Roubini on China

Yes, it is really time to thinkabout China.  This expresses the ongoing concerns been feltby the community of economists.  Theproblem is that we presently have soaring inflation and you can bet that worker’sincomes are not keeping up.  In the meantimeway too much cash is chasing goods and are bidding them up.  The economy is naturally restructuring.

So the question is whether or notwe are to have a severe slump.

As I posted two years ago, China’s bestpolicy was to support an expansion of middle class wealth.  Some of that may have happened, but thissuggests it has a lot further to go.  Thehuge housing overhang, provided it is real, needs to be absorbed with readycredit to buyers who qualify.  This allsurely exists and needs to be realized.

China has been actively securingraw resources to support its growth and is all over world so doing.

Again, do we panic or do we hangtough.  Growth is absurd in some sectorsyet I said the same five years ago and none of all that is shuttered.  Someone owns all those properties and it maywell be the foolish and well connected. If that is the case, then they are not a drag at all on theeconomy.  The drag is that the limitedsupply of foolish commissars may well dry up.

The constraint now is that theable are all now working and productivity really is beginning to matter and realwages must rise.  Already they areoutsourcing into Africa.

I think that they are about toaccept slower growth and may well be already doing so.  It is not a mature economy yet, far from it,but they are likely entering a twenty year period of consolidation, about twentyyears after Japandid.  Chinahas done what Japan did inforty years in thirty years as is India.

The rest of the globe, includingthe Muslim sector has also embarked and will reach the same level in thirtyyears followed by twenty years of consolidation.  Therefore, the globe will be fully developedin about fifty years.  At present, athird is developed, a third is in full cry and the remaining third is inmotion.

The present problem for China is theweakness of the US dollar is slowing their external operations.

Roubini On China'sUnsustainable Growth Model -- And Why The Rate Hike Looks Desperate

Mike "Mish" Shedlock

http://www.businessinsider.com/china-jacks-up-interest-rates-for-the-fourth-time-in-six-months-2011-4

Mike"Mish" Shedlock Mish is an investment advisor at Sitka Pacific Capital. Hewrites the widely read Mish's Global Economic Trend Analysis

In an unexpected move to curb soaring inflation China hikedinterest rates for the 4th time since October.

Premier Wen noted a threat to social stability and stated “Exorbitant”house price increases in some cities are a top public concern.

Please consider China Raises Interest Rates to Counter Inflation Pressure

China raised interest rates for the fourth timesince the end of the global financial crisis to restrain inflation and limitthe risk of asset bubbles in the fastest-growing major economy.

The benchmark one-year lending rate will increase to 6.31 percent from 6.06percent, effective tomorrow, the People’s Bank of China said on its website at theend of a national holiday. The one-year deposit rate rises to 3.25 percent from3 percent.

The move comes as a surprise to some, after Credit Suisse Group AG, MorganStanley and Bank of America-Merrill Lynch said officials may pause intightening. While Japan’sdisaster and Europe’s debt woes are cloudingthe global outlook, Premier Wen Jiabao’s government is more focused on theestimated 5 percent jump in consumer prices last month, said analyst ShenJianguang.

It’s “very significant” that China raised rates before the March inflation datahas even been announced, said Shen, a Hong Kong-based economist at MizuhoSecurities Asia Ltd. who formerly worked for the International Monetary Fundand the European Central Bank. “This is a good preemptive move.”

Premier Wen last month described inflation as “a tiger” that once set free willbe difficult to cage, and also as a potential threat to social stability.“Exorbitant” house price increases in some cities are a top public concern, hesaid.

Today’s announcement contrasted with central bank Deputy Governor Yi Gangsaying March 23 that interest rates were at a “comfortable” level and that hewas “not too worried” by inflation because price increases will slow in thesecond half of the year.

China’s Unbalanced, Unsustainable Growth Model

Via Email update, Nouriel Roubini sent out a note regarding China's growth.

I’m writing on the heels of two trips to China during which I met withsenior policy makers, bank executives and academics, just as the governmentlaunched its 12th Five-Year Plan, intended to rebalance the long-term growthmodel. My meetings deepened my own impression and RGE’s long-standing houseview of a potentially destabilizing contradiction between short- andmedium-term economic performance: The economy is overheating here and now, butI’m convinced that in the medium term China’s overinvestment will provedeflationary both domestically and globally.

Once increasing fixed investment becomes impossible—most likely after 2013—China is poisedfor a sharp slowdown. Continuing down the investment-led growth path willexacerbate the visible glut of capacity in manufacturing, real estate andinfrastructure. I think this dichotomy between the high-growth/inflationpressures of the next couple of years and growth hitting a brick wall in thesecond half of the quinquennium is far more important than the current focus ona “soft landing” amid double-digit growth. A number of local scholars close topolicy circles agree that this is the biggest challenge of the next few years,as we’ve been saying for months.

Despite policy rhetoric about raising the consumption share in GDP, thepath of least resistance is the status quo. The details of the new plan revealcontinued reliance on investment, including public housing, to support growth,rather than a tax overhaul, substantial fiscal transfers, liberalization of thehousehold registration system or an easing of financial repression.

No country can be productive enough to take 50% of GDP and reinvest itinto new capital stock without eventually facing massive overcapacity and astaggering nonperforming loan problem. Most likely after 2013, China willsuffer a hard landing. China needs to save less, reduce fixed investment, cutnet exports as a share of GDP and boost consumption as a share of GDP.

China is rife with overinvestment in physical capital, infrastructureand property. To a visitor, this is evident in brand-new empty airports andbullet trains (which will reduce the need for the 45 planned airports),highways to nowhere, massive new government buildings, ghost towns and brandnew aluminum smelters kept closed to prevent global prices from plunging.

It will take two decades of reforms to change the incentive tooverinvest. Traditional explanations of the high savings rate (lack of a socialsafety net, limited public services, aging of the population, underdevelopmentof consumer finance, etc.) are only part of the puzzle—the rest is thehousehold sector’s sub-50% share of GDP.

Several Chinese policies have led to a massive transfer of income frompolitically weak households to the politically powerful corporates: a weakcurrency makes imports expensive, low interest rates on deposits and lowlending rates for corporates and developers amount to a tax on savings andlabor repression has caused wages to grow much less than productivity.

To ease this repression of household income, China would need a more rapidappreciation of the exchange rate, a liberalization of interest rates and amuch sharper increase in wage growth. More importantly, China wouldneed to privatize its state-owned enterprises so that their profits becomeincome for households and/or massively tax SOEs’ profits and then transferthose fiscal resources to the household sector.

Medium Term Deflationary 

Interestingly, Roubini concludes "China’s overinvestment will provedeflationary both domestically and globally."

When viewed from the point of destruction of credit and the wiping out ofmalinvestments especially in the property sector, I would agree.

The question is how Chinese officials respond and to what degree.

ChinaMay Be Slowing More Than You Think

In many respects, Roubini echos the beliefs of Michael Pettis.

As noted in Hidden Losses and Little Reform; China May Be Slowing More ThanYou Think, Pettis thinks a slowdown in China may have already started.

One difference is that Pettis is not convinced of a "hard landing".

On this score, I side and have sided with Roubini. The case for a "hardlanding" is sound. Can anyone cite any instances when there has been thismuch malinvestment where there has not been a hard landing?

How Will Rate Hikes Affect China'sProperty Bubble?

In early February I was wondering How will Rate Hikes Affect China's Stock Market and PropertyBubbles?

Currently it is taking credit growth 3-4 times GDP growth to achieve China'sgrowth target.

Something has to give. Can Chinagrow 10% without huge investment-driven growth, without rampant creditexpansion? What about speculation in the stock market?

Michael Pettis at ChinaFinancial Markets expects the Chinese stock market to be firm untilPresident Hu Jintao and Premier Wen Jiabao retire next year.

I am not so sure. It is quite possible a series of hikes weighs on the market.Besides, stock market rallies per se will not help China achieve its GDP targets.

When Do Imbalances Matter?

At some point, Chinawill be forced to address massive imbalances in its investment-driven growthmodel, make numerous market-driven changes in its banking system, and addressthe untenable nature of its growth targets in general.

Will the stock market and China'seconomy wait for a leadership change or will the market force some changes viaCPI spikes before then?

I suspect the latter. Moreover, it's entirely possible the series of quarterpoint baby steps hikes weighs on the equity markets sooner than expected,especially if the frequency of those hikes increases faster than expected, evenif credit growth continues unabated.

Implications of the Hard Landing

I spoke about a Chinese hard landing in February in Speculation, Investment Scandals, Fraud, and China's HardLanding; Miracle of Chinese High-Speed Rail will be Reduced to Dust; Peak OilDoomsday Clock. Inquiring minds will want to take a look.

In case you missed it, also consider World's Biggest Property Bubble: China's Ghost CitiesRevisited; 64 Million Vacant Properties.

The video in the link immediately above is a "must see".

Those who believe or hope China'sgrowth will continue unabated will at some point see those beliefs crash on thehard rocks of reality.

Roubini, Pettis, and I are all guessing as to when these imbalances matter, towhat degree, and how hard the landing, but I will leave you with a couple ofquestions, one I asked earlier: Can anyone cite any instances when there hasbeen this much malinvestment where there has not been a hard landing?

While pondering that question, also ponder the implications for commodities asdiscussed in Anatomy of Bubbles; Negative Returns for a Decade Revisited; IsGold in a Bubble?