A month or so ago, there was a long thread, whose original topic escapes me, where the discussion turned toward the pro's and con's of Keynesian economic stimulus and money printing. Today, I came across an interesting article in the New York Times. Since I cannot resurrect the old thread, I thought I'd share this here:

Fears Mount That China Is Headed For A Slowdown

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But a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles. ... ... last week, an analyst at the Royal Bank of Scotland advised clients to hedge against the risk that a flood of cash into China, coupled with soaring inflation, could result in a “day of reckoning.” ... The most immediate challenge appears to be inflation, which some analysts say may be even more serious than the new figures suggest. Housing prices have skyrocketed. And prices for milk, vegetables and other foods have soared this year. “The money supply is too large,” said Andy Xie, an economist based in Shanghai who formerly worked at Morgan Stanley. “They increased the money supply to stimulate the economy. Now land prices have jumped 20 times in some places, 100 times in others. Inflation is broad-based. Go into a supermarket. Milk is more expensive in China than it is in the U.S.” In Shanghai, where the average monthly wage is about $350, a gallon of milk now costs about $5.50. Wages have also risen sharply this year in coastal provinces amid reports of labor shortages and worker demands for higher pay. Many analysts expect more wage increases next year. That may be good for workers, analysts say, but it will also change the dynamics of the Chinese economy and its export sector while contributing to higher inflation. Beijing is now under pressure to mop up excess liquidity after state banks went on a lending binge during the stimulus program that got under way in early 2009. Analysts say a large portion of that lending was diverted to speculate in the property market.

Fiscally responsible China was supposed to be the poster child for stimulus done right: savings accumulated during the good times used as a cushion to sustain demand during the bad times. Unfortunately, as with other stimulus efforts in the past few decades, there is a disconnect between theory and practice. Some people knew this was coming sooner rather than later. I personally can recall conversations two years ago predicting this.

On the bright side, things move fast in China. It'll be more interesting to watch than the slow-moving train wrecks of the US and EU. Maybe we can even learn something.

Oh China has its bubbles alright, but the issue is the vast majority of Chinese cash isn't tied up in them. It's foreign money, seeking a safe haven during the economic crisis, China was a beacon of hope so money flooded into the market. Who do you think are buying the Chinese stocks? The Chinese people? Nah their savings rate hasn't changed.. the government? Nah, they already own the companies outright by decree, the government owns a controlling stake in industries it considers strategically important.. It's foreign investors..

So if and when the bubbles collapse it won't even register as a blip on the Chinese economy because their money is actually invested else where (domestic infrastructure, savings, etc..) .. However the bottom line for the massive multinational banks and traders will take a hit, but like the American bubbles shown, they can make money if they know when to sell and what to short.. so the'll play that game all the way to the end..

The real estate bubbles are a bigger concern though, but that's driven by other dynamics, with Chinese domestic demand increasing at break neck speeds, companies are competing to build out the interior Chinese cities propelling a real estate boom.. The Chinese economy will probably grow at 8% for the next 10 years before it levels off and then those real estate bubbles will probably burst..

Interestingly enough America money printing is driving up world wide inflation which will dampen Chinas and other growing economies as well, so who knows maybe there will be a world wide crash, but it won't be because of China..

-ddn

Foreign money is inflating the Chinese real estate bubble?

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Original post by trzy Foreign money is inflating the Chinese real estate bubble?

Seems like a plausible theory to me. Its a global market, after all. Given that the chinese economy is considered dynamic and on the rise, it seems like a better place to store your currency than sclerotic Europe or the USA.

Any good data sets to consult to sort this out? I would guess that the foreign contribution is indirect. Of course, ultimately China's wealth is derived from its foreign trade imbalances, but I think a lot of the egregious real estate developments are financed with "local" money -- that is, money that has already circulated through the hands of corrupt bureaucrats and local private enterprises. Wealthy mainland Chinese are fueling speculation by buying up multiple homes. But as far as direct investment into real estate from abroad, I'd be surprised if anyone is taking such a high risk in a country lacking the rule of law. Wealthy Chinese are flocking to investments in Europe, the USA, and elsewhere in Asia. London is very popular and if you speak fluent Mandarin, you can make a pretty penny dealing with Chinese clients.

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Original post by trzy A month or so ago, there was a long thread, whose original topic escapes me, where the discussion turned toward the pro's and con's of Keynesian economic stimulus and money printing. Today, I came across an interesting article in the New York Times. Since I cannot resurrect the old thread, I thought I'd share this here: Fears Mount That China Is Headed For A Slowdown Quote: But a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles. ... The most immediate challenge appears to be inflation, which some analysts say may be even more serious than the new figures suggest. Housing prices have skyrocketed. And prices for milk, vegetables and other foods have soared this year. ... That may be good for workers, analysts say, but it will also change the dynamics of the Chinese economy and its export sector while contributing to higher inflation. Beijing is now under pressure to mop up excess liquidity after state banks went on a lending binge during the stimulus program that got under way in early 2009. Analysts say a large portion of that lending was diverted to speculate in the property market. Fiscally responsible China was supposed to be the poster child for stimulus done right: savings accumulated during the good times used as a cushion to sustain demand during the bad times. Unfortunately, as with other stimulus efforts in the past few decades, there is a disconnect between theory and practice. Some people knew this was coming sooner rather than later. I personally can recall conversations two years ago predicting this. On the bright side, things move fast in China. It'll be more interesting to watch than the slow-moving train wrecks of the US and EU. Maybe we can even learn something.

You're making a fundamental mistake about Keynesian stimulus. It's only supposed to be applied during a recession to pick up the slack in demand. It's supposed to stop once the economy rebounds. In that sense China did it right. What you're seeing now in China is the result of two things, neither related to Keynesian stimulus. First, in order to protect it's exports, the CCP has refused to allow it's currency to float, thus keeping it's value artificially depressed. As long as the CCP keeps the Yuan pegged to 80% of the dollar and the US government is trying to inflate the dollar, the Yuan will suffer inflation. In addition, as long as the US government continues to pursuit fiscal policies that dump money on the elites rather than the masses, that is, trickle down rather than trickle up, the money will trickle to China where rising interest rates guarantee greater returns. Second, the housing bubble in China is rooted in government restrictions on the kinds of things that people there can invest in. They aren't allowed to buy foreign stocks so instead they buy houses, although they are closer to what an American would think of as an apartment. Well off Chinese often own several houses, and because of their restrictions on renting many of them go vacant, creating the strange situation of an actually housing shortage even as housing construction booms. In short, inflation in China is the result of rigid thinking by the CCP. Beyond all that, when it comes to inflation, too many people hear the word and start to panic. The truth is that inflation is well understood phenomenon. Policy makers, central bankers and economists have many tools for dealing with it to great success. And before anyone pipes off with stupid remarks about Zimbabwe, the CCP might be rigid, but it's not insane. Hu Jintao is not Robert Mugabe. Lastly, the true purpose of that article might be to scare off American policy makers from pursuing trickle up economics. In that sense, this thread is evidence of it's success.

As Dollar’s Value Falls, Currency Conflicts Rise (October 20, 2010)

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... European policy makers worry that a resurgent euro will threaten growth in their own backyard. And the entire world, it seems, is jawboning China to level the playing field and let its undervalued currency, the renminbi, appreciate. It is a step that Beijing, by all accounts, does not want to take. ... The abrupt decline in the dollar — by about 10 percent since early June against major currencies — is upsetting the delicate balance of world economies still recovering from the shocks of the financial crisis. Many other currencies, especially in Asia and in emerging markets like Brazil, are soaring as a result of the dollar’s fall. Those nations’ domestic economies are attracting floods of speculative capital seeking higher interest rates and are at risk of overheating. The dollar’s decline is being driven by what everyone in global markets is now expecting: another round of so-called quantitative easing by the United States. In the next few weeks, the Federal Reserve is expected to inject vast sums of money into the economy in another attempt to spur growth. ... In deflecting criticism, the United States emphasizes the role of China, an ever-growing power in the global economy. Beijing continues to peg the value of its currency to the dollar, despite an immense accumulation of foreign reserves and a persistent surplus in China’s account equal to about 10.5 percent of its annual economic output, a surplus that in standard monetary theory would prompt China to allow its currency to rise. As a consequence of the link to the dollar, the Chinese renminbi has also declined — which is one reason that despite the fall in the dollar, the United States trade deficit has continued to widen. ... That worries other countries. A stronger United States economy is in everyone’s interest, but they fear that investors will flee America’s low interest rates and declining dollar and instead pour capital into their markets, overheating their economies and creating the types of asset bubbles in stocks and housing that burst with such devastating effects in the 1990s. Already there is evidence of this: American investment in overseas stock funds, which was running at about $4 billion a month over the summer, has surged since Ben S. Bernanke, the Federal Reserve chairman, suggested the possibility of another round of quantitative easing at the end of August. About $19 billion has flowed into these funds since Aug. 1, according to TrimTabs, a funds researcher. ...

China Financial Markets: QE2 and the Titanic (Nov 10th, 2010)

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... Enough people have chuckled at the irony of Beijing’s disparaging of planned economies for me not to comment, but it is worth pointing out that China is very worried about the double impact of a contraction in the trade surplus and the impact of the Fed’s quantitative easing. If the former occurs, it will be almost impossible for Beijing to reduce the impact of the latter without causing a sharp slowdown in growth Beijing claims that QE2 makes it impossible for other countries to protect themselves from massive capital inflows that will destabilize local asset markets. Actually, Beijing is wrong. There is a way for countries to protect themselves against QE2, but it would require that they give up intervening in their currency. In other words the only reason QE2 will create excessive monetary expansion in China is because the PBoC will insist on purchasing all dollar inflows at the exchange rate set by the PBoC and monetizing them. So QE2 is fairly explicitly the US countermove in the great global game of beggar-thy-neighbor. QE2 and the currency war Meanwhile there has been a real flurry of attacks on QE2 in China. Tuesday’s People’s Daily has an article (“China vows to collar US over monetary policies”) that starts: China yesterday urged the United States to “act responsibly” in its monetary policies, and said that concerns will be raised at the upcoming G20 summit in Seoul, South Korea. Vice Minister of Finance Zhu Guangyao made the remarks at a press briefing on President Hu Jintao’s attendance to the meeting. The US Federal Reserve last week announced plans to purchase US$600 billion worth of government bonds in a bid to revive the sluggish economy. The near-zero US interest rate and a weak dollar are expected to push liquidity into Asian countries, potentially destabilizing emerging economies. Zhu urged the United States to “realize its responsibility and obligation as a major currency issuing country, and take responsible macroeconomic policies. “We will have candid discussions with the US side. We hope its macroeconomic policy can be conducive to the development of the world economy, not the contrary,” Zhu said. What an impasse. China and other countries are right to claim that QE2 is likely to lead to asset bubbles outside the US, but only, as the US points out, in countries that intervene to prevent dollar depreciation, something the US is anyway eager to discourage. If Beijing is correct however in claiming, as it has for many years, that Chinese currency policies should be aimed at China’s needs, not those of the US, it is hard for them to dispute the Fed’s argument that Fed monetary policies should be aimed at satisfying the needs of the US economy, not the needs of China. ...

Bubble, Bubble, China's in Trouble: The mad scramble for Chinese real estate. (MAY 13, 2010)

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... Meanwhile, it's not only the young and restless in China for whom real estate represents a source of frustrated ambitions. Economists say one significant driver of China's soaring real estate prices has been wealthy investors in China snatching up property, because they have few other investment options. Current laws -- based on longstanding Chinese economic doctrine that regards capital inflow as good, outflow as bad -- forbid Chinese citizens from making most kinds of overseas investments. Meanwhile, stock markets in China are unstable and immature, and there are few tax incentives for philanthropy. As a result, the wealthiest in China are faced with a problem unimaginable a generation ago: what to do with their money. The answer, for many, has been to invest in one of the few options available to them -- an asset whose value, within their lifetime, has only gone up and up: real estate. "Property is being held by many as a store of value, like gold," explains Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management. "This bids up prices and also skews development toward high-end properties, as opposed to affordable housing." Ms. Wang, the wife of a successful Beijing businessman who gave only her surname, has purchased four homes in recent years. There's the apartment she and her husband live in, and three others they hold as investments. All three are vacant; she's making no attempt to rent them out. No property taxes are assessed in China, and so there's no financial penalty for simply buying and holding. The rental market in Beijing, in comparison to the red-hot real estate market, is fairly weak, and besides, renting out those apartments -- putting them to use and risking some wear and tear -- could diminish their value. So they remain pristine and empty. Ms. Wang's thinking is not unique. Many of China's wealthiest see empty apartments as their best investment option. China's nouveau-riche, which have benefited from the country's rising tide, are now bumping up against its limits. The economy hasn't diversified enough to afford them many options for building their wealth. Privately, some are beginning to grumble; as one corporate tax analyst in Beijing told me: "The government is to blame." ...

Edit: Here's more.

China's 'death grip' on the dollar (December 14, 2010)

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... The unease, he said, stems from the fact that growth in the developing economies tends to raise commodity prices, which pressures income in slower-growing rich countries. What's more, nations such as China continue to subsidize overseas trade by suppressing the value of their currencies, by purchasing dollars with the proceeds of their export sales. By pursuing those policies, he said, those nations are preventing a long overdue rebalancing of the global economy. China is by far the biggest offender there: At last count it had $2.6 trillion of foreign exchange reserves, mostly in dollars – far more than the country could possibly need to deal with any financial market shock. In doing so the emerging economies are keeping their own currencies undervalued, which props up the value of the dollar and retards job growth here, among other things. ...

[Edited by - LessBread on December 15, 2010 2:05:20 AM]