Is China Wealthy? No, Bankrupt.

[touchring]

Re: Is China Wealthy? No, Bankrupt.

Actually being bankrupt is not about assets - liabilities, it is cashflows being sufficient to cover principle and interest on the debt. You do not want to be in a position where you have to start selling assets to meet creditors demand.
I know China's debt to gdp is low by western standards, but we know that there are a lot of shenaningans in the numbers, and is this ratio equally applicable in developed vs. emerging nations.

Wealthy nations can afford to be broke. If the Brits are broke, they can eat toast with butter. The Chinese poor will have to eat tree bark if China is broke.

[jk]

Re: Is China Wealthy? No, Bankrupt.

Actually being bankrupt is not about assets - liabilities, it is cashflows being sufficient to cover principle and interest on the debt. You do not want to be in a position where you have to start selling assets to meet creditors demand.
I know China's debt to gdp is low by western standards, but we know that there are a lot of shenaningans in the numbers, and is this ratio equally applicable in developed vs. emerging nations.

you're confusing liquidity with solvency. so are all the "leaders" in europe.

[charliebrown]

Re: Is China Wealthy? No, Bankrupt.

help me out JK.

Many companies and people operate with a negative balance sheet.


If a person has no savings, an underwater mortgage, but a job that covers their expenses and mortgage payment, the
bank is not going to foreclose on them right? They are not bankrupt. A job loss in this scenario is a different story.

In the Greek case, their income - current expenses does not leave enough cash to make interest and principle payments on the debt. They are running an account defict, which means there income does not even cover current expenses. Even
under the rosiest scenario with big economic growth and austerity, the numbers just don't figure that their debt can
be paid back.

A national story is a bit different too, because a nation is constantly rolling its debt. So it must sign up for another loan
every month or so. Unlike the underwater house example, where the note is not rolled over.

Now if you tell me that China's income is falling because the rest of the world is slowing down and can't buy their exports, and their people are not rich enough to pick up the slack, and China can't cut domestic spending because of a potential revolt, and they have more debt than assets, then this is the equivalent of an underwater home owner losing his/her job.

Maybe this is the case.

So far the article and commentary seem to swirl around debt and assets.

[jk]

Re: Is China Wealthy? No, Bankrupt.

from wikipedia's article on hyman minsky:

[Minsky] identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat. Because of the unlikelihood of most investments' capital gains being enough to pay interest and principal, much of this type of finance is fraudulent.

your statement, charliebrown, "Actually being bankrupt is not about assets - liabilities, it is cashflows being sufficient to cover principle and interest on the debt" equates to saying that the hedge borrower is not bankrupt. or at least is not bankrupt until there is an interruption of the borrower's cash flows. but there is risk in borrowing, even as a hedge borrower, and that risk is revealed when the cash flows are interrupted.

whenever an important institution is broke, tptb will first say that its only problem is that it is illiquid.

the archetypal example of solvency but illiquidity is a sound bank, which borrows short term funds and lends long term. this makes it susceptible to a run, when the short term depositors demand their funds, but those funds are tied up in sound but illiquid loans. this is the case for a lender of last resort and deposit insurance, to provide reassurance and liquidity. the fact that the loans are sound means they can be liquidated in a reasonable period of time by selling them to other institutions for a good enough price so that the banks assets [the loans that it has made] will equal or exceed the banks liabilities [the funds it owes its depositors].

insolvency, otoh, means that liabilities exceed assets. and again, the insolvent institution's first defense will be to claim that it is merely illiquid.

[touchring]

Re: Is China Wealthy? No, Bankrupt.

help me out JK.

Many companies and people operate with a negative balance sheet.


If a person has no savings, an underwater mortgage, but a job that covers their expenses and mortgage payment, the
bank is not going to foreclose on them right? They are not bankrupt. A job loss in this scenario is a different story.

In the Greek case, their income - current expenses does not leave enough cash to make interest and principle payments on the debt. They are running an account defict, which means there income does not even cover current expenses. Even
under the rosiest scenario with big economic growth and austerity, the numbers just don't figure that their debt can
be paid back.

A national story is a bit different too, because a nation is constantly rolling its debt. So it must sign up for another loan
every month or so. Unlike the underwater house example, where the note is not rolled over.

Now if you tell me that China's income is falling because the rest of the world is slowing down and can't buy their exports, and their people are not rich enough to pick up the slack, and China can't cut domestic spending because of a potential revolt, and they have more debt than assets, then this is the equivalent of an underwater home owner losing his/her job.

Maybe this is the case.

I've not got time to listen to the entire speech (listened 1.5 hrs), but Professor Lang is not talking about debt only but rather long term competitive advantage and economic structure.

[charliebrown]

Re: Is China Wealthy? No, Bankrupt.

thank you for your time. I understand what you are trying to say.

I gues I was speaking of a hedged borrower.

It may be that the debts that China in China's banking system are marked to face value, when if fact they are junk.

I also understand what you mean by illiquid, and the mis-use of this term when a bail out occurs.

Hopefully more than just me benefits from this post.

[touchring]

Re: Is China Wealthy? No, Bankrupt.

thank you for your time. I understand what you are trying to say.

I gues I was speaking of a hedged borrower.

It may be that the debts that China in China's banking system are marked to face value, when if fact they are junk.

I also understand what you mean by illiquid, and the mis-use of this term when a bail out occurs.

Hopefully more than just me benefits from this post.

Why would anyone believe in the face value of Chinese bank debt?

[doom&gloom]

Re: Is China Wealthy? No, Bankrupt.

What do Patricia Kluge and the Chinese government have in common? They both look rich, but they’re both bankrupt.

This month the Wall Street Journal reported:

Socialite Patricia Kluge had debts of $47.5 million when she filed for bankruptcy, and so she had to sell off her 45-room house, her Virginia winery and lots of jewelry. As if that weren’t enough, Kluge may now have to sell two marble cupid statues. Bankruptcy Beat reported that a bankruptcy trustee wants to sell the statues at an auction in January in Philadelphia. The cupids, which “possibly” date back to the 1800s, are worth $4,000 to $6,000.

That’s what happens when your debts exceed your assets. And that, according to Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, is the state of China's government finances.

In a private speech in late October that was not supposed to be recorded, the professor divulged

He asserts that:

• The regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). The total is arrived at by adding up Chinese local government debt of US$2.5 trillion and US$3 trillion and debt owed by state-owned enterprises, another US$2.5 trillion and US$3 trillion.

• The real inflation rate is 16 percent, not 6.3% as the regime claims.

• There is serious excess capacity in the economy. Private consumption is only 30 percent of economic activity. Starting this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7.

• China’s economy is in recession. GDP has decreased 10 percent

• Taxes are ridiculously high. Taxes on Chinese businesses (including direct and indirect taxes) are at 70 percent of earnings and the individual tax rate sits at 81.6 percent.

Prof. Lang is no crank. He got both his Master and Ph.D. degrees in Finance from the Wharton School, University of Pennsylvania in 1986. He has been lecturer at the Wharton School of Business, University of Pennsylvania and professor of Finance at Graduate School of Business, Michigan State University, the College of Business, Ohio State University, the Stern School of Business, New York University and Visiting Professor of Finance at Graduate School of Business, the University of Chicago. Now he is Chair Professor of Finance, the Faculty of Business Administration, the Chinese University of Hong Kong.

From 1994 to 1996 he was Partner of GITIC-Lehman Infrastructure Fund, Lehman Brothers. From 1998 to 2000 he worked as Consultant on Corporate Governance Projects to World Bank, Washington, D.C. After that he was Consultant on WTO/Banking Issues to Organization of Economic Cooperation and Development (OECD).

Now Prof. Lang is Consultant on Corporate Governance to China Shenzhen Stock Exchange Hong Kong Government.

In addition to stating that China’s regime is bankrupt, Lang also talked about the censorship that is placed on intellectuals and public figures. According to The Epoch Times, he said:

“What I’m about to say is all true. But under this system, we are not allowed to speak the truth,” he said.

He said: “Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it.”

He said that the regime doesn’t listen to experts, and that Party officials are insufferably arrogant. “If you don’t agree with him, he thinks you are against him,” he said.

After that outburst of truthfulness, we hope Prof. Lang is making arrangements to leave Hong Kong for safer ground.

call me stupid but... in a closed regime like China, they can pretty much create as much damn money as they want and never tell anyone. Just use it to buy up assets, prop up markets, whatever. Seriously, if the FED could create TRILLIONS and loan them out around the world with barely any oversight but our one peek under the hood, imagine what China can create with even less oversight.

[touchring]

Re: Is China Wealthy? No, Bankrupt.

call me stupid but... in a closed regime like China, they can pretty much create as much damn money as they want and never tell anyone. Just use it to buy up assets, prop up markets, whatever. Seriously, if the FED could create TRILLIONS and loan them out around the world with barely any oversight but our one peek under the hood, imagine what China can create with even less oversight.

Yea, this is the reason why Beijing says the Yuan isn't undervalued.

[bart]

Re: Is China Wealthy? No, Bankrupt.

...
In a private speech in late October that was not supposed to be recorded, the professor divulged

He asserts that:

• The regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). The total is arrived at by adding up Chinese local government debt of US$2.5 trillion and US$3 trillion and debt owed by state-owned enterprises, another US$2.5 trillion and US$3 trillion.

• The real inflation rate is 16 percent, not 6.3% as the regime claims.

• There is serious excess capacity in the economy. Private consumption is only 30 percent of economic activity. Starting this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7.

• China’s economy is in recession. GDP has decreased 10 percent

• Taxes are ridiculously high. Taxes on Chinese businesses (including direct and indirect taxes) are at 70 percent of earnings and the individual tax rate sits at 81.6 percent.

Prof. Lang is no crank. He got both his Master and Ph.D. degrees in Finance from the Wharton School, University of Pennsylvania in 1986. He has been lecturer at the Wharton School of Business, University of Pennsylvania and professor of Finance at Graduate School of Business, Michigan State University, the College of Business, Ohio State University, the Stern School of Business, New York University and Visiting Professor of Finance at Graduate School of Business, the University of Chicago. Now he is Chair Professor of Finance, the Faculty of Business Administration, the Chinese University of Hong Kong.

...

For what its worth, my own work from both public (like M. Pettis) and private sources shows similar numbers.

• Gov't debt about $5.35T
• 'CPI' latest 14.6%
• 'Real' GDP down about 6%

Taxes are "special" though, virtually no one pays 70%. I figure most pay no more than 10%.

Non gov't debt is well over $6T.

[EasternBelle]

Re: Is China Wealthy? No, Bankrupt.

But maybe there is still enough money to be playing around with for a while:

'Updated Wednesday, November 2, 2011 8:22 pm TWN, AFP
Macau gambling revenue surges 42 percent to record high


HONG KONG -- Macau's gambling revenue jumped 42 percent in October to a record monthly high, official figures showed Tuesday, as wealthy mainland Chinese continued to fuel growth in the world's biggest gaming hub.
Gambling revenue hit 26.85 billion patacas (US$3.36 billion) in October, up from 18.87 billion patacas a year ago, according to the latest statistics posted on the official Gaming Inspection and Coordination Bureau website.'



Gaming seems very proliferate in Asia and especially China, with a lots of really big players gaming in Macau, Singapore, Australia and soon Cambodia too. Could it be a canary in the coal mine for the bursting of the Chinese Bubble?

EasternBelle

[touchring]

Re: Is China Wealthy? No, Bankrupt.

But maybe there is still enough money to be playing around with for a while

Do you know the "source" of this money?

[EasternBelle]

Re: Is China Wealthy? No, Bankrupt.

No, touchring, no idea about the 'source' of this money. Not even thought about it.
I only meant to highlight that given the fact we have so few reliable indicators for what happens in China, we might be looking for something else, like gaming revenues or even sales of luxury cars. A bit like EJ did when he used UPS, and FEdex volumes to gauge the way the US economy was heading at the time of the recession or just before his recession call (can't quite remember)
EasternBelle

[touchring]

Re: Is China Wealthy? No, Bankrupt.

No, touchring, no idea about the 'source' of this money. Not even thought about it.
I only meant to highlight that given the fact we have so few reliable indicators for what happens in China, we might be looking for something else, like gaming revenues or even sales of luxury cars. A bit like EJ did when he used UPS, and FEdex volumes to gauge the way the US economy was heading at the time of the recession or just before his recession call (can't quite remember)
EasternBelle

The problem in China is corruption, income inequality. Professor Lang talked about why luxury goods sell so well in China. He was careful not to talk about corruption but talked about high taxation. In his lecture he talked about cabbages planted by peasants rotting on the fields with no one willing to buy while sold at a good price in a Shanghai supermarket.

Today, I saw an article about high taxes in China.

http://www.npr.org/2011/11/23/142660...cheap-in-china

China has made a fortune producing cheap products that sell for low prices around the world.
Yet many high-end goods manufactured in China –- everything from iPads to Coach bags — actually cost more in China than they do in the United States.
To figure out why, I recently visited a luxury shopping mall in Beijing with Professor Nie Huihua, who teaches economics at the People's University.
We went to the sixth floor of the mall, where Apple products were being sold, including an iPad 2 that was going for $700. The same iPad 2 costs $499 at an Apple store in Washington, D.C.
We then went to a Columbia sportswear store to get some prices. There was a blue backpack, called the Trail Grinder, which wasn't very big and was selling for 1,399 Chinese yuan — or about $220. Back in the U.S., that made-in-China backpack retails for just $139.
Graft Contributes To High Prices
Nie says products like this cost more in China because of the country's high transportation fees and local government corruption.
Last year, a trucker in East China's Henan Province was caught using fake military license plates to avoid paying tolls along a 110-mile stretch of road. It's easy to see why: Tolls and fees for a single trip are $230.
"It is impossible for him to make a profit if he pays all the tolls and fees legally," Nie says.

At the high end of the market, there is also a certain, kind of flash-for-cash culture. It doesn't really matter what the price is. The whole point is to be seen to pay and to be able to pay.


- Paul French of the consumer analysis firm Access Asia-Mintel

Paul French, chief China strategist for Access Asia-Mintel, a consumer analysis firm, says local governments can continue to gouge truckers because China is still essentially a state-run economy.
"In a market economy, those things will work themselves out," French said. "People will push to reduce those costs. It's just not possible to do that in China. You can buy all the trucks you want. What you can't get rid of is local officials that are on the graft."
China Imposes High Taxes
Another reason high-end goods cost more here is because China taxes them so much. But in a market loaded with fakes, wealthy Chinese are willing to pay a premium for authentic products they can show off.
"At the high end of the market, there is also a certain, kind of flash-for-cash culture," French said. "It doesn't really matter what the price is. The whole point is to be seen to pay and to be able to pay."
Because of the price differential, many Chinese buy luxury goods when traveling overseas.
On a recent trip to New York, a woman named Ling, who didn't want her full name used, went bargain hunting for a Gucci bag on Fifth Avenue.
Ling, who works for an Internet company, still had to shell out $1,000, but she says she thinks she got a good deal compared to what she would have paid in China.
Like other Chinese, she asks friends traveling abroad to buy items for her, including clothes.
Even inside China, products can sell for very different prices.
Luxury goods are cheaper in Hong Kong, which is part of China but doesn't have a luxury tax. Recently, police nabbed a couple trying to smuggle hundreds of thousand of dollars in merchandise from Hong Kong onto the mainland. The stash included Prada handbags, Cartier jewelry and four iPhones.

[Slimprofits]

Re: Is China Wealthy? No, Bankrupt.

US media finally catches on to trouble in China

http://www.forbes.com/sites/gordonch...e-its-economy/


Can China Rescue Its Economy?