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Peston Article On Impending Crash In China

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Thus, buy China

'China's debts as a share of GDP have been rising at a very rapid rate of around 15% of GDP, or national output, annually and have increased since 2008 from around 125% of GDP to 200%.'

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And, of course, the point of my visit to Wuhan was to tell a broader story. Over the past few years, China has built a new skyscraper every five days, more than 30 airports, metros in 25 cities, the three longest bridges in the world, more than 6,000 miles of high speed railway lines, 26,000 miles of motorway, and both commercial and residential property developments on a mind-boggling scale.

It sounds as if spending billions upon billions on infrastructure isn't the answer then.

Well, the Chinese government has announced economic reforms, which - in theory - would over a period of years rebalance the economy away from debt-fuelled investment towards consumption by Chinese people.

and that's a really well proven success story - just look at the likes of the UK :rolleyes:

At least the UK has the financial sector - oops that's bust too.

Edited by billybong

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It sounds as if spending billions upon billions on infrastructure isn't the answer then.

and that's a really well proven success story - just look at the likes of the UK :rolleyes:

At least the UK has the financial sector - oops that's bust too.

What is needed, and what it's all about, is balance.

Investment to produce the goods and services people want, with enough money going to the masses through their wages to be able to afford to consume these goods and services.

China has far to much investment to the extent they are producing things that their citizens do not want (cities in the middle of nowhere, etc), and incomes are too low in that they cannot afford to consume what is produced that they do want.

We have some of both. We are not producing enough of what the people want, with too much going into bad/poor investment (housing bubble!), and wages are too low for many to be able to consume what they do want, even though our high unemployment/underemployment shows that we could produce enough if we got people working. But ironically these people are not working because there is not enough demand in the economy, because wages are too low to support that consumption.

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'China's debts as a share of GDP have been rising at a very rapid rate of around 15% of GDP, or national output, annually and have increased since 2008 from around 125% of GDP to 200%.'

I didn't say hold forever

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What is needed, and what it's all about, is balance.

Well, quite. One of the problems with centrally planned economies is that the PTB really don't have the time or the ability to micro-manage, so they go for the low-hanging fruit. What's the biggest revenue-generator? X. Okay, let's concentrate our economy on X.

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Well, quite. One of the problems with centrally planned economies is that the PTB really don't have the time or the ability to micro-manage, so they go for the low-hanging fruit. What's the biggest revenue-generator? X. Okay, let's concentrate our economy on X.

Corrected fro accuracy:

Well, quite. One of the problems with centrally planned economies is that the PTB.

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Well, quite. One of the problems with centrally planned economies is that the PTB really don't have the time or the ability to micro-manage, so they go for the low-hanging fruit. What's the biggest revenue-generator? X. Okay, let's concentrate our economy on X.

Obviously posters will say money needs to be invested...what they get wrong is that it isnt money that needs to be invested...money is easy, what is needed is wealth to back up the money, for the conversion of wealth to money means the WEALTH is being invested, rather than numbers on a screen...Building 500 tower blocks to house peasants that have no wealth whatsoever in return for their nice new flat, means the original wealth now borrowed against to build, is never going to be repaid. The bank will want its money back, wont get it so possesses the wealth, which will be inadequate, the peasants evicted, or the whole lot bailed with money nobody has.

Banking is the true evil in this world.

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Obviously posters will say money needs to be invested...what they get wrong is that it isnt money that needs to be invested...money is easy, what is needed is wealth to back up the money, for the conversion of wealth to money means the WEALTH is being invested, rather than numbers on a screen...Building 500 tower blocks to house peasants that have no wealth whatsoever in return for their nice new flat, means the original wealth now borrowed against to build, is never going to be repaid. The bank will want its money back, wont get it so possesses the wealth, which will be inadequate, the peasants evicted, or the whole lot bailed with money nobody has.

Banking is the true evil in this world.

I'd say excessive and poorly-regulated banking is the true evil. I'm agnostic when it comes to banking as a generic activity.

That aside, I'm not sure you're entirely right about money vs. wealth. I get paid - I can either choose to buy something (which may or may not be an asset) or invest. I'm not quite sure what 'wealth' that money is tied to. It was my share of some wealth that was generated creating an asset, but it's no longer backed by that asset.

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I'd say excessive and poorly-regulated banking is the true evil. I'm agnostic when it comes to banking as a generic activity.

That aside, I'm not sure you're entirely right about money vs. wealth. I get paid - I can either choose to buy something (which may or may not be an asset) or invest. I'm not quite sure what 'wealth' that money is tied to. It was my share of some wealth that was generated creating an asset, but it's no longer backed by that asset.

You get paid with FIAT....ALL FIAT is originated as a debt, secured on some wealth...thats the whole idea of money, it means in general one doesnt see the House, factory or car the loan that generated the numbers.

QE short circuits all this as there is no wealth to cover it...it is simply printed and buys a financial asset....so we have £200bn or whatever they QEd in circulation...some of that may well have been in your pay packet, but it is impossible to tell due to the fungible property of money...ie, every £ is the same, whether printed or properly borrowed to convert an asset into cash.

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You get paid with FIAT....ALL FIAT is originated as a debt, secured on some wealth...thats the whole idea of money, it means in general one doesnt see the House, factory or car the loan that generated the numbers.

QE short circuits all this as there is no wealth to cover it...it is simply printed and buys a financial asset....so we have £200bn or whatever they QEd in circulation...some of that may well have been in your pay packet, but it is impossible to tell due to the fungible property of money...ie, every £ is the same, whether printed or properly borrowed to convert an asset into cash.

Yes, I get that (I'm not really disagreeing with you) - I'm just wondering if that's the most useful model. HPI indicates that there is some unfortunate feedback that can distort the relationship even without QE - although I suppose that the subsequent debasement of money reflects more on the quality of the 'wealth' rather than the direct approach to debasement favoured by QE...

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Yes, I get that (I'm not really disagreeing with you) - I'm just wondering if that's the most useful model. HPI indicates that there is some unfortunate feedback that can distort the relationship even without QE - although I suppose that the subsequent debasement of money reflects more on the quality of the 'wealth' rather than the direct approach to debasement favoured by QE...

I agree the debasement in the housing market has taken place...99% of people cant now buy a house...they MUST get a loan to do so...I refer to this as the financialisation of the market, ie, prices pushed up by the fact that banks will lend readily for the purchase of the asset...

The same has happened with cars, Pet insurance and in the US...the Medical System....anything where the money is made on lending, the incentive is to lend more and more....of course, there comes a time when borrowers are tapped out no matter how much they lower rates, increase terms and gift aid free money...

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I agree the debasement in the housing market has taken place...

But doesn't this debasement via HPI spread to the wider economy? Even if the mortgagee goes bust and/or house prices crash, the money is now with the original seller.

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War-on-Coal-coal-consumption.png

Yeah, China has taken a collective vow to prove the global warming skeptics wrong.

Fun bit will be when they introduce flue gas desulphurisation and the cooling effect from aerosols goes away..

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But doesn't this debasement via HPI spread to the wider economy? Even if the mortgagee goes bust and/or house prices crash, the money is now with the original seller.

The money has long gone as you say.

What remains are the book balances of outstanding mortgage and interest...balances the bank hoped to get back, and has probably secured another loan or fifty on.

This puts the capital position of the bank in a worse place and unable to leverage so much...or they just lie about it all...

The upshot is that the wealth they valued at x, is now worth only x-y.....y being losses incurred v expectations...

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Regarding China in general..

My impression is that this huge volume of debt is denominated in Renminbi. So what is to stop the Chinese government simply writing loans off en-masse, and printing what it takes to recapitalize the banks?

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Regarding China in general..

My impression is that this huge volume of debt is denominated in Renminbi. So what is to stop the Chinese government simply writing loans off en-masse, and printing what it takes to recapitalize the banks?

Anyone had the "Government information" phone call yet?, Due to "the rising debt" you can "legally write off up to 70% of your debt" if it is over 5k. Keep getting them at work, but this is the first time it has said "Government information". Global write offs/bail in`s coming?

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Anyone had the "Government information" phone call yet?, Due to "the rising debt" you can "legally write off up to 70% of your debt" if it is over 5k. Keep getting them at work, but this is the first time it has said "Government information". Global write offs/bail in`s coming?

Is't that just another take on IVA-pushing (for a fee, I suspect)?

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Probably, I never listen to them because I don`t have any debt, but if everyone started writing off big debts would that help the economy?

Dunno about the economy, but it would be murder on the blood pressure of the average member of these forums...

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Probably, I never listen to them because I don`t have any debt, but if everyone started writing off big debts would that help the economy?

The PsTB think it helped lots in Cyprus, and the EU think its going to help lots throughout Europe...the debts being what the Banks owe YOU though.

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Regarding China in general..

My impression is that this huge volume of debt is denominated in Renminbi. So what is to stop the Chinese government simply writing loans off en-masse, and printing what it takes to recapitalize the banks?

Yes it could. Though this is the same everywhere, GB, China, Japan. A lot of the debt is owned by the country itself.

There is little overall difference in my mind of taxing people, then taking those taxes and spending it on infrastructure, or getting private companies to build infrastructure, then bailing them out with printed money.

But the key difference is at the micro level, where there are some huge winners (relatively few) and a much larger number of smaller losers who pay the price through currency devaluation. The smaller losers of course are less able to absorb the retrospective tax that hits them through price inflation than the bigger winners, who could afford probably to lose a lot more of the disposable income. Trouble is that the cash from the big winners has probably been spirited away somewhere by now if they have any sense.

I guess there is also an issue of how much that investment in infrastructure leads to productive improvement and indeed whether or not that productive improvement is capable of being eaten up by the world. My guess is that the Chinese government could spend 50 billion on flat screen telly plants, but I doubt there is enough demand in the world to utilise all that capacity.

People talk a lot about the boosting of internal consumption, but I think there are cultural barriers to that. The whole idea is to try and change China into a consumer society, but peoples habits regarding spending change relatively slowly compared with the rapid pace of change of the Chinese economy. My guess is that the average Chinese consumer will continue to be frugal compared with a western counterpart for many years yet, and disposable income will be saved rather than spent on frivalous stuff.

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