13 ms·

S&P Cuts China’s Credit Rating, Citing Risk from Debt Growth

170 points by rayuela 9y ago

Iv 9y ago
"China is a country with a huge store of domestic savings and a still tightly controlled capital account. China doesn’t rely on foreign funding." 'nuff said.
- fhood 9y ago
  I think the point is that they rely on foreign lending to help fuel economic growth by flooding institutions with money, a practice that is unsustainable in the long term, and that their rating is being downgraded because their growth numbers are artificially inflated in this way.
- SubiculumCode 9y ago
  You mean Chinese debt is held in their own currency?
- ryandamm 9y ago
  This explains why there aren't external forces that can check the growth in credit. But there has been an explosion in debt within China, financing ultimately non-productive investment. Even with a positive external debt outlook, you can get wild economic imbalances within a country via uncontrolled credit creation. The hangover could be profound. To put it another way: why do you think centrally-planned economies are frequently outpaced by capitalist economies? Misallocation of resources. Debt binges are similarly distorting.
  - AlexCoventry 9y ago
    What specific misallocation of resources are you referring to? The housing developments? I'm not convinced those are wasteful, yet, even if the developers go under.
xutopia 9y ago
Now do you understand why the Chinese government is attempting to ban Bitcoin? Chinese people are scared of their currency and want an easy way to convert theirs into a non-traceable one in case the country descends into a depression.
- SubiculumCode 9y ago
  I was hoping that is was an action that would put pressure on North Korea. North Korea has been trying to use Cryptocurrencies to circumvent sanctions.
  - Waterluvian 9y ago
    I thought the amount at which they're doing so was a drop in the bucket worthy of nothing more than a headline?
    - QAPereo 9y ago
      Compared to their other money making activities, it doesn’t even register as a drop.
      - stctgion 9y ago
        Given the recent duck Vs elephant discussion I'd like to caution you that a drop is very likely to be in excess of 10^20 times smaller than an ocean
- Laforet 9y ago
  Why does anything and everything has to do with bitcoin? There are hundreds of trillions of CNY in circulation compared to ~1 billion USD worth of bitcoin being traded everyday. Compared to forex the volume of all cryptos combined is a drop in the bucket. >Chinese people are scared of their currency and want an easy way to convert theirs into a non-traceable one in case the country descends into a depression. There is a lot of talk of potential deflation cycle coming in, and in that case holding fiat is clearly the wiser option.
indescions_2017 9y ago
Timing is key, as China party leadership head into their fall meeting. Expect some face-saving "reset" rather than outright default. But still, very bullish for dollar vs emerging markets. And adding to already deflationary picture for global macroeconomy. Kyle Bass' original analysis of the China credit bubble is also worth revisiting. The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance http://im.ft-static.com/content/images/42972ca8-d72e-11e5-8887-98e7feb46f27.pdf http://im.ft-static.com/content/images/42972ca8-d72e-11e5-88...
- baybal2 9y ago
  I want people to remember US in late sixties. If somebody has good enough memory, he will recall that US citizens were legally forbidden from owning gold and even simple golden jewelry until 1974 (Nixon struck the gold standard just 3 years before). The schizophrenic policy was "We redeem FX dollars in gold, but not let any of our own citizens have it. Instead, the treasury will own your own gold for you." China tries to do the same trick with savings and assets of its citizens and companies. Except that for gold and silver, we have luxury apartments, lumps of jade, exotic industrial commodities stockpiles, bitcoins, FX certificates, and other novelties.
  - nerfhammer 9y ago
    gold jewelry was not illegal until 1974. It was "hoarding" of gold coins or bars worth over $100 (1933 dollars = ~$2000), and rarely enforced. any actual use of gold as a part of something was exempt.
    - baybal2 9y ago
      >actual use of gold as a part of something was exempt. Certainly not in its entirety, the same "articles containing gold clause" was used very creatively by courts to issue confiscation orders for jewelry for sure. That was my BLAW101 essay subject, something I spent few hours on digging court records. The "rarely enforced," does not mean that it had no effect. Effectively, people were forced to sell their trinkets, and buy stuff on the market with that money if they didn't want to loose all of the value of their savings.
wdn 9y ago
So let me get it, China, the biggest producer in the world and with a culture of saving a lot of money by it's citizens get a downgrade to A+. While at the save time, the US government's debt passed 20 trillions and American in debt with no savings got AAA rating. Yea, it makes a lot sense
- ceejayoz 9y ago
  It's the surge in private debt that's concerning. http://tsi-blog.com/wp-content/uploads/2015/08/chinadebt_gdp_240815.jpg http://tsi-blog.com/wp-content/uploads/2015/08/chinadebt_gdp...
- gthtjtkt 9y ago
  True, if you ignore most of the relevant details it makes no sense. That's basically the case with anything in life.
- kirse 9y ago
  You're right, it does make sense, given that the USA also experienced similar credit downgrades over the past decade when it went through its own credit crisis: https://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrades https://en.wikipedia.org/wiki/United_States_federal_governme... While we're being snarky, let's not forget that China also regularly steals, copies, hacks, and sources much of their "production" innovation from the USA while simultaneously impeding the United States' ability to enter Chinese markets in just about every category of good or service. So we'll just call this one even and leave it at that.
- alexanderstears 9y ago
  China, the biggest producer in the world Of what? Sneakers? Its GDP is smaller than America's (though maybe not with PPP corrections). a culture of saving a lot of money by it's citizens Too bad the savings go to malinvestments. Good luck securing ROI from ghost cities: https://www.wired.com/2016/02/kai-caemmerer-unborn-cities/ https://www.wired.com/2016/02/kai-caemmerer-unborn-cities/ And Sri Lankan airports: https://www.forbes.com/sites/wadeshepard/2016/07/31/china-to-sri-lanka-we-want-our-money-not-your-empty-airport/#633074ba1beb https://www.forbes.com/sites/wadeshepard/2016/07/31/china-to... American in debt with no savings got AAA rating The Federal Government has tremendous assets: http://business.time.com/2013/02/05/the-federal-governments-128-trillion-stockpile-the-answer-to-our-debt-problems/ http://business.time.com/2013/02/05/the-federal-governments-... We could pay off the debt with a land and spectrum auction tomorrow and people would clamor for more. I'd rather hold dollars than yuan and that's not just because I speak English.
dis-sys 9y ago
S&P? the one which repeatedly offered triple-A ratings to those junk securities before the GFC? It was sued by both US federal and state governments, eventually had to pay $1.5 billion fine for its wrongdoings. Maybe S&P should fix its own credibility debt first? https://www.bloomberg.com/news/articles/2015-02-03/s-p-ends-legal-woes-with-1-5-billion-penalty-with-u-s-states https://www.bloomberg.com/news/articles/2015-02-03/s-p-ends-... China has over $20 trillion saved, S&P calls it a debt problem and downgraded their credit rating. US has about $20 trillion debt, S&P is totally happy about it and gives it a triple-A rating. https://www.bloomberg.com/news/articles/2015-06-25/with-21-trillion-china-s-savers-are-set-to-change-the-world https://www.bloomberg.com/news/articles/2015-06-25/with-21-t... https://www.treasurydirect.gov/NP/debt/current https://www.treasurydirect.gov/NP/debt/current S&P is still the same old S&P, it didn't change in the last decade.
- tinfins 9y ago
  How do you think they should do that, and why are you responding so defensively? It seems to me that the only way for them to build up credibility is to never repeat the mistake they made last decade - but you seem to think that they should respond to their mistake by ... never downgrading a credit rating despite seeing issues? That doesn't make sense.
  - dis-sys 9y ago
    China has over $20 trillion saved. S&P choose to downgrade its credit rating. https://www.bloomberg.com/news/articles/2015-06-25/with-21-trillion-china-s-savers-are-set-to-change-the-world https://www.bloomberg.com/news/articles/2015-06-25/with-21-t... US has a real debt problem, yet S&P choose to give it a triple-A rating. This is not credit rating, it is an IQ test.
    - JumpCrisscross 9y ago
      > China has over $20 trillion saved From where did you get $20 trillion? The data I see show $3.5 trillion for the United States versus $5.4 trillion for China [1]. U.S. depository institutions hold over $9 trillion in savings [2]; this doesn't count savings held in stocks and bonds, the majority of Americans' savings. In any case, private savings aren't really relevant to a country's credit rating. Ability and willingness to pay are. If the U.S. Treasury defaults, one can sue. If China defaults...you're just screwed. [1] https://data.worldbank.org/indicator/NY.GNS.ICTR.CD?locations=US-CN https://data.worldbank.org/indicator/NY.GNS.ICTR.CD?location... [2] https://fred.stlouisfed.org/series/WSAVNS https://fred.stlouisfed.org/series/WSAVNS
coliveira 9y ago
Does it have anything to do with the fact that Russian, China and other BRICS are banding together to have Oil sold in Chinese currency? http://www.chinadaily.com.cn/business/2017-09/01/content_31408818.htm http://www.chinadaily.com.cn/business/2017-09/01/content_314...
- JumpCrisscross 9y ago
  > Does it have anything to do with the fact that Russian, China and other BRICS are banding together to have Oil sold in Chinese currency? No. If there's an industry S&P has a conflict of interest with, it's bankers. Derivatives, how Wall Street mostly trades commodities, don't care what their underlying asset is denominated in. I believe your question arises from what I refer to as the petrodollar fallacy. The U.S. dollar is used, globally, because Americans buy lots of stuff. Exporters who sell to Americans naturally end up with U.S. dollars. They could sell those dollars for their own currency, or they could invest them in U.S. dollar denominated assets. (Or they could hold them to further buy stuff from other people.) Our deep, liquid and largely politically indifferent financial markets, huge base of consumers and lack of capital controls underwrite the U.S. dollar's global popularity [1]. Given the United States is, again, a major oil producer, what other people trade their oil in is largely irrelevant to American financial interests. Would certain 3-letter agencies prefer Iran have to sell for dollars? Sure. Is that of even the most vanishing concern to Wall Street? No. [1] Historically, the U.S. dollar supplanted the pound sterling after World War II. The U.S. Treasury, through Harry Dexter White, hard coded the dollar into the Bretton Woods system [a]. He could do this because the United States was the only industrialized power untouched by the war. (We also had a nuclear monopoly.) Either way, nothing to do with oil. [a] https://en.wikipedia.org/wiki/Bretton_Woods_system https://en.wikipedia.org/wiki/Bretton_Woods_system
  - coliveira 9y ago
    What you forget in your analysis is that oil producers are not necessarily happy to exchange oil for dollars. They do that out of necessity, for the lack of an alternative. After all, any holder of wealth would be more than happy to diversify their holdings instead of "trusting" on the miraculous power of the dollar. The petrodollar is just the canary in the coal mine. Once countries are able to create an alternative to the dollar in that very crucial market, other industries will follow, especially at a moment when China is becoming the number one market and offsetting the industrial production of the US.
fspeech 9y ago
I think there is one fundamental point people should understand when pondering macro issues: for a closed system the amount of savings is equal to the amount of debt. Every dollar of debt is a dollar of savings for the debt holder and vice versa (the first part is always true; for the second part to be true we can either take a narrower view of what savings are or we can view "debt" a little more expansively to mean all financial assets -- the key is that claims are always matched by obligations). So China having a lot of debts is equivalent to Chinese having a lot of savings since most of the debts are held domestically. With that in mind maybe people can get a better perspective on the "what if" the credit boom stops.
- fludlight 9y ago
  https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
  - seanmcdirmid 9y ago
    Ya, my thoughts exactly. I think the reserve ratio for Chinese banks is less than 20% ATM; and that doesn't include off the book shadow loans. A lot of the extra liquidity is being sopped up directly into real estate. It never even hits the real economy.
    - fspeech 9y ago
      "A lot of the extra liquidity is being sopped up directly into real estate" It doesn't really work that way. People who buy lose liquidity but people who sell gain liquidity. Cash just changes hands. The question is what are the side effects of these transactions. In this case lots of apartments get built. Many of them empty. You may not regard that as the real economy. But is digging up gold to put in a vault or mining bitcoin any more real?
      - seanmcdirmid 9y ago
        No, they aren't. It isn't doing anything useful, just acting as a speculative asset. It isn't developing the economy so that production is increased later on. Gold and bitcoin mining similar don't create value either (for gold's usage as a speculative asset).
ShabbosGoy 9y ago
The fact of the matter is, having a dirty float exchange regime and beggar-thy-neighbor trade policies will eventually come back to haunt the country that engages in these practices.
cromwellian 9y ago
Lots of people in this thread failing to understand why the US has a higher credit rating. The US has had a stable political system for 200+ years (leaving aside the Civil War), and has a court and political system that investors have confidence in can respond to financial crises. It's not even about the US government's assets which it could sell, it's about the awesome ability of the US government to raise revenues by raising taxes. For example, US taxes as as a percentage of GDP have mostly fluctuated between a ~22-17% window. Right now, they're at 17%. They were almost 20% during WW2. That 3% respresents a half-trillion of revenue it could collect per year. Current US interest payments are $266 billion per year. There is ZERO chance of a default and everyone knows it. The situation with China is way more opaque. No one knows what their long term ability is to make continuing payments, nor does anyone know if what would happen to their political stability if there were a financial crisis. And as a last resort, since most world debt and trade is conducted in US dollars, the US government can literally print money to settle its debts, both domestic and international. If US tax receipts went to 25% of GDP, that's $1.4 trillion per year of interest payments, or paying off the debt in less than 20 years. Now, the common response would be to claim that raising taxes would reduce GDP growth, but the data doesn't show a strong correlation (higher growth has occurred during times of higher taxes and vice versa) and in any case, it's a lagging signal. All in all, US fundamentals are reasonably good, and the country is well equipped to deal with its debt relative to other aging social democracies. Moreover, if the Trumpsters don't screw up immigration with their xenophobia, the US fertility rate and immigration rate protect it against the kind of demographic inversion you seeing in other countries which poses a huge problem for entitlements. I have optimism for China's long term outlook, but there's way too many unknowns from lack of transparency to trust investing money in it.
eighthnate 9y ago
Hasn't the S&P credit ratings lost all credibility? They were the ones lableling worthless deritatives triple A ratings during the financial crisis? had

170 points by rayuela 9y ago

Iv 9y ago

"China is a country with a huge store of domestic savings and a still tightly controlled capital account. China doesn’t rely on foreign funding." 'nuff said.

fhood 9y ago
I think the point is that they rely on foreign lending to help fuel economic growth by flooding institutions with money, a practice that is unsustainable in the long term, and that their rating is being downgraded because their growth numbers are artificially inflated in this way.
SubiculumCode 9y ago
You mean Chinese debt is held in their own currency?
ryandamm 9y ago
This explains why there aren't external forces that can check the growth in credit. But there has been an explosion in debt within China, financing ultimately non-productive investment. Even with a positive external debt outlook, you can get wild economic imbalances within a country via uncontrolled credit creation. The hangover could be profound. To put it another way: why do you think centrally-planned economies are frequently outpaced by capitalist economies? Misallocation of resources. Debt binges are similarly distorting.
- AlexCoventry 9y ago
  What specific misallocation of resources are you referring to? The housing developments? I'm not convinced those are wasteful, yet, even if the developers go under.

xutopia 9y ago

Now do you understand why the Chinese government is attempting to ban Bitcoin? Chinese people are scared of their currency and want an easy way to convert theirs into a non-traceable one in case the country descends into a depression.

SubiculumCode 9y ago
I was hoping that is was an action that would put pressure on North Korea. North Korea has been trying to use Cryptocurrencies to circumvent sanctions.
- Waterluvian 9y ago
  I thought the amount at which they're doing so was a drop in the bucket worthy of nothing more than a headline?
  - QAPereo 9y ago
    Compared to their other money making activities, it doesn’t even register as a drop.
    - stctgion 9y ago
      Given the recent duck Vs elephant discussion I'd like to caution you that a drop is very likely to be in excess of 10^20 times smaller than an ocean
Laforet 9y ago
Why does anything and everything has to do with bitcoin? There are hundreds of trillions of CNY in circulation compared to ~1 billion USD worth of bitcoin being traded everyday. Compared to forex the volume of all cryptos combined is a drop in the bucket. >Chinese people are scared of their currency and want an easy way to convert theirs into a non-traceable one in case the country descends into a depression. There is a lot of talk of potential deflation cycle coming in, and in that case holding fiat is clearly the wiser option.

indescions_2017 9y ago

Timing is key, as China party leadership head into their fall meeting. Expect some face-saving "reset" rather than outright default. But still, very bullish for dollar vs emerging markets. And adding to already deflationary picture for global macroeconomy. Kyle Bass' original analysis of the China credit bubble is also worth revisiting. The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance http://im.ft-static.com/content/images/42972ca8-d72e-11e5-8887-98e7feb46f27.pdf http://im.ft-static.com/content/images/42972ca8-d72e-11e5-88...

baybal2 9y ago
I want people to remember US in late sixties. If somebody has good enough memory, he will recall that US citizens were legally forbidden from owning gold and even simple golden jewelry until 1974 (Nixon struck the gold standard just 3 years before). The schizophrenic policy was "We redeem FX dollars in gold, but not let any of our own citizens have it. Instead, the treasury will own your own gold for you." China tries to do the same trick with savings and assets of its citizens and companies. Except that for gold and silver, we have luxury apartments, lumps of jade, exotic industrial commodities stockpiles, bitcoins, FX certificates, and other novelties.
- nerfhammer 9y ago
  gold jewelry was not illegal until 1974. It was "hoarding" of gold coins or bars worth over $100 (1933 dollars = ~$2000), and rarely enforced. any actual use of gold as a part of something was exempt.
  - baybal2 9y ago
    >actual use of gold as a part of something was exempt. Certainly not in its entirety, the same "articles containing gold clause" was used very creatively by courts to issue confiscation orders for jewelry for sure. That was my BLAW101 essay subject, something I spent few hours on digging court records. The "rarely enforced," does not mean that it had no effect. Effectively, people were forced to sell their trinkets, and buy stuff on the market with that money if they didn't want to loose all of the value of their savings.

wdn 9y ago

So let me get it, China, the biggest producer in the world and with a culture of saving a lot of money by it's citizens get a downgrade to A+. While at the save time, the US government's debt passed 20 trillions and American in debt with no savings got AAA rating. Yea, it makes a lot sense

ceejayoz 9y ago
It's the surge in private debt that's concerning. http://tsi-blog.com/wp-content/uploads/2015/08/chinadebt_gdp_240815.jpg http://tsi-blog.com/wp-content/uploads/2015/08/chinadebt_gdp...
gthtjtkt 9y ago
True, if you ignore most of the relevant details it makes no sense. That's basically the case with anything in life.
kirse 9y ago
You're right, it does make sense, given that the USA also experienced similar credit downgrades over the past decade when it went through its own credit crisis: https://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrades https://en.wikipedia.org/wiki/United_States_federal_governme... While we're being snarky, let's not forget that China also regularly steals, copies, hacks, and sources much of their "production" innovation from the USA while simultaneously impeding the United States' ability to enter Chinese markets in just about every category of good or service. So we'll just call this one even and leave it at that.
alexanderstears 9y ago
China, the biggest producer in the world Of what? Sneakers? Its GDP is smaller than America's (though maybe not with PPP corrections). a culture of saving a lot of money by it's citizens Too bad the savings go to malinvestments. Good luck securing ROI from ghost cities: https://www.wired.com/2016/02/kai-caemmerer-unborn-cities/ https://www.wired.com/2016/02/kai-caemmerer-unborn-cities/ And Sri Lankan airports: https://www.forbes.com/sites/wadeshepard/2016/07/31/china-to-sri-lanka-we-want-our-money-not-your-empty-airport/#633074ba1beb https://www.forbes.com/sites/wadeshepard/2016/07/31/china-to... American in debt with no savings got AAA rating The Federal Government has tremendous assets: http://business.time.com/2013/02/05/the-federal-governments-128-trillion-stockpile-the-answer-to-our-debt-problems/ http://business.time.com/2013/02/05/the-federal-governments-... We could pay off the debt with a land and spectrum auction tomorrow and people would clamor for more. I'd rather hold dollars than yuan and that's not just because I speak English.

dis-sys 9y ago

S&P? the one which repeatedly offered triple-A ratings to those junk securities before the GFC? It was sued by both US federal and state governments, eventually had to pay $1.5 billion fine for its wrongdoings. Maybe S&P should fix its own credibility debt first? https://www.bloomberg.com/news/articles/2015-02-03/s-p-ends-legal-woes-with-1-5-billion-penalty-with-u-s-states https://www.bloomberg.com/news/articles/2015-02-03/s-p-ends-... China has over $20 trillion saved, S&P calls it a debt problem and downgraded their credit rating. US has about $20 trillion debt, S&P is totally happy about it and gives it a triple-A rating. https://www.bloomberg.com/news/articles/2015-06-25/with-21-trillion-china-s-savers-are-set-to-change-the-world https://www.bloomberg.com/news/articles/2015-06-25/with-21-t... https://www.treasurydirect.gov/NP/debt/current https://www.treasurydirect.gov/NP/debt/current S&P is still the same old S&P, it didn't change in the last decade.

tinfins 9y ago
How do you think they should do that, and why are you responding so defensively? It seems to me that the only way for them to build up credibility is to never repeat the mistake they made last decade - but you seem to think that they should respond to their mistake by ... never downgrading a credit rating despite seeing issues? That doesn't make sense.
- dis-sys 9y ago
  China has over $20 trillion saved. S&P choose to downgrade its credit rating. https://www.bloomberg.com/news/articles/2015-06-25/with-21-trillion-china-s-savers-are-set-to-change-the-world https://www.bloomberg.com/news/articles/2015-06-25/with-21-t... US has a real debt problem, yet S&P choose to give it a triple-A rating. This is not credit rating, it is an IQ test.
  - JumpCrisscross 9y ago
    > China has over $20 trillion saved From where did you get $20 trillion? The data I see show $3.5 trillion for the United States versus $5.4 trillion for China [1]. U.S. depository institutions hold over $9 trillion in savings [2]; this doesn't count savings held in stocks and bonds, the majority of Americans' savings. In any case, private savings aren't really relevant to a country's credit rating. Ability and willingness to pay are. If the U.S. Treasury defaults, one can sue. If China defaults...you're just screwed. [1] https://data.worldbank.org/indicator/NY.GNS.ICTR.CD?locations=US-CN https://data.worldbank.org/indicator/NY.GNS.ICTR.CD?location... [2] https://fred.stlouisfed.org/series/WSAVNS https://fred.stlouisfed.org/series/WSAVNS

coliveira 9y ago

Does it have anything to do with the fact that Russian, China and other BRICS are banding together to have Oil sold in Chinese currency? http://www.chinadaily.com.cn/business/2017-09/01/content_31408818.htm http://www.chinadaily.com.cn/business/2017-09/01/content_314...

JumpCrisscross 9y ago
> Does it have anything to do with the fact that Russian, China and other BRICS are banding together to have Oil sold in Chinese currency? No. If there's an industry S&P has a conflict of interest with, it's bankers. Derivatives, how Wall Street mostly trades commodities, don't care what their underlying asset is denominated in. I believe your question arises from what I refer to as the petrodollar fallacy. The U.S. dollar is used, globally, because Americans buy lots of stuff. Exporters who sell to Americans naturally end up with U.S. dollars. They could sell those dollars for their own currency, or they could invest them in U.S. dollar denominated assets. (Or they could hold them to further buy stuff from other people.) Our deep, liquid and largely politically indifferent financial markets, huge base of consumers and lack of capital controls underwrite the U.S. dollar's global popularity [1]. Given the United States is, again, a major oil producer, what other people trade their oil in is largely irrelevant to American financial interests. Would certain 3-letter agencies prefer Iran have to sell for dollars? Sure. Is that of even the most vanishing concern to Wall Street? No. [1] Historically, the U.S. dollar supplanted the pound sterling after World War II. The U.S. Treasury, through Harry Dexter White, hard coded the dollar into the Bretton Woods system [a]. He could do this because the United States was the only industrialized power untouched by the war. (We also had a nuclear monopoly.) Either way, nothing to do with oil. [a] https://en.wikipedia.org/wiki/Bretton_Woods_system https://en.wikipedia.org/wiki/Bretton_Woods_system
- coliveira 9y ago
  What you forget in your analysis is that oil producers are not necessarily happy to exchange oil for dollars. They do that out of necessity, for the lack of an alternative. After all, any holder of wealth would be more than happy to diversify their holdings instead of "trusting" on the miraculous power of the dollar. The petrodollar is just the canary in the coal mine. Once countries are able to create an alternative to the dollar in that very crucial market, other industries will follow, especially at a moment when China is becoming the number one market and offsetting the industrial production of the US.

fspeech 9y ago

I think there is one fundamental point people should understand when pondering macro issues: for a closed system the amount of savings is equal to the amount of debt. Every dollar of debt is a dollar of savings for the debt holder and vice versa (the first part is always true; for the second part to be true we can either take a narrower view of what savings are or we can view "debt" a little more expansively to mean all financial assets -- the key is that claims are always matched by obligations). So China having a lot of debts is equivalent to Chinese having a lot of savings since most of the debts are held domestically. With that in mind maybe people can get a better perspective on the "what if" the credit boom stops.

fludlight 9y ago
https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- seanmcdirmid 9y ago
  Ya, my thoughts exactly. I think the reserve ratio for Chinese banks is less than 20% ATM; and that doesn't include off the book shadow loans. A lot of the extra liquidity is being sopped up directly into real estate. It never even hits the real economy.
  - fspeech 9y ago
    "A lot of the extra liquidity is being sopped up directly into real estate" It doesn't really work that way. People who buy lose liquidity but people who sell gain liquidity. Cash just changes hands. The question is what are the side effects of these transactions. In this case lots of apartments get built. Many of them empty. You may not regard that as the real economy. But is digging up gold to put in a vault or mining bitcoin any more real?
    - seanmcdirmid 9y ago
      No, they aren't. It isn't doing anything useful, just acting as a speculative asset. It isn't developing the economy so that production is increased later on. Gold and bitcoin mining similar don't create value either (for gold's usage as a speculative asset).

ShabbosGoy 9y ago

The fact of the matter is, having a dirty float exchange regime and beggar-thy-neighbor trade policies will eventually come back to haunt the country that engages in these practices.

cromwellian 9y ago

Lots of people in this thread failing to understand why the US has a higher credit rating. The US has had a stable political system for 200+ years (leaving aside the Civil War), and has a court and political system that investors have confidence in can respond to financial crises. It's not even about the US government's assets which it could sell, it's about the awesome ability of the US government to raise revenues by raising taxes. For example, US taxes as as a percentage of GDP have mostly fluctuated between a ~22-17% window. Right now, they're at 17%. They were almost 20% during WW2. That 3% respresents a half-trillion of revenue it could collect per year. Current US interest payments are $266 billion per year. There is ZERO chance of a default and everyone knows it. The situation with China is way more opaque. No one knows what their long term ability is to make continuing payments, nor does anyone know if what would happen to their political stability if there were a financial crisis. And as a last resort, since most world debt and trade is conducted in US dollars, the US government can literally print money to settle its debts, both domestic and international. If US tax receipts went to 25% of GDP, that's $1.4 trillion per year of interest payments, or paying off the debt in less than 20 years. Now, the common response would be to claim that raising taxes would reduce GDP growth, but the data doesn't show a strong correlation (higher growth has occurred during times of higher taxes and vice versa) and in any case, it's a lagging signal. All in all, US fundamentals are reasonably good, and the country is well equipped to deal with its debt relative to other aging social democracies. Moreover, if the Trumpsters don't screw up immigration with their xenophobia, the US fertility rate and immigration rate protect it against the kind of demographic inversion you seeing in other countries which poses a huge problem for entitlements. I have optimism for China's long term outlook, but there's way too many unknowns from lack of transparency to trust investing money in it.

eighthnate 9y ago

Hasn't the S&P credit ratings lost all credibility? They were the ones lableling worthless deritatives triple A ratings during the financial crisis? had