Jump to content
House Price Crash Forum
Guest_FaFa!_*

Just In Case You Are Still A China Bull

Recommended Posts

16gwgti.png

Under specified rebalancing assumptions for China it is possible to calculate arithmetically the annual growth rate for consumption and investment under different GDP growth scenarios. This allows us to decide whether these scenarios are plausible or not.

This allows me to make statements like this: If you think that China’s GDP will grow by 7% a year over the next decade, and if you expect a minimal amount of rebalancing, then you are implicitly predicting that consumption will grow by 10-11% a year for ten years and that investment will grow by 4-5.5%. If you believe these two implicit predictions are plausible, then your 7% prediction is also plausible.

I would argue that positive investment growth rates for another ten years are highly likely to result in our reaching debt capacity constraints well before the end of the decade, so I am skeptical about the investment implications of this scenario. By the way some analysts have mischievously pointed to the very poor construction quality in China to argue that investment growth rates have to stay high just in order to account for higher-than-estimated depreciation costs, and that this suggests that China can grow faster than what we might otherwise assume.

This of course is nonsense. The fact that buildings and infrastructure are poorly constructed means that China is worse off, not better off, and the investment projects will ultimately be required to generate sufficient returns to pay off even more debt than originally estimated. Because it is debt capacity constraints that constrain investment, anything that creates debt without creating additional productivity to service the debt cannot possibly be a solution. Higher-than-expected depreciation increases debt relative to debt-servicing capacity.

I would also argue, more importantly, that if annual investment growth drops to 4.5%, and GDP growth to 6%, it will be very difficult, without significant and politically painful transfers from the state sector to the household sector, for consumption to grow at anywhere close to 9.9% a year for ten years. Consumption growth is, after all, positively correlated with investment growth, especially in the internal provinces upon which a lot of useless investment has been lavished.

In order to get Chinese households to increase their consumption by nearly 10% every year, I would argue that household income would have to grow at that rate, which means that wages, interest rates, and the value of the renminbi should in the aggregate increase rapidly to get consumption to rise fast enough, and of course since it is precisely low wage growth, low interest rates, and an undervalued currency that goose GDP growth, reversing them is not consistent with high GDP growth.

Can consumption grow at close to 10% for ten years while household income grows much more slowly? Yes, of course it can, if the household savings rate declines, but as China’s economy slows and as concerns about debt rise, it seems to me a tad optimistic to assume that the household savings rate will decline sharply. Rising income and rising uncertainty both suggest that we should expect higher, not lower, household savings rates, which in turn imply that household income must grow faster, not slower, than household consumption.

http://globaleconomicanalysis.blogspot.jp/2013/08/how-fast-can-china-grow-not-as-fast-as.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

Share this post


Link to post
Share on other sites

So these chinese who are having their wages/jobs cut as factory bosses lower prices to try to maintain exports and are finding it increasingly difficult to live through food, fuel and house price inflation are going to power the economy forwards by increasing their consumer spending and reducing their historical tendency to save (because they have no welfare safety net).

Well, they'd better get a move on.

Share this post


Link to post
Share on other sites

Ooh, want!

+1

The detail is amazing- the skulls, the almost Shell log,o the little band that is reminiscent of hydrocarbon structures......

Finally a product worth buying

Share this post


Link to post
Share on other sites

And there was me thinking that "china bull" was a some sort of derogatory HPC term, like "plastic bear".

china bull in a china shop?

Share this post


Link to post
Share on other sites

I heard an interesting observation on the psychology of gains and losses on the radio this morning- and the way it works is that people are far more motivated to avoid a loss than they are to make a gain- for example;

If we were to toss a coin and if you lose it costs you 10 pounds- how much would the amount on offer to the winner have to be to persuade you to play the game? most people say at least 20 pounds.

What the guy pointed out is that this has implications for anyone trying to introduce social change- because those that are likely to lose by those changes will fight harder to stop them than those who would gain will fight for them. The potential losers will be those with the highest motivation.

China is in this exact position- they need to shift from the investment led export model to the market led internal consumption model- but this will mean that a lot of people will lose out- most of whom are powerful actors- so any attempt to make this change will run into that inertia as the current status quo fights to preserve it's position.

No ruling elite has ever freely chosen to give up it's power and wealth- so it's hard to see how the current Chinese elite will prove to be the exception.

Share this post


Link to post
Share on other sites

I heard an interesting observation on the psychology of gains and losses on the radio this morning- and the way it works is that people are far more motivated to avoid a loss than they are to make a gain- for example;

If we were to toss a coin and if you lose it costs you 10 pounds- how much would the amount on offer to the winner have to be to persuade you to play the game? most people say at least 20 pounds.

What the guy pointed out is that this has implications for anyone trying to introduce social change- because those that are likely to lose by those changes will fight harder to stop them than those who would gain will fight for them. The potential losers will be those with the highest motivation.

I think Machiavelli had that worked out centuries ago

There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.
Edited by stormymonday_2011

Share this post


Link to post
Share on other sites

I think that it was just a few days ago where released data on The Chinese economy was better than expected (I think it was export/output figures), off the back of that copper prices rose a few percent (copper apparently being the Global economy barometer).

Personally I think its only a matter of time before more bad news comes out of China, with factors such as over investment in infastructure, property boom, rising wages (less competitive) aging demographic etc

The only problem is that China is just as good at fiddling its figures as we are. Living in the UK we can all look around and see whats really happening e.g Inflation higher than official stats. In China we can only guess and try and make an informed decision on how things are from what we are told- so the situation might be far better or far worse than what we think.

Share this post


Link to post
Share on other sites

Rebalance? Why should they need to if the US and others reuse to do likewise?

Why? The US got rich out of manufacturing. Only when they turned their back on that themselves and relied on debt to fund consumption did the manufacturing not pay for a decent standard of living.

Chinese exports about a third up from the 2008 peak. Plenty of scope to move up the quality / skill chain too.

Share this post


Link to post
Share on other sites

I'm saving up for a set of 'globalisation plates' by Jarl.

(like the detail - the couple with gas marks on is an allegory for the degradation of the Chnese environment in the pursuit of exports and economic supremacy B))

All of them are beautiful and imaginitive but £45 for a frigging plate? They want to move production somewhere cheaper.

Share this post


Link to post
Share on other sites
Rebalance? Why should they need to if the US and others reuse to do likewise?

Why? The US got rich out of manufacturing. Only when they turned their back on that themselves and relied on debt to fund consumption did the manufacturing not pay for a decent standard of living.

Chinese exports about a third up from the 2008 peak. Plenty of scope to move up the quality / skill chain too.

Their model relied on cheap labor- but the demographics no longer favor this approach- Some Chinese factories are already outsourcing to cheaper places.

But the real problem is malinvestment- their system rewards the creation of infrastructure even if no one uses it or needs it.

Share this post


Link to post
Share on other sites

the rebalancing isnt really a big problem if gdp isnt as strong as before on a social level, because if there is a significant shift towards consumption the winners will be the people.

so far a lot of gdp growth has been in investment in infrastructure - roads, housing, buildings, schools, sewage, electricity, ports, which are big projects.

however to fund a lot of this infrastructure spending the money has come from households and given to the state. infrastructure projects are expensive.

with rebalancing, if more money is going to be left for households to spend via less taxation, or more probably rising wages, then the people will get to spend that money for themselves on things they need - cars, washing machines, clothes and more importantly there will likely be a big growth in services.

so the idea that china needs to grow at 7-8% to achieve social cohesion is slightly misconstrued because if the people are able to spend 6% more year on year on consuming, their quality of life will be improving. they wont care what the gdp number is, or whether the rate of road building is being maintained, as long as their day to day lives are getting better.

in 10-12 years if consumption rises at 6% their personal spending will double.

expansion through infrastructure although good for the economy, is really about creating potential. when people are able to spend more on consumption, its they themselves that will see tangible benefits in their day to day lives.

so to a certain extent its about changing the dynamics towards the people to reap the reward for themselves instead of the social projects that create potential for the general populous.

imagine everyone in a community puts money towards a hospital being built. that adds significantly to gdp (we need x,y and z, well build x, spend y employ z... its specific spending). but once that hospital has been built the only way to sustain the same gdp growth is to build another big investment project.

alternatively if you start to let people spend their own money, gdp might not grow as fast as is does on a big hospital or road project, but the key is they get to use their money to buy things for themselves.

Edited by mfp123

Share this post


Link to post
Share on other sites

I heard an interesting observation on the psychology of gains and losses on the radio this morning- and the way it works is that people are far more motivated to avoid a loss than they are to make a gain- for example;

If we were to toss a coin and if you lose it costs you 10 pounds- how much would the amount on offer to the winner have to be to persuade you to play the game? most people say at least 20 pounds.

What the guy pointed out is that this has implications for anyone trying to introduce social change- because those that are likely to lose by those changes will fight harder to stop them than those who would gain will fight for them. The potential losers will be those with the highest motivation.

Daniel Kahnemann on Desert Island?

Try Thinking, Fast and Slow: he says a lot of his experiments seem to confirm what old wisdom asserted, problem is old wisdom can be twisted to mean anything. In the end he comes down in favour of state intervention because people constantly misapprehend their standing in the world and are open to abuse.

Share this post


Link to post
Share on other sites
however to fund a lot of this infrastructure spending the money has come from households and given to the state. infrastructure projects are expensive.

Expensive for some= profitable for others. So if resources are shifted away from infrastructure there will be losers- most of whom are well placed to resist this change.

Share this post


Link to post
Share on other sites

Expensive for some= profitable for others. So if resources are shifted away from infrastructure there will be losers- most of whom are well placed to resist this change.

its already happening though. interest rates have risen several times to cool the market. lending has been tightened so investment is being reduced.

Share this post


Link to post
Share on other sites
its already happening though. interest rates have risen several times to cool the market. lending has been tightened so investment is being reduced.

That's true- but will it continue when the losses for the VI's start to hit home? Or will they join the money printing party?

Share this post


Link to post
Share on other sites

At least they have plenty of uncontaminated farmland to fall back on to feed those billions of people, and not covered everywhere with ghost cities or anything..

Oh

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   206 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.