12 ms·

China can deflate the world’s largest credit bubble in an orderly fashion

42 points by frgtpsswrdlame 10y ago

apo 10y ago
If so, this would be the first orderly deflation of a credit bubble in history.
fnazeeri 10y ago
I'm pretty sure history doesn't not count orderly bubble deflations. It's like recording non-car accidents. I'm not suggesting this article is likely true, I'm just skeptical that there has never been an orderly bubble deflation.
- xbmcuser 10y ago
  With the kind of control Chinese government has on everything in its economy l they probably are the one country that could deflate in a controlled manner compared to the rest of the world. Instead of a trillion dollar collapse in 2-3 weeks. They can probably control smaller shocks of few hundred billion over 1-2 years.
  - bilbo0s 10y ago
    This. I think sometimes people who have not actually had to LIVE the experience by being in China longer term don't have an appreciation for the degree of control that exists there. China is a strange place where the central government is omni-present, AND nowhere all at the same time. It's strange, and difficult to describe. But I agree with xbmcuser... The Chinese government, as long as it maintains its current structure, is in a happy position vis-a-vis economic control. (Or any other type of control for that matter.)
    - geppeto 10y ago
      I agree. It took me a long time to realize most of my negative opinion for china was media driven and validated by chinese americans whose outdated opinions are elevated as absolutes, its a quirk of our culture. Everything about china is much more nuanced and full of opportunity
    - AnimalMuppet 10y ago
      The issue may not be the amount of control. It may be the wisdom to use that control in a way that causes the least (economic) harm. At this point, how best to deflate that bubble might be regarded as an unsolved problem. (There may be theories. In fact, there probably are more theories than there are successful examples.)
  - coliveira 10y ago
    I used to be bearish on the Chinese economy until I saw how they handled the crisis of 2016. Nowadays I think if there is an economy that can sustain bubbles, the modern Chinese economy is that one, because it is basically controlled by the communist party. The US, on the other hand, is just one financial bubble away from the collapse (unless we use similar tactics to control the financial system - which will be much more painful than in China).
    - AnimalMuppet 10y ago
      Well, the last bubble that broke here, the Fed saw that the bubble collapse had destroyed about $3 trillion, and injected $3 trillion into the economy to stabilize things. That actually worked rather well. It was very painful, but not catastrophic.
      - coliveira 10y ago
        Of course the next bubble will require more than $3 trillion... And saying that things are going rather well is absurd.
        AnimalMuppet 10y ago
        I didn't say that things are going rather well. I said that the Fed's intervention worked rather well. That's not the same thing. In particular, compare 2008-2017 to 1929-1938. That gives some (imperfect) measure of how well the Fed intervention worked.
  - eru 10y ago
    The Australian housing bubble's end was a non-event, too.
  - Analemma_ 10y ago
    > With the kind of control Chinese government has on everything in its economy l they probably are the one country that could deflate in a controlled manner compared to the rest of the world. See, I used to think this, until as recently as 2014, but now I'm not so sure. I don't think "China" has the total control of the economy that everyone (including themselves) thinks they do. My impression is that the central government in Beijing understands the problems they have very well, and has the right solutions, but then when it comes time to translate that into "action on the ground", they struggle. The issue is that the provincial government leaders don't share Beijing's incentives: they get both tax revenue and political opportunity by continuing to juice the credit bubble and looking the other way at the dangerous techniques used to do that. The last few years of economic news out of China have been like this: - Central government orders reforms to try and gently deflate bubble - Provincial governments obey for a bit, but growth slows and discontent increases. Provincial governments panic and pull back on reforms. - Lather, rinse, repeat. I've come to realize that even authoritarian governments in some sense depend on a popular mandate, even if it's in an indirect way. There might be some way for China to "thread the needle" and balance the opposing goals of deflating their credit bubble before it explodes without stoking popular anger at the hit growth will take, but it's not a sure thing, and if it does happen it won't be because they have total control of the economy.
jcriddle4 10y ago
A "Market Based Approach" but the word bankruptcy didn't appear in the article once?
throwaway04444 10y ago
This is from South China Morning Post, a paper that has now significantly shifted its viewpoint to align with the Chinese government, after Alibaba's founder purchased it. Also, China's debt is huge, it's 300% gdp (bigger than US in 2008), and that's not accounting the shadow banking that would need to be unwound. Couple that the demographics crisis, fleeing foreign money/factories, middle income trap, lack of innovations, authoritarian government controls, capital outflow crisis, and one can see that there's no way this bubble will be unwound "orderly".
- 1001101 10y ago
  SCMP seems to be a little more independent than say the Renmin Ribao, but skepticism is warranted. I would add to your list that Chinese capital has been completely misallocated. Roads and bridges to nowhere, ghost cities. They've poured more concrete in the last 5 or so years than the US did in the first 100 years of its history [1] to give you a sense of the scale. There are cities that are unoccupied - entire cities. I'm still unclear on how these were financed, but my guess is with liberalization of the financial sector these were packaged up somehow and sold to Ma and Pa. It's going to end like it always does, with lots of tears (except for those like Kyle Bass who have positioned themselves to profit). [1] https://www.washingtonpost.com/news/wonk/wp/2015/03/24/how-china-used-more-cement-in-3-years-than-the-u-s-did-in-the-entire-20th-century/?utm_term=.0f20c328c19b https://www.washingtonpost.com/news/wonk/wp/2015/03/24/how-c... More on ghost cities: https://www.wired.com/2016/02/kai-caemmerer-unborn-cities/ https://www.wired.com/2016/02/kai-caemmerer-unborn-cities/ http://www.businessinsider.com/china-ghost-cities-satellite-images-2017-3/#-streets-full-of-mcmansions-in-2015--7 http://www.businessinsider.com/china-ghost-cities-satellite-...
- frgtpsswrdlame 10y ago
  Do you know a better source for high-quality news on China?
dis-sys 10y ago
People rarely think about the crashes China had in the last 5 decades - the great leap forward movement, the culture revolution, the massive layoff in the mid to late 90s that saw tens of millions out of their jobs. Suddenly the exact same system/government that caused all those crashes are now ready to deflate the current bubble in an orderly fashion? How all these happened in the first place? Because the central government had the full power to control the entire economy! In a smaller scale, how about the recent stock market crash? Media stopped talking about it as it is no longer that newsworthy, but how about those 100 million investors who actually invested their life savings into that stock market? Have you ever calculated their annual returns in the last say 15 years? Did that bubble got deflated in an orderly manner? Repeatedly, history has shown again and again that hard working smart Chinese people are paying heavy prices to overcome the burdens brought to them by those highly inefficient Chinese central governments, this never changed since the Han Dynasty, it is never about the government/system, the biggest difference is the people. In case you have no idea of the definition of the current bubble, let me give you one - I live in Shanghai, there are millions of those ugly apartments built before the 90s which were basically handed over to local residents for free, the vast majority of them are located in average or above average areas. Thanks to a "booming" market, nowadays you need to pay $1m to get one of those 70 sqm ones. Did the CCP give every household $1m? No, they give you a bubble and you are paying for it. Oh, btw, Beijing is 20% more expensive than that even when the living conditions there are worse for obvious reasons.
- rm_-rf_slash 10y ago
  Bingo. There is no historical law which states that more control enables more stability. Overly-controlling situations can just as easily cause more harm than good. China saw that play out repeatedly under Mao, while at the same time America's many attempts to control the Vietnam War ended in abject failure. I think the real danger, however, is not what the CCP controls, but rather the peripheries that it cannot control, such as shadow banking and capital outflows (think the newly middle/upper-middle class Chinese family parking assets in overseas real estate; China's government cannot exert eminent domain in Vancouver or Miami).
- dmix 10y ago
  One big difference now is the scale of this potential crisis is massive. A lot more is at stake here and the state is highly motivated to keep things as stable as possible. Despite the inefficacy of the Chinese government, and I do entirely agree with you that they are continually on fragile ground as the tentacles of the government continually wrap around every aspect of the economy, they still have beat many peoples projections that they'd have a big recession/debt crisis by now.
rm_-rf_slash 10y ago
Something to note: the article features a link to the author's previous piece, titled "China's credit excess is unlike anything the world has ever seen." So are we honestly meant to believe that the biggest credit expansion ever can be whisked away by the first ever orderly bubble deflation?
faragon 10y ago
TL;DR: Yet another "financial/asset bubble soft landing is possible" prediction.

apo 10y ago

If so, this would be the first orderly deflation of a credit bubble in history.

I'm pretty sure history doesn't not count orderly bubble deflations. It's like recording non-car accidents. I'm not suggesting this article is likely true, I'm just skeptical that there has never been an orderly bubble deflation.

xbmcuser 10y ago
With the kind of control Chinese government has on everything in its economy l they probably are the one country that could deflate in a controlled manner compared to the rest of the world. Instead of a trillion dollar collapse in 2-3 weeks. They can probably control smaller shocks of few hundred billion over 1-2 years.
- bilbo0s 10y ago
  This. I think sometimes people who have not actually had to LIVE the experience by being in China longer term don't have an appreciation for the degree of control that exists there. China is a strange place where the central government is omni-present, AND nowhere all at the same time. It's strange, and difficult to describe. But I agree with xbmcuser... The Chinese government, as long as it maintains its current structure, is in a happy position vis-a-vis economic control. (Or any other type of control for that matter.)
  - geppeto 10y ago
    I agree. It took me a long time to realize most of my negative opinion for china was media driven and validated by chinese americans whose outdated opinions are elevated as absolutes, its a quirk of our culture. Everything about china is much more nuanced and full of opportunity
  - AnimalMuppet 10y ago
    The issue may not be the amount of control. It may be the wisdom to use that control in a way that causes the least (economic) harm. At this point, how best to deflate that bubble might be regarded as an unsolved problem. (There may be theories. In fact, there probably are more theories than there are successful examples.)
- coliveira 10y ago
  I used to be bearish on the Chinese economy until I saw how they handled the crisis of 2016. Nowadays I think if there is an economy that can sustain bubbles, the modern Chinese economy is that one, because it is basically controlled by the communist party. The US, on the other hand, is just one financial bubble away from the collapse (unless we use similar tactics to control the financial system - which will be much more painful than in China).
  - AnimalMuppet 10y ago
    Well, the last bubble that broke here, the Fed saw that the bubble collapse had destroyed about $3 trillion, and injected $3 trillion into the economy to stabilize things. That actually worked rather well. It was very painful, but not catastrophic.
    - coliveira 10y ago
      Of course the next bubble will require more than $3 trillion... And saying that things are going rather well is absurd.
      - AnimalMuppet 10y ago
        I didn't say that things are going rather well. I said that the Fed's intervention worked rather well. That's not the same thing. In particular, compare 2008-2017 to 1929-1938. That gives some (imperfect) measure of how well the Fed intervention worked.
- eru 10y ago
  The Australian housing bubble's end was a non-event, too.
- Analemma_ 10y ago
  > With the kind of control Chinese government has on everything in its economy l they probably are the one country that could deflate in a controlled manner compared to the rest of the world. See, I used to think this, until as recently as 2014, but now I'm not so sure. I don't think "China" has the total control of the economy that everyone (including themselves) thinks they do. My impression is that the central government in Beijing understands the problems they have very well, and has the right solutions, but then when it comes time to translate that into "action on the ground", they struggle. The issue is that the provincial government leaders don't share Beijing's incentives: they get both tax revenue and political opportunity by continuing to juice the credit bubble and looking the other way at the dangerous techniques used to do that. The last few years of economic news out of China have been like this: - Central government orders reforms to try and gently deflate bubble - Provincial governments obey for a bit, but growth slows and discontent increases. Provincial governments panic and pull back on reforms. - Lather, rinse, repeat. I've come to realize that even authoritarian governments in some sense depend on a popular mandate, even if it's in an indirect way. There might be some way for China to "thread the needle" and balance the opposing goals of deflating their credit bubble before it explodes without stoking popular anger at the hit growth will take, but it's not a sure thing, and if it does happen it won't be because they have total control of the economy.

jcriddle4 10y ago

A "Market Based Approach" but the word bankruptcy didn't appear in the article once?

throwaway04444 10y ago

This is from South China Morning Post, a paper that has now significantly shifted its viewpoint to align with the Chinese government, after Alibaba's founder purchased it. Also, China's debt is huge, it's 300% gdp (bigger than US in 2008), and that's not accounting the shadow banking that would need to be unwound. Couple that the demographics crisis, fleeing foreign money/factories, middle income trap, lack of innovations, authoritarian government controls, capital outflow crisis, and one can see that there's no way this bubble will be unwound "orderly".

1001101 10y ago
SCMP seems to be a little more independent than say the Renmin Ribao, but skepticism is warranted. I would add to your list that Chinese capital has been completely misallocated. Roads and bridges to nowhere, ghost cities. They've poured more concrete in the last 5 or so years than the US did in the first 100 years of its history [1] to give you a sense of the scale. There are cities that are unoccupied - entire cities. I'm still unclear on how these were financed, but my guess is with liberalization of the financial sector these were packaged up somehow and sold to Ma and Pa. It's going to end like it always does, with lots of tears (except for those like Kyle Bass who have positioned themselves to profit). [1] https://www.washingtonpost.com/news/wonk/wp/2015/03/24/how-china-used-more-cement-in-3-years-than-the-u-s-did-in-the-entire-20th-century/?utm_term=.0f20c328c19b https://www.washingtonpost.com/news/wonk/wp/2015/03/24/how-c... More on ghost cities: https://www.wired.com/2016/02/kai-caemmerer-unborn-cities/ https://www.wired.com/2016/02/kai-caemmerer-unborn-cities/ http://www.businessinsider.com/china-ghost-cities-satellite-images-2017-3/#-streets-full-of-mcmansions-in-2015--7 http://www.businessinsider.com/china-ghost-cities-satellite-...
frgtpsswrdlame 10y ago
Do you know a better source for high-quality news on China?

dis-sys 10y ago

People rarely think about the crashes China had in the last 5 decades - the great leap forward movement, the culture revolution, the massive layoff in the mid to late 90s that saw tens of millions out of their jobs. Suddenly the exact same system/government that caused all those crashes are now ready to deflate the current bubble in an orderly fashion? How all these happened in the first place? Because the central government had the full power to control the entire economy! In a smaller scale, how about the recent stock market crash? Media stopped talking about it as it is no longer that newsworthy, but how about those 100 million investors who actually invested their life savings into that stock market? Have you ever calculated their annual returns in the last say 15 years? Did that bubble got deflated in an orderly manner? Repeatedly, history has shown again and again that hard working smart Chinese people are paying heavy prices to overcome the burdens brought to them by those highly inefficient Chinese central governments, this never changed since the Han Dynasty, it is never about the government/system, the biggest difference is the people. In case you have no idea of the definition of the current bubble, let me give you one - I live in Shanghai, there are millions of those ugly apartments built before the 90s which were basically handed over to local residents for free, the vast majority of them are located in average or above average areas. Thanks to a "booming" market, nowadays you need to pay $1m to get one of those 70 sqm ones. Did the CCP give every household $1m? No, they give you a bubble and you are paying for it. Oh, btw, Beijing is 20% more expensive than that even when the living conditions there are worse for obvious reasons.

rm_-rf_slash 10y ago
Bingo. There is no historical law which states that more control enables more stability. Overly-controlling situations can just as easily cause more harm than good. China saw that play out repeatedly under Mao, while at the same time America's many attempts to control the Vietnam War ended in abject failure. I think the real danger, however, is not what the CCP controls, but rather the peripheries that it cannot control, such as shadow banking and capital outflows (think the newly middle/upper-middle class Chinese family parking assets in overseas real estate; China's government cannot exert eminent domain in Vancouver or Miami).
dmix 10y ago
One big difference now is the scale of this potential crisis is massive. A lot more is at stake here and the state is highly motivated to keep things as stable as possible. Despite the inefficacy of the Chinese government, and I do entirely agree with you that they are continually on fragile ground as the tentacles of the government continually wrap around every aspect of the economy, they still have beat many peoples projections that they'd have a big recession/debt crisis by now.

rm_-rf_slash 10y ago

Something to note: the article features a link to the author's previous piece, titled "China's credit excess is unlike anything the world has ever seen." So are we honestly meant to believe that the biggest credit expansion ever can be whisked away by the first ever orderly bubble deflation?

faragon 10y ago

TL;DR: Yet another "financial/asset bubble soft landing is possible" prediction.