China in the Shadows

[Southernguy]

Re: China in the Shadows

Sudden stop with this current account situation?
With the exception of peak second quarter 2015, ca surplus goes around 700 hundred millions. Yearly that means around 3000 hm per year. That is more than 30% of total external debt. And of course they have about 4 times forex reserves against ext. debt.
From my very limited knowledge sounds improbable at best.

China Current Account 1998-2015 | Data | Chart | Calendar | Forecast


China recorded a Current Account surplus of 766 USD Hundred Million in the second quarter of 2015. Current Account in China averaged 405.68 USD Hundred Million from 1998 until 2015, reaching an all time high of 1522 USD Hundred Million in the first quarter of 2015 and a record low of -8.96 USD Hundred Million in the second quarter of 2001. Current Account in China is reported by the State Administration of Foreign Exchange, China.

[Chris Coles]

Re: China in the Shadows

Surely the underlying problem in China, is exactly the same as that which brought the West to a sudden stop in 2008; inability to quantify the true value of the debt instruments held by the banking and shadow banking industry? That once you let the issuance of credit run out of control; the quality of the lending drops to such a low level that it becomes impossible to value on the books of the financial system.

[kbird]

Re: China in the Shadows

I think sudden stops are more about capital flight than changes in the current account.

[Southernguy]

Re: China in the Shadows

Maybe both. Changes in current account may finance capital flight. Forex reserves can do it also.
Also, respect something Chris said above, I tried to find a definition of "sudden stop", which wasn't absolutely clear for me.

"From Wikipedia, the free encyclopedia

A sudden stop in capital flows is defined as a sudden slowdown in private capital inflows into emerging market economies, and a corresponding sharp reversal from large current account deficits into smaller deficits or small surpluses.^[1] Sudden stops are usually followed by a sharp decrease in output, private spending and credit to the private sector, and real exchange rate depreciation. The term “sudden stop” was inspired by a banker’s comment on a paper by Rüdiger Dornbusch and Alejandro Werner about Mexico, that “it is not speed that kills, it is the sudden stop”.^[2][3]
Sudden stops are commonly described as periods that contain at least one observation where the year-on-year fall in capital flows lies at least two standard deviations below its sample mean.^[4] The start of the sudden stop period is determined by the first time the annual change in capital flows falls one standard deviation below the mean and the end of the sudden stop period is determined once the annual change in capital flows exceeds one standard deviation below its sample mean."
So, probably the capital flow part of the definition maybe is accomplished. The current account deficit is not.
The whole article in Wikipedia is very interesting and enlightening, at least for me.

I think sudden stops are more about capital flight than changes in the current account.

[thriftyandboringinohio]

Re: China in the Shadows

Four of the five largest banks in the world are in China.
See ranking below from SNL Financial at this link https://www.snl.com/InteractiveX/Art...33361429-13866

China's external debt is increasing while it's currency is depreciating and it's economy is slowing.
That's a bad witches brew of trouble.

[thriftyandboringinohio]

Re: China in the Shadows

Here's a good related article

http://qz.com/456025/zombies-and-can...ystem-charted/



Zombies and cannibals: The horrors of China’s financial system, charted

[Chris Coles]

Re: China in the Shadows

Four of the five largest banks in the world are in China.
See ranking below from SNL Financial at this link https://www.snl.com/InteractiveX/Art...33361429-13866

China's external debt is increasing while it's currency is depreciating and it's economy is slowing.
That's a bad witches brew of trouble.

In fact, all the top five are Chinese; HSBC stands for Hong Kong and Shanghai Banking Corporation

[Chris Coles]

Re: China in the Shadows

Here's a good related article

http://qz.com/456025/zombies-and-can...ystem-charted/



Zombies and cannibals: The horrors of China’s financial system, charted

Off subject, but of interest is if you scroll down that page you get to a report about the Tianjin explosion and find this:

“We knew there was calcium carbide inside, but no one knew if the calcium carbide had blasted or ignited at the time,” Lei Jingde, an official with the Tianjin fire department, told state-run digital publication The Paper (link in Chinese). “It doesn’t mean the fire brigade is stupid—knowing calcium carbide but still using water. We definitely didn’t use water wrongly.”

Some years ago I attended a lecture by a well known very eccentric scientist who demonstrated the explosive effects of different materials; which ended with by far the loudest explosion; acetylene gas, in that case, set off in an old fashioned glass milk bottle surrounded with masses of bits of furniture and the like to contain the explosion, (which completely destroyed the milk bottle, I might add). For those that do not know, you make acetylene gas by adding water to calcium carbide. In which case that huge explosion may not have been caused by what one might deem as an "explosive" , but simply by adding water to calcium carbide.

[ProdigyofZen]

Re: China in the Shadows

Sudden stop with this current account situation?
With the exception of peak second quarter 2015, ca surplus goes around 700 hundred millions. Yearly that means around 3000 hm per year. That is more than 30% of total external debt. And of course they have about 4 times forex reserves against ext. debt.
From my very limited knowledge sounds improbable at best.

Think about it a little more. I am reticent to write here in the public forum of the trigger that could cause a Chinese sudden stop even with all of their forex reserves.

[touchring]

Re: China in the Shadows

I think China should float the RMB and let it depreciate. A cheaper currency is good for exports.

Four of the five largest banks in the world are in China.
See ranking below from SNL Financial at this link https://www.snl.com/InteractiveX/Art...33361429-13866

China's external debt is increasing while it's currency is depreciating and it's economy is slowing.
That's a bad witches brew of trouble.

[GRG55]

Re: China in the Shadows

In fact, all the top five are Chinese; HSBC stands for Hong Kong and Shanghai Banking Corporation

Bank assets are the amount of loans on the books.

During the run up in the Japanese bubble in the 1980s many of the largest banks in the world were Japanese.

Of course the largest banks in the world today are now largely Chinese. Despite the press reports and popular view that Chinese real estate buyers "pay cash", rest assured all those empty cities were built on cheap and abundant credit. And so was a whole lot of other wasted "investment" there. (However, HSBC is headquartered in London, not Hong Kong or Shanghai - its name reflects its origins in the late 1800s during the British Colonial era).

[touchring]

Re: China in the Shadows

I would agree on the Chinese real estate bubble, but the Japanese bubble is on a different scale. One must not forget that China's population is more than 10 times of Japan's and nearly 5 times the US.

[don]

Re: China in the Shadows

One must not forget that China's population is more than 10 times of Japan's and nearly 5 times the US.

A point seldom made.

+1

back of the envelope point: claims of 4,000 deaths per day due to air pollution in China vs recent MIT study of 548 deaths per day in the US. Add a population multiple of 3.6 and the US weighted comparison is 1973/day versus China's 4,000/d. Twice as many air pollution related deaths in China makes sense in the context of their balls-to-the-wall industrial growth. What would US pollution deaths look like with 50s LA air commonplace, Big Steel roaring, etc. Bad air is part of the nature of the beast.

[Southernguy]

Re: China in the Shadows

Think about it a little more. I am reticent to write here in the public forum of the trigger that could cause a Chinese sudden stop even with all of their forex reserves.

You're a bit sadistic...aren't you?
I would bet you are talking about capital flight which has certainly become big recently.
I was thinking a lot in this "sudden stop" matter. In the first place because it has been a tragic event here. We had two chapters ; one in 1982 (thanks Paul Volcker for that), the other in 2002. Both shared some common featurres: abrupt currency devaluation, intense capital flight, financial crises, asset deflation, deep gdp fall, unemployment explosion (nearing 20%), etc.
Brazil is currently under something that is probably the initial stage of a sudden stop.
And Uruguay is showing some of the first symptons of it.
When we try to understand the deep causes of the disease, however, I think it's something structural to our economies: their rentier condition. Be it soybeans, beef or (these days) cellulose; be it for our "colleagues" iron ore, oil, copper, coal or whatever, our inflow of foreing currency depends heavily on commodities. To say it fast: we are land rentiers. So, when prices go up capital inflows flood us creating "dutch disease" and the usual associated problems. Then comes the new commodities "under" cycle, capital outflows taking the economy down with it.
It is possible, I am far from being certain about nothing economic these days, that China has become an industrial economy (well, for that I am certain, just a short trip to the supermarket makes that sure) and is, therefore, insured on "sudden stop" episodes. Yes, of course, they have big problems, on of the biggest is certainly their huge internal debt. Which main creditor seems to be the Chinese state itself. So, debt seems to be more like simple monetary emission. Which the state can redirect more at less at will following a more or less precise planning.
So, my speculation goes, there shall not be any catastrophic outcome till inflation becomes a real problem. Which at this time does not seem to be happening.

[GRG55]

Re: China in the Shadows

I would agree on the Chinese real estate bubble, but the Japanese bubble is on a different scale. One must not forget that China's population is more than 10 times of Japan's and nearly 5 times the US.

Yes, the Japanese bubble was much smaller than the one that Beijing has engineered. So were the US centric bubbles created in the past 20 years that EJ has written about so extensively (tech, telecom, real estate).

The Chinese have created and dispensed credit through the government owned banks to government owned companies on a scale that dwarfs anything we have seen before (recall Jim Chanos' quip about "Dubai times 1000"). That sponsored a rather large influx of foreign direct investment (no small amount of it from the large Chinese diaspora abroad) which in turn spawned a rather significant shadow credit system (to work around the fact that so much of the economy is controlled by SOEs).

China's outsize growth rates were the result of outsized credit creation and misallocation of capital on a scale that has been both breathtaking and entertaining to witness. That was the point of this thread which was started more than 5 years ago.

Significant amounts of the credit dispensed to SOEs went abroad, with Beijing's official blessing, to buy low grade assets at outrageous prices (the poorest of Canadian oil sands companies for example) and to be re-lent to perpetually bankrupt EM governments (hello BRI*S) ostensibly to construct supply chains for the raw materials needed to build more empty cities in China.

At some point there has to be a deleveraging. Having skillfully engineered bubbles in virtually everything, the question is whether Chinese officials can engineer what Ray Dalios describes as a "beautiful deleveraging". Or will it be something else?

The size of the population would seem to have little to do with any of this. A nation of a Billion consumers isn't worth much when very large percentages of them remain dirt poor. Ask VW, BMW, Unilever, et al how their rush into China's Billion consumer market is working out these days.