It’s unprecedented. With almost 50 million empty houses and with big inventories of major commodities, China’s lenders, builders, and manufacturers are still going for more. As one small example, the world, led by China, is still on track to produce as much as 40 percent more iron and steel than it needs this year.
No, it’s not Tyler Cowen. It’s Richard Vague (what a name to live down!).
And yet the price of iron ore is up 30%+ in the past month or so.
I think these China collapsing stories are over-stating the reality and I suspect there are enough citizens that remember poorer past to survive the economic slowdown. However, long term China is Fast-Forwarding straight into the Japanese economy of the 25 years. (And Japan did not collapse either with their huge bubbles.) I do have some fears:
1) One China is building more military and sooner or later the government will use. (Polls show over 50% of Chinese will go to war with Japan so the people seem ready.) With the commodity slowdown, I suspect Chinese investments in Africa and South America will go sour and Chinese government will have to decide whether to deal with credit writedowns (which won’t be popular) or use military/police action. (And I believe Valenzuela is near renegotiating their bad loans from China any day now.)
2) All developed nations are following a growing economy that leads to over-investment bubble in the economy. The bubble bursts and the nations come out of it by “Turning Japanese.”
3) Government debt is getting worse all over but the debt is worse because families are have fewer children. It is because families are making the rational choice they can’t afford to raise more children.
So, what I’ll call the Austrian story is that normally when those projects become unprofitable we would expect a crash. My truth is that the problem with predicting that for China is that the profitability bar is so very low. They have kept it low for decades. We aren’t comparing a bubble to a Laissez-Faire trend operating at an efficiency margin. We are comparing many bubbles within lots of catch-up growth potential to decades of repression when they were held far below trend. There is even more ruin in such a nation than usual. There may be lots of recessions and they may amount to rounding errors. When you are growing somewhere between 4 and 10% per year, what is a couple of negative quarters between friends?
“China is exacerbating this oversupply, ensuring that the eventual reckoning will be all the more difficult. The reason is that its primary concern has long been unemployment, and continuing to produce keeps people employed.” <<
and when China understands it can hugely increase employment by having a bigger military, and convert from unsold houses into jet planes and submarines, their military will grow faster.
The private debt number is underreported, and very important.
If China is 20 years behind Thailand and Korea and the other Asian Tigers, then China is coming up on its 1997 Asian currency crisis.
But China is so much larger:
New York Stock Exchange – $19.7 trillion
NASDAQ OMX – $7.4 trillion
Shanghai Stock Exchange – $5.9 trillion
Japan Stock Exchange – Tokyo – $5 trillion
Shenzhen Stock Exchange – $4.4 trillion
Hong Kong Stock Exchange – $3.96 trillion
Euronext – $3.5 trillion
OK, name three Chinese multinationals. It’s hard to do. If the Chinese have just $3T in reserves, that seems like hardly enough considering the vast scale of the bubble.