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Monday, December 06, 2010

Have No Fear, We May Win by Default

China's credit bubble on borrowed time as inflation bites

The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist.

China's credit bubble on borrowed time as inflation bites. Officially, inflation was 4.4pc in October but not many in China believes it is that low.
Officially, inflation was 4.4pc in October but not many in China believes it is that low. Photo: EPA

It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.

"Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the bank’s emerging markets chief.

Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.

The Communist Party learned from Tiananmen in 1989 how surging prices can seed dissent. "Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard," said Mr Ash.

RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the "fat tail risk" of a hard landing, with ramifications across Asia.

The Politburo said on Friday that China would move from "relatively loose" money to a "prudent" policy next year, a recognition that credit rationing, price controls, and other forms of Medieval restraint are not enough. The question is whether Beijing has already left it too late.

Diana Choyleva from Lombard Street Research said the money supply rose at a 40pc rate in 2009 and the first half of 2010 as Beijing stoked an epic credit boom to keep uber-growth alive, but the costs of this policy now outweigh the benefits.

The economy is entering the ugly quadrant of cycle – stagflation – where credit-pumping leaks into speculation and price spirals, even as growth slows. Citigroup’s Minggao Shen said it now takes a rise of ¥1.84 in the M2 money supply to generate just one yuan of GDP growth, up from ¥1.30 earlier this decade.

The froth is going into property. Experts argue heatedly over whether or not China has managed to outdo America’s subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two.

It concluded in a report last week that there was no nationwide bubble but that home prices in Shenzen, Shanghai, Beijing, and Nanjing seem "increasingly disconnected from fundamentals".

Prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in China’s eastern cities has risen by over 200pc since 2004

The IMF said land sales make up 30pc of local government revenue in Beijing. This has echoes of Ireland where "fair weather" property taxes disguised the erosion of state finances.

Ms Choyleva said China drew a false conclusion from the global credit crisis that their top-down economy trumps the free market, failing to see that the events of 2008-2009 did equally great damage to them – though of a different kind. It closed the door on mercantilist export strategies that depend on cheap loans, a cheap currency, and the willingness of the West to tolerate predatory trade.

China is trying to keep the game going as if nothing has changed, but cannot do so. It dares not raise rates fast enough to let air out of the bubble because this would expose the bad debts of the banking system. The regime is stymied.

"The Chinese growth machine is likely to continue to function in the minds of people long after it has no visible means of support. China’s potential growth rate could well halve to 5pc in this decade," she said.

As it happens, Fitch Ratings has just done a study with Oxford Economics on what would happen if China does indeed slow to under 5pc next year, tantamount to a recession for China. The risk is clearly there. Fitch said private credit has grown to 148pc of GDP, compared to a median of 41pc for emerging markets. It said the true scale of loans to local governments and state entities has been disguised.

The result of such a hard landing would be a 20pc fall in global commodity prices, a 100 basis point widening of spreads on emerging market debt, a 25pc fall in Asian bourses, a fall in the growth in emerging Asia by 2.6 percentage points, with a risk that toxic politics could make matters much worse.

It is sobering that even a slight cooling of China’s credit growth led to economic contraction in Malaysia and Thailand in the third quarter, and sharp slowdowns across Asia. Japan’s economy will almost certainly contract this quarter.

Albert Edwards from Societe General said the OECD’s leading indicators are signalling a "downturn" for Asia’s big five (Japan, Korea, China, India, and Indonesia). The China indicator composed by Beijing’s National Bureau of Statistics has fallen almost as far as it did at the onset of the 2008 crash.

"I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s. Ignore these indicators at your peril," he said

In a sense, inflation is a crude way of curbing China’s export surpluses and therefore of resolving a key trade imbalance that lay behind the global credit crisis.

If China continues to stoke inflation – and blaming the US Federal Reserve for its own errors help – there will no longer be any need for a yuan revaluation against the dollar, and the US Congress can shelve its sanctions law.

On a recent visit to a chemical plant in Suzhou, I was told by the English manager that wage bonuses for staff will average nine months pay this year. This is what it costs to keep skilled workers. His own contract is fixed in sterling, which has crashed against the yuan over the last two years. "It is a sobering experience," he said.

China may have hit the "Lewis turning point", named after the Nobel economist Arthur Lewis from St Lucia. It is the moment for each catch-up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages. That reserve army of 120m Chinese migrants everybody was so worried about four years ago has already dwindled to 25m.

China’s problem is that this is happening just as the aging crisis starts to bite. The number of workers will decline in absolute terms within four years. The society will then tip into precipitous demographic decline. Unlike Japan, it will become old before it is has built a cushion of wealth.

If there is a hard-landing in 2011, China’s reserves of $2.6 trillion – or over $3 trillion if counted fully – will not help much. Professor Michael Pettis from Beijing University says the money cannot be used internally in the economy.

While this fund does offer China external protection, Mr Pettis notes wryly that the only other times in the last century when one country accumulated reserves equal to 5pc to 6pc of global GDP was US in the 1920s, and Japan in the 1980s. We know how both episodes ended.

The sons of Mao insist that they have studied the Japanese debacle closely and will not repeat the error. And I can sell you an ocean-front property in Chengdu.


  1. Ol' Ambrosia might be onto something this time.

  2. The best thing the Chinese could do "right now" is let their currency appreciate. They've held it too low, for too long.

    They think they're being "cool," but it's going to bite them in the ass harder, and harder the longer they dick around.

  3. Remember what the U.S. did in '28, and what the Japanese were doing in the 80's. Both nations got greedy, and decided to press their luck with "mercantilist" policies, and protectionism. These policies turned the inevitable "crash" into long-term misery.

  4. Buddy, can you spare a dime?

    “…problem with new high-tech $100 bills has caused government printers to shut down production of the new notes and to quarantine more than one billion of the bills…

    “…The total face value of the unusable bills, $110 billion, represents more than ten percent of the entire supply of US currency on the planet…

    “…Sorting such a huge quantity of bills by hand, the officials estimate, could take between 20 and 30 years…

    “…the bills are the most costly ever produced, with a per-note cost of about 12 cents – twice the cost of a conventional bill. That means the government spent about $120 million to produce bills it can’t use…

    “…The government says that more than a decade of research and development went into the new security features on the redesigned $100…

  5. .

    In an interview on “60 Minutes” on Sunday night, the chairman of the Federal Reserve, Ben S. Bernanke, said policy makers should be careful to protect the recovery in what could be interpreted as a warning to Democrats not to raise taxes and to Republicans not to cut government spending. “We don’t want to take actions this year that will affect this year’s spending and this year’s taxes in a way that will hurt the recovery,” Mr. Bernanke said. “That’s important.”

    But Mr. Bernanke also warned about the dangers of the nation’s fast-growing debt, which will be increased by $4 trillion or more over 10 years as a result of the tax deal being worked out by Republicans and the White House, and said policy makers must start thinking now about the “long-term structural deficit...”

    Having it Both Ways: The More I Hear Bernanke Talk The More I Think He Is Like The Rest Of Us Just Waiting For The Economy To Right Itself


  6. Fortunately, we are doing some things right. School Systems Going Solar in a Big way.

    This deal's starting to pick up some steam. California already has fifty, or sixty school systems doing this.

  7. This comment has been removed by the author.

  8. That is Ezzackly what he's doin', Q.

    Unfortunately, there's a "new" wrinkle this time. I speak, of course, of "Peak Oil."

    The recovery starts to take hold, and gas prices rise - knocking the 'conomy back down again. Tax Revenues fail to rise as in the recoveries from past recessions, and the Deficit/debt gets larger.

    Rinse, repeat.

  9. Assange - Soros, in bed together, according to Beck. Is Soros gay? Is this a vast Gay conspiracy??

  10. bob is at the University Inn/Best Western having the usual hot motel sex with his initiating wife, while awaiting bob's big showdown with the Moscow City Council tonight.

    You know, I think I could live the permanent hotel/motel life, life some used to do, back in the old movies.

    By the way, for you game show fans, American game shows are shit compared to say, El Gran Show we found on this endless tv. From sunny loveable old Mejico, WHAT ACTION, WHAT GIRLS, MILLIONS IN PRIZES, but I think that's just pesos or something.

    I could pick up about 25 percent of the lingo.

    Have I been busy, lately. A man has to finally work sometime.

    I want to ask the Management for permission to write up a thread on mission creap by the burracrats, and extoriton by local governments.

    Will give a report tomorrow.

    I have fucked up my laptop, and will have to get another one.

    I need to get one that is electron pulse secure, or something.

    I think it's something about my aura.......

  11. By the way speaking of Assage, I hear that genius Ron Paul is backing him.


  12. The Russian connection to Chinese-American conflict in the Pacific

    China is developing weapons systems, including aircraft carriers and carrier-based fighters, that could threaten Taiwan and test U.S. control of the Western Pacific.

    Last year the Pentagon decided to cut funding for the F-22—currently the most advanced fighter deployed in the world—partly on the grounds that China wouldn't have many similar aircraft for at least 15 years.
    But then Gen. He Weirong, deputy head of China's Air Force, announced that Chinese versions of such jets were about to undergo test flights, and would be deployed in "eight or 10 years."
    The Defense Intelligence Agency now says it will take China "about 10 years" to deploy stealth fighters in "meaningful numbers."

    The deal was a coup for China, which had shifted its military focus away from a potential Soviet land invasion, and now wanted to defend territorial claims over Taiwan and parts of the South China Sea and East China Sea.

  13. That's the damndest thing, I posted extracts from this same article, then my article gets taken down, now it appears as the next topic on the EB.

  14. .

    Sarah Palin’s Caribou Kill Angers Animal Activists

    In the show’s most controversial scene, we got to see Sarah get ready, aim and fire at a caribou, bagging the beast on her fifth shot (after switching to a more powerful rifle with a more accurate sight). And unlike most of the hunting shows that have aired for years on various ESPN channels and the old Outdoor Life Network (among others), we got to witness the moment the animal got hit and then collapsed heavily on the ground. In fact, the scene was preceded by a viewer advisory...

    With this past Sunday’s show, we’re now at the halfway point in the eight-part ‘Sarah Palin’s Alaska.’ Next week, in Episode Five, Sarah goes out in the wild once again, this time it’s a camping trip with fellow TLC reality star Kate Gosselin and her eight children.

    PETA Punks Palin





    It's a tough choice Bobbo.

    Camping with Kate Gosselin and her kids?


  15. Selah,

    I have lost the article at least three times today.

  16. Selah,

    Of course, I was talking about the Chinese, not the boobs.

  17. .

    Tax Deal Agreed to By Obama.

    Obama folds.

    1. All Bush tax cuts extended for two years.
    2. Cap Gains and Dividends will stay at 15%.
    3. Max estate tax will be 35% for estates over $5 million.
    4. Payroll tax will be cut by 2%.
    5. Investment credit has been raised from 50% to 100%.
    6. Estimated cost $1 trillion.

    The agreement may run into some problems in the house.


  18. .

    As part of the deal on taxes, unemployment benefits will be extended by 13 months.


  19. This comment has been removed by the author.

  20. Well Quirkest, there was an article in the paper here today about the Selkirk Mountain Caribou Herd, which now numbers a mighty, count 'em, 50.

    These critters live above the snow line and eat lichen in the winter.

    Couple of your beloved wolves get up there, and my attorney and I agreed, (she's Sarah Palin with a law degree), we agreed, they are finished.

    Caribou in Alaska are hardly in the same category.

    But it's too tough an idea for a clown.

    When get out of the federal minimum security prison, you are no violent man, where you currentlly reside, there's always the circus.

    But you won't have the time to reseach hundreds of thousands of meaningless commments for your coveted Bunco Awards, another of your learned devices to focus attention your precious sense of self.

    My meeting starts at 7 so g'nite.

  21. Stupid fuck pubs don't even have the brains to stretch this out to keep start, cap and tax, wet dream act, and etc off the table.

    Rumor has it they've tapped into Socialist Rufie's Brain.

    We're Screwed!

  22. Hey, Bob:
    The Field and Stream and Screw Mag threads are elsewhere!

  23. Unemployment extensions:

    Massive unfunded mandates on states and businesses.

    Am I correct in believing it costs DC Whore's Budget Zero?

  24. .

    I guess I'll be putting some more money into the market.

    Enjoy this while I can.

    "Après moi, le déluge"


  25. We need some folks with balls leading this party:

    Bachman/Haley 2012!

  26. .

    Geez, Bobbo, you sound a little up tight.

    Take a few deep breaths before you enter that meeting tonight.

    Good luck.


  27. .

    These critters live above the snow line and eat lichen in the winter.

    That's probably why there are so few of them Bob.

    That lichen will kill you.


  28. From Beverly Hills, 91210:

    christian stevens
    December 6, 2010

    There are literally hundreds of homes scheduled to go to foreclosure sale here in The Platinum Triangle, I follow them as I am a REO agent, the second house above is my listing.

    Each month the lenders postpone the sales, a very small few go to sale, and they keep postponing. During this time the folks who are not paying their mortgage are also not paying their property taxes, in a state with a $25,000,000,000 shortfall that means we get to close libraries and parks, cut teachers and firemen to balance a budget that cannot be balanced until lenders flush the toilet on these loans and get rid of them to new owners.

    New owners, unlike the deadbeats in the house for free, hire contractors, buy carpet and paint and go to Home Depot for all sorts of things for the house-about 17 people benefit from this. What a great way to improve unemployment and stimulate the economy instead of sweeping the mess under the rug for a few months.

    If the lenders are right and we are in for a rough time then I would have thought being the first to sell at better pricing levels was the best policy instead of waiting for another drop. look for the lenders to stampede eachother like a crowd in a burning theater once this becomes clear.

    Right now a non performing asset is on the books as an asset and at full bubble price until they foreclose. If they all had to write down the loans to market value there would only be 4 solvent banks in this country. Not good.

    So Obamacare extends to Wall Street and we try everything to “keep these folks in their homes” and curry favor with the voters. The reality is there are more folks looking to get into the market with a downpayment than are not paying their mortgage and they are livid prices are being propped up for deadbeats.

    And they vote too!!!

    doctor housing bubble dot com

  29. .

    The question I don't understand yet is,

    With the 100% investment tax credit, do the companies get that credit strictly for investment in this country or do they get it (as I suspect) on any investment they make worldwide.

    I hope it is the former but suspect it's probably the latter.


  30. For years, as the carnage rolled across the land, folks maintained that the ultra top end of the market would escape unscathed.
    Not so, they are learning now.

    Manhattan Beach all alone now, so far:
    Propped up by Laker Stars and other athlete/celebrities

  31. “Really? Unless you’ve never worn leather shoes, sat upon a leather couch or eaten a piece of meat, save your condemnation of tonight’s episode. I remain proudly intolerant of anti-hunting hypocrisy.”

    How pathetic, she can bite me. Maybe Kate Gosselin will be her running mate.

  32. Ruf will know the details Quirk:

    He'll just draw the wrong conclusions!

    Actually, this is one of his exceptions that proves the rule.

  33. 69. Tim
    I think States will repudiate their debts, it has happened in the US before. I think the entire idea of bankruptcy for a state is a non starter. They would have to give up some level of sovereignty and this is most likely unconstitutional, and not needed. Repudiation works just as well. The section below from economist Murray N. Rothbard shows that repudiation is nothing new.

    ………During the deflationary 1840’s succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in “readjustments.” Specifically, of the 28 American states in the 1840’s, nine were in the glorious position of having no public debt, and one (Missouri’s) was negligible; of the 18 remaining, nine paid the interest on their public debt without interruption, while another nine (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt. As in every debt repudiation, the result was to lift a great burden from the backs of the taxpayers in the defaulting and repudiating states………
    The NYT from 1876 has a detailed article on repudiation in Alabama.

    Other than the pension funds and insurance companies that will be bankrupt I can see very few downsides in the long term for the States that repudiate, however the credit markets will be off limits for some time, they will have to make due without deficit spending or borrowing for large infrastructure.

  34. 53. sol vason
    Times are tougth if…

    McDonald’s has a lay away plan

    Mexicans in Mexico are now sending money to family in America

  35. China, China, China. That's all you hear these days.

    The smart money is going into India. A democracy, unfettered by the aging demographic, educated, hard-working, entrepreneurial.

    If you want to hedge against China, bet on India. They'll be the ones to watch.

  36. Schwarzenegger Declares Fiscal Emergency, Proposes $9.9 Billion In Cuts...

    Schwarzenegger on Monday unveiled a plan that relies largely on cuts to health care and social services for the poor.

    About $7.4 billion of his proposal would come from cuts, include reducing cash assistance to needy families by 15.7 percent in April, then eliminating the entire welfare-to-work program in July.

    He is proposing to eliminate vision coverage and increasing monthly premiums for Healthy Families, a program that provides health coverage for children of low-income families.


    Glad the unions come first, both for Arnold and Jerry.

  37. Even the knuckleheads in DC have wised up to the fact that ethanol is a COMPLETE waste of government and anyone elses' money. Maybe someday Rufus will. There is currently no economic rationale supporting the production of ethanol for energy use.

  38. Yep, I'm a knucklehead.

    Along about July, when jwillie is paying $4.00/gal for his gasoline made from terrorist-financing Saudi oil, I'll be paying $2.60 for Non-subsidized American Ethanol.

    He'll be supporting the death of American troops, and the subsidation of down airliners while I'll be putting Americans to work, and keeping my money at home.

    Of course, the Congress did pass $52 Billion in Fossil Fuel Subsidies at 11:00 one night last month in a voice vote, but I won't have to worry about that in as much as come Jan 1 ethanol will be purely free-market.

    Sometimes it feels Good to be a knucklehead.

  39. Let me make this real simple - where even a non-knucklehead might understand:

    With my car that $2.60/gal E85, made from non-subsidized ethanol will cost me a bit less than $0.13/mile.

    That Subsidized, terror-supporting gasoline, at $4.00/gal will cost me $0.20/Mile.

    Knuckleheads R Us

  40. As for the investment credit question Q, it doesn't matter. Our Corps don't pay taxes on profits made overseas, anyway.

    The taxes aren't collected until the money is repatriated, and, of course, they don't "repatriate" it.

    Problem solved.

  41. In his 2009 Jackson Hole warning, Bernanke identified oil as the looming threat, a kind of Black Hole for the green shoots of growth. He said: "Last year, oil at $145 a barrel was a tipping point for the global economy as it created negative terms of trade and a disposable income shock for oil importing economies".

    He went on to add the oil-phobic punch line: "The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly to $90 a barrel."

    In early December 2010, with oil near $90 a barrel on the Nymex and ICE, we could ask if Bernanke's warning still holds true, especially since he now publicly wants higher inflation rates, as a kind of surrogate sign of would-be economic growth.

    Black Hole for Oil Price Policy

  42. Gee, the anti-knucklehead brigade has gone silent. Wuz it sumpin I said?

  43. Team bob 6 - One World Cafe 0

    Tea leaves have been read from the Idaho and National elections of recent date.

    This only took me approximately 20 years to accomplish. Sarah Palin with law degree gets flowers and chocolate tomorrow.

    This allows me to do something I've wanted to do for a long time.

  44. China’s reluctance to allow a stronger exchange rate has hamstrung its efforts to rein in inflation and endangered a campaign to shift the economy toward domestic demand.

    The central bank continues to add liquidity, with money supply rising 19 percent in November from a year ago, according to the median estimate of 29 analysts in a Bloomberg News survey before a government release this month. That needs to be curbed to 15 percent to 16 percent to rein in inflation, said Fred Hu, the former Goldman Sachs Group Inc. chief China economist who has founded financial advisory firm Primavera Capital Group.

    China has held off executing a series of interest-rate increases in part because that would put pressure on a currency officials have kept down to shelter exports. The strategy will leave inflation accelerating past 4 percent for 2011, a three- year high, according to a separate survey. The cost: diminished consumer spending and narrower margins for domestic industries.

    China, rolling the bones

    Their politicians really are just as stupid as ours. Scary, eh?

  45. US Unloads Citi Stake for $12 Billion Profit
    Fox News - ‎

    The US Treasury sold the last of its Citigroup Inc. common shares in a $10.5 billion offering that capped the government's biggest bank bailout of the financial-market meltdown.

  46. Washington Post - Ellen Nakashima, Julie Tate - ‎5 hours ago‎

    A Navy intelligence specialist at the Joint Special Operations Command has been accused of taking top secret documents from military networks and offering to sell them to an investigator posing as a foreign agent.