Expect a Surge In Debt
- The fierce debate continues in Beijing between those who are more worried by rising debt and those more worried by slowing growth. Among the former, two weeks ago Lou Jiwei said it was time to study an orderly exit of loose monetary policies…
- while PBoC Vice Governor Liu Guoqiang warned of tighter monetary policy “sooner or later”. Now, among the latter, we have Liu Shangxi saying “As to whether [the PBOC] should exit its monetary stimulus, I think it’s not the right time, not even for a marginal tightening.”
- I don’t know how this eventually plays out, but I suspect that given the surge in debt this year and the recent scare in the bond markets, the former will have the upper hand. That is why I disagree with the expectations of most analysts, who seem to be expecting GDP growth next year between 8% to 9%, or more.
- Morgan Stanley, for example, just came out with a 9% projection, while the IMF has lowered its original 9.2% projection to 8.2%.
I think those numbers are too high. - Since April I’ve expected next year’s GDP growth to be much lower – probably 6-7% – for the same reason that this year I expected it to be higher than others expected (my 2-3%, versus their close to or well below zero).
- As I see it, Beijing implicitly targets the minimum growth rate it can politically accept, with local governments and real estate developers acting as the residual to bridge the gap between whatever the real economy does and the GDP target.
- This year, for example, when the real economy almost certainly contracted, local governments and real estate developers expanded sharply to drive positive growth, and while much of this growth added nothing to the country’s productive capacity, the result was the 25-percentage-point surge in the country’s debt ratio.
- Next year, however, I expect the real economy to rebound sharply, driven by consumption and business investment, but because I don’t think Beijing needs much above 6% GDP growth for political reasons, and because of the sharply worsening debt condition
- This year, I expect this will allow Beijing to cut back on local government investment and real estate development. In fact I wouldn’t be surprised if in 2021 China’s debt-to-GDP ratio were flat or even down one or two percentage points.
- Unfortunately, however, while the debt to GDP ratio may improve slightly next year, it will resurge soon after. Beijing’s goal of doubling GDP by 2035 requires very rapid growth in debt, so much so that after a few years I am pretty sure they’ll quietly abandon that goal.
Pettis was commenting on on the article China must maintain coronavirus stimulus to ensure full economic recovery, says prominent Beijing adviser.
Those points, especially point number 10 of his Tweet Thread are something to consider for those who believe the Renminbi (yaun) is undervalued.
Unnecessary and Artificial Goals
All governments are involved in counterproductive programs to meet unnecessary and artificial goals.
For discussion, please see Hello Fed, Low Interest Rates Do Not Promote Growth.
Mish
Every economy has big set backs during its ascent. China will be no different. The question is not will it become #1 (it will), it’s what happens to the rest of the world when China stumbles on the way up.
Will there be sufficient decoupling or will we all be dragged down in a deflationary maelstrom.
My suspicion is we all go down if the Yuan gets a hit. Chinese problems will be exported. If it happens soon (no one can say when) it will be an epic blow to EU, USA, EM and commodity exporters on top of the current pressures.
$ will take off, foreign debts in $ will crush EM, an avalanche of shit and the managers ofvtge senior currency (Fed) will have to act to save the world or the subsequent depression will be off the charts.
We might already be at a point where China is at least as important to the global economy as the US is. Given Chinese manufacturing capability and importance to supply chains and commodity demand its possibly already more important should the Yuan devalue. The sucking sound of deflation will reverberate globally.
Every economy has big set backs during its ascent. China will be no different. The question is not will it become #1 (it will), it’s what happens to the rest of the world when China stumbles on the way up.
Will there be sufficient decoupling or will we all be dragged down in a deflationary maelstrom.
My suspicion is we all go down if the Yuan gets a hit. Chinese problems will be exported. If it happens soon (no one can say when) it will be an epic blow to EU, USA, EM and commodity exporters on top of the current pressures.
$ will take off, foreign debts in $ will crush EM, an avalanche of shit and the managers ofvtge senior currency (Fed) will have to act to save the world or the subsequent depression will be off the charts.
Demand must be slow in China domestically and globally since the sporting goods I’ve been browsing on Alibaba have had their prices slashed 25%. Sales might do better if Alibaba had a warehouse / fulfillment center in the US. Goods have cleared customs, and delivery dates are more certain. That would leave vendors with the easy task of improving product descriptions.
Not many people posting. Either it’s very uninteresting or most people post comments while they are work between bouts of work. Weekends are for ourselves.
Went for a boat ride. It is the most gorgeous mild fall day here today….the leaves have all turned…the lake was smooth as glass. Just beautiful…..
It’s not sustainable. “One child” is about to bite them on the butt in a big way…and they are going to need some Americans, French, and Mexicans to buy their exports…because nobody else has a large graduating class of good consumers.
The student loan people have already harvested our young consumers… gonna have to come from someplace else.
So much of their growth is artificial but the core growth is very real solid and sustainable. The slap-down of the ANT IPO and they way it was done was a powerful signal that the Chinese government will not tolerate an excessive financialization of their economy. They have studied our recent history and decided that they did not want to go down the same path as we did. I can’t blame them for that.
The way the Chinese manipulate the numbers makes the BLS and the Fed look like rank amateurs.
So much of the “growth” China has been booking for years and years now is nothing but pure malinvestment.
The debt they’re taking on now has very little chance of doing anything other than sucking them right down the drain, and when that happens it’s going to happen so fast that the Morgan Stanleys of the word are gonna be left blinking and asking WTF happened.
What you call “pure malinvestment.” has provided employment and salaries to a huge number of people. Sometime “pure malinvestment.” is needed to create a middle class
Yeah, right. Broken window theory. You and Krugman.
I have nothing but respect for he Chinese people… who are great savers and show incredible resilience (not to mention excellent guerrilla tactics in offshoring) in a country that is extremely repressive…but building empty cities is not the path to economic success. Sorry.
And now, the equation that built the Chinese middle class……is changing…..wages are much higher than they were when America started building everything we consume there….and it’s becoming obvious that putting so many of our eggs into that basket has resulted in stategic shortages ( I give you PPE’s for a current example) here…and we need to bring some industry back here.
China is the world’s biggest importer of fossil fuels, they’re totally dependent on foreign oil and they have no decent navy that can protect Chinese tankers moving in and out of the Persian Gulf.
Even with Trump out of the picture, the likely American path is to re-shore….including computers and electronics…..microprocessors…the whole tech ball of wax.
What I’m talking about has nothing to do with emotional sentiments about whether it’s noble for the Chinese to have a vibrant middle class. It’s just macroeconomics and demographics.
“the likely American path is to re-shore….including computers and electronics…..microprocessors…the whole tech ball of wax.”
I’m sorry but that will not happen to any significant level. After all the tariffs and war of words against companies making things in China most of them moved then to other countries (Vietnam, Taiwan, Mexico etc). Honestly the ways CEOs and shareholders get rewarded in the current system is the biggest incentive to off-shoring “the whole tech ball of wax.”
WTF?!
President Trump has already given the Chinese a boost in their quest to be the world’s greatest economy by failing to take any effective action on COVID-19. The virus’ peak is still to come in the US. China has fewer than 100,000 cases of the virus since its beginning while the US currently sees twice the number in new cases daily. China will be in the best position to lead the world economy as the world emerges from the pandemic.
I’m no expert in the world financial markets and the FED. But I cannot see how the US monetary or fiscal policy is going to soon be able to lead the US to any kind of quick return to the level of output and employment it had in January of this year. I don’t see how the effect of the huge personal, commercial and national debt can do anything but be a huge drag on the US economy. Add to that the cost of the pandemic in medical costs and businesses closed.
I’ve given up trying to understand the US economy based on fundamentals, because the entire system is based on speculation – stocks, bonds, bitcoin, etc. But no matter how speculators continue their bets, the underlying truth is that the markets do have fundamentals, no matter how much we may like to think otherwise. In a productive society people must produce (not be provided infinite unemployment benefits) and mortgages and rents must ultimately be paid.
To see how imaginary economics played out in a microcosm, I recommend Michael Lewis’ Boomerang which contains an excellent accounting of how high flying, imaginary security valuations fell to earth in Iceland in 2008.