China Bankrupt?

[Franker65]

Even if things aren't going so well now, its mainly due to the fall in demand in other countries for Chinese goods. Europe and the USA are struggling, and of course this will hit China - I wouldn't say they're bankrupt. China is even forecast to have the worlds leading GDP by 2030, according to statistics. China has developed, and will be a huge world player for decades to come.

[ace16807]

Even if things aren't going so well now, its mainly due to the fall in demand in other countries for Chinese goods. Europe and the USA are struggling, and of course this will hit China - I wouldn't say they're bankrupt. China is even forecast to have the worlds leading GDP by 2030, according to statistics. China has developed, and will be a huge world player for decades to come.

Except Chinese exports to the EU and US have increased?

Before you say "well the euro crisis and US economic crisis....", I know. The point being, you're grossly oversimplifying and misinterpreting the source of PRC's economic problems. There are many internal issues the PRC faces economically and they recognize that.

[DOR]

Except Chinese exports to the EU and US have increased?

China’s exports to Asia (its largest market by far) fell 10.9% in the first half, those to the EU by 0.8%. Sales to the US (+13.7%) and Japan (+35%) bucked the trend.

[ace16807]

China’s exports to Asia (its largest market by far) fell 10.9% in the first half, those to the EU by 0.8%. Sales to the US (+13.7%) and Japan (+35%) bucked the trend.

Source? I was under the impression that exports for the 2012Q1 to the EU had increased substantially, exceeding expectations.

[cyppok]

Source? I was under the impression that exports for the 2012Q1 to the EU had increased substantially, exceeding expectations.

I get this odd feeling that what we are now seeing is pre-determined strategy by industries based in China. Basically no matter whom wins Romney or Obama in the next election the tariff walls will go up. If prices are expected to be boosted it makes sense to build up inventory now at lower cost of goods, pay for space and recoup the investment after trade is disrupted. This can be done for two reasons.

First reason I just mentioned tariff wars and trade barriers.
Second reason is transition from one country to another while production capacity is abandoned and rebuild elsewhere. Think of someone moving from China to Indonesia without prior movement of capital equipment ergo "unready" they just use their factories to build up inventory to last them the transfer from one country to another. Someone whom makes nails or non-perishables etc...

The problem with all these currency inbalances and aggregate expansions of debt that is "sterilized" by governments without passing through purchasing power is that it robs and degrades that purchasing power from where it should go, labor and capital in the country which is sterilizing. Sooner or later their ability to do this suffers either from discounting by the side that is trading ergo I impute your real benefits and simply cut your margins to nil since you cannot negotiate on production only on price which you manipulate (this happened already most producers are at best break even unless they are integrated into the retail in the states which is internally controlled). Second thing that happens is that internally the pressure and price controls do not work because real price margins have to come from somewhere and if it is not coming from your customers your own labor and capital has to carry the rate or return by either degrading conditions for either or both. Which is happening. So you get a neat recepie where capital is slowly drained and destroyed by malpricing of your investment into producing something that carries no real return.

[DOR]

Source? I was under the impression that exports for the 2012Q1 to the EU had increased substantially, exceeding expectations.

ace16807,

Exports from China to the EU were US$76.59 billion in Jan-Mar 2011, and $75.19 bn in Jan-Mar 2012. The second quarter was flat as well.

Source is the National Bureau of Statistics: ÖĐ»ŞČËĂńą˛şÍąúąúĽŇÍłĽĆľÖ

= = = = =

cyppok,

Industries based in China don’t have pre-determined strategies dependent on the outcome of US presidential elections.

Since US politicians like to talk tough on trade, but rarely do anything at all, there is only a minimal chance that import duties will be raised next year. If this were not the case, the duties would be shoved up right now, so as to “benefit” Mr Obama’s campaign. That isn’t happening, in part because it is a really stupid idea to drive up the cost of living just before voters decide who they like best.

Speculating on policy-based price hikes isn’t a very sound corporate strategy, particularly when the strength of overall demand is questionable. Too easy to get stuck with unsold inventories.

Similarly, shifting from one country to another is both easy, and difficult. The easy part is simply sending an order to another factory (very few companies actually own their own factories, and even fewer have all their eggs in one basket). The hard part is guaranteeing the same high quality, low price and on-time delivery. That is where China’s true competitive advantage is found.

[cyppok]

ace16807,

Exports from China to the EU were US$76.59 billion in Jan-Mar 2011, and $75.19 bn in Jan-Mar 2012. The second quarter was flat as well.

Source is the National Bureau of Statistics: ÖĐ»ŞČËĂńą˛şÍąúąúĽŇÍłĽĆľÖ

= = = = =

cyppok,

Industries based in China don’t have pre-determined strategies dependent on the outcome of US presidential elections.

Since US politicians like to talk tough on trade, but rarely do anything at all, there is only a minimal chance that import duties will be raised next year. If this were not the case, the duties would be shoved up right now, so as to “benefit” Mr Obama’s campaign. That isn’t happening, in part because it is a really stupid idea to drive up the cost of living just before voters decide who they like best.

Speculating on policy-based price hikes isn’t a very sound corporate strategy, particularly when the strength of overall demand is questionable. Too easy to get stuck with unsold inventories.

Similarly, shifting from one country to another is both easy, and difficult. The easy part is simply sending an order to another factory (very few companies actually own their own factories, and even fewer have all their eggs in one basket). The hard part is guaranteeing the same high quality, low price and on-time delivery. That is where China’s true competitive advantage is found.

Every industry that is large enough have strategies on outcomes of elections if it effects them. Defense industry comes to mind and steel and other major producers whom shift their production based on how the wind blows. You don't think if steel dumping cases were brought it would impact steel prices in China that export globally?

Most goods already lack quality they are mass produced mass consumed low quality goods. Some like plastic hangers can't really be made too badly same goes for shirts and plastic tie wraps and whatnot.

I agree with you on policy based price hikes with one caveat. If you can see the supply market dynamics and know that you can sell out your inventory more or less within a specified amount of time that it wouldn't burden you. Think Walmart, Cosco, and other mass merchants that in aggregate know their base demand will not fluctuate more than +-10% and high turnover inventory goods and seasonality. Also those people have access we do not have. Now imagine someone that has the retail channel control like P&G or similar firm that is wide enough and has the same information.

China's competitive advantage does not exist. Low labor and low standards of environmental controls is about it. This lasts until the labor cannot survive due to commodity pressures you create by your own demand and environmental damage leads to unbearable semi-diseased conditions. China by pushing high volume low quality low skill high environmental industries and restricting capital formation by simply stripping some of the benefits through sterilization sows the seeds of its own obsolescence in every industry. If I can produce 3 cent tie wraps with Chinese labor until technology goes to automatic robots that can produce them at 2cents while your ability to invest in that is hampered by restricting capital formations it doesn't matter that you produce them now the shift will occur where the 2 cent tech can be applied not necessarily China. It is also unlikely since credit limit extraction for those factories will not allow Chinese companies to build new things since their profit does not repay old loans which with their profit margins are simply cannot be paid back and new capital improvements taken up. All of this is hidden by the fact that currency flows on the back of which internal credit machinations are based on do not decline sooner or later the music stops it doesn't have to stop completely. All that has to happen is a two to three year decline of growth from 8% to 2-3% and insolvency becomes bankruptcy defacto for most operators. You could manipulate currency flows internally by robbing everyone through inflation and whatnot the problem is when you force everyone to pay real world prices with unreal world wages nobody can survive and the economy simply grind to a halt.

P.S. I am never sure about anything

[DOR]

cyppok,

“Every industry that is large enough have strategies on outcomes of elections if it effects them.”

Companies have strategies (at least, the good ones). Sometimes, several will band together to lobby government on industry-wide issues, but industrial strategies are for planned economies, and even there the results are mixed, at best. In the US (and elsewhere), there are anti-trust / competition laws against this sort of industrial strategy.

At the low end of the market (e.g., plastic coat hangers), price is key. For China, most of that sector vanished as costs increased and better opportunities arose. China’s comparative advantage is in providing a better price – quality ratio than its competitors, combined with the planning predictability that buyers value.

Lowest cost isn’t the focus. Slack environmental standards (the laws are actually pretty good, they just aren’t uniformly or aggressively implemented) are a risk to global companies. Who wants to be the poster boy for a BP-style disaster? Local companies, on the other hand, may skirt the rules to cut costs, but they will have trouble with buyers who want their suppliers to do better. Increasingly, they will also have trouble with the local population.

As for credit, in China it is rationed. Access to bank loans is a strategic advantage; repayment isn’t the problem at the official rates. Where official credit (i.e., normal bank loans at government-set interest rates) isn’t available, companies are willing to pay more, much more. The obvious conclusion is that they think they can repay the loans; or they think they can continue to get more financing to repay the loans; or they think they can simply not repay when the bank comes calling.

While labor and land costs are rising (as are the prices of many raw materials), productivity increases and raising prices charged to buyers provide a margin of security. There isn’t one size fits all.

When it comes to China, the only thing I’m sure about is that the data is crap.

[cyppok]

I think you ignored a lot of what I said.

Price competition means they can't raise prices they are competing against others, themselves, and capital/profit constraints.

Credit has to be paid back if it isn't, capital is destroyed. If it can't be paid back then capital was destroyed when the loan taken out not when it was defaulted upon. Ergo malinvestment occurred and its' outcomes are already in the system.

Data is crap but we do have port data here from shipping etc... You can also figure a bit about energy consumption if it isn't manipulated and you get commercial/industrial/residential segmentation.

The problem is flexibility if the selection of investments is not random but herdmentality than the random good outcomes don't happen. Lets say that someone decided to develop something that expanded internal consumption but instead external oriented connected borrowers got all the money that got invested at negative returns in reality. So capital got destroyed and in the future flexibility is even more constrained. Capital in China is very low, Credit IS NOT Capital it is used like it in China but it is not Capital. Capital is past decisions that resulted in expanded benefits and lead to surplus, credit is borrowed surplus from society LENT for risk. If risks don't prove out then you destroy both credit and society's capital.

Even small industries have strategies, even firms with 1 person have strategies those that are lucky and effective grow others drop dead.
Say everyone develops skrews for export and you make yours different with some niche specialization that you think will have application. You fill that niche say skrews for electric cables on electric poles for electricity utilities. That niche once extremely specialized may be very defensible by simply pushing specifics through regulators that make yours the only skrews that do the job. You may not even need to push things through regulators if yours are realistically the only ones that fit.

[DOR]

cyppok,

Not ignoring what you said, just disagreeing.

Price competition prevents price increases? Not in today’s world. Over 55% of China’s exports are by foreign-invested companies, which offers the opportunity – not the necessity, but the opportunity – to engage in transfer pricing. That allows companies to book profits in more attractive (lower tax) places, move capital into and out of “closed” economies and so forth. The theory is correct, but the real world can sometimes get in the way.

Credit does not have to be paid back; if that was true, we wouldn’t have a term for non-performing loans, would we? We also wouldn’t have a term for re-financing, rolling credit lines and so forth.

Port data is better quality crap than most other data, but not perfect. I had a grad student come to me a couple of years ago, complaining that Hong Kong exported more wine to China than China imported from the entire world. [read that once again.]
I questioned the wine (rice and / or grape?), the containers (bulk vs. bottles) and in the end concluded the data were wrong.

Energy consumption as a proxy for GDP in China isn’t all that good anymore. It has had its day, and now is suspect for several reasons that I won’t go into here.

An old friend of mine told me last night that there are dozens of 50-story apartment blocks being built in the suburbs of Guangzhou. We discussed the market implications, and in the end decided that if a Chinese company could borrow million of Rmb to build an apartment block, it might be able to cut costs enough to divert up to half the money into other investments and thereby make even a money-losing proposition pay off.

We’re not in Kansas anymore.

[cyppok]

cyppok,

Not ignoring what you said, just disagreeing.

Price competition prevents price increases? Not in today’s world. Over 55% of China’s exports are by foreign-invested companies, which offers the opportunity – not the necessity, but the opportunity – to engage in transfer pricing. That allows companies to book profits in more attractive (lower tax) places, move capital into and out of “closed” economies and so forth. The theory is correct, but the real world can sometimes get in the way.

Credit does not have to be paid back; if that was true, we wouldn’t have a term for non-performing loans, would we? We also wouldn’t have a term for re-financing, rolling credit lines and so forth.

Port data is better quality crap than most other data, but not perfect. I had a grad student come to me a couple of years ago, complaining that Hong Kong exported more wine to China than China imported from the entire world. [read that once again.]
I questioned the wine (rice and / or grape?), the containers (bulk vs. bottles) and in the end concluded the data were wrong.

Energy consumption as a proxy for GDP in China isn’t all that good anymore. It has had its day, and now is suspect for several reasons that I won’t go into here.

An old friend of mine told me last night that there are dozens of 50-story apartment blocks being built in the suburbs of Guangzhou. We discussed the market implications, and in the end decided that if a Chinese company could borrow million of Rmb to build an apartment block, it might be able to cut costs enough to divert up to half the money into other investments and thereby make even a money-losing proposition pay off.

We’re not in Kansas anymore.

Technology has price competition other industries have far less of it due to barriers, official and unofficial ones.

Energy is always a good proxy for GDP electricity, etc...

All those 50-story apartment blocks are worthless until they operate with people in them in a long term sustainable way. Sooner or later repairs are needed and it has to be utilized by those whom actually can and should use them.

Re-financing and rolling of credits implies sustainability of payback upon project completion or future profit. Non-performing are discharges ergo capital was destroyed and reduced, bank capital, or aggregate national capital vis a vis lower debt backed money in the system in relation to products/services outstanding.
Credit always has to be paid back, by someone. It might not be the bank, the person/business whom took it out, but the system in aggregate will pay it back either it has to be inflated away by money printing which robs everyone a little bit to make up the difference or not in which case aggregate money decreases and available capital is lower. In reality the pretense is that you could leverage bank capital to infinity and roll credit forever. It is not true, everything ends when aggregate cash flows fail to sustain aggregate debt requirements.

Wondering how they declare more wine then actually gets shipped, perhaps they dilute it with water and register it that way?

[DOR]

Energy is not always a good proxy for GDP. In the case of Hong Kong, it has zero relevance (two-thirds of our GDP is foreign trade); similar for Switzerland, New Zealand, Hawai’i or a few dozen other economies. In the case of China, the numbers are being manipulated, sometimes intentionally.

Some of those 50-story apartment buildings are financing vehicles. Certainly not worthless, but perhaps not to be used in the manner that their external facades suggest. Sooner or later, they become uninhabitable and are written off as bad debts, ensuring that the loans are not repaid.

Refinancing and rolling credit may very well imply a bank’s unwillingness to write down a debt. NPLs may well remain on the books because it is better for the balance sheet to maintain the fiction that the loans are being serviced than to admit to fraud, incompetence or worse.

“The system in aggregate” that you are sure will eventually pay back all debt is a Western concept. When there’s too much money sloshing around in a rapidly growing economy, not paying debts can be a blessing in disguise. Remember the notion of “growing your way” out of trouble?

I’m not sure what “technology has price competition” means in this context.

[cyppok]

“The system in aggregate” that you are sure will eventually pay back all debt is a Western concept. When there’s too much money sloshing around in a rapidly growing economy, not paying debts can be a blessing in disguise. Remember the notion of “growing your way” out of trouble?

I’m not sure what “technology has price competition” means in this context.

Technology has price competition means that in general the faster things are on the technology curve the faster prices come down for goods because someone always makes the tech faster,cheaper,better. Think CD drives and memory chips. Price always comes down usually unless severely manipulated.

Unfortunately for you the top paragraph is not a western concept.
Not paying debts is never a blessing in disguise it means someone without capital took someone elses capital and misallocated it in a way that was not productive in bringing more to society than was spent on that thing. Imagine someone building a road for 2 billion dollars with the road bringing in 1 billion dollars in benefit throughout its life time. It can never be profitable from any angle and if it is repeated over and over eventually roads that provide more than 2 billion of benefit won't be built just like those that do not.

Banks should loose money when they lend poorly the problem is they are using public funds (from other people) if those are insured we all experience inflation when useless projects get written off because we all pay for the 1 billion in benefits of a 2 billion road that has not fruitioned to society. Sure privately someone siphoned off money and benefited but in the whole it shouldn't have been done and everyone would be better off except that party.

Growing your way out of trouble means I am making 500k now and I owe 1000k in interest but in two years I ll make 2000k and interest will still be 1000k. Growth is not the issue.

Malinvestment is never a good thing what happens with them is banks and government try to constantly roll them over to prevent the unwinding(Minsky Moment) making it worse and worse until that unwinding can no longer be prevented. The problem with not unwinding asset prices is that every other non-ponzi entrepreneur has no reason to invest(to grow that business) because they see the Unsustainability of such an action. They are gradually pushed to either leave the market and wait on sidelines or operate at break-even until they can investment into margin improvements without detriment to their overall capital impairment.

[DOR]

Still thinking China works like the West, I see . . .

Start with a state-run bank, operating not on a profit-and-loss basis (although more and more do), but by following orders to lend where the cadres say and at rates set by a PBoC committee.

Next, consider the borrower might be a state-owned enterprise (SOE), let’s say one building roads. While it might be nice to make a profit, one of Road Builder SOE bosses’ top concerns is maintaining employment. Another is connecting rural and urban areas, so as to increase prosperity in poorer areas. These are not solely economic goals, but political and social ones too.

Since there isn’t a lot of reward for innovation in Road Builder SOEs, and cost-cutting is likely to get you fired (laying off workers is against policy objectives), the odds are that Road Builder SOE is losing money. This isn’t always true, but the example is one that has extensive real-world support.

So, State Bank lends to Road Builder SOE, which maintains employment. Road Builder SOE can’t repay the loan in full and on time, but State Bank is told to continue lending, and find a way to avoid putting the bad loans into default, thereby increasing State Bank’s NPLs.

Road Building SOE puts Rmb2 billion into a road that has very long term benefits, but can’t realistically be considered a profitable endeavor under normal accounting rules. One might consider the real cost of the road to be the difference between what State Bank might have earned on a “good” Rmb2 billion loan, and whatever portion of the loan was repaid by Road Builder SOE. So, if Road Builder SOE manages to repay Rmb1 billion, the cost is Rmb1 billion (not repaid), plus the potential interest on Rmb2 billion.

In the end, State Bank's boss gets a promotion, Road Builder SOE's boss gets a promotion and the rural community gets connected to an urban one. Political goals met? Yes. Social goals met? Yes. Economic goals met? Only partly.

[cyppok]

Communism only lasts until all surplus capital is destroyed by malinvestment. Ergo all the factory equipment cannot be replaced in time to be competitive technologically and/or at pace with decay rates (depreciation). This is true everywhere. If due to loans given to insolvent businesses equipment costs are so high that rates of return by using that equipment is negative capital is being destroyed, no matter if you are in China, Bangladesh, or USA. In the end this lasts until nothing functions and the ability to use past surplus to sustain oneself collapses. In China's case this is far faster than you imagine, due to commodity pass through being the tie that binds it to reality.

When everyone is building roads to nowhere you run out of cement, asphalt, and the equipment that makes it you build enough roads to nowhere and you cannot replace that equipment at which point reality visits you to collapse every asset to make it profitable again where it should be done. (Replace roads with anything you wish, cars, buildings, food equipment manufacturing etc...)