Wed 2010-09-15 19:16 EDT
Trapped Inside A Property Bubble
When China's real estate bubble finally bursts while exports become less competitive, the consequences could be severe...
exports Topic in The Credit Debacle Catalog
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Wed 2010-09-15 13:55 EDT
billy blog >> Blog Archive >> Export-led growth strategies will fail
The United Nations Conference on Trade and Development (UNCTAD) released their annual Trade and Development Report, 2010 yesterday (September 14, 2010). The 204 page report which I have been wading through today is full of interesting analysis and will take several blogs over the coming weeks to fully cover. The message is very clear. Export-led growth strategies are deeply flawed and austerity programs will worsen growth and increase poverty. UNCTAD consider a fundamental rethink has to occur where policy is reoriented towards domestic demand and employment creation. They consider an expansion of fiscal policy to be essential in the current economic climate as the threat of a wide-spread double dip recession increases. The Report is essential reading...
Billy Blog; blogs Archive; Export-led growth strategies; fail.
Credit Writedowns Thu 2010-08-05 20:20 EDT
Do Deficits Matter? Foreign Lending to the Treasury
...a US current account deficit will be reflected in foreign accumulation of US Treasuries, held mostly by foreign central banks...While this is usually presented as foreign ``lending'' to ``finance'' the US budget deficit, one could just as well see the US current account deficit as the source of foreign current account surpluses that can be accumulated as treasuries...most public discussion ignores the fact that the Chinese desire to run a trade surplus with the US is linked to its desire to accumulate dollar assets...all of the following are linked...the willingness of Chinese to produce for export, the willingness of China to accumulate dollar-denominated assets, the shortfall of Chinese domestic demand that allows China to run a trade surplus, the willingness of Americans to buy foreign products, the (relatively) high level of US aggregate demand that results in a trade deficit, and the factors that result in a US government budget deficit...I am not arguing that the current situation will go on forever, although I do believe it will persist much longer than most commentators presume...there are strong incentives against the sort of simple, abrupt, and dramatic shifts often posited as likely scenarios...I expect that the complexity as well as the linkages among balance sheets ensure that transitions will be moderate and slow...
credit writedowns; deficits matter; foreign lending; Treasury.
China Financial Markets Tue 2010-08-03 14:48 EDT
The capital tsunami is a bigger threat than the nuclear option
...China's ``nuclear option'', which has generated a great deal of nervousness among investors and policy-making circles in the US, is a myth, and what the US should be much more concerned about is its diametric opposite -- a tsunami of capital flooding into the country...All the major capital exporting countries...are eager to maintain and even increase their capital exports. But the balance of payments must balance, and all that exported capital must be imported somewhere else...As net capital exporters try desperately to maintain or increase their capital exports, and deficit Europe sees net capital imports collapse, the only way the world can achieve balance without a sharp contraction in the capital-exporting countries is if US net capital imports surge. And at first they will surge. Foreigners...will buy more dollar assets, including USG bonds, than before...the US trade deficit will inexorably rise as Germany, Japan and China try to keep up their capital exports and as European capital imports drop...This tsunami will bring with it a corresponding surge in the US trade deficit and, with it, a rise in US unemployment. It will also force the US Treasury to increase the fiscal deficit as more of the jobs created by its spending leak abroad...in the past massive capital recycling has usually been very good for asset markets. Might we see a surge in the US asset markets, at least until next year when Congress starts getting tough on the trade deficit?...
bigger threat; capital tsunami; China Financial Markets; nuclear option.
Mish's Global Economic Trend Analysis Tue 2010-08-03 12:11 EDT
Should China Dump Dollars for Commodities? What about the "Nuclear Option" of Dumping Treasuries? Can Global Trade Collapse?
Every time there is a little blip by China in its purchasing or holding of US treasuries, hyperinflationists come out of the woodwork ranting about the "Nuclear Option" of China dumping treasuries en masse. Such fears are extremely overblown for several reasons...[Michael Pettis argues] the real problem is exactly the opposite of what most are ranting about: ``The problem facing the US and the world is not that China may stop purchasing US Treasury obligations. The problem is exactly the opposite. The major capital exporting countries -- China, Germany, and Japan -- are desperate to maintain or even increase their net capital exports, which are simply the flip side of their trade surpluses.'' ...If consumers decide to stop buying goods from China there is almost nothing China can do about it...Chinese exporters are already under severe price pressures...pray tell what is stopping a collapse in global trade? Nothing as far as I can see. It all depends on consumer attitudes. Certainly Bernanke and Congress will do their best efforts to get banks to lend and consumers to spend, it is by no means a certainty the Fed will succeed...consumer attitudes towards spending and debt will determine the global trade imbalance math...The result may be a collapse in global trade, not an inflationary event to say the least.
China Dumps dollar; Commodities; dumped Treasury; global trade collapsed; Mish's Global Economic Trend Analysis; nuclear option.
billy blog Fri 2010-07-02 18:17 EDT
A total lack of leadership
Another G20 talkfest has ended in Toronto and the final communique suggests that the IMF is now back in charge...The line now being pushed is, as always, structural reform of product and labour markets -- which you read as deregulation and erosion of worker entitlements...They buy, without question the notion that ``(s)ound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt.'' But what constitutes ``sound fiscal finances'' is not spelt out. It is all fudged around what the bond markets will tolerate. But what the bond traders think is a reasonable outcome for their narrow vested interests is unlikely to be remotely what is in the best interests of the overall populace...A sovereign government is never revenue constrained because it is the monopoly issuer of the currency and so the bond markets are really superfluous to its fiscal operations. What the bond markets think should never be considered. They are after all the recipients of corporate welfare on a large scale and should stand in line as the handouts are being considered. They are mendicants. It is far more important that government get people back into jobs as quickly as possible and when they have achieved high employment levels then they might want to conclude the fiscal position is ``sound''...The G20 statement is full of erroneous claims that budget surpluses ``boost national savings'' when in fact they reduce national saving by squeezing the spending (and income generating capacity) of the private sector -- unless there are very strong net export offsets...The on-going deflationary impact on demand that persistently high unemployment imposes is usually underestimated by the conservatives...
naked capitalism Tue 2010-06-01 20:06 EDT
When Will Europe Have Its Wile E. Coyote Moment?
...The current program instead is ultimately about protecting Eurobanks from losses, and is destined to fail. John Mauldin, in his newsletters, has been featuring the work of Rob Parenteau, as featured first here on Naked Capitalism (and a source of much reader ire): that deleveraging the public sector and the private sector at the same time is impossible absent a big rise in exports. Pretty much every major economy is on a ``reduce government debt'' campaign. Many are also on a ``deleverage the private sector'' program too (which is warranted, given the amount of profligate lending that occurred). The problem, however, is that these states can't all increase exports, particularly to the degree sought...Rob Parenteau drew out the implications in an earlier post: ``...if households and businesses in the peripheral nations stubbornly defend their current net saving positions [continue to reduce debt levels], the attempt at fiscal retrenchment will be thwarted by a deflationary drop in nominal GDP. ''...This feels like 2007 all over again, with the authorities insistent that Things Will Be Fine, when a realistic assessment suggests the reverse.
Mish's Global Economic Trend Analysis Tue 2010-05-18 16:29 EDT
Canaries in Coalmine: China, Asia, not Participating in Euro Bailout Lovefest; Beginnings of China Credit, Real Estate Bust
Is China a canary in the coalmine of an impending global slowdown, or is China simply overloved as a beacon of growth as it was in 2008? I think it's both. China's property and infrastructure bubbles are massive; that is for certain. Moreover, China's biggest export trading partner is Europe, just as Europe is headed for numerous austerity programs. While it's doubtful the European austerity programs bring deficits down to where they are supposed to be, those programs will for a while cause a decline in European spending along with much social unrest. Can China take a double whammy like this without overheating? I think not. And China will have to show things down, whether it wants to or not. ... The "China Story" that most of the world is in love with is nothing more than excess credit finding a home in malinvestments just as happened in the US.
Asia; Begins; canaries; China; China credit; coalminer; Euro Bailout Lovefest; Mish's Global Economic Trend Analysis; participated; real estate bust.
naked capitalism Mon 2010-04-26 10:08 EDT
Martin Wolf: China, Germany Commiting World to Deflation
...large foreign exchange surpluses, beyond what is useful to defend a currency, is NOT a sign of strength. They cannot be spent without causing the currency to appreciate, something that surplus-dependent countries are unwilling to do. Thus these holdings, which were incurred by acting as de facto export subsidies, cannot be utilized without serving as import subsidies....This battle of wills is rooted on every front in domestic politics, plus a collective inability to recognize that our current version of globalization is no longer workable. But we appear likely to test the current system to destruction rather than come up with less drastic ways out.
China; deflation; Germany Commiting World; Martin Wolf; naked capitalism.
naked capitalism Thu 2010-04-22 18:57 EDT
More Evidence of Lack of Competitiveness of Many Chinese Exporters
...From Bloomberg: The profits of China's makers of household appliances, automobiles and cell phones may plunge by between 30 percent and 50 percent if the Chinese currency were to strengthen by 3 percent, according to a state media report. Small and medium-size exporters with low price-negotiating powers will face losses and may even go out of business, according to the Xinhua News Agency's Economic Information Daily newspaper, citing the results of a ``stress test.'' ... Richard Kline: ...Not that it matters at all for US manufacturing whether the renminbi notches up or not. Because wealth enterprises in the US don't really give a damn about their host country. Low-value added assembly will simply flow to Vietnam, Bangaladesh, back to Mexico, or the like. An industrial policy presupposes a political policy. And the malefactors of great wealth have complete control of US governmental policy, as we see, and not the least interest in investing in their host country. Great wealth here is parasitical, in a word. Fuddling about with currency rates won't change the political equation at all.
Chinese exports; competitions; evidence; lack; naked capitalism.
naked capitalism Tue 2010-04-20 09:43 EDT
Satyajit Das: New & Old Greek Lessons
...Like many of the economically weaker EU members, Greece fudged the numbers to meet the qualifications for entry into the Euro. One example of this is the use of derivative transactions with Goldman Sachs to disguise the level of its real borrowing. Membership of the Euro also reduced the ability of Greece to manage its economy. It lost the ability to use its currency, via devaluations, to improve competitiveness and stimulate exports. It also lost the ability to set interest rates (now set by the European Central Bank (''ECB'')). It also cannot print its own currency to fund sovereign borrowing. Greece also has low levels of domestic saving...Greece's problems are probably incapable of solution and terminal. Temporary emergency funding may help meet immediate liquidity needs but do not solve fundamental problems of excessive debt and a weak economy...the optimal course of action for Greece may be to withdraw from the Euro, default on its debt (by re-denominating it in a re-introduced Drachma) and then undertake a program of necessary structural reform...The current debate misses the fact that the ``bailouts'' are mainly about rescuing foreign investors...
Culture of Life News Tue 2010-04-06 10:23 EDT
Ireland And US Will Be Devoured By Derivatives Beast
The banking mess in the West continues. It has rather deep roots. That is, we decapitalized our own banking system long, long ago. The fix for this was to create a fake banking system with virtually no real capital reserves at all. This was possible thanks to the floating fiat currency created when Nixon suddenly cut the gold standard back in 1971. By 1987, the banking collapse was tremendous during a deflationary time that followed a hyperinflation era. This fix created conditions that caused the near-total collapse in Western banking...So far, governments in the West are being bailed out by Asia. And this is being done so Asia can continue to rapidly expand its own industrial base. This savage business gets worse and worse over time due to the self-feedback system of this debt expansion: you get more credit from export powers via letting them export even more to your own home base. So as capital vanishes, the need for debt shoots upwards and the system continues to get more and more unbalanced...Sure, we have little inflation except in important commodities but this is due to the Goddess of Zero slashing away at the mountain of debt, using the default tool to fix this mess in a very brutal way. Unfortunately, the bankers still control our `democracy' so they are moving all their losses onto our books and far from things going to zero, it is actually heading towards infinity: infinite debts owed by the taxpayers who want to continue stupidly cutting taxes while increasing credit based on virtually no capital at all! Sheesh.
naked capitalism Mon 2010-03-29 13:48 EDT
Thinking the Unthinkable: What if China Devalues the Renminbi?
Conventional wisdom holds that the Chinese are due (as in overdue) for a revaluation of their currency, the renminbi...We question whether a revaluation is the right answer for them, and more important, whether the Chinese themselves see a revaluation as a plus. The government has engineered an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years' growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus...Inflation can take off and thereby begin to ERODE the competitiveness of Chinese exports. Nouriel Roubini pointed out this issue in 2007: if China didn't revalue, inflation would do the trick regardless. A continued high rate of inflation relative to its trade partners would push up the price of goods in home currency terms, which in turn translates into higher export prices. This might be the real reason why China is so reticent to revalue its currency. The Americans might go crazy if the Chinese devalued, but if the inflation is high enough, they might have to do it, as it will severely erode their terms of trade and cause their tradeables sector to collapse.
China Devalue; naked capitalism; renminbi; Think; unthinkable.
Sun 2010-03-21 09:58 EDT
Economist.comNatural gas | An unconventional glut | Economist.comNatural gas | An unconventional glut | Economist.com
...North America has an unforeseen surfeit of natural gas. The United States' purchases of LNG have dwindled. It has enough gas under its soil to inspire dreams of self-sufficiency. Other parts of the world may also be sitting on lots of gas. Those in the vanguard of this global gas revolution say it will transform the battle against carbon, threaten coal's domination of electricity generation and, by dramatically reducing the power of exporters of oil and conventional gas, turn the geopolitics of energy on its head...
naked capitalism Fri 2010-03-19 15:24 EDT
China's Exporters Hanging by a Thread?
Has the Chinese export sector become hostage to WalMartization, the ability of powerful retailers to squeeze vendor profit margins?...Vice Commerce Minister Zhong Shan, in an exclusive interview Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%. Most exporters absorbed the appreciation in the value of the yuan that followed its revaluation in 2005 by boosting innovation and cutting costs, but many were forced to close, he said. A further rise in the currency's value would endanger more exporters' survival, which China can't afford, he said... ...2% margins on export-oriented businesses is not representative of any sort of real competitive advantage. A real competitive advantage when it comes to exporting would show double-digits profit margins. This whole sector is hanging by a thread...nearly none of the activity China has engaged in since the downturn is secular or self-sustaining.
Culture of Life News Fri 2010-03-12 07:51 EST
Toyota Tears Of Regret
Toyota decided long ago during the push to force Japan to open the doors to imports from the US to balance Toyota exports to the US, that they would colonize the US by opening factories here. This allowed them to pocket all the profits while keeping the door open to selling 2-4 million cars every year in the US. This clever move paid off quite handsomely and now many Americans think Toyota is benign and not a major, major cause of the capital drain as well as job drain in the US.
THE PRAGMATIC CAPITALIST Tue 2010-03-09 18:04 EST
GURU OUTLOOK: PAOLO PELLEGRINI
This week's Guru Outlook brings you Paolo Pellegrini. Although he is not the most well known of investment gurus Pellegrini has built quite a name for himself in recent years...He says we are essentially papering over the problems with more debt. We are simply adding more debt to a debt-laden world while China adds more exports to a saturated market. He says the problems in Europe are a harbinger of these continuing issues. Thus far the massive stimulus has been successful in jumpstarting the global economy, but is nothing more than a temporary respite from the longer-term structural problems that remain...
Wed 2010-02-24 08:49 EST
What the PBoC cannot do with its reserves
...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.
Mish's Global Economic Trend Analysis Sun 2010-02-07 18:15 EST
Nonperforming Loans in China Rise to "Trillions of Renminbi"
Inquiring minds are questioning the solvency of the Chinese banking system. Please consider China Defaulting Loans Soar, Insolvency Lawyer Says. Non-performing loans in China have risen into the ``trillions of renminbi'' because of poor lending practices, an insolvency lawyer said...The US, led by Hillary Clinton and president Obama, is putting enormous pressure on China to float the RMB, in expectation that it would rise and US exports would soar. I believe that if China floated the RMB on the Forex markets, it might crash.
China rises; Mish's Global Economic Trend Analysis; nonperforming loans; renminbi; trillion.
Mon 2009-12-21 19:18 EST
America's Head Servant? The PRC's Dilemma in the Global Crisis
...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.
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...