Is China's Economic Bubble About to Burst?

Is China the Next Bubble?

DONGGUAN, China

. . . Japan had its bubble in the late 1980’s, when the Imperial Palace grounds in Tokyo became worth more than all the land in California. Thailand and Indonesia had their bubbles in the mid-1990’s, when speculators and multinationals poured money into what seemed like a Southeast Asian miracle. The United States had its Internet and telecommunications bubble in the late 1990’s . . .Each of those bubbles ended badly, with millions of families losing their savings and many losing their jobs.

As 2004 begins, China’s economy looks as invincible as the Japanese, Southeast Asian and American economies of those earlier times. But recent excesses . . . suggest that China may be in a bubble now, especially on the investment side of the economy.

Bubbles can last years before they pop, but they seldom deflate painlessly when they do. . . The Chinese government is showing concern. In the last few weeks, the central bank has tried to dissuade banks from reckless lending while the government has bailed out two of the largest ones, to prepare them for possible hard times . . . China’s cabinet, has warned that it will discourage further construction of new factories in industries like aluminum and steel, whose capacity has grown swiftly in the last three years. . .

. . . Year after year, China has proved the worriers wrong, although there have been a few missteps along the way, most notably when inflation surged temporarily and foreign exchange reserves withered in the early 1990’s. But even by Chinese standards, things have been moving at a blistering pace of late. Official statistics, which the government tends to smooth so as not to indicate big booms or busts, show that the economy expanded 8.5 percent last year, despite the fact that growth came to a virtual halt during the second quarter because of an outbreak of SARS. According to independent economists, however, the Chinese economy actually expanded at an annual pace of 11 percent to 13 percent through the second half of last year.

Strains are already showing. Blackouts have become a problem in a majority of China’s provinces, as families with new air-conditioners and refrigerators compete with new factories for electricity. . . Most economists specializing in China now predict that sometime this year, growth will have to slow, at least for the investment side of the economy - the building of new factories, for example. That could prove painful. . .

“In China, overcapacity is not an issue that stops a businessman, because they always think they can do better,” Mr. Jaeger said. Domestic and foreign investors alike share that approach. . . The problem arises when too many companies make the same calculation and invest too much. Nearly half of China’s economic growth is investment-related spending, an extraordinary figure that reflects public spending on highways and dams, as well as private-sector projects. . .

China has developed a special disadvantage, in that its economy has become so ravenous for commodities that it is pushing up global prices for products like oil, for which China has become the second-largest market, after the United States. With very low wages and real estate costs, factory managers find that materials are their biggest cost by far, and a sudden jump in their cost can leave businesses with no competitive edge.

. . . Lists of potential causes of a Chinese economic derailment tend to start, and sometime end, with a banking crisis. By plying borrowers with ever more loans . . . laced with corruption and political influence, Chinese banks have wound up with extremely high proportions - as much as 45 percent - of nonperforming loans. The banks rapidly stepped up their pace of fresh loans last year. Exporters, foreign investors and speculators were depositing large sums of dollars. . . with loans rising 21.4 percent last year.

. . . Human-rights groups report a growing number of protests in China, mainly workers and retirees seeking unpaid salaries and benefits. At the same time, many on the mainland are acutely aware of the huge marches organized over the last seven months by democracy activists in Hong Kong, now an autonomous region of China.

Whether any of these forces become significant enough to rattle China’s stability is anybody’s guess. Peaceful change toward a more democratic system may still be possible, especially if it is fairly gradual. But if the economy slows sharply, political instability could follow. That would be a serious problem, and not just for China, but also for the rest of the world

nytimes.com/2004/01/18/busin … na.html?hp

There is a bubble, and it’s very bad and huge.

However, I would claim that they can keep it going to 2008 by sheer will-force alone.

The US bubble lasted some 3-4 years, and that was in a place, where timely stats gave clear warnings, unless you were blind.

In China, we don’t know very much, as the statistics are treated like national secrets.

But then, those protests have been simmering for a long time. The chinese countryside has hardly ever been governed, just surpressed and then extorted for tax money and then left to its own superstitions for the rest of the time.

However, I do agree that China is in for something bad a couple of years down the road.

The Chinese bubble will burst when they stop finding country slaves to produce their foreign investors products.

Once China’s middle class becomes prominent nationwide, no one will want to work for those cheap wages… and then… pop.

The only thing holding up China’s Economy is slave labor and undervalued money.

The most exact thing that you can say about China is that nobody really knows what is going on.

China’s current play is to dress up companies, keep a majority ownership in them and then sell the other 49% of the shares in an IPO. Currently this strategy is working wonderfully. They get cash and keep control. They can then use the company as their piggy bank.

China will be in trouble when 2 events intersect. The rise of commodity prices and the eventual end of fleecing investors(because they flee). Please keep in mind that Asian businesses are net destroyers of capital, not creators of it.

Currently China has an infinite supply of unskilled and semi-skilled labor. It’s big problems is giving them jobs, so they don’t rebel/protest. They also have the most skewered relation of boys to girls, so we might get to see a modern day version of the Nien(sp?) Rebellion. They are quite weak in skilled labor in comparison to most industrialized nations.

I would say(guessing out my ass really) that China can keep it going till about next year, when the money gets spooked again, unless they discover this novel idea called good corporate governance. We’ll then get to see commodity prices really dip and a whole new bout of deflation globally as Chinese companies unload their products for anything.

There are about 800 million “country slaves”, something to eat is better than nothing to eat. This is the choice “country slaves” are dealing with.

China’s middle class is in large cities(Han Chinese dominated) and the coastal provinces. Do you think they really give a damn about some other Chinese person trying to better themselves when it might be at their expense?

Same argument could be applied to any developed country at one time or another. Please pick up a history book(a non politically motivated one) and check it out.

CYA
Okami

[quote=“Nikeh”]
The only thing holding up China’s Economy is slave labor and undervalued money.[/quote]

Which they have a practically inexhaustable pool of. There’s an army of over 100 million unemployed. For the foreseeable future, which means the next 40 or 50 years, slave labor will always be available - and with a steady birthrate, it’s a renewable resource. The only reason why China has become such a success is raw demographics - once they have to move into economic (or military) territory that relies on anything other than sheer numbers for success, such as the Information Sector, then China won’t be able to compete. There’s a limit, a ceiling to how much can be achieved with sheer unskilled brawn…and all the truly skilled workers are trying to jump ship to foreign, democratic lands as soon as possible. Brain drain, they call it.

Agree, but I give them 4 years before they get into a big storm.

Actually, there are skilled people there, but the good ones aren’t that cheap, as they are in short supply.

However I think that the finance sector will be the thing setting it off, as it’s the weakest link. Moreover don’t forget that they have been financing the current upswing by govt borrowing, and that can’t continue indefinitely.

So something big and bad is waiting for them. I plan to leave the vicinity of the country, when it starts going down the drain - after all, they have nuclear weapons etc.

I wish I had a dollar for every time I’ve read about the “Coming Asian Year/decade/wave.” After about 20 years of that shit, you get cynical as hell about it as one can be. China imploding is such a coin toss. Maybe if something bad happened like the Three Gorges Dam bursting. Otherwise I see them just fumbling along like Japan has done. They will not under any terms let a financial storm bring them down. They’re still a authoritarian, police state with total control over their citizen’s lives, property and money.

The future opening of the banking sector should be interesting. Will they actually let foreign banks set up there own fully owned branches and start taking renminbi deposits or not. They’re suppose to, but what will happen if everyone pulls out of state owned banks and puts it in private foreign owned ones? I see them making this a slow painful process for foreign banks due to the financial/political risks. Citibank is already the number 2 consumer bank in Japan after the post office.

I’m sorry to make it sound like there are none. I should of clarified. There are skilled people, but they are going to demand higher wages and get them. China is notoriously short on human capital, because anyone who can will flee the place unless given a very valuable reason to stay. They are also notoriously racist, having been raised on the greatness and uniqueness of the Chinese and their way of doing things. :unamused: The fact that a foreigner would make more than them would burn them up inside and they would demand similiar wages as they know that they are an asset.

CYA
Okami

Have they finally scrapped their “one child policy”? Even if they have, the M/F ratio is already seriously screwed up; isn’t it something like 100M/86F in the under-25 range? That’s going to hurt the birthrate, not to mention all the social ills.

I worked with some Chinese IT people near NYC a few years ago; they had just finished up their BA’s and were in the two-year “training period” (read: cheap exploitation by capitalist vermin bosses) on the end of their student visas. They were educated, intelligent, and the hardest workers I’ve ever met.

Yes, they were the privileged elite, not to mention being China’s cream-de-la-cream, to have gotten the chance to study in a U.S. university. But China has 1.3 billion people to pick from – they’ve got lots.

Your comments could just as easily have been said about India – and been just as wrong – which is currently taking over the IT sector. Even if a particular individual isn’t top-notch, at two bucks an hour he can churn out mistakes by the bucketload and still be considered good enough to keep. (I got stuck working with an Indian like that, too – if he’d been an American he would’ve been fired, but as an H1-B indentured serf, he was too cheap for the boss to dump.)

Hey MaPoDouFu, the one-child was enforcable in the cities only. In the countryside, it has been widely flouted - and that’s where the last 87% of the population lives.

China’s population is still growing, not so fast, but with 2-300 millions of under/un-employed, the reservoir of human labour is vast.

Here’s an excerpt from article in the Financial Times that may be of interest re this topic:

[quote]Dong Tao of Credit Suisse First Boston in Hong Kong is among economists predicting a Chinese slowdown in the next three years - to 7 per cent growth or less, he says - as investment stalls after a period of extraordinary exuberance. The oversupply of DVD machines as a result of too much investment three years ago is now being replicated in many other industries.

China’s already substantial output of steel, cars, textiles, ethylene, mobile telephones and much else besides is expected to double in the next three years, with unpredictable and probably damaging results for prices. “The country is on a wild, wild capex ride,” says Mr Tao. “China is in a situation of severe over-investment.”

Fortunately, Chinese leaders seem to agree. They are tackling the problem by trying to limit investment in overheated “bubble” sectors such as vehicle assembly and urban property. One of the most encouraging signs is that credit growth slowed in the fourth quarter of last year, limiting the vulnerability of state banks already burdened with bad debts.

As China enters a phase of more moderate growth, the government is also right to shift the focus from investment to consumption, and to favour the neglected rural and inland provinces. In spite of the cheapness of manufactured goods, yesterday’s data showed that China had pulled itself out of deflation thanks to rising food prices - a boon to productive peasants and an effective form of wealth redistribution from city to countryside.

news.ft.com/servlet/ContentServe … 2571727269[/quote]