Many, if not nearly all of the foreign correspondents in Beijing have been focusing on more or less the same topic for the past six months, namely how the global financial meltdown is affecting one of the most important spokes in the wheel of globalization,China. They’re sending photographers and reporters to the railroad station to get photos of migrant workers leaving Beijing for their hometowns who know they will probably not be coming back anytime soon. They’re sending them to Shenzhen and Dongguan to cover the closings of factories and how each closing ripples through the food chain in concentric circles. As I said in an earlier post (with the best comments thread in years), it’s all economic crisis all the time. Every day. 24/7.
Everything is now discussed in relation to the crisis. Every discussion about future projects I have with people in all kinds of industries includes the obligatory clause about how “it all depends on how bad the crisis is at the time.” Just last night I attended a panel discussion (and an excellent one, at that) on how we in Beijing can apply creativity and entrepreneurial skills to make money at a time when the economy is contracting. I think nearly everyone I know spends a good part of the day thinking about the crisis in some form or another, whether it’s choosing where to go for dinner or what to do for CNY, buying a Christmas gift or renewing your gym membership.
Which brings me to the link of the day. Paul Denlinger recently wrote one of the grimmest arguments I’ve seen about where we’re all heading, and why China and the US have got to crash. Unfortunately, I agree with him pretty much across the board. This is a lengthy clip, but it’s all essential stuff.
Now, China and America are entering a dangerous period of deglobalization, where they have come to the realization that after the bubble pops and the deleveraging begins, their interests are really quite different. Instead of China and America being two sides of the same economic coin, they need to play or pander to their own constituencies. The blame game will begin.
And their native constituencies are confused, hurt and angry. But they are not nearly as angry now as they will be in the near future when they have figured out what has happened to their wealth. When that happens, there will be hell to pay, and there will be blood in the streets.
The reason for this is because the leveraging which occurred is simply too big and too complicated. Taking all the bad leveraging out of the system and replacing it with cash and credit liquidity is like trying to rebuild the engines of an aircraft in flight. It cannot be done. This means that there can only be a crash.
The bright side is that crashes can be managed. You can go into a death spiral which is impossible to pull out of, but a smart pilot will look for a stretch of land and try to glide in for a crash landing. So far, the political leadership worldwide is pursuing policies which more closely follow the former path of the death spiral. This is because everyone is acting in what they perceive in their own interests, instead of keeping their heads and thinking through what needs to be done. It is a deadly panic move.
The problem is that we are now entering a phase where the crisis has spread from subprime mortgages, to derivatives, and then on to currencies. In the beginning the patient suffered from a lack of credit liquidity (constipation), so the central banks are going to provide liquidity (the enema). This did not work, and the patient has become bloated. There is the very real chance that this will eventually cause runaway inflation (dysentery) and the patient will then die of dehydration. When this happens, the currency becomes worthless and society falls apart until a new dictator imposes his will on the society, as Hitler did at the end of the Weimar Republic in Germany. In China’s case, runaway inflation led to the Kuomintang and Chiang Kai-shek’s loss of support in the cities, and directly contributed to the establishment of the People’s Republic.
Sounds really really really bad, doesn’t it? That’s because it is.
I believe Paul’s metaphor is spot-on. The deflation we are seeing now is the first phase in the treatment, and as the patient is bloated – i.e., as dollars are printed and thrown everywhere – inflation is inevitable, if not hyper-inflation. (I think that may be a year or two down the road, with what we perceive to be a deflation in the short term.)
Meanwhile, I am sticking, for now, with my original argument that even though China will be slammed hard, it will hold up relatively better than the US (“for whatever that’s worth,” as I said before). This is mainly because despite its monumental problems and 300 million+ peasants earning less than $1 a day, China has money on hand, and can launch its own stimulus package with far less strain on its coffers. Also, its domestic financial system has been relatively unaffected, while that in the US has been gutted.
Some are far more pessimistic about China’s future. Deported human rights activist and former Sakharov Prize winner Wei Jingshen sees a veritable “tidal wave” of demonstrators threatening the very existence of the Party. John Pomfret says he’s “agnostic” on the question of which country is better poised, but I think if you read his post on the subject it’s pretty clear where he stands, referring to the “irrational exuberance” of those betting on China. The argument will go on for years, and of course for all our passionate exchanges, there’s still no one on earth who knows.
Like last year’s presidential election, we’ve got another horse race to watch, one with far greater consequences. The way the world’s leaders handle or mishandle this albatross will affect each of us for years to come, maybe for the rest of our lives. I increasingly feel this is not a recession, it’s a depression, and we’re pretty much there. When companies that were seen only months ago as robust report profit losses well above 50 percent, and when you think of the effect their factory closings and layoffs will have right down the food chain, from plastics manufacturers in Dongguan to a family in the Dominican Republic waiting for the monthly check from their daughter working as a nanny in NYC, you can’t help but shudder. Nor can you help but be glad that at this moment you’re in China, as everyone who attended last night’s forum agrees. There are still opportunities and untapped markets here, and most importantly, customers with some cash to spend. Right here in Beijing.
1
By Paul Denlinger
Following a recent visit to the US, and then coming back to China, I have come to the same conclusion as you have: that China is better equipped to deal with this crisis than the US. While Obama has been talking up the challenge and dangers of not acting soon enough, most Americans simply do not get it. Their attitude is one of “We are the US, and really bad things happen to other countries, not the US.” They deny the challenge, and continue to live in a dreamworld generated by print and TV commentators and politicians.
Unfortunately economic rules do not recognize these differences, and the longer the denial, the worse the final reckoning.
In comparison, China (by which I mean the Chinese government) has been able to act more forcefully and quickly, and has been able to get liquidity into the market faster than Paulson’s gang. Then you need to factor into the equation that compared to Americans, who are in debt up to their eyeballs, Chinese have very significant cash savings.
Ironic isn’t it? A country and government which are nominally communist are better able to deal with a global economic crisis than the world’s leading “capitalist” society. And after 60 years of communism, the Chinese are better able to balance their checkbooks than Americans, who are gradually learning that not every American story will have a happy ending.
January 14, 2009 @ 6:04 pm | Comment
2
By Richard
Thanks for the great comment. Regarding your last paragraph: Unlike the Chinese, who learned long ago how hard life can be and why it’s essential to save for the rainy day, Americans have been brainwashed by credit card companies and marketers into thinking life is a blank check, that no matter what they wanted they could own it thanks to endless credit. And for so many years it was true enough. (Adding to the irony, this was enabled in large part by China’s self-serving investment in US dollars.) And I think the situation you describe of living is a dreamworld still applies. To this day, most Americans still don’t understand the gravity of the crisis and still believe there will indeed be a “happy ending.” There has to be. This is America, damn it!
January 14, 2009 @ 6:30 pm | Comment
3
By stuart
Although it would be clearly in everyone’s best interests, I don’t foresee a great deal of cooperation between America and China, other than for cosmetic purposes. My sense is that China feels it has its greatest opponent on the ropes and has no intention of letting up on the pressure.
I hope China’s leaders are going to look beyond the prospect of global domination and begin to show us some of the moral leadership and responsibility that has been so lacking in their rivals during the past few decades.
But what are the chances of that when their own survival depends on maintaining a selective political and historical narrative that is both closed to debate and nationalistic in content?
January 14, 2009 @ 7:41 pm | Comment
4
By Bao
From my 2009 prediction list Richard… Protectionism is starting to show its teeth… 😉
http://www.bloomberg.com/apps/news?pid=20601087&sid=aeLGXDu_0Qiw&refer=home
“Obama’s advisers are considering including a “buy American” provision in the economic-stimulus legislation that the incoming administration has made its first priority.
We are reviewing the buy American proposal and we are committed to a plan that will save or create 3 million jobs, including jobs in manufacturing,” said Jen Psaki, a spokeswoman for Obama’s transition team.”
Bring back the factories and the jobs boy!
January 14, 2009 @ 9:19 pm | Comment
5
By Whishkers
Compare the Dow versus SH index Mid Nov (Obama Orgasm) till now. Predictive markets – SH up 12 odd percent – Dow down 14 % (numbers approx)
January 14, 2009 @ 10:22 pm | Comment
6
By Bao
What’s The Value Of Truth?
http://www.forbes.com/2009/01/13/china-global-media-oped-cx_rm_0114meredith.html?feed=rss_news
The cancer is spreading…. As I said of course… 😉
January 14, 2009 @ 11:24 pm | Comment
7
By wayne
The vast majority of Americans are so fat and senseless together with having gulped the mainstream media BS, they are in a word plucked.
The Mafia/Rico/serial thieves and crooks that constitute state and national government cast a grim shroud over U.S. so called leadership.
As an American, I am disgusted beyond words. The new administration has two choices IMHO:
1. Begin gunboat deplomacy with the installment of obamma and immediatly start another war or maybe two….whatever initiating a draft demands. This fascist/capitalist model fits best with the combination of dummied down americanos,and Fed/Treasury/Gov blind attempts at reinflating the popped balloons.
2. Deflation is rampant and growing at double digit rates in U.S. although ignored by MSM. Unofficially U.S.is now in a depression; american leadership has just admitted to a recession! The combined result will force TPTB to address domestic discontent…so far ignored mostly, an favor of bailing out enormous wealth interests (say housing bubble),
and now the many time larger derivatives market heading for a mother of all crashes.
These events, together with the global rate of awareness and cohesion that will and is taking place regionally could force the U.S. to go isolationist, and therefore learn to live within its means.
Conclusion: Do not expect the U.S. to make any thing but an easy choice.
January 15, 2009 @ 12:41 am | Comment
8
By Math
A Suggestion to the Chinese government to send 250 million students to the USA as Part of China’s Economic Stimulus Package
First, I believe America is a very advanced and modern nation. China is not yet an advanced and modern nation. China’s goal is to reach the same level of advancement and modernity as the US. There are many ways for one country to reach the same level as another. You can develop yourself, or you can drag down the development of another. Of course right now, China’s economy/science/technology/military/diplomacy is all developing very fast, while the US is developing very slowly, and even more slowly given this current financial storm. So, I was thinking yesterday in my room with my son, why not take advantage of this current financial storm, and further drag down the US and close the gap between the US and China? I got up from my chair and took out a map of the US and China, and I saw two countries with approximately the same sizes, but one has 1/6 of the population pressure and twice the natural resources of another. Is this fair allocation of world’s resources?
I saw on the newspaper yesterday that the US gov’t is asking the Chinese gov’t to bailout the US (which means to buy more US bonds). So, as long as the Chinese gov’t will need to spend this amount of money, this post suggests that instead using that money to buy US bonds, use it to sponsor 250 million students to apply and go to the US to study. That is, the government will choose 250 million people and sponsor their application to different US colleges. This will be a government program called “Go To the USA”. in fact, the government will write their applications for them, write their essays, pay their application fees. Now, you say, but what if their scores and backgrounds are not good enough to be accepted? The government will of course forge their education background, their school grades, their test scores, to make them high quality candidates that will surely be accepted by US colleges. However, these 250 million students are not chosen from the best and brightest of the Chinese society. Instead, the gov’t will choose the lowest quality people from the Chinese society, such as jobless teenagers, delinquents, drug users, rapists, young murderes, etc, etc. China has a 1.3 billion, of course it has a large number of such low quality people. I believe one reason China’s GDP is not as high as it should be, is because these low quality people are dragging down the progress. Once these people are sent to the US, of course they’ll not study hard, they’ll not contribute to the US’s technology and research, and instead they may defraud research fund, forge papers, fabricate experiment data, create low qualtiy products for their school and research centers, and overall lower the quality of the US research versus Europe or China. And if these 250 million people can persist for decades, I believe this will have a significant negative impact on the US economy and technological quality, and that is of course the best scenario for China.
For an American university, when they receive an applicant from China, they’ll see great scores, great recommendation letters, great personal statements, etc. And they’ll accept most of those applicants based on objective standards. Of course they do not know that all these data is forged by the Chinese government for the candidates. So after 4 to 5 years, 250 applicants will be accepted into various US schools, such as Harvard, Princeton, MIT, Berkeley, CalTech, University of Georgia, University of Virginia, University of Texas, University of Pennsylvania.
This way, it degrades the quality of the US population and academic research, alleviates resource and population strain on China. THis is simply a way to more efficiently allocate resources in today’s world, should be supported by liberal economists.
I think this project should be part of the stimulus package to recover the Chinese economy and ensure its competitive position in the world.
January 15, 2009 @ 1:44 am | Comment
9
By Bao
@Math
Don’t worry, your evil plan has been put into place years before you could even envision it.
As Wei Jingshen stated it in its visionary article:
“The people of modern China are different from their ancestors: they no longer expect a wise emperor and fair judges to rule over them. They know that only democracy will guarantee what they want: prosperity, security and fair treatment. The Chinese ruling class think this too – that’s why they already send their children and their money to the West.”
They are already studying very, very, VERY hard…
January 15, 2009 @ 2:54 am | Comment
10
By Bao
“…but one has 1/6 of the population pressure and twice the natural resources of another. Is this fair allocation of world’s resources?”
Thank you for fueling my soon to be real expansionist China Cancer theory.
😉
January 15, 2009 @ 2:58 am | Comment
11
By Bao
But I have to admit, as a Troll, you do your homework, and you do not miss a single argument.
It’s well structured and almost credible, hats on HX…
January 15, 2009 @ 2:59 am | Comment
12
By Matt
Related comment — Isn’t the savings rate per capita in China higher than the US because the vast majority of Chinese have no medical insurance, 401K, and social security?
I place my bet on the US leading the way out of this crisis.
January 15, 2009 @ 3:02 am | Comment
13
By Bao
I do as well, what will determine the winner of this insane contest is not how nations deal with the crisis, but who’s emerging first out of it, and in what shape.
An no, I apologize to all the Panda lickers out there, it won’t be China.
The bullets, are, aimed at China. Do not doubt about this.
January 15, 2009 @ 3:13 am | Comment
14
By cina
@Matt
The real reason is that nobody in China trust their own government.
January 15, 2009 @ 3:14 am | Comment
15
By Bao
“They are already studying very, very, VERY hard…”
To make sure they never ever come back to this radiated land…
January 15, 2009 @ 5:11 am | Comment
16
By yourfriend
The joke is on you my radiated friend.
On you…
You are sleeping late our friend, typical sign of your daddy’s fortune. Sleepers, everywhere… Only too late…. By a century…
Beautiful dance… One more quarter for the show.
But thank you for dancing according to my foreign white devil rules…
White trash will prevail, like itn or ot,
They’re coming to get you, Barbara… All of you!
Dance my lovely Chicken,dance! Shake your but, for all of us.
January 15, 2009 @ 5:32 am | Comment
17
By Bao
Thank you yourfriend.
You are a true warrior.
January 15, 2009 @ 5:41 am | Comment
18
By stevelaudig
“Americans have been brainwashed by credit card companies” Or as LBJ said about George Romney [I believe it was George, Mitt’s papa] after George came back from visiting Vietnam and said he’ been “brainwashed”, LBJ said, “All he needed was a light rinse.” It doesn’t take much to persuade a lot of Americans of the most absurd ideas. They are all used to getting stuff for free. After all of them got a whole continent [from its original inhabitants] for free. While the leadership of half of them [the South] got their land for free and slave-labor. So many unknowingly believe “for free” is their birthright.
January 15, 2009 @ 7:15 am | Comment
19
By Richard
Isn’t the savings rate per capita in China higher than the US because the vast majority of Chinese have no medical insurance, 401K, and social security?
I think that is false. The Chinese, no matter their situation, have been great savers throughout history, long before 401Ks and medical insurance. If they did have these expenses to pay, they would find a way to skimp elsewhere so they could still save; and remember, many are taxed heavily by local officials, yet they still save. This is true about the Chinese wherever they go. It is not true about Americans. To the contrary….
You make it sound as if the Americans didn’t have thee expenses they would save like the Chinese. Wrong. The US is a consumer culture, and a borrowing culture. It is not a saving culture. We thrive on debt and drown in stuff. Stuff we can’t afford but buy anyway.
January 15, 2009 @ 9:40 am | Comment
20
By el chino AIP
Matt is not the only Chinese to figure how to spoil the American society, because they see no chance to emulate the Americans.How about corrupt them with the Chinese traits, if the Chinese can’t beat the Americans at all? When Chairman Mao met with Kissinger and Nixon, he offered to send 10 million Chinese women to the U.S., saying that there were too many women in China to feed. The offer might be gladly accepted by the ordinary American men who would enjoy Asian sex slaves and not bother themselves with the consequences generations ahead that the American population and gene pool would be adulterated and debased.
When I was in grad school, I knew at least one Chinese student who got admitted in grad school with good scores in GRE, which however was obtained by other people who took the test for him. The problem was that the cheater looked really dumb and could not speak a word of English. The guy was afraid to go to school and sat in the Apt everyday. Later on he disappeared
January 15, 2009 @ 10:43 am | Comment
21
By yourfriend
The blame game will begin.
It’s quite clear who’s fault it is. It’s Americas. But this is the land where you sue McDonald’s for selling you food, so who knows what these whiners will fabricate in the next few years.
As far as who will survive, China will still be poor, but they have survival skills and savings. America will get hit hard, but they have a thick layer of fat to feed on. If America’s schools weren’t failing, healthcare costs soaring with unhealthy habits, society vaporizing with illegal immigration, it would be relatively better off after “slimming down”.
fueling my soon to be real expansionist China Cancer theory.
You’ve been beaten to it by the last 30 years of thought, only instead of “China Cancer” it’s called “white European Judeo-Christian cancer”. Right now it’s in remission, but fighting its gradual decline hard with the “BIG BAD CHINA” scaremongering.
not bother themselves with the consequences generations ahead that the American population and gene pool would be adulterated and debased.
Even the worst 10 million Chinese women would improve the genetic makeup of Americans and especially Mexicans, “el chino”.
When I was in grad school, I knew at least one Chinese student who got admitted in grad school with good scores in GRE
Students of East Asian descent outscore whites, blacks, Hispanics, Indians, Jews and Muslims in the SAT and GRE, have better grades, are less likely to abuse substances, and are vastly overrepresented in acceptances to better schools despite discriminatory policies favoring non-Asians and legacies.
I think this bit of knowledge will help you through the grieving process of your racial inferiority complex.
January 15, 2009 @ 4:37 pm | Comment
22
By otherlisa
I dunno…in some ways I think that the Chinese economy is fundamentally more sound than the American, and that the Chinese government, because of its ability to mobilize in a crisis, may be better able to get through this depression than the US. But I have my doubts, simply because the scale of problems that China must deal with is so much greater than in the US. The US does not have the huge population to deal with. The US can feed itself. The US doesn’t have an environment so degraded by pollution that lung cancer is a leading cause of death among Chinese urban young people.
On the other hand, Beijing built a subway system in a couple of years, Shanghai is doing the same, and we can’t even get a freakin’ light rail to the Westside here in Los Angeles.
January 15, 2009 @ 4:42 pm | Comment
23
By yourfriend
Los Angeles and Detroit are rapidly crumbling into 4th world hellholes infested with drug dealers and rapists, but there are still pockets of America that resemble civilization.
January 15, 2009 @ 4:44 pm | Comment
24
By otherlisa
Yourfriend, fail. I live in Los Angeles. It’s not perfect and there are parts I would not want to live in. But a great deal of it is lovely.
LA = Mumbai? Hardly. Have you ever actually been here?
January 15, 2009 @ 5:03 pm | Comment
25
By Kellen
funny. i don’t recall seeing a ‘muslim’ box to be checked on my GRE.
January 15, 2009 @ 5:19 pm | Comment
26
By Richard
Thanks for the keen insights, ferin.
All good points, Lisa. In an earlier post I quoted several Chinese students who recognize their dreams are on hold for years and who have adopted a Lei Feng attitude (“I want to put my own needs aside and do all I can to help”). While that attitude may not be universal here, I think the Chinese, far more than the Americans, understand what they’re in for. It’s American’s willful ignorance, as Paul Denlinger tries to point out, that has set them up for a huge shock, while China seems better prepared financially (at least they have actual money to give out) and psychologically (at least the people know they’re going to be fucked for a while). Their banks, amazingly, are more stable than ours at the moment and that can make a huge difference in controlling panic. China has had those monumental problems for a quarter of a century now, and yet they keep going. There will be pain and carnage along the way, but I still place my bets on China coming out ahead in terms of global influence and general stability of existing social structures.
January 15, 2009 @ 5:33 pm | Comment
27
By Bao
“Their banks, amazingly, are more stable than ours at the moment and that can make a huge difference in controlling panic.”
That probably explains why foreign investors are currently pulling out billions of dollars from the Chinese bank. it’s time to break the piggy bank as we say. 😉
“but I still place my bets on China coming out ahead in terms of global influence and general stability of existing structures.”
I have a question Richard, do you really want China, with its current government and politics, to influence the world that much?
As we say, be careful for what you wish for. But maybe you are not wishing for it, and just stating this as a prediction.
January 15, 2009 @ 5:39 pm | Comment
28
By Bao
And in the latest: But, what is OUR oil doing under THEIR sand?! development…
Iran, China sign oilfield development deal
http://www.shanghaidaily.com/sp/article/2009/200901/20090115/article_388159.htm
I wonder what would be the impact of such a deal in the light of a war with Iran…
As some are stating it right now, the Israel conflict is supposedly a platform for what’s coming next for Iran…
We’ll see, as usual…
January 15, 2009 @ 5:44 pm | Comment
29
By Richard
Bao, you show me where I ever, ever said I “want China to influence the world,” Or anything even remotely close. Where are you coming from?
I’m still tired of your gadfly comments, by the way, posting links in multiple threads and commenting in your own little vacuum. Aside from that, delighted to have you here.
January 15, 2009 @ 5:56 pm | Comment
30
By Bao
As long as I’m not the worst offender here, should be fine no?
The funny thing is that you assume that when people do not reply to comments, is because they don’t care.
The urge to reply is actually coming from a simple fact: Not agreeing with it.
What would be the point to constantly reply: yeah I agree with what you’ve just said.
Since when it’s necessary to reply to every single comments being written on this blog in order to get approval?
I’m still wondering why you are so much on my case. I’ve asked you a question and you reply with a snarky comment. What’s the point?
I enjoy discussing on this blog, is it a crime?
January 15, 2009 @ 6:17 pm | Comment
31
By Richard
No, it’s not a crime and I don’t delete you, but I’ve told you it bugs me when you pop up like a jack-in-the-box with incongruous comments and random links that seem irrelevant to the threads you dump them in. You’re unique among all the commenters in this respect – both the links and the talking in your own vacuum. Most readers ignore you, some have told me I should ban you, and I have to admit you are irritating, like lint on a wool sweater that you have trouble getting off. That’s why I’m “on your case,” though I prefer to see it as constructive advice. Ferin bugs me, too, but at least I know who he’s talking to and what he’s trying to say.
I’ve asked you a question and you reply with a snarky comment. What’s the point?
Your exact question was, “do you really want China, with its current government and politics, to influence the world that much?” I answered by asking where you were coming from because I never said or implied or even hinted at such nonsense. No snark whatsoever. Just another Bao head-scratcher, where everyone wonders what he’s doing all day here. You can continue this by email if you want, but I don’t really have much more to say about it,
January 15, 2009 @ 6:41 pm | Comment
32
By dylan
Richard needs to keep up with the realities of the Chinese banking system before firing assessments out. Is he aware, for instance, of the reporting by Bloomberg on 12 Jan indicating that NPLs are on the rise as Chinese bankerss are officially being told to forget about their previous instructions to try to avoid risky lending. This is what we might call storing up problems for the future. Remember, the PRC has just spent more than US$500 billion bailing out the banks for the last binge of NPLs.
As Bao correctly notes, foreign investors are fleeing the Chinese banks in droves.
January 15, 2009 @ 7:07 pm | Comment
33
By Richard
Everything’s relative, dylan. The American banking system seems to me in more immediate trouble. That’s at the heart of the crisis. Chinese banks don’t need to deal with the bad loans that have brought down Lehmann Brothers and Bear Stearns, while wreaking havoc on Citi, Merrill, UBS, etc. And we haven’t even seen the start of it. China at least has the cash to clim out of its hole. America right now has no such luxury, except by printing money and inviting hyper-inflation, another point in Paul Denlinger’s post.
Browsing over the latest China headlines, I’m not convinced China’s banks are in such dire straits. There was a big drop in foreign investment in November, but in 2008 it was up 24 percent, a record year. Reuters reports today on how the foreign banks rushing out of China may come to regret it. And from yesterday’s IHT:
So I guess we can find supporting facts for whatever side we choose. But I want to repeat, I look at the gutting of the US financial system and compare it to China’s and I have to conclude China is better poised, at least at this moment. And believe me, for years I thought China’s banks would be the death of the country. The fact that they stabilized them and drew so much foreign investment in them is amazing when you consider the catastrophe these banks looked like less than 10 years ago.
Disclaimer: This does not mean I am a communist. I just see what’s working and what’s not. America is going to get hit hard in 2009 due to bad loans. China, for all its fragility and catastrophic problems, will not hit by this wrecking ball. That means when the carnage ends, the fundamentals of China’s banking system could be more sound than America’s.
January 15, 2009 @ 7:20 pm | Comment
34
By Bao
“Reuters reports today on how the foreign banks rushing out of China may come to regret it. And from yesterday’s IHT:”
I’m sorry to say Richard, but for me this is just another very clear sign that we are heading for conflicts with China.
I mean, it’s very simple, what do you do before you enter in conflict with a nation?
You get back your marbles.
And this is exactly what’s happening now. But not so many people see it.
Sad, but true.
January 15, 2009 @ 9:51 pm | Comment
35
By Bao
And btw, this is why I’ve posted the previous link about Iran and what it could imply geo-strategically for the very near future.
I’ll make sure from now on that when I post random links, I explain my reasoning behind it.
I apologize to all the readers for being so cryptic in the past.
January 15, 2009 @ 9:53 pm | Comment
36
By yourfriend
I wonder what would be the impact of such a deal in the light of a war with Iran…
So you’re planning an invasion of Iran next? If so, I doubt China will be the bigger loser.
As Bao correctly notes, foreign investors are fleeing the Chinese banks in droves.
They’re fleeing banks everywhere. It’s a question of who will be worse off when this is over with, no one is saying China will be untouched.
January 16, 2009 @ 2:34 am | Comment
37
By otherlisa
Actually, Richard, I think that we tend to overestimate Americans’ willing blindness to the situation. You and I have worked in sort of upper middle class type positions and have done okay over the years. There are huge numbers of Americans for whom things have been very difficult for quite a while. Look at income disparity in this country since Reagan. Look at the privatization of risk and the increase of poverty. Look at the ongoing crisis in our healthcare system. “Ordinary” peoples’ struggles don’t get reported on much – they aren’t what you see on television, they aren’t a part of the culture of celebrity and the culture of distraction and consumption. But part of the reason that savings rates are low and personal debt is high is that real income has been falling here for decades – it’s what people needed to do to get by.
Are we as thrifty as we should be? No. Do we make unnecessary purchases? Sure. We can definitely learn to live more simply and wisely. But to a certain extent I think it’s a false stereotype to say that Americans don’t know what’s coming. For many Americans, it’s already here.
January 16, 2009 @ 3:35 am | Comment
38
By Richard
Lisa, I base that claim, unscientifically, on things I’ve read and Americans I’ve spoken with who think it’ll be over by the summer and that after some pain America will simply return to normal. I think there will be a whole new “normal” once recovery begins and, and that it will take much, much longer to get there than most Americans believe. But I’m over here, and I may be misreading this.
January 16, 2009 @ 9:15 am | Comment
39
By lam kebob
“China has money on hand, and can launch its own stimulus package with far less strain on its coffers”
30% of China’s forex reserves were in Merrill Lynch and AIG, and more was in other corporate bonds. How much was in the automotive sector? Do all of you really believe that China just has huge warehouses of cash?
Also, China is still getting IDF and ADB loans for water treatment and environmental cleanup and that currency is DOLLARS! So don’t expect the USD to collapse, everyone who has received aid money would find that the paper is good for nothing and they are in a worse off situation than before.
January 16, 2009 @ 3:12 pm | Comment
40
By Matt
Richard, your statements on Chinese as a saving people, and the reasons they are and Americans aren’t — they’re not quite believable. Americans have a bit more safety net in the way of medical insurance (for a majority of people anyway), social security, and for many, a retirement plan of some sort (no matter how humble).
My perception is that many Chinese save because, yes, it’s cultural, but also because they have no choice. When an unexpected illness can wipe your family’s finances out, it’s best to save as much as you can.
Good thing Americans spent so much in the past decade or so. China was the direct beneficiary.
Richard, you are as optimistic about China’s ability to weather the storm than I am about America’s. I will try to remember your statement:
“China, for all its fragility and catastrophic problems, will not hit by this wrecking ball. That means when the carnage ends, the fundamentals of China’s banking system could be more sound than America’s.”
Financial systems are much about transparency, which we will have more of in the coming years. Not sure if the same transparency will be available in the PRC.
January 16, 2009 @ 10:00 pm | Comment
41
By Richard
Yeah, look at how transparent we were with our financial system, and how far it got us. Look at how the transparency saved us from Bernie Madoff’s highway robbery and the blatantly dangerous AAA-rated CDOs. Yes, nothing like good old American transparency, especially under the most transparent regime ever, the BushCheney
Reichregime.Time will tell. Just remember, I have never been wrong before and won’t be wrong this time. Cliincal tests have confirmed Peking Duck Infallibility.
January 16, 2009 @ 10:18 pm | Comment
42
By Matt
Banking and financial regulations are scheduled to go through an overhaul, no doubt.
On the Madoff thing, the SEC certainly fell down, but more than that — individual investors are friggin’ idiots.
January 16, 2009 @ 11:19 pm | Comment
43
By lam ke bob
Alice Poon says Richard is wrong
w.asiasentinel.*om/index.php?option=com_content&task=view&id=1667&Itemid=324
“Foreign and domestic investors have good reason to lose confidence in China’s financial sector. Although the government has announced a stimulus package worth 4,000 billion yuans to be spent over two years, insiders would know that the watery content of this package is huge – the Chinese government is incapable of finding the 4,000 billion of hard cash. Thus her stimulus package cannot be compared apple-to-apple with other countries’ fiscal stimulus packages.”
w.asiasentinel.*om/index.php?option=com_content&task=view&id=1665&Itemid=422
Over the cliff we go!
Also count the fact that China still relies on foreign loans and grants to cover its domestic development expenses while it plows money into space and the military. The second Asia Sentinel article mentions the ADB and IDF running dry as the usual benefactors (like the US, Japan and EU) close their wallets.
January 17, 2009 @ 3:39 am | Comment
44
By yourfriend
The second Asia Sentinel article mentions the ADB and IDF running dry as the usual benefactors (like the US, Japan and EU) close their wallets.
Except Japan, the US, and the EU account for approx 25% of FDI. The lion’s share of FDI comes from Hong Kong, Singapore, Macau, and Taiwan.
As for Japan, they are seeing China more and more as a crucial market. Even far-right Aso is warming up to China.
January 17, 2009 @ 11:54 am | Comment
45
By Richard
Well, if Alice Poon says it, it must be true. I included links to stories that say the same thing – that China will be devastated far worse than the US. I did that to show this debate is split right down the middle. Nourini and Ferguson and Sorors and others with economics experience equal to or even greater than Poon’s say just the opposite, that China is poised to come out the winner. Only time will tell.
January 17, 2009 @ 1:41 pm | Comment
46
By Bao
“Their banks, amazingly, are more stable than ours at the moment and that can make a huge difference in controlling panic.”
“That probably explains why foreign investors are currently pulling out billions of dollars from the Chinese bank. it’s time to break the piggy bank as we say.”
Actually, I was only partly right about this, here’s a much better answer to this:
http://www.rgemonitor.com/asia-monitor/255164/dear_chinese_banks_shareholders
An excellent article from RGE Monitor that finally shed the light as to why the foreign investment might be fleeing the banks in China, being simply:
The return of the Iron fist.
I don’t know about all of you, but for me that doesn’t sound exactly like a very healthy situation. It might be a quick fix, like what’s being done worldwide, but for the long term it’s definitively not good news.
And also an interesting point, it’s interesting to see how China might finally spend a big part of it’s foreign reserve… To refinance the banks (losing some feathers in the process), that in turn will end up doing the same exact thing that the US are doing right now, lending to industries and companies in trouble.
The difference being that they do it CCP style, and since we are used to their political system, nobody is shouting in panic SOCIALISM like it’s the case in the US!!! 😉
January 19, 2009 @ 3:24 am | Comment
47
By Dror Poleg
Paul, Richard, you are missing the point: Bottom line is – China’s economic model is not viable. It did little to build real human and social capital and other intangible assets and depends almost exclusively on foreign investment, government spending, and low-end export.
The current crisis was cause mainly by the US and China, who, in a dance of cheap credit and cheap goods spiraled themselves into oblivion and took all of us with them. It’s going to be painful for all parties involved, but at the end of it, America will still have a stable and viable political and economic system, and China will still be a nation with 900 people who make an average of 1 USD a day, with declining literacy rates, and no intangible assets to speak of. China will also have to go through a social storm, the consequences of which few can predict.
Richard, since our last discussion in the thread you linked to, about 25 million Chinese have lost their jobs, and the compromised position of Chinese banks is becoming more and more apparent. America also seems to be in a worst state than we expected back then.
Another important thing to rememebr is that while the Chiense government can make decision more quickly and without public debate, the mechanisms that are supposed to execute these decisions are inefficient and corrupt, so the gap between what they plan to what will actually happen is wide.
The main question is, given the fact that the world is going into serious turnmoil which will cause social unrest ALL OVER THE WORLD, is China in a BETTER position to go through the next 3 years and maintain its current political structure? I think not. I’m not saying it will fall apart, but it’s definitely under a considerably heavier threat than most other countries.
March 4, 2009 @ 12:56 pm | Comment