[TigerLikesRooster]

The follow-up:

http://www.creditwritedowns.com/2008/12/china-is-set-up-for-a-big-fall.html

China is set up for a big fall

Posted by Edward Harrison on 23 December 2008

Published in economy

The punderati has been especially kind to China. As the global recession takes hold, the conventional wisdom has moved from the largely debunked de-coupling of China to a story where China slows, but much less so than the west. But is that really how things will play out?

Marshall Auerback certainly thinks China faces some stiff headwinds, but he believes these are issues that can be overcome. Debt levels are extremely low and savings levels very high amongst the consuming masses there. Mark Mobius believes that the emerging markets generally are shortly due for an upswing. However, I would like to take a more pessimistic tack here.

You may recall that just yesterday I quoted from an Indian article which underlined the cratering of export demand for China. Let me add to those thoughts with the following analysis:

1. The Chinese are highly dependent on manufacturing exports to maintain growth. Most of their growth in the last two decades has come from export demand subsidized by a cheap currency and massive numbers of relatively low wage workers.
2. However, demand from the west is cratering because of the worst recession since the 1930s. Because China’s export economy is geared to the west, this has had a devastating impact on export demand.
3. As a result, the Chinese will need to switch to a focus on domestic demand. Where is this demand going to come from? Granted they have no debt. However, people don’t just start buying stuff in the middle of the greatest downturn in 75 years. Chinese people see these and must know that caution is warranted.
4. Moreover, their residential property market has imploded as has the stock market. This too must work against the psychology of increased domestic spending as the wealth effects here are significant.
5. And the banking system was already fragile. My general thinking would be there are huge hidden losses at Chinese banks as a result. Therefore, lending capacity has to be restricted going forward. I would not be surprised if we saw a reduction in the money multiplier in China as well.
6. Ultimately, I would argue that the Chinese domestic consumer is not going to consume more. In fact, they would need to consume a lot more given the GDP per capita of the average Chinese person in order to replace the lost demand from the West. But, I believe they will consume less given the factors enumerated above.

I await more data from China. In the meantime, I remain skeptical but open to persuasion.

[grey_whiskers]

Ultimately, I would argue that the Chinese domestic consumer is not going to consume more. In fact, they would need to consume a lot more given the GDP per capita of the average Chinese person in order to replace the lost demand from the West. But, I believe they will consume less given the factors enumerated above.

It'd be great to see how C.K. Prahalad (Indian, globalist whore who was an influential thought-leader behind the gutting of US industry to gain market share in Third World nations) reacts to this.

Cheers!

...oh, and Happy New Year!

[WilliamofCarmichael]

RE: The Edward Harrison comments: "My general thinking would be there are huge hidden losses at Chinese banks"

Yes I think it's called nonperforming loans -- money "loaned" to those worthless Mao-era "enterprises" which have for years "pretended to pay workers who pretended to work." Closing them all, should have occurred but that would mean millions more unemployed and more unrest.

There weren't tens of thousands of incidents of citizens squaring off against authorities annually in 1930s America.

[Iris7]

Hi, Tiger.

Examining Chinese government actions and anecdotal evidence from Guangdong one is inclined to agree with the presented analysis.

It is well known that the proximal cause of the Great Depression was European inability to repay debts owed to United States creditors. That is what triggered chain bankruptcy of the US financial system in those days. Leverage collapsed.

Of course, the financial system is bankrupt again nowadays in the USA. We’ll shall have to see if Dr. Frankenstein’s creation, patched together from dead tissues and shocked into “life” with a lightning blast of trillions of dollars, is for us a good and faithful servant.

[tbw2]

Other thoughts:
1. Lack of oil revenue causes Muslim countries to implode, because their leadership can no longer afford to bribe everyone.
2. Mexico loses oil revenue, and economic slowdown kills terrorism, leaving drug lords the only people with money. How we handle millions (more) Mexicans coming here to escape the chaos I’m not sure.
3. Criticizing and analyzing any of the situations in these threads become illegal (hate speech), preventing popular feedback that forces real resolutions.

[GOPJ]

Ultimately, I would argue that the Chinese domestic consumer is not going to consume more. In fact, they would need to consume a lot more given the GDP per capita of the average Chinese person in order to replace the lost demand from the West.

If the Chinese did a Henry Ford - the modern equivalent of "5 bucks a day" - they'd be fine. But luckily for us, the Chinese don't 'get' capitalism...