: That will never work. Faust picks corn 365days/yr. lol.

                Comment


                • #9
                  Faust doesn't plant corn!!!

                  Comment


                  • #10
                    Ya don't think that faust can talk the insurance co. into not being able to pull himself off the beaches of FLA as a reason for a prevent plant claim.lol

                    Comment


                    • #11
                      Originally posted by villageidiot View Post
                      Ya don't think that faust can talk the insurance co. into not being able to pull himself off the beaches of FLA as a reason for a prevent plant claim.lol
                      Plenty good guys on Faust, hope he reads this. You know, I might tell the wife to plan a week this winter when the kids are out of school and we all take time off and go to FL. Be me, wife, kids, and mother-in-law. Mother-in-law snores pretty bad, so I will have to get her, her own hotel room.

                      Comment


                      • #12
                        Originally posted by IA CORN FARMER View Post
                        Plenty good guys on Faust, hope he reads this. You know, I might tell the wife to plan a week this winter when the kids are out of school and we all take time off and go to FL. Be me, wife, kids, and mother-in-law. Mother-in-law snores pretty bad, so I will have to get her, her own hotel room.
                        ICF: Learn to think outside the box. Go to Belize instead. They love Americans. Buy a house while you're down there. That way when the shxt hits the fan, you will have your safe haven and passport already set up. You're welcome.

                        Comment


                        • #13
                          Originally posted by 48 View Post
                          ICF: Learn to think outside the box. Go to Belize instead. They love Americans. Buy a house while you're down there. That way when the shxt hits the fan, you will have your safe haven and passport already set up. You're welcome.
                          Maybe your right, I need to think out of the box. Maybe forget to bring mother-in-law back to the states and leave her down there!!!
                          Just kidding, she is a pretty good mother-in-law, she is in the process of gifting the wife a really nice quarter section, mid-80's CSR rating so excellent corn ground. I had better be nice to her.

                          Comment


                          • #14
                            Originally posted by IA CORN FARMER View Post
                            she is a pretty good mother-in-law, she is in the process of gifting the wife a really nice quarter section, mid-80's CSR rating so excellent corn ground. I had better be nice to her.
                            Wow, you lucky man, I wish I had a mother-in-law that could do that... you should be very nice to her, what a great gift- the kind that keeps on giving!
                            [URL="http://www.facebook.com/DiederichFarm"]DiederichFarm[/URL]
                            "You are only as good as your next success, not your last" Sir Jock Stirrup

                            Comment


                            • #15
                              Originally posted by drdiederich View Post
                              Wow, you lucky man, I wish I had a mother-in-law that could do that... you should be very nice to her, what a great gift- the kind that keeps on giving!
                              Yea, been out combining all day, getting close to being dome. So far this harvest has gone well. On the quarter section, the quarter was bought by my mother-in-laws, grandfather and has been in the family many years. With land prices going so high, this is what her tax Attorney/estate planner has told here to do for proper tax planning. I have seen some farmland sold to pay the tax bill because of poor estate planning. Estate Planning is one thing you need to do right if you are to avoid kids selling a farm or 2 to pay Mr. Taxman.

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