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The Macroeconomics of Chinese kleptocracy

199 points by alecco 14y ago

drstrangevibes 14y ago
lets just say that they learned from the best ;)
ridruejo 14y ago
John Hempton (the author of the blog) is awesome, thought the crap he has to deal with is usually not. I find his accounts fascinating, kind of an Australian Michael Lewis mini-me. You can take a look at another post from him of a couple of years ago taking a look at Linux/Windows/Apple http://brontecapital.blogspot.com.es/2010/08/fund-manager-experiments-in-geek.html http://brontecapital.blogspot.com.es/2010/08/fund-manager-ex...
narrator 14y ago
Negative savings rates are fine, as long as capital is created and the price of goods produced by that capital is falling due to efficiency improvements. Where you get the boom/bust is when increased investment and loans creates a feedback loop with the money multiplier causing prices of assets to increase in value even as the supply of those goods increases. Production is encouraged to become wasteful and inefficient because inflation and production taking place over time takes care of the profit margin. When the credit runs out, interest drags the prices back to their non-inflated money supply value and you get debt deflation and doom and gloom covers on The Economist. China fixes debt deflation by printing the money and handing it to the banks in exchange for their bad loans. In the west, the way things are set up, for better or for worse, we have to borrow it into existence and pay it back with interest, further burdening the tax payer and forcing government austerity. China can take care of the moral hazard that comes with printed money bank bailouts because the government has political control of the financial sector. The government routinely tells banks to stop lending to certain sectors and slaps very specific regulations on to what kind of people and on what terms bank can lend to borrowers. In the west, we like to let the "free market" run things which is why we got rid of Glass/Stegal, etc.
- jasonwatkinspdx 14y ago
  I don't see how what you're saying addresses anything in the article. What am I missing?
  - crdoconnor 14y ago
    It sounds like "kleptocracy is fine provided it doesn't cause a boom/bust cycle".
  - jasonwatkinspdx 14y ago
    To elaborate: I can understand how temporarily forcing a negative nominal savings rates on a population might be beneficial in the short term in the Keynesian sense. But a forced, regressive negative real savings rate? I cannot think of a moral justification for that.
  - nikcub 14y ago
    Having a country being run as a Mafia state is better than living in a real estate bubble?
- maratd 14y ago
  > Negative savings rates are fine, as long as capital is created and the price of goods produced by that capital is falling due to efficiency improvements. Plain English: Theft-level interest rates are OK, as long as you have deflation. China is not experiencing deflation, so it is not OK. > China fixes debt deflation by printing the money and handing it to the banks in exchange for their bad loans. To make sure that inflation occurs, yes, China prints money. This is a fine balancing act, as the article implies. Print too little, deflation takes place and all the SOEs collapse. Panic + revolution. Print too much, you get a high inflation rate. Also panic + revolution.
- cynicalkane 14y ago
  In the west, the way things are set up, for better or for worse, we have to borrow it into existence and pay it back with interest, further burdening the tax payer and forcing government austerity Not only is this opinion not right, it's not even wrong. When you say "we", are you talking about the Fed? Banks? Consumer debt and credit? Since you're talking about "burdening the tax payer and forcing government austerity", I'll suppose you're taking about Treasury-backed Federal Reserve currency. Now, the Fed remands almost all of its profit back to the Treasury, so we're actually talking about the opposite--Federal Reserve printed currency is seignorage, it's very close free money to the government. The taxpayer pays almost nothing for as long as the debt-backed money exists. A lot of this narrative seems to depend on popular, but bad, memes of armchair economics, so I'm just picking out the worst one.
fleitz 14y ago
Except for the one child policy and a few other specifics I'm not sure that the poster is actually talking about China.
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trevelyan 14y ago
This post does not pass the smell test. Yes, there is a lot of corruption in China and the political elite is enriching itself at the expense of the public and private sector. One mechanism for this certainly involves the government suppressing interest rates on bank deposits, and then directing banks to provide loans to preferred enterprises, which often engage in real estate. This is not actually a horrible approach to development since it keeps the government from having to finance everything up-front and a lot of the time the projects actually end up working. But sometimes it leads to non-performing loans and everyone knows there is much more of this than is claimed. But even so the alarmism doesn't make any sense. If we multiply the amount of state-acknowledged NPLs at the largest five Chinese banks (~300 billion RMB) by an order of magnitude and we still only have 500 billion USD in bad assets. Sure this is a lot of money, but the Chinese government has previously dealt with the NPL issue by dumping cash into the banking sector and will doubtless continue to do so if necessary to maintain the status quo. 500 billion dollars still pales in comparison to China's more than 3 trillion in foreign currency reserves, so who cares? In reality, this system is actually sort of preferable since no-one can effectively loot state currency reserves yet, so bailing out the banks gets the money back into play. To the extent there are stresses in the system, its that real estate development has been on the rocks since 2008 and prices are getting past the point where people can throw themselves into practical servitude in order to buy property. If you follow the Chinese media, right now it looks like the bubble will play out with local governments buying properties from cash-strapped developers at inflated prices (bonus question: guess who will issue the loans to finance this?) in order to turn them into social housing projects (bonus question two: guess who you need to be related to in order to get apportioned these assets?). Since it seems likely the poor are going to get screwed regardless, the real losers in the coming years are Chinese citizens locked into 30 or 40 year mortgages on underwhelming properties who will soon find themselves doubly-screwed as cash-strapped localities who can no longer charge real estate developers such inflated prices for real estate switch to issuing property taxes instead.
- jasonwatkinspdx 14y ago
  Interesting that you feel the need to start your refutation with nothing more than "smells bad." To me that reads like you don't even believe your own envelope arithmetic enough to not throw in some superfluous rhetorical support.
chaostheory 14y ago
It's always interesting to focus on China and I definitely do not disagree with the article. However based on the subject, what is happening in China is also happening elsewhere; especially in the West. I think it's also important to look in the mirror and get our own house in order first.
- Sambdala 14y ago
  It's easier to see what's wrong in a particularly egregious example (savings rates approaching 50%!!!) and then later examine what parallels you can find in your own (assuming you're not Chinese) culture.
- kylebrown 14y ago
  Right, corruption is a global pandemic. Who can say how much the bids are rigged in awarding US military-industrial contracts (funded both by US taxpayers and global dollar-demand), to say nothing of state and local gov contracts (eg NYC paying $632m for a 911 phone system upgrade[1]). And wall street fleecing everyone else, as usual.[2] The article makes some very insightful points, but I'm not convinced that Chinese SOEs are more evil than any other centers of power (just one manifestion of growing inequality). One casualty overlooked here are Chinese SMEs: "The real problem is the limited presence of other financial intermediaries and the rudimentary nature of bond and equity markets, both of which poorly serve the needs of small private companies and local governments."[3],[4] The author is right about deflation as the sandtrap up ahead, but that's just the consequence of a decelerating economy and we're still to see how soft/hard China lands. In doing a root cause analysis, one can chase down endless trails corruption. But if you want to find a problem which can be solved with a technological solution (as opposed to a social solution), it comes down to a distinct lack of progress in energy tech. Productivity gains in IT just haven't been enough to offset the rising cost of energy (as argued by Peter Thiel)[5]. Sure, the rising cost of energy is tempered a bit during deflationary cycles. But its a lose-lose, because so is economic growth (harmed both by too much inflation and deflation). 1. http://yro.slashdot.org/story/12/05/31/1953210/comptroller-accuses-hp-of-overcharging-nyc-163m-on-911-system http://yro.slashdot.org/story/12/05/31/1953210/comptroller-a... 2. http://www.nytimes.com/2012/06/10/business/banks-could-return-a-favor-to-governments-fair-game.html http://www.nytimes.com/2012/06/10/business/banks-could-retur... 3. http://www.bloomberg.com/news/2012-06-05/tall-tales-about-china-s-banks-hide-economy-s-problems.html http://www.bloomberg.com/news/2012-06-05/tall-tales-about-ch... 4. http://www.bloomberg.com/news/2011-11-06/china-credit-squeeze-prompting-suicides-along-with-offer-to-sever-a-finger.html http://www.bloomberg.com/news/2011-11-06/china-credit-squeez... 5. http://www.youtube.com/watch?v=XRrLyckg8Nc http://www.youtube.com/watch?v=XRrLyckg8Nc
meatsock 14y ago
do they really have see-through apartment buildings in china or is that a mistranslation?
- dynamichype 14y ago
  I'm going to possibly expose myself to some ribbing by assuming this this a genuine question instead of a statement that just presses the joke. By "see-through" I assume the author refers to (mostly motel style) apartment buildings that are completely unoccupied or even unfinished and hence they lack blinds, drapes, furniture, (and sometimes walls). Thus, you can completely "see-through" them from street level. You can---by the way---see the same phenomena in the American South where gulf-relief zones made building (or to start building) new apartments/condos in some areas practically a tax-dodge but where the natives in those areas don't have the means to buy them at even a quarter (sometimes eighth) the cost.
  - dynamichype 14y ago
    I'm not sure about in China, but in the South another way such buildings are "see-through" is that the buildings were built elevated over completely empty parking lots. There are streets where you can see two or three streets over "through" these empty parking lots.
  - meatsock 14y ago
    i thought it might refer to buildings laying fallow and having no substance in the context of their use; ghost buildings. nowhere in the article does he refer to why they are see-through but he does mention unused buildings.
- corford 14y ago
  A good friend of mine has just moved out there and judging by what he's told me, I think this might refer to empty apartment buildings i.e. each apartment literally consists of a few walls and has no electrical wiring, plumbing, windows or anything else. They just buy the shell and sit on it.
- crdoconnor 14y ago
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- cynicalkane 14y ago
  no, when a couple marries, the woman's parents are not (generally) cared for by the new family My bet is the one-child policy will make short work of this social norm. The point is there's a one-to-one relationship between children and sets of four grandparents. Daughters won't let their elders starve.
- jakarta 14y ago
  Does it really matter if you have a 1% or 3% rate on your bank account? At the end of it, because of the inflation rate, you still have a negative real rate for deposits which would promote investing elsewhere (like apartments). I don't see anywhere where he said everyone was speculating on property as a savings mechanism. Obviously some parts of China are very poor. The fact remains though that people are choosing to speculate in property, which is logical given the negative real rates in China.
  - planetguy 14y ago
    I assume there are restrictions which prevent Chinese people from easily investing their money in other countries? On the other hand, I assume these restrictions are somewhat permeable which is why you certainly do have rich Chinese buying up property overseas?
    - mmagin 14y ago
      In general, Chinese citizens cannot invest in stocks of non-Chinese companies. There may be some ways around that, but that's the general understanding I was given when I was recently talking to someone from Beijing.
- learc83 14y ago
  >"4 grandparents" problem - no, when a couple marries, the woman's parents are not (generally) cared for by the new family." I don't see how that changes his argument. If you have a girl then you now have 0 grandchildren to help you when you're old, thus logically causing you to save even more than you would have. >The savings rate is due to thousands of years of constant invasion, mass slaughter, starvation and death. Look through Chinese history and you will see more than a few "mass extinctions" (80%+ death rates). This leads to a saving mentality, it's embedded in the culture (and not a new thing at all). Europe has had near extinction events and invasions as well, so I don't think you can really just point to that as the total explanation. Additionally from what I've read Chinese savings rates have been increasing, so it can't be explained as merely cultural. >Personal savings are not at all used in this way. How are banks investing the money, then? If they are investing the money in such a way that it frees up other funds for the government to invest elsewhere then it has the same net effect.
elchief 14y ago
Sounds slightly less corrupt than Wall Street.
- planetguy 14y ago
  There should be a name for the phenomenon on the internet whereby any article about any phenomenon in any non-US country of the world will inevitably result in someone piping in with "oh yeah? it's even worse in the US"
  - drstrangevibes 14y ago
    yeah its called 'highlighting hypocrisy'
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cs702 14y ago
There are a lot of things I don't understand about China's economy, and every time I think I might have a handle on it, I come across juicy tidbits like these ones: * The ghost city of Ordos. Built on spec for one million residents, this city sits empty in the middle of nowhere. A lot of money went into building all its plazas, museums, parks, office buildings, and residences, but no one needs or uses any of it.[1] * The New South China Mall, in Guangdong Province. With nearly 10 million square feet of retail space, it's by far the world's largest mall. Opened in 2005, almost no one ever visits it, and only around 1% of the retail space has been leased -- it just sits empty. A lot of money went into building it, but no one needs or uses it.[2] * A well-known hedge fund manager recently reported that China is building "2.8 billion square metres of Class A office space over the following couple of years... That’s basically a five-foot by five-foot office cubicle for every man, woman and child in China.” A lot of money is going into building a new cubicle for everyone, but what's the economic rationale?[3] [1] Here's a recent BBC article on it: http://www.bbc.co.uk/news/magazine-17390729 http://www.bbc.co.uk/news/magazine-17390729 and a great photo essay in Time: http://www.time.com/time/photogallery/0,29307,1975397,00.html http://www.time.com/time/photogallery/0,29307,1975397,00.htm... [2] Here's a recent video of the mall on a Saturday: http://www.youtube.com/watch?v=Eel1r1nm1lU http://www.youtube.com/watch?v=Eel1r1nm1lU and here's an article about it: http://www.dailymail.co.uk/news/article-1223747/Ghost-mall-The-worlds-largest-loneliest-shopping-centre.html http://www.dailymail.co.uk/news/article-1223747/Ghost-mall-T... [3] For example, see http://www.theglobeandmail.com/report-on-business/rob-magazine/chanos-calls-china-syndrome/article596067/?page=all http://www.theglobeandmail.com/report-on-business/rob-magazi...
- twelvechairs 14y ago
  A few points (with no overarching narrative): - China's construction industry is a force unto itself - important economically and a huge employer. Its hard to say 'stop'. - As it said in the OP - property seems the simplest way to invest money. After all, can prices go down when they are already so low compared to the west? - In the west we built in the 1960s at (what seemed then) a ridiculous pace, with new building typologies that were often terribly designed. Like us, they will be living with (or in) the consequences for the next 50 years. - Various levels of govt are already trying to put the brakes on the worse kinds of speculative development, with some success. Aside from the already clear examples of 'bad investment' (like the ones you point out) - the brakes are already coming from other directions too.
twelvechairs 14y ago
It doesn't take a genius (or quite so many words) to come to the conclusion that when the economy is growing fast corruption starts and when the economy slows down the poor will get angry about cortuption. That said - I'm not really for predicting the future in narrative form like this because it is very one eyed. There's plenty of signs pointing in other directions as well.
harrypreston 14y ago
In China, a married couple who are both only-children can actually have 2 children. This was an alteration to the policy made in 2010 and was exactly designed to stop the 4 grandparent problem. Ref: http://www.cbc.ca/news/world/story/2009/10/28/f-rfa-germain.html http://www.cbc.ca/news/world/story/2009/10/28/f-rfa-germain....
superslug 14y ago
I dont get it.. when the Western nations steal resources from other countries (Oil,natural resources,scientists etc) its considered growth or "preserving" interests... when the chinese or any other non-westen countries do this its considered a kleptocracy? sounds like sour grapes to me...
yaix 14y ago
The article forgets about the big business of the local gov'ts in China, who are the driving (selling) force behind the building boom. It is correct, that investment in real estate is the best options for most lower and middle class Chinese. The local gov'ts expropriate the land from peasants and sell is for housing development. In the absense of substantial tax income, this is the one important source of income for cities and towns. There is often no legal way for people to fight the expropriation, because executive and judicative powers are all in the local party's hand.
gringomorcego 14y ago
I wonder if anyone actually understood what the one child policy would have. I mean, was this predictable? Did the Chinese government know it was going to create this situation?
quantgenius 14y ago
Based on the comments it seems many people are missing out on some of the most important points the blogger is making. First, a very large percentage (maybe 40-50%) of Chinese companies going public on Western and developed Asian exchanges have turned out to be complete frauds. There have of course been some very large companies that have been very successful and they are likely completely honest, but there are also many, many often smaller companies who's financial statements are pure fiction. It turns out that the biggest beneficiaries of the frauds were politically connected families, yet none has been prosecuted. The Chinese had decided to open things up a little bit, essentially taking baby steps towards the Western model and require companies to file at least a minimal amount of information domestically and to make some this information theoretically publicly available. Furthermore when a company goes publicly in most markets outside China, it has to file a whole smorgasbord of financial information. Most of these frauds were uncovered by a careful examination of financial statements companies going public were required to file. A number of the frauds were in fact discovered by this blogger himself (see his earlier posts). In many cases the financial statements were just ludicrously implausible. In other cases they were listing facilities which did not exist etc. Very few were in anything other than plain view. Remember that this really hurts honest Chinese companies (and there are many high quality Chinese companies that do things by the book) because you are going to have to do far more due diligence on a Chinese company because you can't really rely on the financial statements. Even after you do due diligence you are going to demand a discount. While there is a mania for anything Chinese by naive retail investors everything seems fine if you are a small company with a limited float but for a huge company trying to raise a lot of capital, you have to raise money from well informed institutions. While companies that only list domestically are harder to do due diligence on, it seems, based on work done by the blogger and others, that the percentage of frauds listing on the Shanghai exchange is at least as high as the percentage of frauds listing on foreign exchanges. Imagine if 40-50% of US companies going public over a period of time were frauds and this was discovered through their public filings. Legislators and regulators would be lining up to require more disclosure. Instead the Chinese have now changed the law so Chinese companies have to file less information and the information they do file is practically a state secret. This is somewhat akin to companies trading on the NYSE filing absolutely NO financial statements and the SEC and Congress preventing anyone from seeing what they did file. Especially given that in the few cases where it is possible to trace the ultimate beneficiary of the frauds, it has been a politically connected family member, none of whom have been prosecuted, it is hard to ascribe any reason to pass rules restricting access to company financial information other than a desire by the elites to steal as much as they can through stock fraud.

199 points by alecco 14y ago

lets just say that they learned from the best ;)

John Hempton (the author of the blog) is awesome, thought the crap he has to deal with is usually not. I find his accounts fascinating, kind of an Australian Michael Lewis mini-me. You can take a look at another post from him of a couple of years ago taking a look at Linux/Windows/Apple http://brontecapital.blogspot.com.es/2010/08/fund-manager-experiments-in-geek.html http://brontecapital.blogspot.com.es/2010/08/fund-manager-ex...

narrator 14y ago

Negative savings rates are fine, as long as capital is created and the price of goods produced by that capital is falling due to efficiency improvements. Where you get the boom/bust is when increased investment and loans creates a feedback loop with the money multiplier causing prices of assets to increase in value even as the supply of those goods increases. Production is encouraged to become wasteful and inefficient because inflation and production taking place over time takes care of the profit margin. When the credit runs out, interest drags the prices back to their non-inflated money supply value and you get debt deflation and doom and gloom covers on The Economist. China fixes debt deflation by printing the money and handing it to the banks in exchange for their bad loans. In the west, the way things are set up, for better or for worse, we have to borrow it into existence and pay it back with interest, further burdening the tax payer and forcing government austerity. China can take care of the moral hazard that comes with printed money bank bailouts because the government has political control of the financial sector. The government routinely tells banks to stop lending to certain sectors and slaps very specific regulations on to what kind of people and on what terms bank can lend to borrowers. In the west, we like to let the "free market" run things which is why we got rid of Glass/Stegal, etc.

jasonwatkinspdx 14y ago
I don't see how what you're saying addresses anything in the article. What am I missing?
- crdoconnor 14y ago
  It sounds like "kleptocracy is fine provided it doesn't cause a boom/bust cycle".
- jasonwatkinspdx 14y ago
  To elaborate: I can understand how temporarily forcing a negative nominal savings rates on a population might be beneficial in the short term in the Keynesian sense. But a forced, regressive negative real savings rate? I cannot think of a moral justification for that.
- nikcub 14y ago
  Having a country being run as a Mafia state is better than living in a real estate bubble?
maratd 14y ago
> Negative savings rates are fine, as long as capital is created and the price of goods produced by that capital is falling due to efficiency improvements. Plain English: Theft-level interest rates are OK, as long as you have deflation. China is not experiencing deflation, so it is not OK. > China fixes debt deflation by printing the money and handing it to the banks in exchange for their bad loans. To make sure that inflation occurs, yes, China prints money. This is a fine balancing act, as the article implies. Print too little, deflation takes place and all the SOEs collapse. Panic + revolution. Print too much, you get a high inflation rate. Also panic + revolution.
cynicalkane 14y ago
In the west, the way things are set up, for better or for worse, we have to borrow it into existence and pay it back with interest, further burdening the tax payer and forcing government austerity Not only is this opinion not right, it's not even wrong. When you say "we", are you talking about the Fed? Banks? Consumer debt and credit? Since you're talking about "burdening the tax payer and forcing government austerity", I'll suppose you're taking about Treasury-backed Federal Reserve currency. Now, the Fed remands almost all of its profit back to the Treasury, so we're actually talking about the opposite--Federal Reserve printed currency is seignorage, it's very close free money to the government. The taxpayer pays almost nothing for as long as the debt-backed money exists. A lot of this narrative seems to depend on popular, but bad, memes of armchair economics, so I'm just picking out the worst one.

fleitz 14y ago

Except for the one child policy and a few other specifics I'm not sure that the poster is actually talking about China.

deleted 14y ago

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trevelyan 14y ago

This post does not pass the smell test. Yes, there is a lot of corruption in China and the political elite is enriching itself at the expense of the public and private sector. One mechanism for this certainly involves the government suppressing interest rates on bank deposits, and then directing banks to provide loans to preferred enterprises, which often engage in real estate. This is not actually a horrible approach to development since it keeps the government from having to finance everything up-front and a lot of the time the projects actually end up working. But sometimes it leads to non-performing loans and everyone knows there is much more of this than is claimed. But even so the alarmism doesn't make any sense. If we multiply the amount of state-acknowledged NPLs at the largest five Chinese banks (~300 billion RMB) by an order of magnitude and we still only have 500 billion USD in bad assets. Sure this is a lot of money, but the Chinese government has previously dealt with the NPL issue by dumping cash into the banking sector and will doubtless continue to do so if necessary to maintain the status quo. 500 billion dollars still pales in comparison to China's more than 3 trillion in foreign currency reserves, so who cares? In reality, this system is actually sort of preferable since no-one can effectively loot state currency reserves yet, so bailing out the banks gets the money back into play. To the extent there are stresses in the system, its that real estate development has been on the rocks since 2008 and prices are getting past the point where people can throw themselves into practical servitude in order to buy property. If you follow the Chinese media, right now it looks like the bubble will play out with local governments buying properties from cash-strapped developers at inflated prices (bonus question: guess who will issue the loans to finance this?) in order to turn them into social housing projects (bonus question two: guess who you need to be related to in order to get apportioned these assets?). Since it seems likely the poor are going to get screwed regardless, the real losers in the coming years are Chinese citizens locked into 30 or 40 year mortgages on underwhelming properties who will soon find themselves doubly-screwed as cash-strapped localities who can no longer charge real estate developers such inflated prices for real estate switch to issuing property taxes instead.

jasonwatkinspdx 14y ago
Interesting that you feel the need to start your refutation with nothing more than "smells bad." To me that reads like you don't even believe your own envelope arithmetic enough to not throw in some superfluous rhetorical support.

chaostheory 14y ago

It's always interesting to focus on China and I definitely do not disagree with the article. However based on the subject, what is happening in China is also happening elsewhere; especially in the West. I think it's also important to look in the mirror and get our own house in order first.

Sambdala 14y ago
It's easier to see what's wrong in a particularly egregious example (savings rates approaching 50%!!!) and then later examine what parallels you can find in your own (assuming you're not Chinese) culture.
kylebrown 14y ago
Right, corruption is a global pandemic. Who can say how much the bids are rigged in awarding US military-industrial contracts (funded both by US taxpayers and global dollar-demand), to say nothing of state and local gov contracts (eg NYC paying $632m for a 911 phone system upgrade[1]). And wall street fleecing everyone else, as usual.[2] The article makes some very insightful points, but I'm not convinced that Chinese SOEs are more evil than any other centers of power (just one manifestion of growing inequality). One casualty overlooked here are Chinese SMEs: "The real problem is the limited presence of other financial intermediaries and the rudimentary nature of bond and equity markets, both of which poorly serve the needs of small private companies and local governments."[3],[4] The author is right about deflation as the sandtrap up ahead, but that's just the consequence of a decelerating economy and we're still to see how soft/hard China lands. In doing a root cause analysis, one can chase down endless trails corruption. But if you want to find a problem which can be solved with a technological solution (as opposed to a social solution), it comes down to a distinct lack of progress in energy tech. Productivity gains in IT just haven't been enough to offset the rising cost of energy (as argued by Peter Thiel)[5]. Sure, the rising cost of energy is tempered a bit during deflationary cycles. But its a lose-lose, because so is economic growth (harmed both by too much inflation and deflation). 1. http://yro.slashdot.org/story/12/05/31/1953210/comptroller-accuses-hp-of-overcharging-nyc-163m-on-911-system http://yro.slashdot.org/story/12/05/31/1953210/comptroller-a... 2. http://www.nytimes.com/2012/06/10/business/banks-could-return-a-favor-to-governments-fair-game.html http://www.nytimes.com/2012/06/10/business/banks-could-retur... 3. http://www.bloomberg.com/news/2012-06-05/tall-tales-about-china-s-banks-hide-economy-s-problems.html http://www.bloomberg.com/news/2012-06-05/tall-tales-about-ch... 4. http://www.bloomberg.com/news/2011-11-06/china-credit-squeeze-prompting-suicides-along-with-offer-to-sever-a-finger.html http://www.bloomberg.com/news/2011-11-06/china-credit-squeez... 5. http://www.youtube.com/watch?v=XRrLyckg8Nc http://www.youtube.com/watch?v=XRrLyckg8Nc

meatsock 14y ago

do they really have see-through apartment buildings in china or is that a mistranslation?

dynamichype 14y ago
I'm going to possibly expose myself to some ribbing by assuming this this a genuine question instead of a statement that just presses the joke. By "see-through" I assume the author refers to (mostly motel style) apartment buildings that are completely unoccupied or even unfinished and hence they lack blinds, drapes, furniture, (and sometimes walls). Thus, you can completely "see-through" them from street level. You can---by the way---see the same phenomena in the American South where gulf-relief zones made building (or to start building) new apartments/condos in some areas practically a tax-dodge but where the natives in those areas don't have the means to buy them at even a quarter (sometimes eighth) the cost.
- dynamichype 14y ago
  I'm not sure about in China, but in the South another way such buildings are "see-through" is that the buildings were built elevated over completely empty parking lots. There are streets where you can see two or three streets over "through" these empty parking lots.
- meatsock 14y ago
  i thought it might refer to buildings laying fallow and having no substance in the context of their use; ghost buildings. nowhere in the article does he refer to why they are see-through but he does mention unused buildings.
corford 14y ago
A good friend of mine has just moved out there and judging by what he's told me, I think this might refer to empty apartment buildings i.e. each apartment literally consists of a few walls and has no electrical wiring, plumbing, windows or anything else. They just buy the shell and sit on it.
crdoconnor 14y ago

deleted 14y ago

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cynicalkane 14y ago
no, when a couple marries, the woman's parents are not (generally) cared for by the new family My bet is the one-child policy will make short work of this social norm. The point is there's a one-to-one relationship between children and sets of four grandparents. Daughters won't let their elders starve.
jakarta 14y ago
Does it really matter if you have a 1% or 3% rate on your bank account? At the end of it, because of the inflation rate, you still have a negative real rate for deposits which would promote investing elsewhere (like apartments). I don't see anywhere where he said everyone was speculating on property as a savings mechanism. Obviously some parts of China are very poor. The fact remains though that people are choosing to speculate in property, which is logical given the negative real rates in China.
- planetguy 14y ago
  I assume there are restrictions which prevent Chinese people from easily investing their money in other countries? On the other hand, I assume these restrictions are somewhat permeable which is why you certainly do have rich Chinese buying up property overseas?
  - mmagin 14y ago
    In general, Chinese citizens cannot invest in stocks of non-Chinese companies. There may be some ways around that, but that's the general understanding I was given when I was recently talking to someone from Beijing.
learc83 14y ago
>"4 grandparents" problem - no, when a couple marries, the woman's parents are not (generally) cared for by the new family." I don't see how that changes his argument. If you have a girl then you now have 0 grandchildren to help you when you're old, thus logically causing you to save even more than you would have. >The savings rate is due to thousands of years of constant invasion, mass slaughter, starvation and death. Look through Chinese history and you will see more than a few "mass extinctions" (80%+ death rates). This leads to a saving mentality, it's embedded in the culture (and not a new thing at all). Europe has had near extinction events and invasions as well, so I don't think you can really just point to that as the total explanation. Additionally from what I've read Chinese savings rates have been increasing, so it can't be explained as merely cultural. >Personal savings are not at all used in this way. How are banks investing the money, then? If they are investing the money in such a way that it frees up other funds for the government to invest elsewhere then it has the same net effect.

elchief 14y ago

Sounds slightly less corrupt than Wall Street.

planetguy 14y ago
There should be a name for the phenomenon on the internet whereby any article about any phenomenon in any non-US country of the world will inevitably result in someone piping in with "oh yeah? it's even worse in the US"
- drstrangevibes 14y ago
  yeah its called 'highlighting hypocrisy'

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cs702 14y ago

There are a lot of things I don't understand about China's economy, and every time I think I might have a handle on it, I come across juicy tidbits like these ones: * The ghost city of Ordos. Built on spec for one million residents, this city sits empty in the middle of nowhere. A lot of money went into building all its plazas, museums, parks, office buildings, and residences, but no one needs or uses any of it.[1] * The New South China Mall, in Guangdong Province. With nearly 10 million square feet of retail space, it's by far the world's largest mall. Opened in 2005, almost no one ever visits it, and only around 1% of the retail space has been leased -- it just sits empty. A lot of money went into building it, but no one needs or uses it.[2] * A well-known hedge fund manager recently reported that China is building "2.8 billion square metres of Class A office space over the following couple of years... That’s basically a five-foot by five-foot office cubicle for every man, woman and child in China.” A lot of money is going into building a new cubicle for everyone, but what's the economic rationale?[3] [1] Here's a recent BBC article on it: http://www.bbc.co.uk/news/magazine-17390729 http://www.bbc.co.uk/news/magazine-17390729 and a great photo essay in Time: http://www.time.com/time/photogallery/0,29307,1975397,00.html http://www.time.com/time/photogallery/0,29307,1975397,00.htm... [2] Here's a recent video of the mall on a Saturday: http://www.youtube.com/watch?v=Eel1r1nm1lU http://www.youtube.com/watch?v=Eel1r1nm1lU and here's an article about it: http://www.dailymail.co.uk/news/article-1223747/Ghost-mall-The-worlds-largest-loneliest-shopping-centre.html http://www.dailymail.co.uk/news/article-1223747/Ghost-mall-T... [3] For example, see http://www.theglobeandmail.com/report-on-business/rob-magazine/chanos-calls-china-syndrome/article596067/?page=all http://www.theglobeandmail.com/report-on-business/rob-magazi...

twelvechairs 14y ago
A few points (with no overarching narrative): - China's construction industry is a force unto itself - important economically and a huge employer. Its hard to say 'stop'. - As it said in the OP - property seems the simplest way to invest money. After all, can prices go down when they are already so low compared to the west? - In the west we built in the 1960s at (what seemed then) a ridiculous pace, with new building typologies that were often terribly designed. Like us, they will be living with (or in) the consequences for the next 50 years. - Various levels of govt are already trying to put the brakes on the worse kinds of speculative development, with some success. Aside from the already clear examples of 'bad investment' (like the ones you point out) - the brakes are already coming from other directions too.

twelvechairs 14y ago

It doesn't take a genius (or quite so many words) to come to the conclusion that when the economy is growing fast corruption starts and when the economy slows down the poor will get angry about cortuption. That said - I'm not really for predicting the future in narrative form like this because it is very one eyed. There's plenty of signs pointing in other directions as well.

harrypreston 14y ago

In China, a married couple who are both only-children can actually have 2 children. This was an alteration to the policy made in 2010 and was exactly designed to stop the 4 grandparent problem. Ref: http://www.cbc.ca/news/world/story/2009/10/28/f-rfa-germain.html http://www.cbc.ca/news/world/story/2009/10/28/f-rfa-germain....

superslug 14y ago

I dont get it.. when the Western nations steal resources from other countries (Oil,natural resources,scientists etc) its considered growth or "preserving" interests... when the chinese or any other non-westen countries do this its considered a kleptocracy? sounds like sour grapes to me...

yaix 14y ago

The article forgets about the big business of the local gov'ts in China, who are the driving (selling) force behind the building boom. It is correct, that investment in real estate is the best options for most lower and middle class Chinese. The local gov'ts expropriate the land from peasants and sell is for housing development. In the absense of substantial tax income, this is the one important source of income for cities and towns. There is often no legal way for people to fight the expropriation, because executive and judicative powers are all in the local party's hand.

gringomorcego 14y ago

I wonder if anyone actually understood what the one child policy would have. I mean, was this predictable? Did the Chinese government know it was going to create this situation?

quantgenius 14y ago

Based on the comments it seems many people are missing out on some of the most important points the blogger is making. First, a very large percentage (maybe 40-50%) of Chinese companies going public on Western and developed Asian exchanges have turned out to be complete frauds. There have of course been some very large companies that have been very successful and they are likely completely honest, but there are also many, many often smaller companies who's financial statements are pure fiction. It turns out that the biggest beneficiaries of the frauds were politically connected families, yet none has been prosecuted. The Chinese had decided to open things up a little bit, essentially taking baby steps towards the Western model and require companies to file at least a minimal amount of information domestically and to make some this information theoretically publicly available. Furthermore when a company goes publicly in most markets outside China, it has to file a whole smorgasbord of financial information. Most of these frauds were uncovered by a careful examination of financial statements companies going public were required to file. A number of the frauds were in fact discovered by this blogger himself (see his earlier posts). In many cases the financial statements were just ludicrously implausible. In other cases they were listing facilities which did not exist etc. Very few were in anything other than plain view. Remember that this really hurts honest Chinese companies (and there are many high quality Chinese companies that do things by the book) because you are going to have to do far more due diligence on a Chinese company because you can't really rely on the financial statements. Even after you do due diligence you are going to demand a discount. While there is a mania for anything Chinese by naive retail investors everything seems fine if you are a small company with a limited float but for a huge company trying to raise a lot of capital, you have to raise money from well informed institutions. While companies that only list domestically are harder to do due diligence on, it seems, based on work done by the blogger and others, that the percentage of frauds listing on the Shanghai exchange is at least as high as the percentage of frauds listing on foreign exchanges. Imagine if 40-50% of US companies going public over a period of time were frauds and this was discovered through their public filings. Legislators and regulators would be lining up to require more disclosure. Instead the Chinese have now changed the law so Chinese companies have to file less information and the information they do file is practically a state secret. This is somewhat akin to companies trading on the NYSE filing absolutely NO financial statements and the SEC and Congress preventing anyone from seeing what they did file. Especially given that in the few cases where it is possible to trace the ultimate beneficiary of the frauds, it has been a politically connected family member, none of whom have been prosecuted, it is hard to ascribe any reason to pass rules restricting access to company financial information other than a desire by the elites to steal as much as they can through stock fraud.