Could the China that Enda Kenny is visiting this week enter a recession in the next year or two? Yes, a recession, not a gradual slowdown, but a recession. This might seem a preposterous suggestion, given what we know has happened in the past ten years. But that is precisely the point. The recent past has been stellar, but all growth spurts come to an end, particularly those driven by huge credit growth.
For China, such an end will only be the end of the beginning, because the long-term process whereby economic vigour is moving relentlessly from west to east seems unstoppable. In the absence of war or protectionism, the march of the east will continue, but it won’t continue in a straight line. The economy rarely works like that.
As we in Ireland reassess the legacy of the Ahern years, we all know about the chimera of credit-fuelled growth. We would be wise to apply the same basic rules to China.
I have visited China four times for work in the past five years, and the place has changed almost beyond recognition on each of those occasions. Buildings and train lines have sprung up where they didn’t exist a few months previously; huge bridges were constructed apparently overnight; entire cities seemed to appear where there were none before. Shenzhen in the south is one such example. Twenty years ago, it was a fishing port. Today it is bigger than New York.
One visit to the Pearl River Delta (for book research) – in search of the factory where Irish soccer shirts are made – was one of the most bizarre I’ve ever experienced. One year, the street where the shirts were made was there. I met the owner and the workers. We took photos with them and shot a scene for a documentary there. The next year it was gone. So, too, were the dormitories that housed all the workers, the internet cafes and all the tiny shops making all sorts of tools and parts of machines. The place was a huge building site.
China’s extraordinary growth over the last decade has been built on exporting cheap goods to the developed economies, where punters have been flush with credit-fuelled wealth. But as we know here in Ireland, that wealth has now largely disappeared because it never really existed.
From 2000 on, the global deal was pretty straightforward. China exported stuff to us in the west. With the proceeds, the Chinese bought US government bonds, allowing the US to keep borrowing. The more the US borrowed, the more the price of houses in the US rose, making the average American feel richer. They borrowed yet more against this wealth and bought yet more goods from China. We were at the same carry-on.
Now it has all collapsed around us. We have moved from the great age of leverage to the great age of deleveraging. This means we don’t have the cash to buy the Chinese stuff in such quantities. This big move was becoming apparent in 2008 and 2009, so the Chinese switched to lending at home, rather than lending to the Americans. Domestic credit in China exploded, driving up the price of everything, especially property.
The Chinese government flooded the economy with cheap loans to boost demand, because the last things an authoritarian government wants are unemployment and restless people who might start asking questions about who rules the place and why.
According to the wonderful American analyst Bill Bonner, the key to understanding what is happening in China now is the fact that these local cheap loans are going bad as the economy contracts. We know from our experience here that, when loans go bad, they go bad quickly and relentlessly.
The slowdown is being felt in manufacturing because we are not buying their stuff in such huge numbers. HSBC’s Chinese manufacturing purchasing managers’ index for March is down to 48.1 in March, from 49.6 in February. A reading below 50 shows a manufacturing sector in decline, so we are moving towards contraction. Japanese exports to China were also down 14 per cent in February.
This is all feeding into a rise in bad loans and write-offs. In the view of many investors, things are worse than we think. Even the Chinese government admitted that half of all new loans to local governments in China were going to go bad.
Now, here are some figures that should set alarm bells ringing. Total credit this year is likely to be between 30 per cent and 40 per cent of GDP. If half of these go bad, that is 15 per cent to 20 per cent of GDP. Imagine that the recovery rate on bad loans is 50 per cent. That means that the Chinese economy – after write-offs – may not be growing at all.
According to the hedge fund manager Jim Chanos (the man who was the first to spot that Enron was a pile of junk), China may be heading for a hard landing. He argues that the write-downs on bad debt means that China’s “9 per cent growth may actually be zero”.
Counteracting this negative cyclical view is the sense that even a short recession won’t stop the march of China.
Any indicator you take reveals an extraordinary global behemoth like the US economy from the 1890s onwards.
My own favourites are the figures on internet usage. According to Internet World Stats, the number of internet users in China has more than tripled since 2006, soaring to 485 million in mid-2011. Moreover, China’s rush to connectivity is far from over. As of mid-2011, only 36 per cent of its 1.3 billion people were connected. This is far short of the nearly 80 per cent penetration rates seen in South Korea, Japan and the United States. (For more on this see: http://www.kpcb.com/insights/internet-trends-2011.)
Irrespective of the likely sharp contraction in growth, Irish companies should be looking to China because it’s simply too big to ignore. This can take many forms, and sometimes we don’t realise that we have some things here that Chinese business people need and want. For example, law firm A&L Goodbody is this week launching an internship in Beijing for Chinese lawyers from the biggest and best-connected Chinese law firms.
The golden rule of business is that you do business with people you know. Therefore, creating a Chinese network means that there is someone you know at the end of a phone when you want to trade. Consequently, the initiative from the likes of Goodbody is highly likely to bear fruit in the years ahead, and it’s good to see private companies doing this for themselves rather than waiting for the state to take the lead.
Even if China comes to a shuddering halt after 20 years of extraordinary growth this year, which is the year of the Dragon, it will rev up again and, as always, fortune will favour the brave.
I am at a loss here . If China makes everything and the West buys everything from China with credit issued by China . The West needs another credit boom to buy the Chinese stuff . How can we be just consumers ? How do we generate wealth in the West ?
And you wonder why you have a bad name, you are the Propeht of Doom David, I love it!
Very wary of China, desparate Human Rights record, Nepotism, Corruption, they will be in good company with our genius politicians over there right now.
Arn’t the Chinese building a city or something in Athlone?
House of cards economy?
Chinese growth has been revised downwards and internal power struggles over the socio-economic road to take hint at issues brewing. Could potentially be the greatest property and financial bubble in human history. Longer the recession goes on, the harder demand will be hit, the tougher for the Chinese who are trying different mechanisms to tilt things in their favour. Trouble on the horizon? I think so.
Odros – a Chinese Ghost City – from the BBC a week a go or so. Not just ghost estates here!
http://www.bbc.co.uk/news/magazine-17390729
A key quote from the article;
“Western financial experts who fear a bursting of the Chinese real estate bubble point out that the Chinese economy is more dependent on house building than the United States economy was, before the sub-prime lending bubble burst in 2007.”
Photos of the same from Time;
http://www.time.com/time/photogallery/0,29307,1975397,00.html
Golem XIV ( AKA Dave Malone ) has written a lot about this over the last few years on his blog…here is an example…http://www.golemxiv.co.uk/2011/04/making-the-new-sub-prime-part-1-backdoor-to-china/.
SHENZHEN AND THE GIANT EYE IN THE SKY There is China, and there is China, the China you talk about is the China of the giant copycat and artificial wealth creation. The other China is the overwhelming majority of people living in this amazing place, they are somewhat excluded from the growth and poverty is perhaps the most threatening issue to the authorities. All the larger centers of “economic growth” are undergoing a massive change now. In December 2011, in Wuhan, capital city of the Hubei province, being home for around 10 million people, a network of 250,000 observation cameras… Read more »
David, so in other words they are due a big crash, or on the other hand, like the US from 120 years ago, they might just keep on coming? I think the US model in that period was very different to what was experienced in Europe, but I wonder how much the present Chinese situation is analagous. I get the strong impression the Chinese are trying to think their way through this one and are aware of traps placed by what Hudson calls ‘junk economics’. Will Hutton wrote a book about the country just a few years ago arguing that… Read more »
Interesting article which illustrates how impressed the author can be by throwing up a few flash buildings and bridges. And to be honest, I would have gone along with that maybe 30 yrs ago when I happened to be living in Belgium for a while. Now, if you want to understand infrastructure penetration – practically a bus or tram stop at every doorstep and motorways (all lit) going everywhere – Belgium is probably the best example there is. And yet…very high unemployment and enormous debt. (one of the highest house ownerships in the EU as well)- success is not all… Read more »
This is all very interesting,but if I may be allowed to go slightly off topic here. What do all of the contributors to this blog think about what’s happening in Spain? The Spanish government have in essence told the rest of the EU governments what they can do with their austerity measures!!! Fair play to the Spanish PM I say!!! At least the Spanish PM and his government had the balls to tell the EU where to go regarding trying to impose austerity budgets on the Spanish people!! If our government had even half the ‘cojones’ of the Spanish government… Read more »
subscribe.
Chomsky on China 2010
http://www.chomsky.info/interviews/20100822.htm
http://www.nobelprize.org/nobel_prizes/peace/laureates/2010/xiaobo.html
And if China slips into recession, Austerity will visit Australia. Where will our young people go then?
China’s economic ‘miracle’ is a mirage: ‘the World Bank, as Watts shows, has calculated the annual bill for Chinese pollution – health costs, premature deaths, damaged infrastructure and crops – at 5.8 per cent of GDP. That lowers the Chinese miracle to our level. And if you add in erosion, desertification and environmental degradation, the World Bank calculates there is an 8 to 12 per cent bite into China’s GDP, stopping the miracle in its eroded tracks.’ http://www.literaryreview.co.uk/mirsky_07_10.html China will be old before it’s rich, and with peak oil, peak water and peak soil will not be able to repair… Read more »
“Fortune will favour the brave” David some of us have stopped listening to this sort of talk because there are more pressing matters in life than making a buck. Don’t you get it? It’s like a cliche from some of the morons on Dragon’s Den and ALL of the morons on The Apprentice. One track minds whose egos have disconnected from reality And if all those people were so clever and productive we would not have half a million unemployed It is all hot air and pissing in the wind. It is all over my friend ——————————————- Stacey Herbert and… Read more »
Hi David,
The reason I brought the subject up was down to I flicking through the channels on my TV and stopping on NYSE Closing Bell on CNBC to hears ome experts talking about the Spanish PM telling the EU and the ECB that he wasn’t going to impliment austerity measures on the Spanish people by saying that things were bad enough without making them worse!!
Not quite on Topic, but talking of economic collapse. The US is Bankrupt and has no intention of paying off its debts. It is mathematecally impossible anyway. At least China did not borrow to go on a spending spree. Its citizens were on austerity from the beginning and still mostly are except for the usual 1% The US is mortally wounded and as such is very, very dangerous. More so than a wounded tiger or dragon. Posted today on http://www.lemetropolecafe.com Dave from Denver… Thursday, March 22, 2012 How Much Treasury Debt? If this doesn’t scare the shit out of you… Read more »
Tony Brogan’s note is totally spot on. The confettizing of dollars and related currencies is probably imminent – particularly if the petrodollar starts to wobble. But let’s stand back for a moment. US is going broke…China has decreased demand…Europe is seizing up…consequences are not good for Germany or Australia or any of the BRICs for that matter. The whole thing is broken. The current paradigm (paradigm = current way of assessing and solving problems) is crumbling and with it the credibility of the preisthood which supported it. What is the new paradigm? Here we are looking at one another –… Read more »
There’s a bear in the China shop.
Ouch! It’s a Hard Landing.
http://online.barrons.com/article/up_and_down_wall_street.html#articleTabs_article%3D1
The idea that human rights are somehow worse in China than in the US is no longer the case. Any US citizen can now be arrested and locked up without any charge and has no legal recourse to free themselves. Also the US government can now take wharever food, water or any other “strategic supply” it sees fit without payment. We are entering the era of Big Brother on a global scale not just in China. This is all being led by the banking elites who control the weak politicians. We are entering an era of more and more centralized… Read more »
My hunch about China centers on the fact that China uses a public credit system. The Chinese government is the issuer of money. Sovereign money rules the day in China. So, thus, the micro loans going bad can easily be wiped with no cost. This is the beauty of Sovereign money / public credit over a monetarist / central banking / private corporate control over creation of money which we have in the west which is now proven to be utterly corrupt. Of course this not to negate the fact that China is a collectivist society and democracy is withheld… Read more »
Having Watched Niall Ferguson’s series on china some thoughts occur. Have we seen this before? Surely the rise of Japan in the 70’s mirrors what is going on in china at the moment. Remember when Japan was the driving force of the world economy – second only to the US. Its manufacturing was state of the art, it had cornered innovation through applied research (improving products that were designed in the west but whose true potential had never been realised.) It had a stable political system, a non diverse cultural environment and population and a well educated workforce. Yet look… Read more »
US companies employ 240,000 people in Ireland. American planes involved in illegal wars were permitted by our government to use Shannon. Our government were afraid of offending the Americans, in case they would start withdrawing these jobs, thus the increase in unemployment would undermine our democratic government. Our government is endeavoring to get the Chinese to invest in job creation in Ireland. Supposing they are successful, will we be then in the position to have to comply with Chinese foreign policy so as to maintain these jobs? One can visualize a situation where would be caught between American and Chinese… Read more »
There is one glaring problem with this article .. it is poor and could have been penned by a 13 year old I could have wrote it while drunk and so could anyone with half an ounce of intelligence. No doubt the lickers will disagree and flock as always but this sounds like a press release for Enda’s Chinese trip You are flying the flag of hopelessness and sound like the psychotic and desperate General Custer. Just stop it will ye and show some humanity in your writing. Otherwise you are in danger of becoming a robot. An automaton programmed… Read more »
The more I think about the article the more I hope you redeem yourself in future David but I reckon you are well and truly fucked (and know it yourself) and frankly I would not miss a wink if that was the case Some upcoming tiger will replace you. Gigantic intellects like Laura Noonan must give you nightmares. Right now you are out of touch, totally. No one gives a fuck about what is happening in China Your writing makes me think, for days at a time sometimes, so don’t be pissed if I decide to come back and give… Read more »
@Paul Divers “shaking the bush here boss”
I knew I heard that before
http://www.youtube.com/watch?v=G7QwTTn3FIk
Off-topic perhaps, but an excellent and clear presentation of the situation in the USA.
http://www.zerohedge.com/news/how-fund-government-year
Folks, I think there is a a lot of misunderstanding in regards to debt. Debt is simply an accounting technology in the abstract. Debt technically is an empty value. It has no energy. Debt and wealth are not equivalent. The crisis is NOT about debt. David’s article above is expanding out another reality and weaving it into tapestry regrading Ireland and its economy. Not its accountancy. This is in fact more real than focussing all energy on debt debt debt out of a context. The elites, the system operators use debt. USE it to irrigate monetarism and run their oligarchy… Read more »
To Admin.
It looks like Prof William Black’s website “New economic perspectives org” is black listed. Is this correct? If so, could it be removed from such a list?
Folks,
Rioting on the street is a waste of time.
There is a system of running economy.
Penetrate its maze and hall of mirrors and work it, use it, its there, use it and play their game back at them like they play their game at us.
Hi David Once I thought it would be a good idea for you to get elected but now I do not believe such would be in our greater intersts. If you did go native who would replace you to hold up the mirror on that shower of eejits FG Labour and FF(most others excluded) in the Dail. Keep holding the mirror up. Kenny is an absolute moron with his antics in China. Won’t be long before they own us too by the looks of it. Nice photo of Denis and Enda together in NY. They were in the right place… Read more »
Jim Chanos has pointed out that China generates very little of its GDP (less than 10%) from exports while 70% is generated from state controlled infrastructure & construction spend..following that logic, what has driven China`s growth is not trade with the west. what real wealth does China create?…it doesnt have high-end innovation in tech or pharma and it doesnt have much natural resource wealth..