Seeking Alpha

China to accelerate projects in order to support growth

  • China's government just can't help itself. The State Council intends to accelerate construction projects and enact other measures in order to expand domestic demand and stabilize growth.
  • The plan comes amid data which suggests that the economy is softening. However, it also contrasts with noises from China's leadership that it's prepared to tolerate slower growth in order to enact reform that would shift the economy away from heavy industry and towards consumption.
  • Meanwhile, foreign money entering China plummeted to a five-month low of $21.1B in February from $72.3B in January. The plunge suggests that the government's attempts to discourage speculation on yuan appreciation by forcing the currency to fall may be enjoying initial success. The inflows of hot money can be a problem, as they can inflate asset prices.
  • The Shanghai Composite is -0.3%, while the USD-CNY is +0.4% at 6.219 yuan.
Comments (7)
  • al roman
    , contributor
    Comments (8701) | Send Message
    China is a ethical and viable consideration for long term investment.
    20 Mar 2014, 07:20 AM Reply Like
  • User 353732
    , contributor
    Comments (4966) | Send Message
    The successful Chinese economic model of force feeding capital into projects that cannot earn their cost of capital and coercive integration of its declining labor force into global manufacturing supply chains is now coming to the end of its lifecycle/ Nothing compelling has been devised to replace it.
    20 Mar 2014, 08:23 AM Reply Like
  • Michael Nau
    , contributor
    Comments (972) | Send Message
    Not a good idea, they have enough empty cities.
    20 Mar 2014, 08:31 AM Reply Like
  • samuel_liu
    , contributor
    Comments (2798) | Send Message
    On January 30th, the day before Cn New Year, I had a lunch with a senior pastor, she said don't worry about it, when I retire you can come live amongst us, a it is in the countryside.


    The point, is that real people are buying into these new developments with real money, as there are few avenues for serious returns of investment in Cn.


    I have seen residential and commercial property go up where there was nothing (and lack of demand) over the past 18 years in Shanghai.


    Central Beijing and Shanghai residential condo prices are far greater than in San Francisco. The reason the prices are rising but the figures are stated less is because Beijing and Shanghai is spreading out like Los Angeles, not like San Francisco which stays at 49 sq miles.
    20 Mar 2014, 09:00 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1621) | Send Message
    In 2008, the governments and central banks of many developed countries opened the debt spigots in an effort to ward off debt deflation.


    Attempting to borrow our way out of debt seemed absurd, but Ben Bernanke likened these actions to the words of St. Thomas Aquinus who once uttered the words, "...grant me chastity and continence, but not yet..."


    As described in this commercial sponsored by Governments Against Public Waste, at the time, it was believed that China would one day be mocking the United States for placing so much reliance upon debt to spend their way out of a recession.



    But, now that China has painted itself into the same corner, we're seeing them follow the same playbook. How long will it be until we see a similar commercial mocking the folly of the Chinese for relying so heavily upon debt to sustain their economic growth?


    The world is awash with surplus labor, surplus capital, and surplus productive capacity, thanks in part to the efforts of policymakers to ward off debt deflation which has served to create more of the same. But, what is required is not simply GDP growth, but rather increased consumer demand to absorb all of this surplus supply. In other words, a stable disequilibrium is not a sustainable alternative to market equilibrium achieved through the natural market forces of supply and demand.


    But, we have travelled so far down the Road to Serfdom, it is hard to imagine how it would ever be possible to turn back. Instead, we still seem to be driving toward that fiscal cliff that briefly captured the attention it deserved, until the term was borrowed by Congress for their kabuki theater script that they portrayed as a farce rather than a Greek Tragedy so that now the fiscal cliff seems to be behind us. I don't believe that to be the case. Our attention has merely been diverted, and China's debt-fueled Fixed Asset Investment spending has only served to lengthen that road just a bit despite the addition of some additional clover leafs and other twists and turns.



    Before the 2008 GFC, Americans and Europeans comforted themselves that their debt problems should not be of concern to themselves based upon the "we suck, but they suck worse" principle. But, the 2008 GFC made it clear that we were all in this together, and were suddenly forced to choose between growth or austerity in order to manage our large and growing debt. After several decades of ignoring this "third rail" of politics, austerity had not become any more palatable to politicians and their constituents, many of whom took to the streets to express their anger and discontent, but existing levels of debt and aging populations called into question whether this growth could be achieved especially if rising debt levels and a cessation of unsustainable Central Bank interventions would eventually cause interest rates to return to their historic norms.


    Miraculously, China's GDP grew from $2.7 trillion in 2007 to over $9 trillion today and thus served as an engine of global economic growth. During this same period, China's M2 money supply also grew from $6.7 trillion to $18.8 trillion today, and the economic growth that this stimulated in other countries allowed foreign central banks to print massive amounts of money as well--well beyond the money that the Federal Reserve had attempted to create. Much of this newly created money poured into capital markets helping to suppress interest rates, and as an added bonus, to push up prices for capital assets making everyone feel richer and far less concerned than before about the mountains of debt that had piled up in developed countries.


    But, China's economic growth is also being fueled by debt, and Fixed Asset Investment spending by its very nature is largely non-recurring in nature, so investors must now ask themselves what will happen if this debt-fueled investment spending begins to slow. China is China, some may argue, but what about all the other countries that relied upon China for their growth? Many of these countries are already experiencing slower economic growth and financial crises as capital flees those countries. The financial contagion risks this introduces may be limited due to the relatively small size of the economies and financial markets of those countries, but since slower growth will make it more difficult for central banks in those countries to continue printing money without triggering inflation, what impact could this have on interest rates for the mountains of debt that have been allowed to grow still further? In the US, for example, debt levels are now six to seven times higher than they were when we last saw 6% interest rates on 10-year US Treasuries. And, despite signs that some European economies are beginning to emerge from recession, those economies, and their banking systems, still seem to be somewhat frail. Will it once again be possible for banks to borrow from governments so governments can borrow from banks, like two drunks leaning upon each other for support?


    And, are those two drunks more likely to remain standing if they are joined by even more drunks suffering from worse debt addictions than before? Or, now that everyone has had a chance to drink from the punch bowl, will they all now be more willing to press the reset button since there no longer seems to be anyone left who is willing and able to take the punch bowl away?
    22 Mar 2014, 02:14 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1621) | Send Message
    A few days ago, I had an opportunity to attend a presentation by Robert Hormats, former vice-Chairman of Goldman Sachs and Under Secretary of State for Economic Growth, Energy, and the Environment, regarding global economic trends.


    He made an interesting comment that, despite China's one-party system and the lack of citizens' right to vote or to own land [in rural areas], local government officials must still win the satisfaction of the people in the villages, cities, or provinces they represent if they hope to be promoted within the Chinese Communist Party. You can hear his comments at the 40:00 minute mark in this recorded video of his presentation sponsored by the Foreign Policy Association.



    If local government officials were truly concerned about satisfaction ratings among the people in their districts, including those without guanxi, this would argue that these local government officials would think twice about seizing land for sale to real estate developers, since that would disenfranchise those who were forced off that land.


    And if members of the CCP were likewise concerned about the ability of local government officials to achieve such satisfaction ratings, this would also suggest that these local government officials would be reluctant to defy the central government's wishes to rein in spending on white elephant projects despite the fact that "the mountains are high and the government is far away."


    However, we know that local government officials have managed to incur over $2 trillion in debt in just the past few years alone, supposedly against the wishes of the central government. So, what went wrong?


    In some cases, the answer may be that corrupt local government officials simply decided to "take the money and run." There is no shortage of money making its way out of China to fund all cash purchases of foreign real estate, often in places where many successful Chinese have already relocated their families.


    But, it may also be the case that the CCP doesn't place as much importance on the satisfaction of "the people" as it does upon taking care of its own, i.e., well-connected members of the CCP, and maximizing opportunities to collect what might otherwise be reported as profits.


    And, the current CCP leaders may also be growing less concerned about the development of the inland areas, as evidenced by their recent decision to move an additional 100 million peasants from the already decimated inland areas to the coastal areas as part of their urbanization "simulation plan." Apparently they have already forgotten that the founder of their communist party, former Chairman Mao Tse-tung, was able to rise to power by going inland to amass an army of disenfranchised peasants that he then relied upon to successfully overthrow the vested interests in the wealthy coastal areas.
    23 Mar 2014, 03:28 PM Reply Like
  • samuel_liu
    , contributor
    Comments (2798) | Send Message


    When I was learning Macroeconomics from Dr David Li Daokui. That was how he described the situation too: that the Cn Govt rules by the mandate of the people.


    On the other hand, the Central Govt has awful demands on the underfunded local govts (Reaganomics taken to the extremes)
    and then there is inherent corruption (greed) in the System (lack of job advancement).


    On the one hand, I haven't seen that in Shanghai (other than directly improvement of the infrastructure), I know of that "carrot and stick" approach in Beijing-- you live amongst legal smog, we give you cheap urban transportation and health care.


    The documentary you suggested is probably the greatest contrast. I lived in Wuhan for 7+ months from 1995-1996, and have not been back since December 24, 1999. Life has changed for all, but those in the top 1% the most (sounds kind of like the USA doesn't it).


    When I first came to dwell in Shanghai 1998, I thought: the complexities are too great here that even Bill Clinton couldn't fix them. So those were my thoughts as an outsider.


    Now more of an insider my beliefs are, so what has the Govt done for the last 10 years ...


    Maybe they ought to think of that in the USA (where I pay my taxes), what has Washington done in the two administrations!


    And to that, I am more critical!
    23 Mar 2014, 09:54 PM Reply Like
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