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Monday, October 10, 2011

China - The Next Wave

Things seem to be far more difficult in China than they should be. China's property sales seem to be declining, and second hand property sales turnover prices suggest that a real problem impends. The crash may end up being deeper than I thought - the Chinese banking restrictions and the willingness of developers to pay 16-25% for working cash loans has blown up financing for smaller firms in China, and in some areas, the damage is obvious:
In Wenzhou, one-fifth of the 360,000 small and mid-sized businesses have stopped operating due to cash shortages, according to the city's council for small and medium-sized enterprises.

Of the 855 companies surveyed by the Wenzhou Economic and Information Commission, more than 76 percent said they are almost out of money and are struggling to continue production.
Unfortunately, I think that many of those business owners who are now so pressed bought property as an investment, and now will be twice whacked. It's certain that the property development whirlwind sucked a lot of ongoing investment out of other businesses. It's certain that far too many local governments became dependent on the developer market for ongoing spending - they were basically confiscating property from the holders and selling it to developers, in many cases financed by guaranteed loans.

It's the 1920s in China, and it will take perhaps a decade or even 14-15 years to fully unwind the current coil.

China's manufacturers aren't going to get any help from the international scene, that's for sure. The Chinese government has to unwind the property/local government financing coil, deal with the accumulation of bad banking debts (once again), try to restore the business environment for smaller businesses to keep employment up, and deal with what may be an epic outflow of capital as the class of very wealthy Chinese turn toward investing outside their own country. The pace of building has not slowed, and a lot of property is still lined up to come on the market.

Before this point I thought the likely outcome was for a downshift in the rate of Chinese expansion to 4-5% a year for 3-4 years, then an oscillation around the 6% point. But now I am not sure of that. I am very uncomfortable with the way things have moved over the summer. I'm still not seeing the necessary price adjustments in inputs! The system is not moving into the phase of internal regulation at all.

As the danger signs mounted over the summer (declining auto sales, for example), more unfilled jobs due to wages that didn't pay living costs, and growing production problems based on low sales prices and high input prices, the financial fever continued to mount. At this point, it seems as if many companies and wealthy people are buying assets outside China and are beginning to invest in production outside China, so I think all bets are off. Continuing electricity supply problems are another factor - hydro production is down in many regions due to drought/near drought conditions, and coal won't make up the difference.

In both China and India, the weakness is shown mostly in the first-time consumer buying market, with larger/luxury sales doing far better. This is a bad indicator.

Try this article. Hayek would have known what to make of this.

Here's a graph of China's population by age and gender. It's for 1990, so you have to add 21 to the ages.

Looks to me like China is now roughly where the U.S. was in 2005 (add five years to this chart). But China has the wild card of the "missing girls" among those 25 and under.

Economic indicators are suspect, at best, under these conditions.

Your links to articles are much appreciated. I am impressed that you're able to dig up such value-added material! I thought I was good at getting stuff off the internet, but I need obviously need to work harder.
Declining Household Income per the NYT link below: Any questions about lack of demand?

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