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Beijing In A Sweat As China's Economy Overheats

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http://www.telegraph.co.uk/finance/financetopics/recession/china-economic-slowdown/7786996/Beijing-in-a-sweat-as-Chinas-economy-overheats.html

China is struggling to contain the threat of an overheating economy in the face of rising house prices, inflationary wage increases and a continuing surge in money supply, the head of the country’s second-largest bank has warned.

Guo Shuqing, chairman of China Construction Bank, said that the latest figures for China’s M1 money supply – a key predictor of inflation – had raised concerns that the country’s vast stimulus and bank-lending was running too hot.

“I saw the figures for last month and M1 is still very high, increasing 31pc from last year, which is one per cent higher than last month,” he said in an interview with The Daily Telegraph.

“We are seeing a lot of money coming to China which is creating a current and capital account surpluses.”

China’s regulators have introduced a raft of measures in recent weeks in an attempt to cool down the economy, forcing banks to raise the capital adequacy ratios and hitting second home buyers with regulation designed to drive speculators out of the property market.

However, Mr Guo warned that the effectiveness of measures to cool house prices, which have risen by up to 40pc this year in some major cities, could be blunted by the massive reserves of cash still being held by private developers. “Sales are falling but prices are not,” he said. “Developers have a lot of cash, so they’re not too concerned at the moment.”

“Property prices are definitely seeing something of a bubble, but it differs from city to city. You can see prices going very high on the coastline, but in the inland areas and western areas, even in provincial capitals, it’s still not so high.”

China has moved quickly to apply the brakes after first quarter figures showed the economy expanding at 11.6pc year-on-year, driving down sentiments on the country’s benchmark Shanghai index, which has fallen 27 per cent this year.

However, while loan growth is slowing from 2009, huge amounts of fresh loans continues to pour into the Chinese economy with the total outstanding loans still growing at a rate of 18pc this year.

After issuing 10 trillion yuan (£1 trillion) of new loans in 2009, Chinese banks are targeted to inject another 7.5 trillion yuan this year, a reduction but still nearly twice the 4.6 trillion yuan of the loans disbursed in 2008.

Mr Guo warned that the continuing splurge in lending also raises the risk of a sharp rise in non-performing loans among smaller Chinese banks that have funded local government infrastructure projects, often of dubious viability.

“I think that small banks last year newly issued loans grew even fast, some even doubled their liability and assets,” Mr Guo said.

“At the moment the banks seem healthy but I think that small banks, because we don’t know the structure of their assets, maybe have got more risk exposures because they are growing too fast and their risk management is not as good as big banks.

“And secondly because they are very small and their loans are going to a more concentrated number of customers, that also could definitely cause a problem.”

Mr Guo added that with such massive stimulus Chinese inflation, currently running at 2.8pc, was at growing risk of rising. Almost all the coastal provinces that make up China’s manufacturing heartland had granted wage increases averaging 20pc this year.

Analysts add there is an increasing anecdotal evidence to suggest that China’s official inflation figures do not reflect the true pace of price rises being felt by people on the ground. The price of some foodstuffs is up 20pc this year.

Tom Miller of the Dragonomics consultancy in Beijing said: “The Chinese government recently mooted that food subsidies be handed out to rural low-income families, which is a sure indication of the government’s true concerns on inflation.

Wow 20% wage increases, it would seem China is fast heading towards a crash. Everyone is looking at the US or Europe to implode in hyperinflation, perhaps it will be the Chinese that suffer that fate.

Being all conspiratorial for a moment if you where a US official what better way to undermine China than to generate hyperinflation in the economy and destroy the manufacturing base?

Still it's all contained and the recovery is locked in.

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Debt deflation

Crowd at New York's American Union Bank during a bank run early in the Great Depression.

Crowd gathering on Wall Street after the 1929 crash.

Main article: Debt deflation

Irving Fisher argued that the predominant factor leading to the Great Depression was overindebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles.[16] He then outlined 9 factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows:

1. Debt liquidation and distress selling

2. Contraction of the money supply as bank loans are paid off

3. A fall in the level of asset prices

4. A still greater fall in the net worths of business, precipitating bankruptcies

5. A fall in profits

6. A reduction in output, in trade and in employment.

7. Pessimism and loss of confidence

8. Hoarding of money

9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.[16]

During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%.[17] Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.[18] Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.[19]

Bank failures snowballed as desperate bankers called in loans, which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.[18] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.

The liquidation of debt could not keep up with the fall of prices it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed.[16] This self-aggravating process turned a 1930 recession into a 1933 great depression.

Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Fisher.[20][21

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As you can guess I see it differently. 2.8% inflation for a developing nation is hardly anything. You can see they are still having to strongly pump new money into the system to stay ahead of the deflation.

20% wage gains are a great thing for China and the world economy. I think its mainly being driven by the incredible productivity increases going on in China.

A fascinating thing is that since China owns the major banks it can fund loans even when accounting prudence would advise against it. And the reverse is also true, China can put the brakes on new loans even when a flood of new borrowers meet the standard criteria.

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http://www.telegraph.co.uk/finance/financetopics/recession/china-economic-slowdown/7786996/Beijing-in-a-sweat-as-Chinas-economy-overheats.html

Wow 20% wage increases, it would seem China is fast heading towards a crash. Everyone is looking at the US or Europe to implode in hyperinflation, perhaps it will be the Chinese that suffer that fate.

Being all conspiratorial for a moment if you where a US official what better way to undermine China than to generate hyperinflation in the economy and destroy the manufacturing base?

Still it's all contained and the recovery is locked in.

It's hard to know th real truth about China. Their economy is all about a small section of their population. The rest live in poverty on the rice fields as they always did. I think they have internalised their growth because exports dived in the crisis. This has preserved temporarily the raging 'economy', but also made an internal real estate bubble which will have to burst. Don't believe their growth rates. When you see Australia squeal, from whom they buy vast resources, you will know the party is over for a while. This chinese excess has kept the Aussies away from almost any recession and they think they have been clever. But if you think the chinese building motorways with no traffic and shopping centres with no customers is clever, be my guest.

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Debt deflation

Crowd at New York's American Union Bank during a bank run early in the Great Depression.

Crowd gathering on Wall Street after the 1929 crash.

Main article: Debt deflation

Irving Fisher argued that the predominant factor leading to the Great Depression was overindebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles.[16] He then outlined 9 factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows:

1. Debt liquidation and distress selling

2. Contraction of the money supply as bank loans are paid off

3. A fall in the level of asset prices

4. A still greater fall in the net worths of business, precipitating bankruptcies

5. A fall in profits

6. A reduction in output, in trade and in employment.

7. Pessimism and loss of confidence

8. Hoarding of money

9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.[16]

During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%.[17] Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.[18] Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.[19]

Bank failures snowballed as desperate bankers called in loans, which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.[18] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.

The liquidation of debt could not keep up with the fall of prices it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed.[16] This self-aggravating process turned a 1930 recession into a 1933 great depression.

Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Fisher.[20][21

China also seems to have studied the great depression and decided to flood their country with new money in the face of a world economic crisis.

Imagine if they had tried to cut back spending and raise taxes as many in the west are recommending doing?

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Debt deflation

Crowd at New York's American Union Bank during a bank run early in the Great Depression.

Crowd gathering on Wall Street after the 1929 crash.

Main article: Debt deflation

Irving Fisher argued that the predominant factor leading to the Great Depression was overindebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles.[16] He then outlined 9 factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows:

1. Debt liquidation and distress selling

2. Contraction of the money supply as bank loans are paid off

3. A fall in the level of asset prices

4. A still greater fall in the net worths of business, precipitating bankruptcies

5. A fall in profits

6. A reduction in output, in trade and in employment.

7. Pessimism and loss of confidence

8. Hoarding of money

9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.[16]

During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%.[17] Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.[18] Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.[19]

Bank failures snowballed as desperate bankers called in loans, which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.[18] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.

The liquidation of debt could not keep up with the fall of prices it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed.[16] This self-aggravating process turned a 1930 recession into a 1933 great depression.

Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Fisher.[20][21

With the USA money supply M3 now falling at the same rate as 1931 and reports of further falls in real estate prices, the USA looks as if the same debt deflation is in process again. When will it come to the Eurozone, which seems to be a step behind?

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As you can guess I see it differently. 2.8% inflation for a developing nation is hardly anything.

Providing of course they aren't lying, now if it is 20% like it is for food stuffs you have an entirely different problem.

Get the stimulation wrong and you will get hyperinflation.

Only time will reveal which view is correct.

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China also seems to have studied the great depression and decided to flood their country with new money in the face of a world economic crisis.

Imagine if they had tried to cut back spending and raise taxes as many in the west are recommending doing?

Choose your demise carefully. Flood the country with 'money' and the paper becomes worthless. Cut the spending and you see a more immediate downward pressure but it costs less in the end. It might save your currency from going 'pop' which brings its own pain. "You cannot spend you way out of recession" MR BROWN 1997 Labour party conference. Mmmmh. You could try not borrowing so much in the first place and regulating lending properly?

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Isn't their inflation just an attempt to keep pace with the depreciation in currencies like the Dollar, Sterling and the Euro? The west is trying to inflate its way out of debt, much of it owed to China, by increasing their own money supply they are not allowing us to slip off the hook.

The day will come when the Yuan has no option but to rise in purchasing power, that will be good for the western debtors, but bad for western countries who will have to compete for resources. There are positives and negatives to both outcomes. If goods become expensive to import, our standard of living will fall, but that will create opportunities for products to be made at home providing jobs and also improving the trade deficit.

Importing cheap goods from abroad is what led to the vast surplus of money, which was then lent back to us in the form of sub prime mortgages, for the moment everyone wants to keep the game going. It's like some sort of bizzar game of international poker, China has more than enough surplus to match our bets, because ultimately we are only bluffing.

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It's hard to know th real truth about China. Their economy is all about a small section of their population. The rest live in poverty on the rice fields as they always did. I think they have internalised their growth because exports dived in the crisis. This has preserved temporarily the raging 'economy', but also made an internal real estate bubble which will have to burst. Don't believe their growth rates. When you see Australia squeal, from whom they buy vast resources, you will know the party is over for a while. This chinese excess has kept the Aussies away from almost any recession and they think they have been clever. But if you think the chinese building motorways with no traffic and shopping centres with no customers is clever, be my guest.

Essentially tens of millions were thrown out of work when the exports dived. So the state redirected those workers to building infrastructure. Accelerating their infrastructure building plans.

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Isn't their inflation just an attempt to keep pace with the depreciation in currencies like the Dollar, Sterling and the Euro? The west is trying to inflate its way out of debt, much of it owed to China, by increasing their own money supply they are not allowing us to slip off the hook.

The day will come when the Yuan has no option but to rise in purchasing power, that will be good for the western debtors, but bad for western countries who will have to compete for resources. There are positives and negatives to both outcomes. If goods become expensive to import, our standard of living will fall, but that will create opportunities for products to be made at home providing jobs and also improving the trade deficit.

Importing cheap goods from abroad is what led to the vast surplus of money, which was then lent back to us in the form of sub prime mortgages, for the moment everyone wants to keep the game going. It's like some sort of bizzar game of international poker, China has more than enough surplus to match our bets, because ultimately we are only bluffing.

Everyone is holding worthless paper, every move the political elite take seems to bring this truth being revealed to everyone.

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It's the capitalist disease, their economy is 'overheating' because the surplus wealth becomes trapped in the housing market, and the only way to access it is to speculate in land.

It's all very predictable.

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he actually said that?

http://www.thisislondon.co.uk/standard/article-23579801-darling-we-wont-spend-our-way-out-of-recession.do

Mr Darling will say that he believes in a “combination” of rules and discretion of governments to bend them.

He added that he would set out plans at the Pre-Budget Report “that demonstrate our commitment to keeping the public finances on a sustainable path”. He also hinted that inflation could go back up again over the longer term.

During Prime Minister's Questions, Mr Cameron was scathing about Mr Brown's claim in 1997 that “you cannot spend your way out of a recession”.

“Isn't the truth that you have been going around telling everyone you are the new John Maynard Keynes with your plan for a spending splurge,” Mr Cameron said.

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SO WHAT!!!

the UK had booms and bubbles in the 19th century, the US in the 20th - on the way to becoming global powerhouses

big deal

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It's the capitalist disease, their economy is 'overheating' because the surplus wealth becomes trapped in the housing market, and the only way to access it is to speculate in land.

It's all very predictable.

It's not quite speculating in land. All the land in China belongs to the state. People only own what is build on top of it.

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As you can guess I see it differently. 2.8% inflation for a developing nation is hardly anything. You can see they are still having to strongly pump new money into the system to stay ahead of the deflation.

20% wage gains are a great thing for China and the world economy. I think its mainly being driven by the incredible productivity increases going on in China.

A fascinating thing is that since China owns the major banks it can fund loans even when accounting prudence would advise against it. And the reverse is also true, China can put the brakes on new loans even when a flood of new borrowers meet the standard criteria.

Except that anecdotal evidence is that inflation isn't 2.8%, rather it is much, much higher.

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SO WHAT!!!

the UK had booms and bubbles in the 19th century, the US in the 20th - on the way to becoming global powerhouses

big deal

They also had multidecade long depressions. during the late 19th century...

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It's not quite speculating in land. All the land in China belongs to the state. People only own what is build on top of it.

I think you're mistaken. People say the same about the UK, that all the land is technically owned by the queen when the reality is that the economic benefits of ownership transfer to the deed holder.

It's clear from the article that China is suffering from the same thing that has brought the rest of the world economy to it's knees.

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They also had multidecade long depressions. during the late 19th century...

ONE multidecade depression during the 19th century. Even then, strangely, GNP seemed to grow decade on decade. So some revisionists say it wasn't even a depression.

I THINK that even then the stockmarket indeces gave reasonable profits. The pain was felt in standards of living. The global economy nevertheless expanded and improved.

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It's clear from the article that China is suffering from the same thing that has brought the rest of the world economy to it's knees.

no it isn't - where are the CDOs?

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no it isn't - where are the CDOs?

The liabilities rest with the banks, who are now going bankrupt as a result of all this property speculation.

All this has proven is that the presence of CDO's isn't the determining factor in a crashing economy, you just need an overheating housing market.

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The liabilities rest with the banks, who are now going bankrupt as a result of all this property speculation.

All this has proven is that the presence of CDO's isn't the determining factor in a crashing economy, you just need an overheating housing market.

Exactly

Property booms and busts existed long before the quants started thinking up exotic financial instruments.

All you need is easy credit by the bucket load which is what the Chinese government has been telling its banks to provide. It is the obvious trigger for a bubble in real estate.

If it looks like a duck, walks like a duck and quacks like a duck then it probably is a duck even if it is crispy and served up by Chinese waiters.

China may be the coming super power for the 21st Century but that does not mean its economy can not crash and burn along the way.

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Exactly

Property booms and busts existed long before the quants started thinking up exotic financial instruments.

All you need is easy credit by the bucket load which is what the Chinese government has been telling its banks to provide. It is the obvious trigger for a bubble in real estate.

If it looks like a duck, walks like a duck and quacks like a duck then it probably is a duck even if it is crispy and served up by Chinese waiters.

China may be the coming super power for the 21st Century but that does not mean its economy can not crash and burn along the way.

China IS a superpower.

It WAS a superpower before the Russian failure.

any power that has a large, well fed POPULATION is a superpower.

Governments are nothing.

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The liabilities rest with the banks, who are now going bankrupt as a result of all this property speculation.

All this has proven is that the presence of CDO's isn't the determining factor in a crashing economy, you just need an overheating housing market.

Bingo

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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