A Tale of Two Economies...

[thriftyandboringinohio]

Re: A Tale of Two Economies...

...China is tooled up to produce what its preferred developed export markets demanded. Not sure the average Chinese consumer has exactly the same needs and wants as their American counterpart. That seems to be showing up in spades right now with so much manufacturing (over)capacity idled or losing money.

GRG55 that's an excellent point.
I think that the problem is smaller than it might appear.

You are in the petroleum business, and petroleum might be the poster child for manufacturing plant and equipment that is nearly inflexible.
An oil refinery cannot be retooled to do anything else. It makes petroleum products or it's idle scrap iron.

Other industries are more easily converted.
I suppose the poster child for that might be the 1940's automotive plants that quickly morphed into WWII plants making bombers and tanks.

I think much of the industry in China is pretty flexible, and can be redirected without too much trouble.
Plants making one electronic device can make others pretty easily. Empty circuit boards are much alike, and surface mount pick-and-place machinery can stuff any components into any board.
Plants engaged in light industry and mechanical assembly can punch out or extrude different pieces and assemble different products.

Plastic injection molding plants can make a totally different shape by just swapping the core and cavity tools..
Today it's barbie dolls and earbud pieces, next month it could be totally different shapes that Chinese people want.

The kind of basic, no-frills, low-cost manufacturing that moved to China is the most easily adapted, general-purpose manufacturing there is.
It's the highly specialized, world-scale plant type of manufacturing that is impractical to redirect. Giant chemical plants. Chip fabs and silicon foundries.

From time to time I look at a cell phone or toy helicopter and think how easy it would be for China to redirect that manufacturing capacity into missile seeker heads.
If China wanted to turn its spare manufacturing capacity towards making simple things they want for themselves, it should be pretty easy.

[santafe2]

Re: A Tale of Two Economies...

You could have made the same statement in 2007 that USD reserve values are way up with USD value.

I'm not following your argument. The US$ peaked in 2002 at ~120 and was down to ~85 in 2007, headed for a low of 72 in 2008.

[santafe2]

Re: A Tale of Two Economies...

Hmm. Gross debt-financed capital misallocation into a non-productive asset (property) in Canada is going to be tough on the brothers.

But an even more egregious debt-financed capital misallocation into non-productive assets (property and a whole lot more) in China paves the way for a crisis free rebalancing to a consumptive economy.

Too much debt, check.
Misallocation, check and check again.
"Only" 7% growth this year, check.

Hum, what could China possibly do to stretch out and minimize the impact of the downturn while they recalibrate...

Maybe a little QE? Maybe a lot of QE? China has not even begun to get creative.

We'll have to see how this plays out over the next several years.

And folks in China with a little money love just about everything represented by the American lifestyle. Especially the old west. Below is a picture from Jackson Hole China.

[GRG55]

Re: A Tale of Two Economies...

GRG55 that's an excellent point.
I think that the problem is smaller than it might appear.

You are in the petroleum business, and petroleum might be the poster child for manufacturing plant and equipment that is nearly inflexible.
An oil refinery cannot be retooled to do anything else. It makes petroleum products or it's idle scrap iron.

Other industries are more easily converted.
I suppose the poster child for that might be the 1940's automotive plants that quickly morphed into WWII plants making bombers and tanks.

I think much of the industry in China is pretty flexible, and can be redirected without too much trouble.
Plants making one electronic device can make others pretty easily. Empty circuit boards are much alike, and surface mount pick-and-place machinery can stuff any components into any board.
Plants engaged in light industry and mechanical assembly can punch out or extrude different pieces and assemble different products.

Plastic injection molding plants can make a totally different shape by just swapping the core and cavity tools..
Today it's barbie dolls and earbud pieces, next month it could be totally different shapes that Chinese people want.

The kind of basic, no-frills, low-cost manufacturing that moved to China is the most easily adapted, general-purpose manufacturing there is.
It's the highly specialized, world-scale plant type of manufacturing that is impractical to redirect. Giant chemical plants. Chip fabs and silicon foundries.

From time to time I look at a cell phone or toy helicopter and think how easy it would be for China to redirect that manufacturing capacity into missile seeker heads.
If China wanted to turn its spare manufacturing capacity towards making simple things they want for themselves, it should be pretty easy.

I remain sceptical, but then I have been sceptical about the Chinese "miracle" since at least 2010.

China has all manner of unused capacity in iron ore processing, steel making, coal handling, cement, wire making, aluminum, fertilizer granulation, plate glass, and a host of other similar products. These are not easily re-tooled to satisfy the expected Chinese consumer demand. This is the legacy of too much misallocated capital to build empty cities and rail lines without passengers. At present the authorities have two main tactics: 1) extend new loans to maintain some semblance of SOE debt servicing continuity, and 2) talk up grand projects like a high speed rail line to Moscow and the new Silk Road ("one road, one belt") linking China with Europe to try to create demand to fill this capacity. We'll see how that plays out. My bet is much of this supply chain capacity will never come back into production, and the SOEs involved will probably have to be quietly wound up by the authorities.

China's well off consumers (skilled labour in the coastal regions) have already developed an appetite for higher quality foreign made products. Even foreign made imported baby formula is sought after over local product. This is a similar pattern to what happened in India decades ago as incomes rose among skilled workers in the cities - the SOE made products from cars to soap to matches were displaced by higher quality products from the private sector (Fiat, Suzuki, Unilever, Colgate). Granted many of those were made in India as the economy was opened up. We'll see how the Chinese authorities respond to the threat to their already beleaguered SOEs.

The rising US$ is going to give China a reprieve from domestic USA competition, although Mexico is well placed to provide products head to head against Chinese imports in the NAFTA block.

Having said that, I am intrigued by the fact that EJ and Co at VirZOOM have sourced what they represent is a high quality Chinese made stationary bike as their development platform. Given how important the quality, reliability, serviceability and tactile feel of the bike to the customer is to the entire VirZOOM venture it does cause me to pay attention. I saw something similar in 2012 when I was sourcing mining equipment from China. Most of it was junk by North American or European standards - and well deserved that label. But there was one higher quality manufacturer in the country...who used Caterpillar diesel engines exclusively in its products. That equipment was about 20% less expensive than a comparable CAT made in CAT's China plant. The others were less than 50% of CAT's prices - but you had to buy two; one to run and one for spare parts.

Going to be an interesting time moving forward with many minefields and many opportunities imo.

[Chris Coles]

Re: A Tale of Two Economies...

Going to be an interesting time moving forward with many minefields and many opportunities imo.

As I see it, the challenge is to take an economy based upon very large SOE operations delivering quantity for export, to very small, locally owned and managed skill based operations, free enterprise delivery of very high quality products to the ordinary people, not just the middle class. Something like what the Japanese achieved two centuries ago with their high quality ceramics and bronzes. The underlying problem is how to increase local prosperity at the grass roots, so that you have sufficient prosperity to permit the purchase of the products; and as you all know, my viewpoint is the need to introduce free enterprise equity capital into that particular aspect of the underlying economic model.

Lots of different small companies, each competing against each other, each employing the "village or small town" local community; to produce high skill based product for their own local community. Wood furniture immediately comes to mind. Today we see here in the West major auction houses selling such very high quality hand made product from our own past, the production of which that almost no longer exists.

A prosperous nation; at every level of the nation, will be much more stable than one still carrying all those now collapsed SOE's, princeling founders, many of which have already got their money out of the nation already. China has to learn to think small if it wants to truly prosper.

[GRG55]

Re: A Tale of Two Economies...

Too much debt, check.
Misallocation, check and check again.
"Only" 7% growth this year, check.

Hum, what could China possibly do to stretch out and minimize the impact of the downturn while they recalibrate...

Maybe a little QE? Maybe a lot of QE? China has not even begun to get creative.

We'll have to see how this plays out over the next several years.

And folks in China with a little money love just about everything represented by the American lifestyle. Especially the old west. Below is a picture from Jackson Hole China.

I wonder if they can get zero down sub-prime mortgages to buy those mountain cottages. That would pretty well complete the replication

The authorities in China have long experience with credit easing, and on a scale like no other we have ever witnessed. So I don't doubt their credentials in that regard.

What is at issue is whether the outcome in China will be determined more by what the PBOC and Beijing do, or by what Mrs. Yellen is now doing back in Washington. ;-)

[GRG55]

Re: A Tale of Two Economies...

I remain sceptical, but then I have been sceptical about the Chinese "miracle" since at least 2010.

China has all manner of unused capacity in iron ore processing, steel making, coal handling, cement, wire making, aluminum, fertilizer granulation, plate glass, and a host of other similar products. These are not easily re-tooled to satisfy the expected Chinese consumer demand..

A lot of this capacity was built on China's then labour cost advantage, which is disappearing as new sources of economic growth are tapped.

EJ's "Economic M.A.D." may be entering its final stages as the global trade and finance systems reset?

The transition to a consumer economy would seem neither quick nor smooth. In the meantime China is doing what it can to maintain employment and capacity utilization in these smokestack industries - and that will come under increasing resistance as well:

U.S. Calls for 256% Tariff on Imports of Steel From China

December 22, 2015 — 9:12 PM MST

Corrosion-resistant steel imports from China were sold at unfairly low prices and will be taxed at 256 percent, according to a preliminary finding of the U.S. Department of Commerce.

Imports from India, South Korea and Italy will be taxed at lower rates, the agency said Tuesday in a statement. Imports from Taiwan and Italy’s Marcegaglia SpA will not face anti-dumping tariffs. The government found dumping margins of 3.25 percent for most South Korean steel imports, with Hyundai Steel Co.’s shipments subject to duties of 3.5 percent. Imports from Italian companies excluding Marcegaglia will be taxed at 3.1 percent. Indian imports are subject to duties from 6.6 percent to 6.9 percent...

...U.S. steelmakers have filed three sets of cases against imports of hot-rolled, cold-rolled and corrosion-resistant steel after deliveries from abroad surged. The price of hot-rolled steel coil, the benchmark product, is down about 40 percent this year, with domestic mills idling as much as 38 percent of capacity after imports climbed by 38 percent in 2014...

India to impose uniform import duty on some steel as imports surge

Mon Sep 14, 2015 4:05pm IST

India will soon impose a 20 percent import tax on some hot-rolled steel products for 200 days, two sources said on Monday, as the government investigates a threat to domestic companies from rising supplies from China, Japan, South Korea and Russia.

The products together accounted for more than half of the 5.5 million tonnes of steel imported last fiscal year into India, the world's only major growing market at a time when top consumer and seller China is slowing...



BRAZIL EYES RAISING IMPORT TARIFFS FOR STEEL

Sao Paulo (Platts)--18 Nov 2015 522 pm EST/2222 GMT

Brazil's finance minister Joaquim Levy said Wednesday that the country is considering raising import tariffs for steel goods, in order to protect the local industry...

...Local market participants were positive about the minister's comment. One source noted that "this is a current request from local producers," and added that "[the government] has been very sensitive to it."...

[santafe2]

Re: A Tale of Two Economies...

I wonder if they can get zero down sub-prime mortgages to buy those mountain cottages. That would pretty well complete the replication

OK, that made me laugh out loud and then I started thinking about what a centralized government that has to be more worried about their citizens than their corporations might do if they need to fill ghost cities with labor and help bring back their labor cost advantage. If you build it they will come - especially if you give them housing in lieu of some salary. Maybe housing and a couple of bikes so these new wage earners can contribute to cleaner air standards. Could be just like Portland or Seattle. Beijing style QE with cowboy hats. I'm surprised folks from China haven't discovered Calgary.

[touchring]

Re: A Tale of Two Economies...

I wonder if they can get zero down sub-prime mortgages to buy those mountain cottages. That would pretty well complete the replication

The authorities in China have long experience with credit easing, and on a scale like no other we have ever witnessed. So I don't doubt their credentials in that regard.

If you're living in the West, you may get a wrong impression after reading all those MSM reports on credit easing in China. Everything is relative. If credit is super tight in the first place, and easing is at snail pace, even after all the easing, credit in China is still very tight in comparison to the West.

Asia is not the West, people here don't get cash in mails, nor is there such a thing as zero or even 10% down payment for mortgages.

It is not that easy to get a credit card or a mortgage loan. In Singapore, you could be a multi-millionaire retiree with zero loans and mortgages and perfect credit score, have a 1 million dollar FD with Citibank branch in Singapore, but you're not eligible for a new credit card if you can't show that you hold a day job that earns $1800 every month.

Mortgage loans are also scrutinized and there's no bluffing, everything you write in that form will need to be verified with official letters from the income tax and social security, etc.

Governments can publish regulations allowing home buyers to borrow up to 80% (for first Homes), but you will find that banks will offer even lower loan quantum (probably only 50-70% loan) than what they are permitted by regulation.

China has many problems, but as I see it, the economy doesn't even rank in top 3 problems. The biggest problem would of course be the pollution, followed by labor shortage/single child policy and shoddy constructions.

[GRG55]

Re: A Tale of Two Economies...

OK, that made me laugh out loud and then I started thinking about what a centralized government that has to be more worried about their citizens than their corporations might do if they need to fill ghost cities with labor and help bring back their labor cost advantage. If you build it they will come - especially if you give them housing in lieu of some salary. Maybe housing and a couple of bikes so these new wage earners can contribute to cleaner air standards. Could be just like Portland or Seattle. Beijing style QE with cowboy hats. I'm surprised folks from China haven't discovered Calgary.

I think Calgary is the complete antithesis of what the Chinese aspire to.

Despite being a winter city 6 months of the year (the outside temperature this morning is a frosty 8 deg F and snowing) Calgary has one of the most extensive bicycle path systems in North America, and a Mayor and Council that are actively allocating more downtown street lanes to dedicated bicycle lanes only (complete with traffic lights in the shape of a cyclist at intersections). This is supported by the highest downtown parking rates of any city in North America - and the city has confirmed that despite the severe economic downturn it will proceed with its scheduled annual downtown car parking rate increase this coming April.

Add in the effects of the economic recession about to hit Canada and by 2020 I expect Calgary will look like this:

However, I understand the Chinese aspire to leave their bicycles behind and are building roads and bridges so that by 2020 their cities can look like this.
Why would they want to come to Calgary?

[santafe2]

Re: A Tale of Two Economies...

Who would not want that! I've been away from Los Angeles for almost 20 years now and I can't say I miss it at all. The 405 / 101 interchange is just a special little slice of hell and the rest of the system isn't much better.

[Chris Coles]

Re: A Tale of Two Economies...

And every one of them a heat engine!

[touchring]

Re: A Tale of Two Economies...

However, I understand the Chinese aspire to leave their bicycles behind and are building roads and bridges so that by 2020 their cities can look like this.
Why would they want to come to Calgary?

Biking in Calgary is not the same as in China. Chinese summer days go above 100F. And in winter, it looks like this.

[touchring]

Re: A Tale of Two Economies...

rail lines without passengers.

I don't really know much about the empty cities as I've not traveled to those places, but I can attest that rail lines without passenger is a myth, which I actually believed in, before I went to West China (supposedly the least developed part of China as compared to East China like Shanghai and Guangzhou) early this year on holiday, and had first hand experience in booking the high speed rail.

The best time slots (between 8am to 12pm) in the morning are fully booked a few days before departure date. Without making any booking or having to login, you can actually see the number of seats available for each class on every train trip in the entire China 2 months in advance. I'm glad I bought the tickets online because when I was there, I saw a couple of local people trying to get tickets without success so this confirmed that the tickets are really sold out.

Note that I had avoided the peak holiday season, since I went 1 month after Chinese New Year which was considered off-peak as it was still winter.

The basic rule to traveling in China on a DIY is - 1). Never travel in the 3 weeks preceding Chinese New Year, during the 2 weeks Chinese New Year holiday and Golden week, 2). To book everything in advance online and if pre-booking is not allowed, make you are at the venue 2 hours before, because you will find lots of people waiting there in queue even if you are there 2 hours early.

Here's a video log by a British South African on his high speed rail experience in China. Take note that he is there in August, which is off-peak.

[GRG55]

Re: A Tale of Two Economies...

I don't really know much about the empty cities as I've not traveled to those places, but I can attest that rail lines without passenger is a myth...

You may be correct, but it would be a truly astonishing miracle if the Chinese rail system was constructed based on meeting actual demand.

In a country that has gushed enormous credit to its SOEs, where influence, graft and corruption permeate the capital investment landscape, where the shadow banking system is large and pro-cyclical and where capacity in absolutely everything (including steel rail manufacturing capacity) is well beyond both China's and and world's current ability to absorb it the probability that China's state owned railways escaped these influences and are the sole entity in the nation that didn't overbuild stretches credulity.

Every time a bit of rail is laid in China someone of influence made money. Even the expropriation of land for right-of-way benefited local officials That's been the key ingredient in a recipe to overbuild everything in China.

Liu Zhijun, China's ex-railway minister, sentenced to death for corruption