A post by Edward Harrison.
Edward Chancellor, author of the seminal book on financial speculation and manias "Devil Take The Hindmost," is now turning his eyes to China. He sees a number of red flags which point to excess in China.
Chancellor writes:
In the aftermath of the credit crunch, the outlook for most developed economies appears pretty bleak. Households need to deleverage. Western governments will have to tighten their purse strings. Faced with such grim prospects at home, many investors are turning their attention toward China. It's easy to see why they are excited. China combines size "“ 1.3 billion inhabitants "“ with tremendous growth prospects. Current income per capita is roughly one-tenth of U.S. levels. The People's Republic also has a great track record. Over the past thirty years, China's Gross Domestic Product has increased sixteen-fold.
So what's the catch? The trouble is that China today exhibits many of the characteristics of great speculative manias. The aim of this paper is to describe the common features of some of the great historical bubbles and outline China's current vulnerability.
Everyone knows there is extreme levels of excess. The latest report from Andy Xie on local governments shows that governments are now depending on asset prices for revenue, much as they did in places like California during America’s housing bubble.
How can we identify a speculative mania? Chancellor says:
bubbles can be identified ex ante, as the economists like to say. There also exists an interesting, if rather neglected, body of research on leading indicators of financial distress. A few years ago, many of these indicators were pointing to rising economic vulnerability in the United States and other parts of the globe. Today, those red flags are flying around Wall Street's current darling, The People's Republic of China.
James Rickards thinks this is the greatest bubble in history. Even Sino-enthusiast Stephen Roach is pointing to a bubble in China. He just thinks the government will be able to prevent its dragging down the real economy.
That's because Beijing was vigilant in preventing asset and credit bubbles from spilling over into the real side of the Chinese economy. This was very different from the Japan endgame of the late 1980s, where the confluence of equity and property bubbles led to a massive overhang of excess capacity.
Roach’s confidence sounds an awful lot like blind faith in the Chinese authorities to me "“ exactly the opposite of what Roach’s former colleague Andy Xie is saying.
Chancellor includes this blind faith in the 10 signposts of manias and financial crises (very reminiscent of Kindelberger, by the way).
100% yes. Check.
See Roach’s comments above or read Goldilocks is not sleeping in America anymore; she's now in China. Check.
See my posts China's present growth story is built on malinvestment and Jim Chanos still bearish on China, talks malinvestment for evidence that China is misallocating resources. Check.
Remember this post?: "I want to be a corrupt official when I grow up". That’s exactly what Chancellor is talking about. Check.
Andy Xie: Chinese monetary policy has to be tightened Check.
Think Latvia or Argentina. (Are the Baltics the new Argentina?) And we know China’s peg is creating problems because that’s a bone of contention right now. Check.
"Enron-Esque Characteristics" Hiding An Even More Explosive Credit Growth In China. Check.
See Stephen Roach’s comments again. Check.
See #7 again. Check.
The Andy Xie story shows you this. Check.
It looks like China is ten for ten. Is China in a bubble blow-off top like Japan post-Plaza accord? I say yes. I believe anyone who thinks this will not end badly is in for a rude awakening. Please comment if you have counterfactuals.
Much more below. Do read the full report. It is a lovely piece of research.
Source
China's Red Flags (free subscription required) "“ Edward Chancellor, GMO
“China is 10 for 10.”
Funny. The US is 10 for 10 as well. Perhaps we need a bit more introspection and a little less finger pointing. China, for all their malinvestments and bubbles, at least have a new (read not rusted out) manufacturing base and a gleaming new infrastructure. We have a service economy (Yeah, THAT was a great idea) and a 100 year old dilapidated infrastructure. Sorry, but China still beats the US in the next few decades. Oh, and they execute bankers whose banks fail over there: Not advising that we do that, but it sure means that they have a sounder grasp of moral hazard than we do.
Mis-allocation of investment? By whose reckoning?
What’s the US Dept Of Defense’s ( I miss the old “War Department” name) daily spend now? 2 billion (2,000 million) dollars a day or thereabouts?
How’s about what could be saved by the USA with a universal coverage, single-payer, health insurance system? Oh I forgot the US Constitution forbids such.
Beams in my neighbor’s eye, but no motes in mine?
What’s wrong with a “service economy”?
That would include servicing the technology, which allows most to avoid true physical toil & drudgery, right? And developing the existing tech further, and the continuous innovation in processes by degrees, is “service”, too.
Service = brains
“Service = brains”
No over-simplification or over-generalization there. Does flipping burgers = brains or making computer chips = only dummies need apply?
The problem with our supposed service economy is that we’ve increasingly abandoned manufacturing but forgotten that goods are easier to export/import than services. Hence while we have a trade surplus in services it’s small compared to the deficit in goods.
Bill, you are definitely on to something! Of course the US has misallocated resources – and still is doing so. Chancellor (and Grantham) can get away with pointing fingers because they are both British and do not work in officialdom.
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