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Sancho Panza

China Risks Deflation Trap As True Gdp Crumbles

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Telegraph 21/7/13

'Diana Choyleva, from Lombard Street, said the official Chinese figures show that the economy contracted by 0.2pc in the second quarter, rather than growing 1.7pc (7.5pc year-on-year) as claimed by the government.

The discrepancy comes from the inflation assumptions used by Beijing. The government relies on a fixed basket of prices that can flatter the true health of the economy.

A better benchmark is the “GDP deflator”, which uses an evolving measure of prices that better reflect the reality of China’s fast-changing economy. “If you measure it that way, China is much closer to deflation than people realise,” she said.

Mrs Choyleva said the sugar rush from last year’s credit growth has worn off. The country is facing a witches brew of an over-valued yuan, stagnant exports and higher borrowing costs.

"China is within a hair's breadth of outright deflation," said Albert Edwards from Societe Generale, insisting that the GDP deflator is the key indicator to watch as the investment bubble deflates. It may prove more of a threat to the world economy than the tapering of bond purchases by the US Federal Rserve, he said.

Mr Edwards said the country has suffered a deflationary trade shock over recent months, both from Japan’s massive devaluation of the yen, and from China’s own semi-fixed link to a rising US dollar. The country has lost competitiveness after letting wage levels soar to head off social tensions or any risk of "regime change" demands along the lines of the Arab Spring.

The currency ructions are akin to events during the build-up to the East Asian crisis in 1997, when a strong dollar punctured credit bubbles across the region.

The recent focus by analysts on the GDP deflator is a new twist in a long-standing dispute over the reliability of Chinese statistics. A Wikileaks cable reported premier Li Keqiang during his days as a regional party chief telling a US diplomat that China’s data were “mad-made and for reference only”. Mr Li said he looked at electricity use, rail freight and credit growth to discern the truth.

Chinese analysts have put together a "Li Keqiang Index" using these three sets of data. It shows that China’s annual growth rate has collapsed to less than 2pc, below the worst levels after the Lehman crisis.

"The trouble is that China's data are a black box. All we know is that whole sectors of the economy that were until recently big drivers of growth have ground to a halt, so I don't see where new growth will come from," said Prof Chovanec.

Xianfang Ren, from IHS Global Insight, said China’s factory gate prices have already been in deflation for the past 15 months. This has spread wider than during the 2008-2009 crisis, reaching 20 sectors of the economy. “Industrial deflation is poisonous, as it hurts business profitability, damages balance sheets and thus stunts expansion,” she said

Lars Christensen, from Danske Bank, said Japan’s experience at the onset of its Lost Decade in the 1990s offers a salutary warning for China. The GDP deflator began to slide long before headline inflation and proved to be a much more reliable indicator of trouble to come, though the Bank of Japan did not realize it at the time.

The risk is that China could continue to focus on the wrong indicator, tightening monetary and credit too hard, and tipping the economy into deflation trap. The Japanese are still there 15 years later.'

GDP deflator

'Like the Consumer Price Index (CPI), the GDP deflator is a measure of price inflation/deflation with respect to a specific base year; the GDP deflator of the base year itself is equal to 100. Unlike the CPI, the GDP deflator is not based on a fixed basket of goods and services; the "basket" for the GDP deflator is allowed to change from year to year with people's consumption and investment patterns.

The nominal GDP of a given year is computed using that year's prices, while the real GDP of that year is computed using the base year's prices.

The formula implies that dividing the nominal GDP by the GDP deflator and multiplying it by 100 will give the real GDP, hence "deflating" the nominal GDP into a real measure.'

Edited by Sancho Panza

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Not like anything like this can be applied to the west, particularly the US and UK.

Japan physically lost their manufacturing work during the lost decades, little sign of China doing that, in fact moving up the chain and becoming more efficient and better industrialised they could reduce energy usage and still be outputting more so the raw stats alone do not tell the whole story.

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Decoupling anyone? :lol:

It seems only yesterday that an endless succession of talking heads on Bloomberg were touting China as some kind miracle that could somehow float free of the globalised economy- never mind that this view completely contradicted the very globalist propaganda these same talking heads had been using for decades to explain and justify the mass offshoring of jobs to China.

I think the plan was to let the populations of the west drown in their debts and sink into poverty while the banksters set up shop in the BRICS where a new population of unencumbered rubes were just waiting to be milked.

That plan way not be going as well as might have been hoped. :D

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That evil deflation that works so well in the tech market, and of course for ordinary workers, wage deflation is acceptable in the "race to the bottom." Strangely deflation is ruinous of course to banks and land speculators! Fancy that.

Edited by aSecureTenant

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Decoupling anyone? :lol:

It seems only yesterday that an endless succession of talking heads on Bloomberg were touting China as some kind miracle that could somehow float free of the globalised economy- never mind that this view completely contradicted the very globalist propaganda these same talking heads had been using for decades to explain and justify the mass offshoring of jobs to China.

I think the plan was to let the populations of the west drown in their debts and sink into poverty while the banksters set up shop in the BRICS where a new population of unencumbered rubes were just waiting to be milked.

That plan way not be going as well as might have been hoped. :D

China is a totalitarian state. Problem is they can't exercise controls over globalisation. China has had many opportunities to boost consumption internally, but has not done so. Now it has effectively outsourced its internal stability controls to the row.

Maybe if what has been going on for the past 20 years had gone on for another 40 years China might be in a strong position. But it's economy is too dependent now on the west and there has not been enough internal market development to reduce that dependence.

The bottom line therefore is that the west/row controls Chinas economy and it is demand in the west that will make it sink or swim.

With reduced energy costs in the States and a process of onshoring going on China is going to struggle.

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That evil deflation that works so well in the tech market, and of course for ordinary workers, wage deflation is acceptable in the "race to the bottom." Strangely deflation is ruinous of course to banks and land speculators! Fancy that.

+1 The crisis will only end when deflation is no longer seen as an evil in itself.

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It may prove more of a threat to the world economy than the tapering of bond purchases by the US Federal Reserve, he said.

The only threats I get are how houses in nice areas can't crash, that savers are the devil, and encouragement to use Help-To-Buy to take on masses of debt to buy a house.

Something is going on.

http://www.reuters.com/article/2013/07/21/us-china-analysts-idUSBRE96K0CM20130721

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The only threats I get are how houses in nice areas can't crash, that savers are the devil, and encouragement to use Help-To-Buy to take on masses of debt to buy a house.

Something is going on.

http://www.reuters.c...E96K0CM20130721

Benny is having to stop QE because of what it's doing to China. To keep the yuan competitive with the dollar the Chinese have had to run an enormous property bubble of their own. This now appears to have burst decisively. Mervo the Clown's decision to open a 200 billion yuan swap line with the PBoC last month was the key tell for me - in effect the BoE is now bailing out China. Par for the course you say, but potentially good news for us as the world's central banks could now be working at cross-purposes. The Fed and PBoC drawing down liquidity while the wretched BoJ and BoE try desperately to keep the bubble inflated.

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China is a totalitarian state.

The funny thing is this is exactly why so many 'free market' western investors were so bullish on China- their view being that the Chinese elite being unencumbered by such trivia as Democracy and Rule of Law would find it easy to impose any adjustments required to keep the economy on track.

What they failed to grasp is that the Chinese elite are as self serving and corrupt as the western elite- and similar entrenched interests there would impede reforms just as they have in the west.

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The funny thing is this is exactly why so many 'free market' western investors were so bullish on China- their view being that the Chinese elite being unencumbered by such trivia as Democracy and Rule of Law would find it easy to impose any adjustments required to keep the economy on track.

What they failed to grasp is that the Chinese elite are as self serving and corrupt as the western elite- and similar entrenched interests there would impede reforms just as they have in the west.

There's that, and the fact that China is no North Korea. It's much much closer to the west than that, and the range of options/balances the leaders have to keep the country stabilised is much more limited.

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In my estimation 90% of Chinese made stuff is utter crap.

People like me who want things to last do their best to avoid their products.

Yep. Note they dont do a "reverse hedonics" adjustment regarding quality in inflation stats. Might fall apart after a week, but who cares, its got more features than last years version.

When the Japs were where the Chinese are today, you always got quality. Chinese stuff is truly abysmal quality 99% of the time.

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Yep. Note they dont do a "reverse hedonics" adjustment regarding quality in inflation stats. Might fall apart after a week, but who cares, its got more features than last years version.

When the Japs were where the Chinese are today, you always got quality. Chinese stuff is truly abysmal quality 99% of the time.

its was never like that. made in the USA use to be the reputation poor stuff, then it was japan, after japan, it was made in taiwan, and then made in south korea.

however they all developed their industries over time. no ones going to start making high quality products before youve learned how to even make a product. china is slowly moving upwards into more machinery based manufacturing, after a while it will be the case of made in india or vietnam as the cheap stuff.

you cant run before you can walk.

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its was never like that. made in the USA use to be the reputation poor stuff, then it was japan, after japan, it was made in taiwan, and then made in south korea.

however they all developed their industries over time. no ones going to start making high quality products before youve learned how to even make a product. china is slowly moving upwards into more machinery based manufacturing, after a while it will be the case of made in india or vietnam as the cheap stuff.

you cant run before you can walk.

Levi 501`s being an exception? The one`s I used to buy in the 80`s lasted literally years, now the a*rse is out of them within 12-18 months, and they are made in all the cheap labour hotspots as far as I know.

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Levi 501`s being an exception? The one`s I used to buy in the 80`s lasted literally years, now the a*rse is out of them within 12-18 months, and they are made in all the cheap labour hotspots as far as I know.

USA = 1910/1920's, basically knock offs of British stuff.

Japanese was 50's/60's

Taiwan was 70's

South Korea 80's

China end of 90's 2000's

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There's that, and the fact that China is no North Korea. It's much much closer to the west than that, and the range of options/balances the leaders have to keep the country stabilised is much more limited.

I recently watched a debate called 'does China Do Capitalism better than America- well worth a look on you tube if you have the time.

My favourite part- Peter Schiff waxing lyrical about how the Chinese were superior managers because their leaders were former engineers- to which the only actual Chinese person on the panel replies 'Yes- but they are also Billionaires" :lol:

It's fascinating to watch a bunch of self declared free market libertarians practically drooling at the idea of a state so powerful that it could give them anything they wanted- they were up for it big time- they really liked the idea of a state based capitalism that could act without the constraint of needing to preserve at least the illusion of democratic legitimacy.

Obviously in their excitement they had forgotten Jefferson's warning; "A government big enough to give you everything you want, is a government big enough to take away everything that you have."

But I guess it's understandable in a way- they have grown so used to wall street friendly governments that they probably cannot now imagine what a state run for the benefit of the whole nation would actually look like.

Their wet dream is a totalitarian state in which speculators rights are enshrined at the apex of the system- the last thing they want is a free society- because that way lies the danger that their complete lack of social utility might come to be regarded as a problem- an extremely dangerous line of thought to a rentier class.

Edited by wonderpup

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its was never like that. made in the USA use to be the reputation poor stuff, then it was japan, after japan, it was made in taiwan, and then made in south korea.

however they all developed their industries over time. no ones going to start making high quality products before youve learned how to even make a product. china is slowly moving upwards into more machinery based manufacturing, after a while it will be the case of made in india or vietnam as the cheap stuff.

you cant run before you can walk.

Yep. People used to look down their noses at Japanese stuff. They didn't realise they were moving up the curve. By the time they did, it was too late. I see the same attitudes to China today.

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http://www.bloomberg.com/news/2013-07-23/li-s-government-sees-7-as-growth-bottom-line-chinese-media-say.html

'Premier Li Keqiang’s government sees 7 percent growth as the bottom line for tolerance of an economic slowdown, Chinese news organizations reported, signaling the nation will act to support expansion if needed.'

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I read an interesting article that they expect the smartphone market to deflate. The article mentioned Manufacturers in China who could operate on wafer thin margins who will ramp up production.Ok so the quality will probably be dire but cheap as excess capacity brought into production.

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'Premier Li Keqiang’s government sees 7 percent growth as the bottom line for tolerance of an economic slowdown, Chinese news organizations reported, signaling the nation will act to support expansion if needed.'

Haven't they been 'supporting expansion' to the tune of billions for the last few years? Why do they see this as being a new policy?

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I read an interesting article that they expect the smartphone market to deflate. The article mentioned Manufacturers in China who could operate on wafer thin margins who will ramp up production.Ok so the quality will probably be dire but cheap as excess capacity brought into production.

There are plenty of people out there who are more interested in the best cost rather than the best value. They never seem to learn either.

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I'm not sure that everything made in China is rubbish! They make very nice teapots, and vases! :blink:

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I'm not sure that everything made in China is rubbish! They make very nice teapots, and vases! :blink:

A lot of high quality stuff is made in China. Iphones are made in china for example.

it's the quality system that is imposed and how it is enforced that counts.

I buy one composition critical material that comes from China. It all does. I buy from a western business that imposes strict quality standards on its chinese suppliers and carefully QC's every batch of stuff that comes in via its own test methods.

If I bought the stuff direct from the chinese it would be 1/3 the price and they would try to sell me any old crap they thought they could get away with.

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Benny is having to stop QE because of what it's doing to China. To keep the yuan competitive with the dollar the Chinese have had to run an enormous property bubble of their own. This now appears to have burst decisively. Mervo the Clown's decision to open a 200 billion yuan swap line with the PBoC last month was the key tell for me - in effect the BoE is now bailing out China. Par for the course you say, but potentially good news for us as the world's central banks could now be working at cross-purposes. The Fed and PBoC drawing down liquidity while the wretched BoJ and BoE try desperately to keep the bubble inflated.

I'm not smart enough to extrapolate the sort of conclusions you've reached there. Got lost in a world of stimulus scheming which has rewarded debtors and older home-owners, whilst bringing ruin on non-owning savers who had waiting for housing value.

Tue Jul 23, 2013 9:52pm EDT (Reuters) - Activity in China's vast manufacturing sector slowed to an 11-month low in July as new orders faltered and the job market darkened, a preliminary survey showed on Wednesday, suggesting the world's second-largest economy is still losing momentum.

The flash HSBC/Markit Purchasing Managers' Index fell to 47.7 this month from June's final reading of 48.2, marking a third straight month below the watershed 50 line which demarcates expansion of activities from contraction.

http://www.reuters.com/article/2013/07/24/us-china-economy-flashpmi-idUSBRE96N03M20130724

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  • 243 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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