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I think the best model to understand this is Michael Pettis's balance sheet analysis. He covers it extensively, but here's his latest digest of the model: http

• jseliger 9y ago
  and there will need to be a reckoning And yet when I read things like this I also think of the cliché, "Markets can remain irrational longer than you can remain solvent." People have been waiting decades for Japan's post-boom day of reckoning and we've not seen it.
  • Analemma_ 9y ago
    > People have been waiting decades for Japan's post-boom day of reckoning and we've not seen it. Japan's "day of reckoning" already came: what they've been in for the last 25+ years is the "post-reckoning" of ZIRP, low growth and low inflation. If the Chinese debt bubble explodes, it's not like the country is going to collapse, the most common prediction is that they'll become "Japan 2.0" where the country is functional but trapped in anemic growth because they won't let zombie businesses fail.
    • coffeevradar 9y ago
      Yeah, it's more like people have been waiting for decades for a day of reckoning for Japan in the sense that the country is still very productive in many senses but has yet to escape its extremely long-term recession. Japan has been punished enough. It's quite tragic.
      • toomuchtodo 9y ago
        Punished? Late stage first world economies with structural issues (an aging population, enourmous entitlement obligations) can escape recessions (stagnation, really) no more than humans can escape the heat death of the universe.
    • tlear 9y ago
      Huge problem in China is that unlike Japan it is not a uniform country. Income is VERY unevenly distributed geographically. Japan can stay in zombie state because even in stagnation it is pretty nice place to live for most people. The poor areas of China can not afford stagnation. Elite knows this and dreads it, why Vancouver housing market is nuts? Because when you live in China and have $$ you really want to have a place to bolt to or at least have your kids be somewhere else when the proverbial shit hits the fan.
  • hkmurakami 9y ago
    >People have been waiting decades for Japan's post-boom day of reckoning and we've not seen it. We saw the bust in the early 90's.
  • kadfasd4324 9y ago
    Nikkei peaked at 40k in 1990; it has been hovering around 10-20k ever since.
    • tonyedgecombe 9y ago
      That 40k price was after a huge asset price bubble.
  • ryandamm 9y ago
    Pettis quantifies it (elsewhere in his articles). He's gone on record that there's going to be an explicit or implicit write down, and China's average GDP growth is going to be well below 5% (averaging more like 2-3%) by 2020. I think those numbers are roughly correct. What appeals to me about Pettis's analysis is it's rooted in a simple quantitative model that rests on accounting identities. When you've got a model that fundamental, it's easier to make strong predictions. Also, "markets being irrational" is a claim about asset bubbles. What we're discussing here is much larger, and subject to its own laws of dynamics. It's not a bubble, per se -- it's more like a bad loan that keeps getting rolled over and bigger, and no one acknowledges the loan won't be repaid. Someone is going to lose out, but the day you can't cover the interest payments is the day you have to acknowledge the loss. In the case of China in 2017, the debt is held by banks, who are functionally insolvent if the bad loans (usually to property developers and commercial entities) were called in. Many of these commercial entities (large, state-owned enterprises, or state-adjacent conglomerates) simply have no possible way to service the actual loans, short of rolling over more debt. This isn't about asset prices, or a bigger fool bidding up the price of, say, housing stock: it's about the ratio of debt to productive capital. And the reason debt ballooned post 2008 is because the regular investment engine (mostly infrastructure and housing) had started to lose steam. The growth in debt in the economy was a rational response to the need to keep growth numbers high. But deferring the reckoning doesn't make it better. Though it's held in the corporate sector, much of China's debt behaves almost like revolving consumer credit in the US. (Also: one form of reckoning is flat growth for an extended period of time; Japan's lost decade is entering its third decade now, and systemic debt is still really bad. Pettis holds up Japan as one example of how not to correct the imbalances.)
    • stupidhn 9y ago
      >He's gone on record that there's going to be an explicit or implicit write down, and China's average GDP growth is going to be well below 5% (averaging more like 2-3%) by 2020. But I'd hardly describe that as a "reckoning". It sounds more like a predictable "regression to the mean" China's unprecedented growth is unsustainable; people know this. Case in point: this article.
    • codingmyway 9y ago
• drcode 9y ago
  It seems like smart people have been predicting that China's growth is unsustainable on a regular basis for at least 15 years... it's tough for an average HNer like myself to take the time to tell which "expert" is just blowing smoke and which expert truly has a handle on the salient facts- Guess all I can really do is simply wait and see who ends up being right...
  • hackuser 9y ago
    Agreed, to an extent (though not every 'expert' is equally reliable). Two ways I look at it: 1) Generally, the nature of a bubble is that nobody knows when it will pop. People knew about the U.S. asset bubble in the mid-2000s for years, but even those not caught up in the bubble mass psychology couldn't accurately predict when it would collapse. The same was true of the dot-com bubble around 2000. You can be right that there is a bubble, but be far wrong about when it ends. 2) There was a stock broker looking for new business. He cold called 512 people (he must have been a quant); half he told to sell X stock, half he told to buy. The next week he called the 256 for whom he'd made the right prediction and did the same again: Half he told to sell, half to buy ... several weeks later he was down to 16 people. He called all of them and said, 'look, I was right 5 times in a row ...'.
    • zeusk 9y ago
      > There was a stock broker looking for new business. He cold called 512 people (he must have been a quant); half he told to sell X stock, half he told to buy. The next week he called the 256 for whom he'd made the right prediction and did the same again: Half he told to sell, half to buy ... several weeks later he was down to 16 people. He called all of them and said, 'look, I was right 5 times in a row ...'. Except, what you just described is a scam and not something a registered broker can do.
      • llukas 9y ago
        At least not something that registered broker can do more than once. FTFY
      • 9y ago
• gitah 9y ago
  When you have a hammer everything looks like a nail. My problem with these kind of analysis is that it pretty much only looks at things from a financial perspective thinking it's the be-all-end all. However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology. As a developing country, China has lots of easy productivity growth just by adopting current technologies on the technological frontier. Therefore, I think an analysis on how fast China is advancing in various technological areas and their industrial policy would be much more useful than one just at a financial level. Are Chinese companies as a whole becoming more productive and creating new technology?
  • leoc 9y ago
    > However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology. Pettis does discuss this at length.
    • deleted 9y ago
      [deleted]
    • gitah 9y ago
      Can you elaborate? From the article, Pettis assumes the following is true: 1) China has overinvested in infrastructure and manufacturing capacity to such an extent that in the aggregate the cost of additional public sector investment exceeds the present value of future increases in productivity generated by the investment and 2) China's long-term sustainable growth rate is substantially below the economy's current GDP growth target Why does he make these assumptions without also analyzing the technology improvement aspect? I don't see anything about that in this article.
      • ryandamm 9y ago
• baursak 9y ago
  There's also MMT. E.g. https://www.thenation.com/article/the-rock-star-appeal-of-modern-monetary-theory/ https://www.thenation.com/article/the-rock-star-appeal-of-mo... or https://www.youtube.com/watch?v=d57M6ATPZIE https://www.youtube.com/watch?v=d57M6ATPZIE for overview.
• yuhong 9y ago
  Yea, basically the demand for goods from China is fuelled by increasing US and other debt, which increased the value of the yen too. In the 1970s and 1980s when US first got off the gold standard it was Japan I think.
• Animats 9y ago
  Pettis assumes, without justification, that the assets owned by the Government of China would be more productive in private hands, and thus calls for the government "to begin to sell off government assets". That's an ideological position. The privatization experience of the USSR indicates otherwise. China's government debt situation isn't bad.[1] Government debt / GDP is less than half that of the US. Japan is much worse off, with the world's highest Government debt to GDP ratio. What's really likely to hit China is the same thing that's hitting the rest of the developed world - it just doesn't take all that many people to make all the stuff. This is a killer for an export economy. This hit in Japan 20 years ago, in the US 10 years ago, and is starting to hit in China. The biggest suggestion of trouble is that so many wealthy Chinese are trying hard to get assets out of the country. This fuels the Vancouver and London real estate booms, and in a lesser way, Bitcoin. [1] http://www.tradingeconomics.com/country-list/government-debt-to-gdp http://www.tradingeconomics.com/country-list/government-debt...
  • seanmcdirmid 9y ago
    As for government debt, it really depends on if you include SOE debt or not. So SOEs are technically companies owned by the state, but have implicit backing from the government that they won't go bankrupt, giving them access to easy credit from the biggest banks (also often state owned....). Without the perception that moral hazard exists, this credit binge is really dangerous.
  • ryandamm 9y ago
    No, the reason he suggests the government move assets into private hands is because his main thesis for how China can get out of the jam is to improve household consumption vis-a-vis growth in household wealth. Not covered in the article I linked in particular, but his main idea is that China has had investment-fueled growth that's no longer sustainable; the foundation for all advanced, post-industrial economies is a robust consumer sector. China's is stunted at best. That's the motivation for transfers, not a productivity argument.
    • Animats 9y ago
      improve household consumption vis-a-vis growth in household wealth. He's complaining that China's individual savings rate is too high? "Use it up. Wear it out. Make it last. Or do without." - U.S. Government, WWII.
• mistermann 9y ago
  "To move from the abstract to something specific, I will assume, as occurred in 2009-10 as a consequence of the global crisis, that for reasons external to China there is a sharp contraction in its current account surplus, mainly caused by a sharp fall in exports....." (he then goes on to describe the repercussions that match his model.) Maybe I'm misunderstanding what he's saying, but isn't what he describes true of any export-driven economy? And, doesn't it ignore the fact that a large portion of the country is still pre-industrial and is easy pickings for GDP growth? It should be not terribly difficult to grow GDP via moving these people to an industrial standard of living based on domestic consumption, albeit not nearly as easily as in an export-driven economy where your customers are holding your hand along the path. And, does it not also ignore the possibility of moving up the value chain as their technological prowess increases? China is producing some pretty sophisticated technology on their own these days, and they have no shortage of engineers (although the quality may not be world class, I have no idea). This isn't to say his theory is wrong, it just doesn't seem terribly useful. But I think I must be missing something?
  • yxhuvud 9y ago
    So what you are talking about would amount to a rebalancing of the economy from the SOEs to the private sector. This is something he has written extensively about and that he thinks is necessary for long-term sustainable growth. But something has to be done about the SEOs, and right now they are kept afloat by a transfer in the OTHER direction. That is, the resources spent on their debt is cannibalizing growth in other areas.
    • ryandamm 9y ago
      To piggyback on your point, Pettis lays out explicitly how China should shift to consumer-driven GDP growth... then also points out how politically difficult it will be (because it likely entails assigning losses to the wealthy and politically connected, via breakup of SOEs, transfer of wealth to households from the government, etc). So yes, grandparent's point is correct, that there's room for consumer-led GDP growth. But the mechanism for how to get there is not easy. (And it's something Pettis has written about extensively.)
• brownbat 9y ago
  Pettis's recent articles show he's more optimistic than Moody's in the short term, and more pessimistic than the new optimism driven by a Morgan Stanley bluepaper, "Why We Are Bullish on China." He's pessimistic in the longrun, but it seems like China may be able to keep the ball in the air for the next few years. Worth a read: http://carnegieendowment.org/chinafinancialmarkets/68708?lang=en http://carnegieendowment.org/chinafinancialmarkets/68708?lan...