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The Forum > Article Comments > China drowning in money: what it means for the rest > Comments

China drowning in money: what it means for the rest : Comments

By Derek Scissors, published 31/5/2012

Trade Minister Craig Emerson is sure the Chinese can turn their economy up by fiat. Is he right?

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Interesting article, especially since it illustrates well how nobody and no nation can escape the trap that is energy decline. Since money is only a method of allocating energy, printing money or loaning it into existence is ultimately futile if the energy is not there to give it value. Now that world energy supply has plateaued (and NET energy is probably already declining) we will see overall world decline and attempts by China to stimulate its economy may mean growth for a while there but only at the expense of the rest of the world which will thereby decline faster. We are already seeing this in terms of oil exports to European Nations and the USA.
Posted by michael_in_adelaide, Thursday, 31 May 2012 9:19:29 AM
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Over leveraging is only possible, when you stop creating the tangible assets that back the creation of value backed capital.
As far as I understand it, most Chinese have serious savings habits and its banks are thankfully, state owned and ought to continue with the very same financial strategy that has underpinned their economic miracle thus far. And ought to resist to the last man, any privatisation of a currently very successful system.
If it ain't broke don't fix it.
Or indeed, force a private American type commercial system on it, that has created the GFC: and or, appears to have been spectacularly unsuccessful!
They don't appear to have or place must trust in a derivative market, which is the way we have created the valueless junk bond money now flooding Europe and the US, as unsustainable,virtually un-repayable debt?
Those very commercial, too big to fail entities that have contributed to or almost single handedly created this problem, with their massive over-leveraging, unsustainable high lending margins, and derivation creations, will simply have to take an equally massive economic haircut, or fold and lose everything?
China and its current economic paradigm is not the problem, but extreme capitalism may well be?
I fundamentally disagree with most of the article and its patently flawed premise, which as I see it, allows one to understand, why economists as a professional group, and according to an ivy league university's thirty year study, seem to have the economic predictive ability of a dart throwing monkey. China needs to keep on keeping on. It's is after all, virtually keeping our own economy very much alive and well. Capishe?
Rhrosty.
Posted by Rhrosty, Thursday, 31 May 2012 10:34:56 AM
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rhostry, I read your comments and couldn't let those misconceptions stand without pointing out the flaws in that attitude.

"its (China's) banks are thankfully, state owned and ought to continue with the very same financial strategy that has underpinned their economic miracle thus far."

Those banks have been singled out by Wen Jiabao and numerous economists as being among the biggest problems with the Chinese economy. You're making the assumption that because the privatisation of our banks was a mistake, the situation in China must be similar.

It's not. The one similarity, is in the bad loans that have been provided by these state owned banks. http://online.wsj.com/article/SB10001424053111903554904576459774073114738.html

The central government instructs banks to lend to local governments. The local governments seize land from farmers, develop condos and sell them off. The lack of an annual property tax means that the people who buy these condos don't need to find tenants, it's cheaper to keep the apartments as empty shells. Google 'Ordos' the community of thousands of empty houses in Mongolia. Or just walk through the Zhongguancun in north-western Beijing and note all the empty apartments (I've lived in one of those buildings). It's a pyramid scheme. The central government had to bail out banks to the tune of a trillion yuan last year. More's expected.

You said:"(the Chinese don't have or place must trust in a derivative market," which itself is accurate, but it's not wisdom. Actually, they'd love more investment options, for most of the last 30 years, interest rates at banks have been lower than inflation. You lose money if you bank it. Investment isn't an option, companies don't have the same reporting requirements as here so it's incredibly dangerous. There's also a cultural bias that favour tangible assets over intangible or intellectual. This is why there's no Chinese googles (Baidu's foreign owned, BTW).
Corruption and guanxi mean investment is only attractive with inside information.

The CCP has predicated legitimacy on rapid economic growth. Because it's become desperate, they're engaged in all kinds unsustainable activities. Christ, look at Bo Xilai and the debt in Chongqing.
Posted by TurnRightThenLeft, Thursday, 31 May 2012 6:59:31 PM
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Rhosty, I'm afraid you still have a few gaps in your understanding of the derivative market.

>>...a derivative market, which is the way we have created the valueless junk bond money now flooding Europe and the US, as unsustainable,virtually un-repayable debt?<<

"Junk bond" and "derivative" are not equivalents. Junk bonds are real, live investments that carry a coupon, a redemption value and therefore a yield. At maturity, they will deliver actual, identifiable value to the holder.

Derivatives, on the other hand, are predominantly hedging instruments, and exist separately from their underlying assets. Think of them as a somewhat aggressive form of insurance.

One form of derivative product may be created to hedge against a reduction in the market value of an asset, with the instrument being a put option that locks in a selling price.

http://www.investopedia.com/terms/p/putoption.asp

Yet another may be created - against exactly the same asset - in the form of a call option, where a premium is paid for the privilege of buying in at a specified price level.

The value of the asset underlying the put and call options are added together in order to quantify the "size" of the derivative market, but as you can see, not only can they cancel each other out, but that dollar figure does not itself represent debt, of any kind.

Let alone "unsustainable,virtually un-repayable debt".
Posted by Pericles, Friday, 1 June 2012 10:54:35 AM
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