Unfortunately, China now faces significant problems.
The weakness of its two major trading partners (the U.S. and Europe) means export demand is likely to remain subdued. Domestically, the side-effects of debt-driven investment are now emerging.
China’s ability to sustain high growth levels is questionable. Specifically, its capacity for further stimulus is uncertain. The ability to adjust the economy to the new economic environment poses unprecedented challenges in rebalancing consumption and investment within China. Slowing growth also poses social and political challenges. Chinese Premier Wen Jiabao has repeatedly admitted that the “stabilization and recovery of the Chinese economy are not yet steady, solid and balanced”.
The conventional view is that China will be able to continue to stimulate demand using its large foreign exchange reserves, large domestic savings and low levels of debt.
China’s $3.2 trillion in foreign exchange reserves are invested in predominately in U.S. dollars, euro and yen, primarily in the form of government bonds and other high-quality securities. These assets have lost value, through increasing default risk (as the issuer’s ratings are downgraded) and falls in the value of the foreign currency against the renminbi.
Attempts by the Chinese to liquidate reserve assets would result in sharp falls in the value of the securities and a rise in the renminbi against the relevant currencies with large losses. The reserves also force China to buy more dollars, euro and yen securities to defend the value of the existing portfolio, increasing both the size of the problem and risks.
In reality, China ultimately will have to write-off these reserves, recognizing its losses. It can do so of its own volition or have the value of its investment reduced over time through falls in the value of the currency in which the security is denominated.
This equates to a real loss of wealth as China has issued renminbi or government bonds against the value of these investments.
China also has far greater levels of debt than commonly acknowledged, although the bulk is held domestically. The Central government has a low level of debt — around $1 trillion (17% of GDP). In addition, state-owned and state-supported entities have debt totalling $2.6 trillion (42%); local governments about $1.2 trillion (19%); policy banks $800 billion (13%); Ministry of Railways $280 billion (5%), and government-backed asset-management companies set up to hold non-performing bank loans $300 billion (5%). The total debt, around $3.6 trillion, is 59% of GDP.
The debt levels are exacerbated by what Michael Pettis in his book “The Volatility Machine” describes as an inverted debt structure — where borrowing levels increase when the economy has problems. When the economy slows, China’s debt levels, both direct and contingent, will increase rapidly.
China also has limited flexibility in managing its currency. The renminbi has risen 30% since Beijing adopted a policy of managed appreciation and revalued its dollar peg in July 2005.
As growth and exports slow (the trade surplus and foreign exchange reserves are falling), China needs to let the renminbi fall to cushion the adjustment. But developed countries are all seeking to increase their share of limited global growth by lowering the value of the currency. In a U.S. election year, the risk of trade protectionism and the prospect of being referred to the World Trade Organization for currency manipulation limit China’s policy flexibility.
The reality is that since 2007/ 2008, a part of China’s growth has been an illusion. Since 2008, China’s headline growth of 8%-10% has been driven by new lending averaging around 30%-40% of GDP. Up to 20%-25% of these loans may prove to be non-performing, amounting to losses of 6%-10% of GDP. If these losses are deducted, Chinese growth is much lower.
The China economic debate is focused on the alternatives of a soft or hard landing. Even China has stated that growth will slow.
The case for a soft landing assumes that the investment and property bubbles are less serious than thought. Beijing has sufficient financial capacity to boost growth by loosening monetary policy and bank lending, while adjusting specific policies, such as lifting restrictions on housing sales to prop up prices.
In that case, China is able to boost domestic consumption, replacing investment as the key driver of its economy. Excess capacity is gradually absorbed as the world economy recovers. Growth comes down gradually, without causing social and political disruptions.
In contrast, the case for a hard landing assumes the rapid and destructive unwinding of asset-price bubbles and problems within the Chinese banking system. A poor external environment and losses on foreign investment exacerbates the problem. Growth collapses, triggering massive social unrest and political tensions.
The end of a cycle of debt- and investment-driven growth is typically disruptive. Japan’s experience, which China has drawn on in shaping its economic model, is salutary. Japan grew on average by 10% in the 1960s, 5% in the 1970s, 4% in the 1980s, and has remained stagnant since, as it adjusts to the deflation of its debt-fueled bubble.
As an old Chinese proverb, probably apocryphal, holds: “There is no feast that does not come to an end.”
Yes, Wall Street will crash. Has to. They’re gambling addicts. Dodged the bullet in 2008. But learned nothing. Now killing reforms. Teamed up with the Super Rich, CEOs, lobbyists, and crony politicians. It’s only a matter of time.
Yes, they’ll crash, again. No matter how anemic the recovery. No matter how much more debt they pile on taxpayers. No matter who’s president. Crash.
First off, most American know somebody who’s trapped in addictive behavior. I got a front-row seat years ago as a professional helping a few hundred addicts, alcoholics and gamblers getting help from the Betty Ford Center and others like it.
Guess what: Wall Street’s behavior is exactly like all other addicts, trapped in denial, they’ll risk destroying family, friends, health, careers and even America before stopping. They’re obsessed, hooked, blind, addicted to gambling.
Second, the Treasury secretary and his wife warned us. Seriously, Tim Geithner highlighted her in a recent Wall Street Journal op-ed, “Financial Crisis Amnesia,” that made clear how addictive and clueless Wall Street and their team are: “My wife looks up from the newspaper with bewilderment at another story about people in the financial world or their lobbyists complaining about Wall Street reform.”
Yes, amnesia. Wall Street’s got a bad case of denial, blind to “the lessons of the crisis and the damage it caused to millions of Americans.” So it’ll happen again. And soon. Why? Mr. Secretary’s diagnosis: “Amnesia is what causes financial crises.” Look closely.
Yes, Wall Street insiders need treatment. They’re like addicts who will resist treatment till the bitter end, insisting there’s no problem, protecting their business as usual high-life. Their addiction has control of them, they’re in denial, in amnesia, blind to the long-term damage they’re doing to America.
So yes, Wall Street must crash, will hit bottom. America cannot reset the economy because Wall Street won’t go willingly. So here, you do the full diagnosis. Here are 10 characteristics of this self-destructive addictive personality type. Think about what is happening on Wall Street today, stuff like their war against the Volcker Rule. See why Wall Street’s collective mental state is so damaged it’s on track to hit bottom, crash and burn, in a meltdown more damaging than 2008, as they take down the rest of America.
Don’t believe me? Check out Wall Street’s 10 personality traits today:
Begin with Geithner diagnosis Wall Street’s addiction: Banks have “no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up outside of the safeguards all economies require.” Amnesia makes Wall Street deaf. Can’t hear. Remember, bank insiders are short-term thinkers who naturally discount long-term costs to zero, pass them on to taxpayers and future generations.
Since the dot-com crash of 2000, when the Dow peaked at 11,722, to today with the market hovering around 13,000, Wall Street’s lost an inflation-adjusted return of about 20% of your retirement money. And economist Gary Shilling sees no growth through the next decade ... Nouriel Roubini warns of a decade of dark days ... Pimco’s Bill Gross sees a long “new normal” of lower returns … GMO’s Jeremy Grantham predicts “Seven Lean Years” … Martin Weiss warns that a “historic world-changing event is about to crush the U.S. economy and stock market.” Still, Wall Street lives in a fantasy land, ignores warning signs, pushing mega-IPOs, risky junk. Protect yourself.
Yes, Wall Street’s an immature child. Members of AA call this the “King Baby” syndrome: People who never grow up. They want what they want when they want it. Now. No compromise, like today’s politicians. In “The Coming Generational Storm,” Larry Klotnikoff and Scott Burns warn of the massive debt we’re leaving for our “kids.” Eventually these kids will rebel against the $70 trillion burden. Wall Street’s addictive spenders are at risk of a revolution that will make the Arab Spring look like a picnic.
Michael Douglas’ famous indictment is truer today than ever. Vanguard’s founder Jack Bogle confronted the toxicity of out-of-control greed in his “Battle for the Soul of Capitalism.” Wall Street has become a soulless, amoral culture that cares nothing about the rest of America. Wall Street has sunk back deep into their business-as-usual culture of greed, blind to the public consequences of their behavior. Ethics? Integrity? Fiduciary duty? No. Investors come second. Insiders first. Always. And nothing will change till Wall Street hits bottom, crashes. Then we can truly reform Wall Street as we did in the 1930s.
Members of AA use a simple test: “How can you tell when an alcoholic or addict’s lying?” Answer: “His lips are moving.” You can’t believe anything said on Wall Street. Why this culture of lying? Simple: To create illusions, like “investors come first,” “you can trust us,” and “we the best interests of America at heart.” Wrong. Their sole loyalty is to insiders. Period. Carole Geithner sees through the illusions.
Wall Street is past the point of no return, an addict incapable of stopping, must hit bottom. In “American Mania” psychiatrist Peter Whybrow says we’re a nation of addicts, we’re insatiable, “more is never enough.” Trillions in new debt annually, big bonuses, zero savings, as bank bailouts roll on, with the Fed feeding Wall Street cheap money. Forget reforms. No change till the banks hit bottom. A return to the Glass-Steagall might help, but Wall Street hates that as much as addicts hate Betty Ford.
Addicts cannot see their weaknesses. In “Confronting Reality” Larry Bossidy and Ram Charan warn: “The greatest consistent damage to businesses and their owners is the result not of poor management but of the failure, sometimes willful, to confront reality.” Like Wall Street insiders, they simply cannot admit the gross mistakes, moral lapses and catastrophic errors in judgment that triggered the 2008 crash. They’re blind to their faults.
In “Stocks for the Long Run” Jeremy Siegel studied market history from 1801 to 2000, comparing the biggest up and down days. Bottom line: Markets are random. There were no obvious reasons for 75% of the moves that trigger either long-term gains or long-term losses. Wall Street cannot predict crashes. But they can create them. Finance professors Terrance Odean and Brad Barber did some long-term research on both American and China investors. Conclusion: The “more you trade the less you earn.” Yes, returns for buy-and-hold investors are a third higher than heavy traders. No wonder Wall Street pushes active trading.
Behavioral economics is the psychology of investment decisions, based on Nobel Economist Daniel Kahneman who proved investors are irrational. That was 2002. Investors are still irrational, Wall Street as well as Main Street. And yet we still assume we’re making rational decisions! Admit it, investors are irrational. As behavioral finance guru Richard Thaler once admitted: Wall Street “needs investors who are irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets.” Main Street’s naive irrationality makes Wall Street very rich.
Wall Street’s addiction to short-term thinking guarantees another crash. But worse, Wall Street’s shortsightedness is setting up an inevitable global catastrophe and self-destruction of their capitalist ideology. In “Collapse: How Societies Choose to Fail or Succeed” Jared Diamond warns that throughout history surviving cultures are always the ones that focus on long-term planning, far in advance of crises. Failed societies are the ones whose leaders “focus only on issues likely to blow up in a crisis within the next 90 days.” And that fits Wall Street’s blind obsession with quarterly earnings, annual bonuses, 1% rates, no Volker Rule, no reforms, ever, more is never enough.
So how did your “Addictive Personality Rating Score” add up? Chances are you diagnosed Wall Street with a perfect 10 out of 10. No wonder Wall Street’s insiders need treatment for their gambling addiction, at a Betty Ford Center
Standard & Poor's warned on Monday it could lower Japan's sovereign rating if the economy expands less than expected or if public debt continues to grow, as the country's unpopular government struggles to win support for higher taxes.
The ratings agency affirmed its AA- rating on All three agencies rate Japan three notches below the top AAA rating.
Japan's rating could fall if real gross domestic product growth per capita drops below S&P's forecast of 1.2 percent, according to the statement.
Late last year the ruling Democratic Party agreed a timetable on rises in the sales tax to pay for welfare spending. It said it would increase the 5 percent sales tax to 8 percent in April 2014 and then to 10 percent in October 2015.
Prime Minister Yoshihiko Noda needs opposition votes to pass the tax hike in a divided parliament, but his public approval ratings are sinking and the opposition are refusing to cooperate as they look to force an election.
Higher taxes could help reduce revenue shortfalls, but that wouldn't change Japan's ageing population, which continuously pushes up welfare costs, S&P said.
Japan's sovereign ratings are also constrained by the government's weak policy foundations, the ratings agency said.
Even if the sales tax rises to 10 percent, that would not be enough to lower the ratio of public debt to gross domestic product, which is the worst among industrialised nations and almost twice the size of its $5 trillion economy, government estimates show, but also warned that higher taxes wouldn't solve the structural problems that push up Japan's welfare spending and increasingly pressure state coffers.Japan's debt burden is the worst among industrialised economies, and it may not be able to postpone drastic spending cuts and aggressive tax hikes much longer as Europe's debt crisis threatens the global economy.
"We would also consider lowering the long- and short-term ratings if the government's debt trajectory remains on its current course or begins to erode the nation's external position," S&P said in a statement.
"On the other hand, we may revise the outlook to stable if the government were to implement robust and sustainable fiscal consolidation."
S&P and Fitch both rate Japan AA- with a negative outlook. Moody's Investors Service ranks Japan at the same level, at Aa3, but has a stable outlook.
All three agencies rate Japan three notches below the top AAA rating.
Japan's rating could fall if real gross domestic product growth per capita drops below S&P's forecast of 1.2 percent, according to the statement.
Late last year the ruling Democratic Party agreed a timetable on rises in the sales tax to pay for welfare spending. It said it would increase the 5 percent sales tax to 8 percent in April 2014 and then to 10 percent in October 2015.
Prime Minister Yoshihiko Noda needs opposition votes to pass the tax hike in a divided parliament, but his public approval ratings are sinking and the opposition are refusing to cooperate as they look to force an election.
Higher taxes could help reduce revenue shortfalls, but that wouldn't change Japan's ageing population, which continuously pushes up welfare costs, S&P said.
Japan's sovereign ratings are also constrained by the government's weak policy foundations, the ratings agency said.
Even if the sales tax rises to 10 percent, that would not be enough to lower the ratio of public debt to gross domestic product, which is the worst among industrialised nations and almost twice the size of its $5 trillion economy, government estimates show
The EU’s statistics office, yesterday said the 10.4 percent unemployment rate in December was unchanged at its highest level since the euro was launched in 1999, as November’s was revised upward from a previous estimate of 10.3 percent.
Unemployment has been steadily rising over the past year in December 2010, it stood at 10 percent largely because of Europe’s debt crisis, and compares badly with the US, where unemployment stands at 8.5 percent.
There are huge disparities across the eurozone, however, with those countries at the front line of Europe’s current financial turmoil, such as What even those figures mask is that unemployment among the young is much, much higher. Latest figures from Spain show unemployment among people aged under 25 was 48.7 percent, prompting concerns that an entire generation of people could fail to accumulate the necessary skills and experience for a prosperous life.
At the other end of the scale, some countries like Austria are operating not far off what is considered to be the natural rate of unemployment in an economy of 4.1 percent, while Germany’s rate at a post-unification low of 5.5 percent.
Since Europe’s debt crisis exploded around two years ago, the focus has been on austerity, with governments getting their houses in order with big, often-savage spending cuts, and tax increases.
However, there are growing signs that Europe is changing tack, and that measures to boost growth and jobs are now central to the crisis resolution effort.
On Monday, at a summit in Brussels designed to shore up the euro’s budgetary defenses against debt, EU leaders promised to stimulate growth and create jobs across the region.
The leaders pledged to offer more training for young people to ease their transition into the work force, to deploy unused development funds to create jobs, to reduce barriers to doing business across the EU’s 27 countries and ensure that small businesses have access to credit. and Spain, suffering record rates of unemployment that are stoking concerns about the social fabric of their societies. Spain’s unemployment stands at a staggering 22.9 per cent and Greece‘s is not far behind at 19.2 percent.What even those figures mask is that unemployment among the young is much, much higher. Latest figures from Spain show unemployment among people aged under 25 was 48.7 percent, prompting concerns that an entire generation of people could fail to accumulate the necessary skills and experience for a prosperous life.
At the other end of the scale, some countries like Austria are operating not far off what is considered to be the natural rate of unemployment in an economy of 4.1 percent, while Germany’s rate at a post-unification low of 5.5 percent.
Since Europe’s debt crisis exploded around two years ago, the focus has been on austerity, with governments getting their houses in order with big, often-savage spending cuts, and tax increases.
However, there are growing signs that Europe is changing tack, and that measures to boost growth and jobs are now central to the crisis resolution effort.
On Monday, at a summit in Brussels designed to shore up the euro’s budgetary defenses against debt, EU leaders promised to stimulate growth and create jobs across the region.
The leaders pledged to offer more training for young people to ease their transition into the work force, to deploy unused development funds to create jobs, to reduce barriers to doing business across the EU’s 27 countries and ensure that small businesses have access to credit.
No matter what deal politicians and policy makers reach on Greece current focus the continent’s economic future seems doomed in the medium term.
The just-concluded European Summit, ostensibly, sought to find ways to balance austerity with growth. Predictably, it ended focusing primarily on finding a deal to cut Greek debt.
In other words, the focus remains very, very short term. A deal on Greece might cheer the financial markets for now but will do very little for Europe in the long term.
Why? Because European policy makers have been focusing on all the wrong things, such as tightening government spending and reining in budget deficits at a time when economies are swooning. Yes, the region needs those belt-tightening cuts over the long term, but what it desperately needs right now is growth — and there is absolutely no plan for that.
For most of last year, Europe was on overdrive to enforce fiscal austerity plans. “Cut spending, raise taxes and bring government budgets into balance” was the constant refrain among European leaders, led by Germany’s Chancellor Angela Merkel.
One year on, those austerity cuts, especially by troubled countries such as Spain and Italy, have done precious little to boost growth— or rein in high public debt, which is what started the region’s crisis in the first place.
The focus, so far, has been on lowering that dreaded “debt-to-GDP” ratio. Debt-stricken governments, under duress, have slashed government spending and raised taxes. The result: lower economic activity, lower consumer demand, higher unemployment and rising discontent among businesses and households alike. In addition, with lower tax revenues, the ability of governments to repay their debts also decreases.
It’s also important to note that when gross domestic product (GDP), shrinks, the debt-to-GDP ratio also increases automatically because of a lower denominator. To bring the ratio down, more austerity is required, which further shrinks the economy, requiring more austerity ……you get the picture.
“Last year was one for fiscal hawks to celebrate as fiscal consolidation proceeded apace,” theEconomist noted recently. “In the eurozone, Germany, France, Spain and Italy all managed to reduce their structural budget deficits, the latter three thanks to austerity. All three are expected to reduce those deficits further this year.”
But it has come at a terrible price. Unemployment across the 17 nations that use the euro hit a euro-era high of 10.4 percent in 2011, even as recession fears grow across the region.
Several experts have been warning about exactly this situation since last year. Prominent among them was Nobel Prize-winning economist Paul Krugman who, in a recent blog post, noted that what is happening in Europe was “completely unnecessary”.
“Half a century ago, any economist — or for that matter, any undergraduate who had read Paul Samuelson’s textbook “Economics” could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.”
Now, the voices against further spending cuts are gaining traction. At the World Economic Forum in Davos, Switzerland, even the International Monetary Fund, which until recently had been advocating the need to cut debts, issued a warning that inappropriate spending cuts could strangle growth prospects in Europe.
At the same event, US Treasury Secretary Timothy Geithner also warned of the risk of a “recessionary” cycle. “There is a risk that every disappointment in growth will be met with an austerity that will feed the decline, and that is a cycle you have to arrest to solve financial crisis,” he said, according to a BBC report.
Finally, European leaders seem to be waking up to the problem. The recent EU summit at least introduced growth into the agenda for the first time— so far, the focus has only been on austerity.
Unfortunately, given their snail’s pace of reacting to the sovereign debt crisis, it seems highly unlikely they’ll do anything quickly on the growth front.
They may have started talking about growth but so far, that’s all it remains — talk. Clearly, sovereign debt crisis nothwithstanding, Europe has a much bigger problem on its hands
