Is China in a bubble?
That's THE current debate between China optimists and pessimists.
And this has been accentuated by reports that China will surpass Japan, by next year, as second in the order of ranking among the world's economic heavyweights.
The Economist underscores the mainstream polemic, (bold emphasis mine)
``NEXT year China will overtake Japan to become the world’s second-largest economy. Its rapid ascent has led some to question whether China will follow in Japan’s footsteps, with the bursting of a massive bubble followed by years of decline. But China is still far poorer than Japan was at its peak, and thus has more room to improve productivity. A transition of surplus labour from agriculture to industry and services would increase efficiency and bring its economy more in line with the developed world. And China’s stimulus package has produced much needed infrastructure that will reinforce future growth. But in the long run, a shift away from investment and exports towards domestic consumption would make China’s output more sustainable, and help it to avoid experiencing a bubble like Japan's."
I do not share the mainstream economic gobbledygook.
Although establishing China's current conditions would likely be tricky and complicated.
First, we share with the bears that China could be in a bubble if they continue to pursue current interventionist policies on their banking, finance and the real economy.
For instance, easy monetary policies and a massive jump in money supply are suspected to have buoyed prices of real estate and the stock market as bank credit (circulation credit) have been presumed to have channeled into speculative activities.
Empirical evidence of this would be the emergence of several uninhabited or ghost cities [see China's Ghost Cities].
In the Austrian Business Trade Cycle, the manipulation of interest rates essentially leads to massive clustering errors or huge malinvestments that will eventually unravel-hence the boom bust cycle.
To quote Dr. Richard M. Ebeling, (bold emphasis mine)
``Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.
``Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."
Nonetheless, Chines corporations have remained cash liquid and may not have reached the state of wild orgy of misdirected investments.
According to the US Global Investors, ``Despite government infrastructure spending boom in China this year, Chinese companies have not aggressively deployed cash so far and corporate bank deposits kept soaring and reached around $3 trillion as of October. There exists a remote risk of “herd spending” down the road when domestic demand picks up strongly and profit cycle restarts, eventually resulting in economic overheating." (see Chart upper right window)
Moreover, private spending has taken over public spending since September; see chart above from US Global Funds
In other words, for the meantime it would seem like some semblance of economic recovery, however as earlier cited, the persistence of present policies are likely to foster massive economic and financial imbalances.
Moreover, China's stock market as signified by the Shanghai (topmost chart below) and the Shenzhen (bottom) benchmarks are quite distant yet from ALL time highs. [chart courtesy of Bloomberg]
Like in most bubbles, both real estate and the stock market benchmarks would likely reach new highs before inflecting as in the case of the Japan (1990) and the Asian Crisis (1997) with the exception of the US mortgage crisis (2007-8) [see previous post The Lost Decade: US Edition].
One possible factor that could offset or extend the bubble cycle would be China's thrust to integrate with Taiwan [see Tomorrow’s Investing World According To The Bond King] and with ASEAN [see Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone].
In addition, while there have been indeed some signs of bubble, usually in the context of grandeur edifices such as China's unveiling of Speeding Bullet Train program, to quote Bloomberg,
That's THE current debate between China optimists and pessimists.
And this has been accentuated by reports that China will surpass Japan, by next year, as second in the order of ranking among the world's economic heavyweights.
The Economist underscores the mainstream polemic, (bold emphasis mine)
``NEXT year China will overtake Japan to become the world’s second-largest economy. Its rapid ascent has led some to question whether China will follow in Japan’s footsteps, with the bursting of a massive bubble followed by years of decline. But China is still far poorer than Japan was at its peak, and thus has more room to improve productivity. A transition of surplus labour from agriculture to industry and services would increase efficiency and bring its economy more in line with the developed world. And China’s stimulus package has produced much needed infrastructure that will reinforce future growth. But in the long run, a shift away from investment and exports towards domestic consumption would make China’s output more sustainable, and help it to avoid experiencing a bubble like Japan's."
I do not share the mainstream economic gobbledygook.Although establishing China's current conditions would likely be tricky and complicated.
First, we share with the bears that China could be in a bubble if they continue to pursue current interventionist policies on their banking, finance and the real economy.
For instance, easy monetary policies and a massive jump in money supply are suspected to have buoyed prices of real estate and the stock market as bank credit (circulation credit) have been presumed to have channeled into speculative activities.Empirical evidence of this would be the emergence of several uninhabited or ghost cities [see China's Ghost Cities].
In the Austrian Business Trade Cycle, the manipulation of interest rates essentially leads to massive clustering errors or huge malinvestments that will eventually unravel-hence the boom bust cycle.
To quote Dr. Richard M. Ebeling, (bold emphasis mine)
``Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.
``Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."
Nonetheless, Chines corporations have remained cash liquid and may not have reached the state of wild orgy of misdirected investments.
According to the US Global Investors, ``Despite government infrastructure spending boom in China this year, Chinese companies have not aggressively deployed cash so far and corporate bank deposits kept soaring and reached around $3 trillion as of October. There exists a remote risk of “herd spending” down the road when domestic demand picks up strongly and profit cycle restarts, eventually resulting in economic overheating." (see Chart upper right window)
Moreover, private spending has taken over public spending since September; see chart above from US Global Funds
In other words, for the meantime it would seem like some semblance of economic recovery, however as earlier cited, the persistence of present policies are likely to foster massive economic and financial imbalances.
Moreover, China's stock market as signified by the Shanghai (topmost chart below) and the Shenzhen (bottom) benchmarks are quite distant yet from ALL time highs. [chart courtesy of Bloomberg]
Like in most bubbles, both real estate and the stock market benchmarks would likely reach new highs before inflecting as in the case of the Japan (1990) and the Asian Crisis (1997) with the exception of the US mortgage crisis (2007-8) [see previous post The Lost Decade: US Edition].
One possible factor that could offset or extend the bubble cycle would be China's thrust to integrate with Taiwan [see Tomorrow’s Investing World According To The Bond King] and with ASEAN [see Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone].
In addition, while there have been indeed some signs of bubble, usually in the context of grandeur edifices such as China's unveiling of Speeding Bullet Train program, to quote Bloomberg,
``Train C2019 covers the 120 kilometers between Beijing and Tianjin in 30 minutes, passing peasants in fields burning corn stalks and warrens of shacks occupied by people who aren’t sharing in China’s economic boom.
``The line is part of China’s 2 trillion yuan ($292.9 billion) investment in a nationwide high-speed passenger-rail network that may be too much train, too fast."
...these may not seem as extravagant yet-relative to other recent bubble afflicted economies or markets as Dubai.
In Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman, we noted, ``Dubai’s meteoric rise via profligate projects produced many of the world’s landmark projects (boondoggles), such as the only seven star hotel, the Burj Al Arab, the world’s tallest skyscraper, Burj Dubai (uncompleted), biggest indoor ski slope, Ski Dubai, largest shopping mall (in terms of total area and not gross leasable space), the Dubai Mall, the world’s biggest theme park, the Dubailand and the Palm Islands, the Palm Jumeirah, has virtually challenged Abu Dhabi’s role."
You see, 'delusions of grandeur' typically herald bubble climaxes, such as the emergence of towering skycrapers...
or even in the art markets as previously posted see Global Art Market As Bubble Meter, China's Fast Expanding Role
Bottom line: Political policies based on path dependency suggest that China will mostly endure a boom-bust cycle, although it may not necessarily redound to a Japan model or experience. However, these policy based imbalances would likely evolve overtime, and will be manifested in diverse asset markets, before facing her fateful day of reckoning.
``The line is part of China’s 2 trillion yuan ($292.9 billion) investment in a nationwide high-speed passenger-rail network that may be too much train, too fast."
...these may not seem as extravagant yet-relative to other recent bubble afflicted economies or markets as Dubai.
In Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman, we noted, ``Dubai’s meteoric rise via profligate projects produced many of the world’s landmark projects (boondoggles), such as the only seven star hotel, the Burj Al Arab, the world’s tallest skyscraper, Burj Dubai (uncompleted), biggest indoor ski slope, Ski Dubai, largest shopping mall (in terms of total area and not gross leasable space), the Dubai Mall, the world’s biggest theme park, the Dubailand and the Palm Islands, the Palm Jumeirah, has virtually challenged Abu Dhabi’s role."
You see, 'delusions of grandeur' typically herald bubble climaxes, such as the emergence of towering skycrapers...
or even in the art markets as previously posted see Global Art Market As Bubble Meter, China's Fast Expanding RoleBottom line: Political policies based on path dependency suggest that China will mostly endure a boom-bust cycle, although it may not necessarily redound to a Japan model or experience. However, these policy based imbalances would likely evolve overtime, and will be manifested in diverse asset markets, before facing her fateful day of reckoning.
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