China Financial Markets Wed 2010-09-15 19:28 EDT

What do banking crises have to do with consumption?

Michael Pettis

For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy. It is more likely to be a vice. In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth. Why? Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital...With all of the major economies facing banking crises, they must clean up the banks by forcing the household sector to pay the bill. This will put downward pressure on household disposable income and wealth for many years...For twenty years Japanese consumption growth has limped along [due to paying for] their banking crisis...Chinese consumption dropped from a very-low 45% of GDP ten years ago to an astonishing 36% last year just as -- no coincidence -- Chinese households were forced to clean up the last banking crisis...

bank crises; China Financial Markets; consumption.

China Financial Markets Tue 2010-04-20 09:17 EDT

Who will pay for China's bad loans?

Michael Pettis

...pessimists are starting to worry about excessive debt levels in China, about which they are very right to worry, and many are predicting a banking or financial collapse, which I think is much less likely. Optimists, on the other hand, are blithely discounting the problem of rising NPLs and insisting that they create little risk to Chinese growth. Their proof? A decade ago China had a huge surge in NPLs, the cleaning up of which was to cost China 40% of GDP and a possible banking collapse, and yet, they claim, nothing bad happened. The doomsayers were wrong, the last banking crisis was easily managed, and Chinese growth surged. But although I think the pessimists are wrong to expect a banking collapse, the optimists are nonetheless very mistaken, largely because they implicitly assumed away the cost of the bank recapitalization. In fact China paid a very high price for its banking crisis. The cost didn't come in the form of a banking collapse but rather in the form of a collapse in consumption growth as households were forced to pay for the enormous cleanup bill...

China Financial Markets; China's bad loans; pay.

Mon 2010-04-19 15:42 EDT

Why The World Is Headed For A Balance Sheet Recession - Credit Writedowns

...[Richard Koo] believes the US, Europe and China are headed for a period of incredibly weak consumer spending not unlike what Japan has been through...what US policymakers are trying to do is to both increase asset prices and consumption in order to short circuit the D-Process i.e. prevent the debt deflation that results from deleveraging and asset and price deflation. Almost all measures taken to date are attempts to prop up asset prices (artificially I believe)...we are in for a debt restructuring across Europe, and in America and China because of the accumulation of debt and malinvestment. Policy makers are reverting to the same old game of asset price inflation to stave this off...It leaves us with chronically weak consumption trends acutely exacerbated by the demographic trends of an aging populace...these dynamics are particularly problematic for Europe because of the strictures imposed by the Euro, the large public sector debt-to-GDP ratios and the advance age of the populace. The Greek problem is the tip of the iceberg and the Europeans are seriously deluded if they think their troubles are over...

Balance Sheet Recessions; credit writedowns; Head; world.

Fri 2010-04-02 19:12 EDT

Shopaholic China: China's Global Shopping Spree: Is the World's Future Resource Map Tilting East?

Michael Klare, TomDispatch

...anticipating the kind of voracious resource consumption that goes with anticipated future growth, and worried about the availability of adequate supplies, giant Chinese energy and manufacturing firms -- many of them state-owned -- have been on a veritable spending binge when it comes to locking down resource supplies for the twenty-first century. They have acquired oil fields, natural gas reserves, mines, pipelines, refineries, and other resource assets in a global buying spree of almost unprecedented proportions...

China's Global Shopping Spree; Shopaholic China; world's future resource map tilting east.

China Financial Markets Thu 2010-03-04 08:47 EST

Stuck in neutral -- what Japan's rebalancing can teach us

Michael Pettis

...A few days ago I read a good article (``Stuck on Neutral'') about Japan [from] the Economist...about Japan's post-1989 rebalancing, ...discusses why, in spite of every attempt, Japan has not been able supposedly to rebalance the economy and achieve any real growth during the two lost decades after 1990. Private consumption never took off to drive economic growth...After many years of excess investment driving growth, Japan's rebalancing process, which occurred after corporate, bank and government debt levels prevented the investment party from continuing, locked the country into many years of slow growth because it had to grind through years of debt-fueled overinvestment...it doesn't matter what individual policies we take to boost consumption if these polices don't in the aggregate represent a real transfer of income to the household sector, as they did not in Japan...Japan's experience suggests one of the risks China faces...Chinese household consumption will undoubtedly rise as a share of Chinese GDP over the next decade or two, but the process nonetheless can be disappointing for growth. It depends on lots of other moving parts, most importantly perhaps the change in investment and the speed with which income is transferred to households. And the change in investment might depend on debt capacity constraints and the extent of earlier overinvestment.

China Financial Markets; Japan's rebalancing; neutral; stuck; teach.

Wed 2010-02-24 08:49 EST

What the PBoC cannot do with its reserves

Michael Pettis

...Revaluing the RMB, in other words, is important and significant because it represents a shift of wealth largely from the PBoC, exporters, and Chinese residents who have stashed away a lot of wealth in a foreign bank, in favor of the rest of the country. Since much of this shift of wealth benefits households at the expense of the state and manufacturers, one of the automatic consequence of a revaluation will be an increase in household wealth and, with it, household consumption. This is why revaluation is part of the rebalancing strategy -- it shifts income to households and so increases household consumption. So a revaluation has important balance sheet impacts on entities within China, and to a much lesser extent, on some entities outside China. But since it merely represents a distribution of wealth within China should we care about the PBoC losses or can we ignore them? Unfortunately we cannot ignore them and might have to worry about the PBoC losses because, once again, of balance sheet impacts. The PBoC runs a mismatched balance sheet, and as a consequence every 10% revaluation in the RMB will cause the PBoC's net indebtedness to rise by about 7-8% of GDP. This ultimately becomes an increase in total government debt, and of course the more dollars the PBoC accumulates, the greater this loss. (Some readers will note that if government debt levels are already too high, an increase in government debt will sharply increase future government claims on household income, thus reducing the future rebalancing impact of a revaluation, and they are right, which indicates how complex and difficult rebalancing might be). In that sense it is not whether or not China as a whole loses or gains from a revaluation that can be measured by looking at the reserves, and I would argue that it gains, but how the losses are distributed and what further balance sheet impacts that might have.

PBoC cannot; reserves.

Mon 2009-12-21 19:18 EST

America's Head Servant? The PRC's Dilemma in the Global Crisis

Ho-fung Hung

...Despite all the talk of China's capacity to destroy the dollar's reserve-currency status and construct a new global financial order, the prc and its neighbours have few choices in the short term other than to sustain American economic dominance by extending more credit...the historical and social origins of the deepening dependence of China and East Asia on the consumer markets of the global North as the source of their growth, and on us financial vehicles as the store of value for their savings. I then assess the longer-term possibilities for ending this dependence, arguing that, to create a more autonomous economic order in Asia, China would have to transform an export-oriented growth model--which has mostly benefited, and been perpetuated by, vested interests in the coastal export sectors--into one driven by domestic consumption, through a large-scale redistribution of income to the rural-agricultural sector. This will not be possible, however, without breaking the coastal urban elite's grip on power.

America's Head Servant; Global Crisis; PRC's Dilemma.

Mon 2009-12-21 18:29 EST

China's Economy: Decoupling from what? - Drorism*

One of the most popular memes repeated by mainstream media since the collapse of Lehman Brothers last year is the idea that China will manage to avoid the consequences economic downturn by shifting from an export-based economy to one based on local consumption...the "decoupling" theory proved to be false: The downturn in the developed world had a significant impact on China's economic well-being, causing a dramatic rise in unemployment and a sharp slowdown in economic growth...A new study published by Professor Hung Ho-fung...compares China's development path to that of other Asian economies, including Japan, Korea, Taiwan, Singapore, and Hong Kong. It provides a concise summary of political and economic events in East-Asia since World War II as well as some colorful predictions and recommendations...

China s Economy; decoupled; Drorism.

zero hedge Thu 2009-11-19 10:23 EST

Guest Post: Dear Prudence, Won't You Come Out To Play?

Contrary Investor

...consumers appear to have for now taken a vow of frugality. Whether by necessity or choice, prudence seems the order of the day. Does that mean consumers are not going to come out to play in the land of increased personal consumption any time soon? We think that's the theme, along with continued household balance sheet reconciliation that must come. Is monetary policy now impotent in an environment where consumers choose not to borrow and spend? If so, that leaves increased fiscal policy as the lever ahead for the government, with all the consequences that come along with that...it is critical to at least be open to the thinking that economic and financial market relationships we have grown to know and love over the past three to four decades are in the midst of meaningful change, perhaps secular change.

comes; Guest Post; play; prudence; Zero Hedge.

Mon 2009-10-05 11:23 EDT

New Bubble Threatens a V-Shaped Rebound

Andy Xie

...What we are seeing now in the global economy is a pure liquidity bubble. It's been manifested in several asset classes. The most prominent are commodities, stocks and government bonds. The story that supports this bubble is that fiscal stimulus would lead to quick economic recovery, and the output gap could keep inflation down. Hence, central banks can keep interest rates low for a couple more years...I think the market is being misled. The driving forces for the current bounce are inventory cycle and government stimulus. The follow-through from corporate capex and consumption are severely constrained by structural challenges. These challenges have origins in the bubble that led to a misallocation of resources. After the bubble burst, a mismatch of supply and demand limited the effectiveness of either stimulus or a bubble in creating demand...he structural challenges arise from global imbalance and industries that over-expanded due to exaggerated demand supported in the past by cheap credit and high asset prices. At the global level, the imbalance is between deficit-bound Anglo-Saxon economies (Australia, Britain and the United States) and surplus emerging economies (mainly China and oil exporters)...The old equilibrium cannot be restored, and many structural barriers stand in the way of a new equilibrium. The current recovery is based on a temporary and unstable equilibrium in which the United States slows the rise of its national savings rate by increasing the fiscal deficit, and China lowers its savings surplus by boosting government spending and inflating an assets bubble.

New Bubble Threatens; Shaped Rebound.

Thu 2009-07-30 00:00 EDT

Mish's Global Economic Trend Analysis: Effect of Household Deleveraging on Housing, Consumption and the Stock Market

consumption; effect; Household Deleveraging; Housing; Mish's Global Economic Trend Analysis; stock market.

Tue 2009-04-21 00:00 EDT

Mish's Global Economic Trend Analysis: Boomers' Future Went Down The Drain

``A structural shift in consumption to savings or at least reduced consumption, is in store for boomers''

Boomers; drain; futures went; Mish's Global Economic Trend Analysis.

Wed 2009-04-01 00:00 EDT

Calculated Risk: Business Cycle: Temporal Order

residential investment and personal consumption expenditure lead economy out of recession

business cycle; Calculated Risk; Temporal Order.

Tue 2009-02-24 00:00 EST

Calculated Risk: The Rebalancing Continues ...

``savings rate is rising, consumption is falling, and the trade deficit is declining''

Calculated Risk; Rebalancing Continues.

Thu 2009-01-15 00:00 EST

Calculated Risk: Q3 2008: Mortgage Equity Extraction Strongly Negative

``the Home ATM is closed, and MEW is no longer supporting consumption''

Calculated Risk; Mortgage Equity Extraction Strongly Negative; Q3 2008.

Fri 2008-11-07 00:00 EST

Jesse's Café Américain: Credit Card Bond Sales Zero As the Credit Markets and Consumption Engines Stalls

Jesse's Café Américain: Credit Card Bond Sales Zero As the Credit Markets and Consumption Engines Stalls

Consumption Engines Stalls; Credit Card Bond Sales Zero; credit markets; Jesse's Café Américain.

Thu 2008-06-26 00:00 EDT

naked capitalism: MasterCard: US Retail Gas Consumption Fell 2.7%

7; MasterCard; naked capitalism; Retail Gas Consumption Fell 2.

Thu 2008-05-29 00:00 EDT

naked capitalism: Former Fed Economist: Central Bank Using Wrong Playbook

Richard Alford: US consumption levels unsustainable

Central Bank Using Wrong Playbook; Fed economist; naked capitalism.