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I am no expert, but my rough understanding is that China has 'trapped' itself in a tricky situation by relying on its export economy and on debt/investments to

by pyoung 9y ago

I am no expert, but my rough understanding is that China has 'trapped' itself in a tricky situation by relying on its export economy and on debt/investments to stimulate growth. Ideally, a 'healthy' economy is balanced between exports, local consumption, and debt/investment. But China has weak local consumption due to their high saving rates and their capital outflows. This means they have had to rely on the other two (debt, exports) to grow the economy. High debt normally isn't an issue because a healthy economy can always 'grow out of it' (i.e. over time inflation will make it more manageable). But because China is export driven, if their currency rises too much, that part of their economy will crash (because their exports get more expensive). Had they had more local consumption, the impact would be smaller because the stronger currency would mean increased buying power for local consumers. But because local consumption is weak, they have to hope that growth in exports outpaces growth in debt (which recently hasn't been the case). The big question mark, is how actively the government will intervene if things go south. In a normal market, too much debt results in bankruptcies. This results in people losing money (all of those savers who have been socking their money away in banks). But a lot of institutions in China are state owned, so it's possible that they could prop up these institutions. No one really knows what that would look like, or how it would impact the economy, but the assumption is you will have a lot of zombie companies that only exist because the government is making good on their debt obligations.

SeeDave 9y ago
Thank you for sharing, especially your concerns centered around government intervention in case things go south. From my understanding, capital outflows seek higher returns in foreign markets which would eventually (in theory) be repatriated to drive eventual consumption. If the Yuan is strengthened, would this not make foreign produced goods cheaper to consume within the country? Would it truly be a "crash" if goods are consumed domestically instead of shipped to foreign countries? Considering the high savings rate, could these accelerated savings be used to purchase productive foreign assets? Strange times, to say the least.
- shostack 9y ago
  My understanding from what I've read is that the capital outflows aren't just seeking higher returns in foreign markets. Instead, they are also seeking to protect that money from an expected economic collapse in China and lord knows what means of trying to claw that capital back by the government. So I'm not sure a strengthening Yuan would necessarily remove the need for that reduction of risk.
  - pyoung 9y ago
    That is my understanding as well. These aren't your typical international investments, the goal is to get the money out of China entirely. Worth noting, China is also trying to limit international investments (in addition to capital flight mentioned above) to try and encourage domestic investments[1]. If I had to pick one sign that there might be trouble ahead, it would be this one. It's one thing to try and clamp down on people dodging capital controls, but it's another thing entirely to try and limit international investments that would broaden China's economic footprint. And one final thought. While there are some troubling signs, no major modern economy is or has been as tightly controlled as China's. So I don't think anyone really knows how this will play out. It's quite possible that they thread the needle and keep everything rolling smoothly. And as others mentioned in this thread, there are plenty of examples in history where massive infrastructure investments caused some big financial pain/failures in the short term, only to result in positive long term impacts. It's quite possible that China is playing the long game here, ready to suffer some short term pain, but looking 20-30 years down the road. As their economy matures, infrastructure projects will get more expensive (see the US for example), so might as well overbuild now. [1] https://www.theguardian.com/business/2016/dec/26/china-to-rein-in-foreign-investment-as-domestic-growth-stalls https://www.theguardian.com/business/2016/dec/26/china-to-re...

by pyoung 9y ago

SeeDave 9y ago

Thank you for sharing, especially your concerns centered around government intervention in case things go south. From my understanding, capital outflows seek higher returns in foreign markets which would eventually (in theory) be repatriated to drive eventual consumption. If the Yuan is strengthened, would this not make foreign produced goods cheaper to consume within the country? Would it truly be a "crash" if goods are consumed domestically instead of shipped to foreign countries? Considering the high savings rate, could these accelerated savings be used to purchase productive foreign assets? Strange times, to say the least.

shostack 9y ago
My understanding from what I've read is that the capital outflows aren't just seeking higher returns in foreign markets. Instead, they are also seeking to protect that money from an expected economic collapse in China and lord knows what means of trying to claw that capital back by the government. So I'm not sure a strengthening Yuan would necessarily remove the need for that reduction of risk.
- pyoung 9y ago
  That is my understanding as well. These aren't your typical international investments, the goal is to get the money out of China entirely. Worth noting, China is also trying to limit international investments (in addition to capital flight mentioned above) to try and encourage domestic investments[1]. If I had to pick one sign that there might be trouble ahead, it would be this one. It's one thing to try and clamp down on people dodging capital controls, but it's another thing entirely to try and limit international investments that would broaden China's economic footprint. And one final thought. While there are some troubling signs, no major modern economy is or has been as tightly controlled as China's. So I don't think anyone really knows how this will play out. It's quite possible that they thread the needle and keep everything rolling smoothly. And as others mentioned in this thread, there are plenty of examples in history where massive infrastructure investments caused some big financial pain/failures in the short term, only to result in positive long term impacts. It's quite possible that China is playing the long game here, ready to suffer some short term pain, but looking 20-30 years down the road. As their economy matures, infrastructure projects will get more expensive (see the US for example), so might as well overbuild now. [1] https://www.theguardian.com/business/2016/dec/26/china-to-rein-in-foreign-investment-as-domestic-growth-stalls https://www.theguardian.com/business/2016/dec/26/china-to-re...