UK Guardian: Chinese Economy Headed for a Fall

[powayseller]

Last month, China’s residential homes lost 10% of their value in ONE week, a problem attributed to bad bank loans, and an overheated economy.

Some observers are worried that China is headed for a deep fall. IMO, the coming US recession will bring China into recession too. The question is: what will China do with its large Treasury holdings when it is in recession? (More important, Japan holds more Treasury debt than China, and what will it do?)

“The trigger for a crash could be a period of weakness in the US, the main customer for low-priced goods from Chinese factories. Exports and fixed investment account for more than 80% of China’s GDP, and any sudden fall in US demand would feed through into factory closures and higher unemployment in China. The initial shock would, it is feared, be compounded by a financial crisis as it brought to light numbers of under-performing bank loans.”
full story

[PerryChase]

Economies are now becoming more inter-dependent. Policy makers will face some tough choices in the years ahead. China depends on America. Japan depends on America but Japan depends even more on China for incremental growth.

[VADCMD]

Hi, PS. Thank you for posting more info about the economy and real estate of other posts as well.

But I do not think the US is heading for a recession even if the housing market will crash pretty badly soon. Housing market is similar to stock market in the case of speculation; its process is much slower though – speculators/investors profit from other speculators/investors. Many people made significant profit over the last 2 years. They won’t cut their spending and some may increase their spending. The homeowners whose home will depreciate are only part of the population. People like me who rent to live is neither a winner nor a loser in the housing game.

Housing counts for about 20% of the whole economy. Other sectors are doing well with adjusted 3% in the Q2 (not as good as the Q1). So my point is that only the downturn housing market will not cause recession. But if the energy situation gets worse again, say the oil is above $90, it would be a different story. Please correct me if I am wrong.

By the way, does anyone remember what happened to the economy and stock market during 1990-1995?

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

1995 I think is when Greenspand Orchestrated the one (and only) soft landing is history I believe, I think he achived this by changing the way CPI is calculated which some now blame on the bubble economy we have been experiencing ever sence.

At least that is the way I understand it.

[powayseller]

Quick response – Roubini tells you why there will be a recession, and dispels the 8 myths of the housing bulls, why the world catches a cold when the US sneezes, why China will not decouple from the US during our recession, and much more

[vcguy_10]

Nor_La- Guy:
Greenspan (not Greenspand) had no jurisdiction whatsover over how the CPI was computed.

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

OK I still think I read it somewhere that Greenspan changed it as well, but I think the big change was in 1983 (CPI Calculated).

http://themessthatgreenspanmade.blogspot.com/2005/10/home-ownership-costs-and-core.html

http://www.tradingacademy.com/lessons/lessons20051017.shtm

It is common knowledge that the homeownership component of the CPI consists of owner’s equivalent rent instead of the real cost of homeownership. As described in this New York Times article, this was done back in 1983, for what some would say were dubious reasons:

Until 1983, the bureau measured housing inflation by looking at what it cost to buy and own homes, considering factors like house prices, mortgage interest costs and property taxes. But given the shifts in interest rates and housing prices, those measures could show big bounces from month to month. Besides, homes are a strange hybrid of a consumable good and a long-term investment. As part of a long-running evaluation, the bureau wanted to “separate out the investment component from the consumption component” of the housing market, said Patrick C. Jackman, an economist at the bureau.

Not coincidentally, taking home prices out of inflation reporting seems to have had a very calming effect on reported inflation,

[vcguy_10]

That bureau is the Bureau of Labor Statistics (BLS), which is a unit of the Department of Labor.

The Federal Reserve Board (Fed), has no jurisdiction over the BLS. The change you report took place in 1983, when Alan was in the private sector. Only in 1987 was he named Fed chairman.

[sdduuuude]

Powayseller – just so you don’t think I always bag on you. This is an interesting post.

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

The changes to CPI in 1995 link and another link How Greenspan influenced it.

http://www.cbo.gov/showdoc.cfm?index=31&sequence=5
http://66.102.7.104/search?q=cache:RDOftaVzhe0J:research.stlouisfed.org/publications/review/97/05/9705ch.pdf+Greenspan+changed+CPI+change+1995&hl=en&gl=us&ct=clnk&cd=7

[qcomer]

I returned from a one week stay in Shanghai and I was just amazed by the sky scrapers in that city and how many are under construction. From the 50th floor of my hotel, I could either see apartment buildings or sky scrapers. However, pollution is a real problem and water and air are distinctly worse than in San Diego. Traffic is insane there and people are always trying to sell you something.

The positives of China are that they just produce almost everything person needs for daily life. People work hard and have turned into money minting machines more or less. I was very impressed by China’s infrastructure of roads/Telecom that is world class. Human resource is cheap and will stay cheap for sometime as there is a huge migration of people from villages to cities and new industrial cities are growing rapidly.

The main problem with China is definitely that most of the money seems to be in the pocket of certain %age and government and major population is very savvy with money. I talked to a Chinese guy who made money from defaulting loans from banks as there are lots of loop holes. Pollution is just an enormous issue (you can always feel it as you breath) and will soar Chinese health costs for sure in the coming generations. An important difference I noted was that most people listen to the comunist media and are anti US but also lack the creativity of US workers. Housing prices in China have quadrupled in last 7 years and have not shown signs of cracking but may will do. However, unlike US it is not tied to consumer spending in China. Entertainment opportunities are limited for Chinese people. Prostitution is widespread and one child policy is a concern for most Chinese as they depend on children for their old age.

For me China will be facing real challnges in about 7-8 years. Right now, the main consumer of western prodcuts (mainly cell phones entertainment, etc) in China are few top percentage of wealthy people and new generation in cities inspired by MTV and addicted to big franchises. Otherwise most middle class Chinese already consume everything produced from within China and I don’t think they can extend themselves to replace the huge US consumer spending. The middle class wages are ok but it is already extended considering the increase in oil/housing/transportation/health costs. Healh costs are not provided by corporates or government and are soaring considering pollution. Factory workers have to save money to take care of unpredictable accidents in life. I just don’t see the Chinese consumer being able to offload the US consumer and the Chinese government knows this.

[no_such_reality]

Stagnation.

From 1990 – 1995 we saw a recession then slow expansion of ~1% per year. Compared to real growth in the late 90s of nearly 3%/yr.

do you remember the job market in 1990, 1991, and 1992?

Year,
Nominal GDP(billions of dollars),
Nominal GDP per Capita(current dollars)
Real GDP per Capita
(2000 dollars)
1990 $5803.1 $23247 $28493
1991 $5995.9 $23701 $28067
1992 $6337.7 $24707 $28601
1993 $6657.4 $25613 $28981
1994 $7072.2 $26878 $29779
1995 $7397.7 $27782 $30163
1996 $7816.9 $29017 $30917
1997 $8304.3 $30458 $31922
1998 $8747.0 $31709 $32868
1999 $9268.4 $33215 $33939
2000 $9817.0 $34788 $34788
2001 $10128.0 $35524 $34692
2002 $10469.6 $36360 $34899
2003 $10960.8 $37693 $35424
2004 $11712.5 $39885 $36449
2005 $12455.8 $41974 $37232

[Author]

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