Chinese banks gave out more than USD 1 billion during the first 6 months of 2009. This is equal to 25% of China's total GDP. The plan is to boost the economy by sponsoring viable projects that will create new jobs and increase productivity. However, even according to Chinese government sources, about 20% of these new loans already found their way to the stock exchange. Prof. Michael Pettis from Beijing University, estimates that 20-33% of these new loans go directly to the stock exchange, real estate market, or even the gaming tables in Macau.
This means that a big chunk of the loans are not even going to the projects they are supposed to sponsor and are instead used to inflate prices in other parts of the economy. It is not surprising, then, that the Shanghai stock market went up about 70% since the beginning of the year, and that real estate prices in many Chinese cities are going up, despite declining occupancy rates.
A article published this week in The Economist tries to convince us that things are not all that bad. Still, even The Economist article states, with the help of some bullish bankers, that up to 12% of new loans were used in the property market (buying apartments, not construction), and up to 10% were used in the stock exchange.
To this, you can add the fact that a lot of the money already loaned did not yet reach the markets (bank loans are often delivered in tranches) and that a lot of the money already in the market is still sitting in the coffers of Chinese companies. So, even according to conservative estimates, a very large part of the new loans that was already spent went to the wrong places. On top of this, we should remember that large parts of the money that ended up where the government wanted it to be was loaned to projects that are not necessarily viable, based on political considerations and "friendship".
As you know, Chinese banks are controlled by the Chinese government. Governments are not producers and do not create any wealth. They take the wealth produced by the public and distribute it. So, when the government gives away money (directly, or through state-owned banks), it essentially takes money from one part of the economy, and moves it to another part of the economy. Naturally, the money is being taken from the productive parts of the economy (since this is were profits are generated).
Hence, when a big part of the new money goes to the wrong places, it is not only given to the wrong people, but it is also taken away from the right people. Growth of profitable and viable industries is being diminished in order to sponsor investment in other, less viable industries, or, even worse, in order to sponsor speculation in the stock and real estate markets. In addition, the resulting rise in stock and property prices encourages other private investors to put some of their money in, and so even more money is being channeled to the wrong places and a new bubble is being created.
It seems that the Chinese government is starting to realize this, and is now working very hard to cut bank lending. Still, it will take a few years before the full scope of the damage becomes apparent.
That's assuming all of the companies that are selling stock are bad ones, and that people don't actually need houses.
On the housing part of it I can see a bubble but demand will grow since people *have* to live somewhere.
On the stocks side of it, I'd like to know which companies are getting the most money and how productive they are.
Thanks, Captcha. And welcome back - I missed you.
Speculation in the stock market is, indeed, the lesser evil, since some of the money might actually go to companies who need and deserve it (unlike with property speculation or gambling in Macau).
Still, every bubble is fueled by a true story, and even the good companies end up getting more money that they deserve. The best example for this is the dot com bubble in the beginning of this decade. Yes, the internet was the next big thing, and yes, many good companies were worth investing in. But, even the good companies ended up having their market caps inflated, and lots of hot money was following their lead into plenty of bad companies.
Just before the current crisis (2007-08), when things were still going well, the NASDAQ composite was still priced at almost a half of its 2000 value. Did the internet not fulfill it's promise? It did, but a bubble was still created and lots of capital was wasted. Developed countries can afford to make such mistakes, as long as they don't do them too often. For developing countries, wasting a big chunk of your GDP on the wrong things, might have more severe consequences.
Just like when a rich man spends half of his income on things he does not need - he might lose a lot, but will still have everything he needs and much more. When a poor man does the same, he might not have anything left to eat.
I wouldn't go by just GDP when calculating assets.
For example- America vs. Japan. Even in the "lost decade" Japan's net worth per capita is $50,000 higher than America's. That was in 2006- this recent financial crisis did not impact GDP massively (a single digit contraction is not that horrible IMO), but when it comes to wealth American assets took a huge hit.
Japan and the Tigers on the other hand took a massive hit to GDP but the value of their assets was not so severely affected as their stock markets did OK and real property prices remained stable in most regions.
In fact their financial assets gained strength as the prices of commodities were slashed. Japan is fairly heavily indebted but Taiwan and China aren't.. so now would probably be a good time for them to go on a shopping spree.
If you spend 25, 50, 75% of your yearly income on stuff that ends up being a bad investment it's no big deal. If you lose 25% of your pre-inflation adjusted wealth to a decade of stupid behavior, now to some men that might be worth killing oneself over.
I should say one year's worth of income, not yearly income. If you earn say $50,000 a year, lose 25% to taxes and spend $18,000 of the remaining $37,500 on crap (like many Americans do) it's not a big deal.
But when 25% of your $160,000 accumulated assets (stocks, bonds, property) vanishes in 2 years it can be depressing.
But Americans are still in the top 10 in terms of per capita wealth. And to China, $1 trillion is affordable given their assets... assuming they really do blow it all on gambling.
Thanks, Captcha. I was not talking about who feels more sad or loses more money. I was talking about the fact that a developed country can afford to stagnate for 10,20 years and it still maintain a high standard of living. People might go on overseas trips less often, and change their TV sets less frequently, but there will not be any real pain. In a developing country, on the other hand, stagnating for the same amount of time has completely different consequences, including the inability to provide the most basic healthcare, education, and logistics (food) services.
Have you been to Japan during the so-called lostr decade? It was still running better than any other country on earth. Almost everyone was employed, healthcare was ubiquitous, etc.
So, I am not talking about how a rich man feels when the value of his assets go down. I am talking about how a poor man feels when half of his money his gone and he is unable to buy food. The first is about attitude, the second is about physical necessity. Not the same.
That's the problem- China isn't going to stagnate for 10 or 20 years.
Also, if being number one confers a huge advantage that a nation has gotten used to in the last 40 or so years there can be a problem adjusting to a more multipolar world- a lot of it will be psychological for Americans. If America loses its grip as the world's banker and enforcer they're going to feel a lot more pain than anyone alive is used to.
So, I am not talking about how a rich man feels when the value of his assets go down. I am talking about how a poor man feels when half of his money his gone and he is unable to buy food.
That's just it. Half of GDP isn't "half of his money", it's just half of one year's income.
Have you been to Japan during the so-called lostr decade? It was still running better than any other country on earth. Almost everyone was employed, healthcare was ubiquitous, etc.
I was there in fact... but you're agreeing with my point, GDP isn't everything. General financial health is important.
Japan in a lot of ways is a lot stronger as an economy than America.
More wealth, little external debts, no ethnically different underclass, etc.
Thanks, Captcha. I'm starting to worry that we're agreeing on too many things:
- China will not stagnate in the sense that Japan was stagnating, since it's underdeveloped. But it can stagnate in the sense that no REAL growth - no real increase, or fast enough increase in the productive capacity of the country will occur. In fact, some would claim that this is already happening. China will achieve 8% growth this year, but a big chunk of this growth comes from investment in non-productive parts of the economy. So not only that they do not produce real growth, but they are actually damaging other parts of the economy by wasting capital.
- Try to take half of a poor man's annual income from him. Having no food for 6 months is not a viable strategy for life :)
- Agree with you about GDP being an almost meaningless indicator. You might remember my article on the subject. I likened GDP to a person's weight: "Imagine meeting a potential business partner online and evaluating him according to his weight. He tells you that he weighs 80kg and - judging from your own experience - you assume that he is a mature individual. If you were to go and meet him in person, you would discover that he is actually an overweight 8-year-old kid. Not only is he not fully mature, but he also has severe health problems. Not exactly the type of person you want as a business partner. But you'll never know unless you visit. "
- Agree with you on Japan as well. It has a lot of advantages, as well as a superior culture with different priorities (in terms of ensuring social stability, harmony).
- Try to take half of a poor man's annual income from him. Having no food for 6 months is not a viable strategy for life :)
Food in the less developed areas of China is extremely cheap. Sometimes contains trace amounts of carcinogens and other poisons, but it isn't straight-to-the-artery fatal like a Big Mac.
Cute, but you understand what I mean... there's certain things that developed countries can afford and undeveloped ones cannot. Although being poor has its advantages too. The Chinese managed to survive the Japan siege for many years since they were used to living on almost nothing...
I'm a newcomer here, so I may have missed a lot. My comment goes to China's lack of arable land and
ability to feed itself. As China develops, people are eating more pig and fewer veggies. To produce pig requires more land than producing veggies. People are also buying and putting on the road, more cars. That means more roads, today or tomorrow.
More office buildings and hotels also require more land. Where is this going to come from?
China has only about 15 to 20% arable land to start with. Building more factories, more roads and more apartment blocks is going to eat up what little farmland China has. Where is the land to produce more pigs going to come from?
No one is going to want to put roads, factories or
farms on the tops of mountains. The competition for the available, useful land is going to get really bad.
This is what I see as China's real problem in the future. It is now, or soon will be, completely
unable to feed itself, along with all its other problems. I read Gordon Chang's book and I think
he was correct. China, because of its population, its development, its political system and its inability to change is headed for a cliff.
The only point of suspense is when will it arrive at the edge?
I generally agree. Of course, it still has a (limited) opportunity to change course, but that's not likely .