Monday, Dec 07, 2009
Dubai shows what we can expect to happen in China
FT: Why Dubai's debacle does matter
"Many commentators initially dismissed losses on subprime mortgages because of their relatively small share of the US mortgage market. Yet the subprime fiasco turned out to be significant because the irresponsible practices it revealed turned out to be commonplace.
Likewise, minuscule Iceland, with its outsized foreign liabilities and giant current account deficits, revealed the worst excesses of international finance. Despite its diminutive size, Dubai provides another cautionary tale." - Goes on to point out that China looks very similar to Dubai.
Posted by mountain goat @ 02:02 PM (1110 views) Add Comment
15 Comments
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1. icarus said...
This is about China. Why not just analyse China instead of focusing on Dubai's 'canary in the coal mine' role? Size alone makes them different economies. China can carry on for some time propping up zombie enterprises and activities.
2. cynicalsoothsayer said...
China has an export economy, where Dubai doesn't. Useless comparison.
3. rumble said...
Dubai builds islands, China appropriates islands.
4. mountain goat said...
All bubbles look sustainable until they burst. Dubai is an example of the same malinvestment that continues in China, frenzied building of houses and industrial infrastructure, awash with speculative international finance. "short-term interest rates are below 2 per cent and the money supply has grown by 30 per cent over the past year. This country is experiencing a real estate boom. Reports tell of a newly constructed ghost city with dwellings for a million people. Speculators are reportedly snapping up luxury developments, which remain unoccupied long after completion. Despite a 20 per cent vacancy rate in the capital city, new skyscrapers are being planned." Both developing countries prowled around buying up trophy assets around the world.
China looks solid but their success in export is based largely on currency manipulation and tolerance of this trade war by the "west". When employment doesn't bounce back in these western economies then China's policies will likely be interpreted as highly aggressive, and action will be taken. Empty skyscrapers and empty factories, when the hot money leaves the bubble bursts.
5. rumble said...
I agree China is wearing the Emperor's new clothes, but have resources at home and abroad, which sets it somewhat apart from Dubai, which apparently doesn't even have decent sand.
6. mountain goat said...
I wrote "All bubbles look sustainable until they burst." but should have written "All bubbles have a rational justification". "housing shortage", "playground for the rich" "industrial workshop of the world". But it is the extreme of sentiment that makes a bubble. Seems to me like China has been at an extreme for some time given that it makes up only a small fraction of the world's GDP. Of course it makes up a large fraction of the world's population but is that a plus or minus in economic terms?
7. icarus said...
It's a familiar story of cheap money and asset bubbles. No need to confuse the issue by comparing Dubai and China. Question is how will the Chinese bubble(s) inflate and burst.
mg @ 4 - "Currency manipulation and tolerance of this trade war by the west". Question is why the west tolerates this. The US talks as though the Chinese alone can determine the dollar-yuan rate. The bigger economy, with military back-up is powerless to alter the exchange rate? Pull the other one. Does Wall Street and the government really want to support US manufacturing and reduce the destabilising imbalances? A recent report to Congess bemoaned the fact that a high-tech cluster in upstate New York was unravelling because of the Chinese rascals and their cheap currency and subsidies for companies locating in China.
But the truth may well be very different. The high dollar -yuan rate lowers US inflation and when China recycles its dollars into US Treasuries and US financial products it provides Wall Street with a lot of cheap capital to boost stockmarkets and boost the bottom line. Those "unsustainable imbalances" are in fact windfall profits. The weakening of US manufacturing is just collateral damage. It's useful in weakening unions, and don't forget that more than half of the increase in Chinese exports over the past decade or so comes from the China-based subsidiaries of US and other western multinationals using sweatshop labour to undermine US and other western workers. Globalisation, free trade, offshoring comes down to the dominance of Wall Street and US/western corporations.
Wall Street's also very interested in opening Asian markets to US financial products. When Geitner talks of Asian social safety nets "to reduce the need for the precautionary saving that produces global imbalances" (that's not the way it works anyway) he means that China etc. should allow G Sachs et al. to provide pensions and healthcare plans and other financial expertise and debt-based exotics.
These are the reasons for Obama's saying nothing about the damaging $-yuan exchange rate when he was over there
8. mountain goat said...
Icarus - agreed with most of what you wrote. Still think the author has a point, as Marc Faber recently said to Bloomberg "it’s a reminder that governments can default.”
9. tenyearstogetmymoneyback said...
As commented above the big difference with China is that they export.
Whats more most of the things they export are the things Joe public wants to buy.
Which would cause more of a Political uproar. No pay rises or the price of a
Ipod / Digital Camera / Whatever jumping 30%.
I wonder if the Chinese have the same plan as Amazon, which was to completely corner
the market before raising their prices.
10. crunchy said...
Not so sure about collateral damage. Deindustrialisation in both the USA and GB have been In my view quiet deliberate and there we were over the past years trying to make economic sense of all this weakening. Out of sight, out of mind. A future (carbon taxation) double standard?
Probably!
11. the number cruncher said...
Great post Icarus - approaching reality...
Alternately you can look at it from the 'great game' geopolitical point of view as opposed to the selfish b@stards point of view (I think both views are very valid)
I have heard tell that the comming economic collapse in China is being engineered by America in alliance with India. America's foreign policy is to balance the power between the regional powers of India, Russia and China (just like Britain's European foriegn policy over the last thousand years was to never allow one dominant power to rise).
America built up China to act as ally when Russia was strong in the 60's, 70's and 80's. now they need to weaken China a bit, hence the old bubble/bust switcheroo where hina will end up being desperate to sell assets at bargain basement prices, just as America did with the 'tiger' economies in the 90's.
In balancing the powers they allow themselves to carve out ownership/access to the tremendous natural resources of central Asia or as some put it the 'pipelinestans'.
Wheels within wheels.
12. icarus said...
crunchy - "collateral damage" - I was giving them the benefit of the doubt - I went on to say it weakened unions and allowed corporations to use cheap labour on the other side of thje world, in addition to other benefits accruing to America's rulers.
number cruncher - good points. And of course all those US Treasuries the Chinese etc. bought are paying for the US military build-up that facilitates those aims. And the high dollar-yuan rate makes those Chinese assets cheaper for Americans.
13. rumble said...
"Deindustrialisation in both the USA and GB have been In my view quiet deliberate"
"economic equivalent of a creationist - everything is deliberate"
First step of conspiracy creation: declare the event deliberate.
14. estrader said...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aPE08qtAKvaE&pos=4
"Debt restructuring by Dubai state-run companies may almost double to $46.7 billion as more of the emirate’s businesses could need help making payments, Morgan Stanley said."
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Surprise, surprise...things are looking worse after all the experts seemed to be saying "Move along, there is nothing to see here"
If China went bust tomorrow I'm sure the very leaders who were banking on China will try to convince us all it will have little impact!
15. Aziz said...
no comparison between dubai and china, the fundimintales completely differ. The economic of Dubai depends on flashing of sparks, nothing to be manufactured in this city which depend on breaking the arab life style approching the europ scheem in daily life ....night clubs
fantazya facilities which can be used by gusetes and visitors as funy time and funy time only.and the period of good wether not more than three monthes each year. But in china, the machines of productions for consumed items , they are doing true bussines .....exporting thousands of items, in the whole of the world. NO COMPARISON WILL BE FAIR.