China's Credit Bubble and the Balance of Trade 32 comments
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Recent German economic data has been interpreted as indicative of a renaissance in the Eurozone's primary economy. Aside from the fact that Germany is ill prepared to handle its so-called "second credit crisis wave" (the ECB having much less free reign over printing wheelbarrows worth of Euros may have something to do with this), looking purely at GDP components one would note that a primary function of this anticipated growth comes primarily from a mathematical contribution resulting from an increase in net exports. From the Bundesbank's most recent monthly economic report:
According to provisional figures from the Federal Statistical Office, in May the foreign trade surplus was up by 30.2 billion on the month to 39.6 billion. After adjustment for seasonal and calendar effects, it rose from 39.0 billion to 310.3 billion. The value of exports rose slightly by 0.3%, while the value of imports declined by 2.1%. If April and May are taken together, seasonally adjusted nominal exports were 5.1% below the average for the first quarter of 2009. Of this, 0.6 percentage point can be attributed to export prices. Imports were down as much as 8.4%, with 1.7 percentage points due to market prices.
So basically, we are seeing voodoo mathematics which indicate sovereign economic improvement as a result of declining world trade. This is even more obvious by looking at a time series of US net exports, where a disproportionate collapse in imports has made it seems that the US GDP is also improving (click to enlarge) .
Yet while Germany (and thus the Eurozone) and the US are basking in the temporary glow of mathematical bliss, gulped up by eager momo quants who have the attention span of only the first 5 letters of any headline before lurching with millions of bids, this changes nothing on a global scale where all trade flows are net neutral, and the traditional net exporters are getting pummeled: we demonstrated the collapse in Japanese exports, historically one of the strongest positive trade balance countries. The simple math is that what is good for the US and the Eurozone is bad for Japan.
Yet the real wild card is China, where estimates for export decline approach the 20% mark, after a prior year increase of 20%. This is a huge hit to the Chinese economy and is the primary reason for the $1.1 trillion in increased lending, whose primary purpose is to spur replacement demand with traditional export partners reeling.
In essence what is going on, is that the brief pick-up in German and US GDPs on the trade balance side, are being facilitated exclusively by the credit bubble in China. By dint of China being able to recognize GDP at production instead of expenditures (like normal Western countries), China is now trying to back fill into the trade void left from the collapse of Western economies by promoting the same kind of irresponsible lending (and borrowing) that lead the US economy to its current sorry state. This will eventually end very, very badly.
Two conclusions: i) the bubble is unsustainable and recent overtures by the Bank Of China indicate that they are aggressively attempting to rein it in; however as the amount of liquidity let loose primarily in the equity capital markets is staggering, on par with the balance sheet expansion by the Federal Reserve, this will prove to be a nearly impossible task; ii) as this replacement demand is shut off, the tremors in trade flows will exacerbate the temporary respite that the two main non-Chinese economies have been experiencing, and not only will the velocity of exports over imports decline, but the bigger question of how the collapse in Chinese capital markets (and the real estate bubble) is yet to be answered. All this, of course, also means that the temporary period of abnormal increase in the US equity markets will be aggressively tested as flush global liquidity will be promptly mopped up beginning over the next 2 months, with the expiration of QE and a major shift in Chinese lending policy.
As everyone knows, the S&P 500 is up 50% + not on any improvements in fundamentals, but merely as a function of excess liquidity driving markets higher, which in turn generated temporary increases in confidence, feeding a closed loop of confidence and market increases. Yet, the US consumer is down for the count, and while it is this primary factor for US growth the the Fed should be tending to, Mr. Bernanke is more concerned about keeping mortgage rates artificially low in order to perperuate the credit bubble as long as he can. As we have seen over the past year, credit bubbles do not go away by themselves, and inflated asset bubbles tend to pop. And that's regardless of how much cash one can throw at the problem, and how much pain the formerly proud US dollar can take.
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This article has 32 comments:
One implication for America is that they're not going to be flexible on the exchange rate until they get compensating growth from elsewhere. That means our trade and budget deficits continue to suffer, but atleast we can sell them some more worthless treasuries.
what about the NY Post article about you this morning???
www.nypost.com/seven/0...
Both now are adept at producing 3 kinds of toxic vapors for their citizens and for global investors:
1. Statistical fraud
2. Financial bubbles
3. Systemic risk
Wall St adores both Govts for this, of course, because what Wall St was only able to do on a contained, regional, basis, the 2Govts are able to do on an unconstrained, global basis. Financial markets, being now, not much more than the manipulated artifacts of Govt Bubble making and Wall St disinformation and self dealing are responding as expected.
The bubbles of the West are imploding faster than the US Govt and Wall St can create new ones. The same will inevitably happen with the 3 simultaneous inventory ,real estate and stock market bubbles of the East.
Well, I must say that is a new twist!
On Aug 21 01:15 PM chap08 wrote:
> You only have to look at stocks in Shanghai to see the evidence of
> a bubble. But I'm not convinced that "liquidity will be promptly
> mopped up". China will not slam the brakes on because they will be
> more worried about civil unrest than asset bubbles. They've recently
> seen unrest in western china caused by jobless migrants and they
> don't want to see any more.
>
> One implication for America is that they're not going to be flexible
> on the exchange rate until they get compensating growth from elsewhere.
> That means our trade and budget deficits continue to suffer, but
> atleast we can sell them some more worthless treasuries.
tinyurl.com/kjj7wz
On Aug 21 01:18 PM Econ 101 wrote:
> Tyler,
>
> what about the NY Post article about you this morning???
>
> www.nypost.com/seven/0...
but I still don't know how to allocate cash...
I agree with Durden this is another bubble so you dont want to go long... but then again you don't want to short a system that could be propped up for years... can't hold cash with 1% rates & inflation potential high... GLD at $960 per ounce with no known physical gold to back it up?
People who agree with Tylers premise... how are you allocating?
On Aug 21 02:15 PM Harry Tuttle wrote:
> I don't see why it matters who he is. The ideas should stand on their
> own.
On Aug 21 01:18 PM Econ 101 wrote:
> Tyler,
>
> what about the NY Post article about you this morning???
>
> www.nypost.com/seven/0...
I'd like to see people refute his argument vs cry about his identity
On Aug 21 02:44 PM Stone Fox Capital wrote:
> That's why you've always got to know the angle of the person your
> reading about. Do your own homework.
On Aug 21 01:18 PM Econ 101 wrote:
> Tyler,
>
> what about the NY Post article about you this morning???
>
> www.nypost.com/seven/0...
All we have to do is list a few years and a few countries, Japan 1989, Russia 1987, The United States 2008 and China ??, to get the idea.
I was sitting in my backyard with a family of politically minded Germans, in 1986, telling them that I thought the Berlin Wall was about to come down and they all laughed at me and said it would not come down in our lifetimes. The conversation changed to another subject, abruptly, but the Berlin Wall fell around their ears within a few months of their return to Germany. I'm not bragging about my predictive powers but I happened to be following German events very closely at that time, and I was looking at some things that most Germans wouldn't allow themselves to see at the time. (I won't mention some of my less successful predictions :)
From a bird's eye view it looks as if China is in a counterrevolutionary swing to the right. With political unrest, that pendulum could reach its limit and begin moving back to a center that has, probably, shifted towards the totalitarian, egalitarian left permanently. Mix this with a 2500 year old native grown Confucian authoritarianism, combined with a "China is the center of the universe" mentality, and we could see trouble in the future.
For one thing, Asia itself has big political problems, even though they seem to be in party mode at the moment. Consider: Japan is rearming. The Korean civil war has not truly ended since it started in 1951. China is circling Taiwan like a shark in love.
Most China scholars agree that one major reason Chinese leaders embraced Marxism was as a shield to allow the Chinese people to turn from their ancient feudal culture towards Western humanist culture, and especially towards our political, economic and social institutions, while keeping the West out of its internal affairs, which they were unable to do in the past.
As in Japan, this has worked on the surface but underneath the surface, Confucianism and Taoism continue to have a very strong influence, just as Christianity has a strong influence, under the surface, in the West. Chinese feudal culture, along with the Chinese language and character system, will tend to isolate China from the rest of the world and especially from the West. The Chinese have deluded even themselves into thinking that they are a Western style economic system. But they aren't.
This is a very complex subject and I've only scratched the surface.
(For example, Russia believes that its culture and civilization forms a true bridge between Asia (including Islam) and the West. But, of course, that is another story. (And, ominously, it involves "the roof of the world" Afghanistan and environs.) )
I'm going to have another cup of coffee. Maybe I'll cheer up.
I'm curious to see if we're going to get another stimulus funding after bernanke put on his cheerleader outfit, tassles and poms Wednesday and declared recovery.
On Aug 21 03:16 PM carey_jim wrote:
> Sometimes I sound like a nihilist, even to myself, but I can't help
> repeating that predicting even the near term future is a bear, if
> you'll pardon the image.
>
> All we have to do is list a few years and a few countries, Japan
> 1989, Russia 1987, The United States 2008 and China ??, to get the
> idea.
>
> I was sitting in my backyard with a family of politically minded
> Germans, in 1986, telling them that I thought the Berlin Wall was
> about to come down and they all laughed at me and said it would not
> come down in our lifetimes. The conversation changed to another
> subject, abruptly, but the Berlin Wall fell around their ears within
> a few months of their return to Germany. I'm not bragging about
> my predictive powers but I happened to be following German events
> very closely at that time, and I was looking at some things that
> most Germans wouldn't allow themselves to see at the time. (I won't
> mention some of my less successful predictions :)
>
> From a bird's eye view it looks as if China is in a counterrevolutionary
> swing to the right. With political unrest, that pendulum could reach
> its limit and begin moving back to a center that has, probably, shifted
> towards the totalitarian, egalitarian left permanently. Mix this
> with a 2500 year old native grown Confucian authoritarianism, combined
> with a "China is the center of the universe" mentality, and we could
> see trouble in the future.
>
> For one thing, Asia itself has big political problems, even though
> they seem to be in party mode at the moment. Consider: Japan is
> rearming. The Korean civil war has not truly ended since it started
> in 1951. China is circling Taiwan like a shark in love.
>
> Most China scholars agree that one major reason Chinese leaders embraced
> Marxism was as a shield to allow the Chinese people to turn from
> their ancient feudal culture towards Western humanist culture, and
> especially towards our political, economic and social institutions,
> while keeping the West out of its internal affairs, which they were
> unable to do in the past.
>
> As in Japan, this has worked on the surface but underneath the surface,
> Confucianism and Taoism continue to have a very strong influence,
> just as Christianity has a strong influence, under the surface, in
> the West. Chinese feudal culture, along with the Chinese language
> and character system, will tend to isolate China from the rest of
> the world and especially from the West. The Chinese have deluded
> even themselves into thinking that they are a Western style economic
> system. But they aren't.
>
> This is a very complex subject and I've only scratched the surface.
>
>
> (For example, Russia believes that its culture and civilization forms
> a true bridge between Asia (including Islam) and the West. But,
> of course, that is another story. (And, ominously, it involves "the
> roof of the world" Afghanistan and environs.) )
>
> I'm going to have another cup of coffee. Maybe I'll cheer up.
You bring up some very excellent points. Sometimes, when attempting to deal with the minutia of the markets, its easy to forget there's an underlying connecting thread between the market, economics and geopolitics. Granted, at times it can appear tenous...almost to the point of disappearing, but its always there. To not be aware of it, or to ignore it, puts the investor at risk.
On Aug 21 03:16 PM carey_jim wrote:
> Sometimes I sound like a nihilist, even to myself, but I can't help
> repeating that predicting even the near term future is a bear, if
> you'll pardon the image.
>
> All we have to do is list a few years and a few countries, Japan
> 1989, Russia 1987, The United States 2008 and China ??, to get the
> idea.
>
> I was sitting in my backyard with a family of politically minded
> Germans, in 1986, telling them that I thought the Berlin Wall was
> about to come down and they all laughed at me and said it would not
> come down in our lifetimes. The conversation changed to another subject,
> abruptly, but the Berlin Wall fell around their ears within a few
> months of their return to Germany. I'm not bragging about my predictive
> powers but I happened to be following German events very closely
> at that time, and I was looking at some things that most Germans
> wouldn't allow themselves to see at the time. (I won't mention some
> of my less successful predictions :)
>
> From a bird's eye view it looks as if China is in a counterrevolutionary
> swing to the right. With political unrest, that pendulum could reach
> its limit and begin moving back to a center that has, probably, shifted
> towards the totalitarian, egalitarian left permanently. Mix this
> with a 2500 year old native grown Confucian authoritarianism, combined
> with a "China is the center of the universe" mentality, and we could
> see trouble in the future.
>
> For one thing, Asia itself has big political problems, even though
> they seem to be in party mode at the moment. Consider: Japan is rearming.
> The Korean civil war has not truly ended since it started in 1951.
> China is circling Taiwan like a shark in love.
>
> Most China scholars agree that one major reason Chinese leaders embraced
> Marxism was as a shield to allow the Chinese people to turn from
> their ancient feudal culture towards Western humanist culture, and
> especially towards our political, economic and social institutions,
> while keeping the West out of its internal affairs, which they were
> unable to do in the past.
>
> As in Japan, this has worked on the surface but underneath the surface,
> Confucianism and Taoism continue to have a very strong influence,
> just as Christianity has a strong influence, under the surface, in
> the West. Chinese feudal culture, along with the Chinese language
> and character system, will tend to isolate China from the rest of
> the world and especially from the West. The Chinese have deluded
> even themselves into thinking that they are a Western style economic
> system. But they aren't.
>
> This is a very complex subject and I've only scratched the surface.
>
>
> (For example, Russia believes that its culture and civilization forms
> a true bridge between Asia (including Islam) and the West. But, of
> course, that is another story. (And, ominously, it involves "the
> roof of the world" Afghanistan and environs.) )
>
> I'm going to have another cup of coffee. Maybe I'll cheer up.
On Aug 21 01:18 PM Econ 101 wrote:
> Tyler,
>
> what about the NY Post article about you this morning???
>
> www.nypost.com/seven/0...
On Aug 21 01:36 PM Bill L. wrote:
> Much like the many bubbles that have formed in the last 10 - 15 years
> or so in the US, China has adopted a similar approach in combating
> deflationary cycles, but on a massive dose of new and improved communist
> steroids. It is quite obvious that the huge run in stocks, commodities,
> and real estate in China is a direct result of the Government forcing
> banks to increase lending 200% year over year. Unfortunately, as
> we learned in our own lending bubble, when you force banks to lend
> more, the only way to go is down the totem pole; lendees with poor
> credit capacity are given credit to speculate with. This only ends
> one way.
On Aug 21 03:16 PM carey_jim wrote:
> Sometimes I sound like a nihilist, even to myself, but I can't help
> repeating that predicting even the near term future is a bear, if
> you'll pardon the image.
>
> All we have to do is list a few years and a few countries, Japan
> 1989, Russia 1987, The United States 2008 and China ??, to get the
> idea.
>
> I was sitting in my backyard with a family of politically minded
> Germans, in 1986, telling them that I thought the Berlin Wall was
> about to come down and they all laughed at me and said it would not
> come down in our lifetimes. The conversation changed to another subject,
> abruptly, but the Berlin Wall fell around their ears within a few
> months of their return to Germany. I'm not bragging about my predictive
> powers but I happened to be following German events very closely
> at that time, and I was looking at some things that most Germans
> wouldn't allow themselves to see at the time. (I won't mention some
> of my less successful predictions :)
>
> From a bird's eye view it looks as if China is in a counterrevolutionary
> swing to the right. With political unrest, that pendulum could reach
> its limit and begin moving back to a center that has, probably, shifted
> towards the totalitarian, egalitarian left permanently. Mix this
> with a 2500 year old native grown Confucian authoritarianism, combined
> with a "China is the center of the universe" mentality, and we could
> see trouble in the future.
>
> For one thing, Asia itself has big political problems, even though
> they seem to be in party mode at the moment. Consider: Japan is rearming.
> The Korean civil war has not truly ended since it started in 1951.
> China is circling Taiwan like a shark in love.
>
> Most China scholars agree that one major reason Chinese leaders embraced
> Marxism was as a shield to allow the Chinese people to turn from
> their ancient feudal culture towards Western humanist culture, and
> especially towards our political, economic and social institutions,
> while keeping the West out of its internal affairs, which they were
> unable to do in the past.
>
> As in Japan, this has worked on the surface but underneath the surface,
> Confucianism and Taoism continue to have a very strong influence,
> just as Christianity has a strong influence, under the surface, in
> the West. Chinese feudal culture, along with the Chinese language
> and character system, will tend to isolate China from the rest of
> the world and especially from the West. The Chinese have deluded
> even themselves into thinking that they are a Western style economic
> system. But they aren't.
>
> This is a very complex subject and I've only scratched the surface.
>
>
> (For example, Russia believes that its culture and civilization forms
> a true bridge between Asia (including Islam) and the West. But, of
> course, that is another story. (And, ominously, it involves "the
> roof of the world" Afghanistan and environs.) )
>
> I'm going to have another cup of coffee. Maybe I'll cheer up.
In China, "long term" means 50 years. In US, it means 5 years. When Chinese build an infrastructure project, they don't look at whether it will make money in 1 quarter, 1 year, or even 5 years. Rather, it is about real future.
And they have been extremely successful with that. Many projects (highways, bridges, rail lines, subways) were rarely used when first completely, and now are completely packed.
One example is Shanghai. The first subway appeared about 15 years ago, and now they have 7 lines and adding more, and most lines are packed. Even the maglev high speed train is getting a good ridership.
On Aug 22 12:11 PM Ben Gee wrote:
> China does NOT work with the Same economic principles as the West.
> Trying to predict how China will perform based on Western economic
> principles will likely fail. For exemple, China does not adhere to
> profit maximization in its productions. China does not adhere to
> cost-benefit relationships in its productions. If China want something
> done, it just go ahead and do it. At what cost? China does not care.
> In the West, we will build a road if its has economic benefit and
> if we need it. In China, they say, if you built a road, someone will
> use it. What if no one use it? Tear it down and build a better one.
> We can not do that, but it apear to work in China. I stopped predicting
> what China can not do long time ago.
Your statement impresses me about your ability to see things from the roots. What you state about China is the truth. One thing I would like to add is the fundamental aspect of economics which is: Wealth does not mean only money; besides money, it includes other things such as intellectual wealth and technological prowess. Money is printed by a government of any nation of this world depending on its monetary need but, in the modern globalized world, these national monies (currencies) are interdependent. Of course, U.S. dollar, due to the seer size of the U.S. economy so far has the most significant effect globally. This influence of the U.S. dollar on the global monetary system is certainly shrinking. However, as long as the U. S. businesses, research instituitons (e.g., new drugs, technologies, etc.) and its other products remain dominant, its economy will remain to be the most powerful. I am not so concerned about Obama government adding to the monetary budget deficit, I am more concerned about loosing our edge in the other areas of our eceonomic wealth (such as, intellectual and technological - Moral wealth is not included in the economic wealth altough it indirectly affects it). As long as this monetary deficit produces substantially increased levels of the other types of wealth, we will not be bankrupt. Yes, if you ask an accountant (e.g., a typical Wall Street analyst), he will judge economic well being meaning more money. Wealth to them means only money!! That is the dumbest understanding of what economy really means.
On Aug 22 12:11 PM Ben Gee wrote:
> China does NOT work with the Same economic principles as the West.
> Trying to predict how China will perform based on Western economic
> principles will likely fail. For exemple, China does not adhere to
> profit maximization in its productions. China does not adhere to
> cost-benefit relationships in its productions. If China want something
> done, it just go ahead and do it. At what cost? China does not care.
> In the West, we will build a road if its has economic benefit and
> if we need it. In China, they say, if you built a road, someone will
> use it. What if no one use it? Tear it down and build a better one.
> We can not do that, but it apear to work in China. I stopped predicting
> what China can not do long time ago.
SCARY.
With due respect and *great* appreciation for all you contribute, this is certainly the wrong end-point for the focus.
It's the people that feel the pain, dollars just lose value. It's a shame that the valuable knowledge you provide is not easily translated into terms of human misery and suffering.
HardToLove
Although we may need to be cautious of someone "with a past", time and actions determine the current worth of an individual(s) - even if we really assume that we have "the truth, the whole truth and nothing but the truth".
With the MSM seemingly in the pocket of TPTB, we no longer have a trustworthy "fourth estate" and can not presume we know "the truth".
HardToLove
On Aug 21 02:15 PM Harry Tuttle wrote:
> I don't see why it matters who he is. The ideas should stand on
> their own.
HardToLove
On Aug 21 08:27 PM Jiang Nan wrote:
> The key is the accounting standard, specifically "marked to market"
> or as some would call it, "staying power".
Given the higher savings rate of the Chinese and the relatively high capital requirements on mortgages, there is potentially a lot of upside before a pop.
The middle class in China is more than the US and EU combined. So longer term, China could drive WAY more consumption than the mature western economies ever did.
My guess there will be some big bubbles and troughs along the way.
Buy low sell high young man