The Cost of China’s Excess Capacity

[youngbuck]

http://www.ft.com/cms/s/0/a75ade98-dd14-11de-ad60-00144feabdc0,dwp_uuid=9c33700c-4c86-11da-89df-0000779e2340.html?nclick_check=1 (http://www.ft.com/cms/s/0/a75ade98-dd14-11de-ad60-00144feabdc0,dwp_uuid=9c33700c-4c86-11da-89df-0000779e2340.html?nclick_check=1)


Published: November 29 2009 19:05 | Last updated: November 29 2009 19:05
The world has changed; but China has not. China has responded to the world financial crisis with what seems to be great success. But this is an illusion. China’s solution – a surge in spending on investment – will create greater excess capacity. China’s high-savings, high-investment economy is costly for its people and destabilising for the world. The time for a radical reform is long past.

In a disturbing new report, the European Chamber of Commerce in China lays out the challenge in six sectors: aluminium, where the capacity utilisation rate is forecast to be 67 per cent in 2009; wind power, on 70 per cent; steel, on 72 per cent; cement, on 78 per cent; chemicals, on 80 per cent; and refining, on 85 per cent. Yet vast additional capacity is on the way.

The scale of the excess capacity is breathtaking. At the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.

Foreign producers fear the impact of China’s growing surplus capacity on their markets. But this is not just a problem for specific industries. It is a broader problem. China has become hooked on an unbalanced pattern of economic development, in which investment cures this year’s excess capacity by increasing next year’s.

In China’s current development model, household income is taxed, to support corporate profits.

Corporations now generate more than half of China’s huge savings. Since consumption tends to grow more slowly than GDP, excess capacity can only be used up via yet more investment or exports. This year, economic crisis has made the latter impossible. But China desperately needs to expand its exports once again. The result may well be a crisis in the trading system.

China’s trading partners have to engage with the rising giant. They must explain that they cannot – and will not – absorb the surplus capacity its heavily distorted model of development is creating. But they can point out that this pattern also damages the standards of living of ordinary Chinese. China has to shift income from its corporations to its households and spending from investment to consumption. What is needed for that is a massive structural reform. This must start now. Indeed, it may already be too late.

[tmosley]

Oh noes, cheap goods! How will we ever be able to live, purchasing manufactured goods for so little!?

[dannno]

China has high savings and high manufacturing capacity.. wow, the author is right, they're doomed :rolleyes:

Absolutely amazing how illogical our world has become.

[krazy kaju]

It seems to me that the author is attacking malinvestment, not investment/production in general.

[youngbuck]

If the economy continues to worsen here, might there be too little demand for the "excess supply," i.e., as the article states, unable to expand exports?

[InterestedParticipant]

If the economy continues to worsen here, might there be too little demand for the "excess supply," i.e., as the article states, unable to expand exports?
Exactly.

Add to that excess [cheap] capital, 30% growth in money supply annually, excess domestic construction in China, and you have the makings of a huge bubble that is about to POP.

Just wait until all those Int'l speculators pull their money out when the Yuan goes up, if it goes up... excess capital dries up and you end-up with sever throttling of development and sharply lower volumes of exports. It'll be ugly for the Chinese people.

[Lafayette]

With all this money saved and a huge supply of cheap crap, what is to stop the Chinese from buying their own crap when the rest of the world can't?

[dannno]

Exactly.

Add to that excess [cheap] capital, 30% growth in money supply annually, excess domestic construction in China, and you have the makings of a huge bubble that is about to POP.

Just wait until all those Int'l speculators pull their money out when the Yuan goes up, if it goes up... excess capital dries up and you end-up with sever throttling of development and sharply lower volumes of exports. It'll be ugly for the Chinese people.

So how far are the Chinese in debt?

[InterestedParticipant]

With all this money saved and a huge supply of cheap crap, what is to stop the Chinese from buying their own crap when the rest of the world can't?
They don't have a very big middle class, and I think the middle class that they do have is only making about $5K per year. Hence, that can't afford their own crap, as evidenced by the vacant shopping centers, vacant office space, vacant cities, and 50% Office Vacancy Rate In Beijing. It's all being driven by Int'l capital and China's aristocracy which forces bank lending for development.

In short, its another smoke-n-mirrors growth cycle being driven by the top rather then by real tangible demand for goods and services. It's another pump-and-dump, and this dump is going to be big.

It's is my hypothesis that they want to crash China... that this is being done deliberately to destabilize the country and the Chines elites hold on power, with the end result being a take-over of China through an internal revolution.

[hugolp]

They don't have a very big middle class, and I think the middle class that they do have is only making about $5K per year. Hence, that can't afford their own crap, as evidenced by the vacant shopping centers, vacant office space, vacant cities, and 50% Office Vacancy Rate In Beijing. It's all being driven by Int'l capital and China's aristocracy which forces bank lending for development.

In short, its another smoke-n-mirrors growth cycle being driven by the top rather then by real tangible demand for goods and services. It's another pump-and-dump, and this dump is going to be big.

It's is my hypothesis that they want to crash China... that this is being done deliberately to destabilize the country and the Chines elites hold on power, with the end result being a take-over of China through an internal revolution.

China has a bubble and it will pop.

But China has a lot of potential increasing its local demand. You say that middle class only makes like $5k, but you were saying that the yuan would apreciate, so that would increase a lot.

[InterestedParticipant]

China has a bubble and it will pop.

But China has a lot of potential increasing its local demand. You say that middle class only makes like $5k, but you were saying that the yuan would apreciate, so that would increase a lot.
We're not certain that the Yuan will appreciate, unless the US forces it.

But if the Yuan does appreciate, it will significantly damage China's exports, and therefore demand for their production, and thus we will see a shrinking of their economy, which will put downward pressure on Chinese labor wages.

[hugolp]

We're not certain that the Yuan will appreciate, unless the US forces it.

But if the Yuan does appreciate, it will significantly damage China's exports, and therefore demand for their production, and thus we will see a shrinking of their economy, which will put downward pressure on Chinese labor wages.

The USA created its industrial base with a strong currency. Devaluating gives a short boost to your exports but it is a bad long term policy to have a strong industry.

[dannno]

Ya, having too much capital sucks.

[tmosley]

We're not certain that the Yuan will appreciate, unless the US forces it.

But if the Yuan does appreciate, it will significantly damage China's exports, and therefore demand for their production, and thus we will see a shrinking of their economy, which will put downward pressure on Chinese labor wages.

No, it won't. It will make their economy stronger. Their domestic market is larger than their export market, so an appreciating currency will have a net positive effect on their production, as more than half of their customers (the Chinese) will experience greater purchasing power.

[InterestedParticipant]

Ya, having too much capital sucks.
It does if...

the capital belongs to others, say international speculators;
the speculators intend to pull out all their capital as soon as you raise your currency;
the speculators are actively trying to create political instability;
there is no demand to support the use of the capital
the only reason you are using the capital is to stave off political instability.



Have you all forgotten what happens in the USA with its housing bubble just a few years ago? Would I have been engaging in this same argument with you about the USA in 2008, with you arguing how great all the cheap mortgages were and the free flow of capital to support housing development? The USA was drunk on over consumption then, and the Chinese are now drunk on over production and over construction. What happens when the speculation capital leaves?

[InterestedParticipant]

No, it won't. It will make their economy stronger. Their domestic market is larger than their export market, so an appreciating currency will have a net positive effect on their production, as more than half of their customers (the Chinese) will experience greater purchasing power.
Yea, all those chinese getting paid $20 dollars a day are going to buy a lotta of crap? Their middle class is smaller than ours, their real domestic economy is still very small. Their domestic demand cannot replace the false production/construction being supported by international capital and exports.

Guys, capital is driving the production/construction boom there, not export or domestic demand. It's classic oversupply conditions. What do you think they are going to do with 12 billion square feet of commercial office space they are building (US cities have around 200million sq ft of space), when they already have entire office buildings and factories sitting vacant. We not talking about a simply supply-demand curve here. We're talking about supply that is many time over and above demand. At some point, they have to come back together, and that will happen via a crash when foreign capital leaves.

[hugolp]

Guys, capital is driving the production/construction boom there, not export or domestic demand. It's classic oversupply conditions.

There can be no oversupply. What happens is that the capital structure of the chinese is fucked up, that is, they are not building what their customers (national or foreign) want.

When mainstream economist talk about the nonsense of oversupply is because they just checks the keynesian agregates and so decide that there is not enough clients for that production. But that is complete nonsense, because it makes no sense to look at the production as a whole. Its not the same producing steel than producing iPods. What happens is not oversupply, what happens is that the economy is producing things nobody really wants, and producing too little of what people really wants.

Therefore the capital structure (what is being produced) is wrong. And usually this happens because of monetary manipulation (in the extreme creating bubbles) as the ABCT explains.

The chinese had an economy focused on supplying the USA consumer, now it has to change to supply other costumers, including their own. They can exchange their production themselves, but obviously that will requiere some reform on what they produce, because the consumer preference wont be the same.

[YumYum]

Yea, all those chinese getting paid $20 dollars a day are going to buy a lotta of crap? Their middle class is smaller than ours, their real domestic economy is still very small. Their domestic demand cannot replace the false production/construction being supported by international capital and exports.

Guys, capital is driving the production/construction boom there, not export or domestic demand. It's classic oversupply conditions. What do you think they are going to do with 12 billion square feet of commercial office space they are building (US cities have around 200million sq ft of space), when they already have entire office buildings and factories sitting vacant. We not talking about a simply supply-demand curve here. We're talking about supply that is many time over and above demand. At some point, they have to come back together, and that will happen via a crash when foreign capital leaves.

You make excellent points! China's collapse is going to be worse than ours. China has been too dependent on foreign investment, and their "middle class" cannot sustain their economy. Its like a dog eating its own leg to keep from starving to death.

[tmosley]

Yea, all those chinese getting paid $20 dollars a day are going to buy a lotta of crap? Their middle class is smaller than ours, their real domestic economy is still very small. Their domestic demand cannot replace the false production/construction being supported by international capital and exports.

Guys, capital is driving the production/construction boom there, not export or domestic demand. It's classic oversupply conditions. What do you think they are going to do with 12 billion square feet of commercial office space they are building (US cities have around 200million sq ft of space), when they already have entire office buildings and factories sitting vacant. We not talking about a simply supply-demand curve here. We're talking about supply that is many time over and above demand. At some point, they have to come back together, and that will happen via a crash when foreign capital leaves.

Median income in China is $5000/year, not $20. And they are paid in Yuan, not dollars. If the Yuan doubles against the dollar, then suddenly they will be making $10,000 per year, and their appetite for consumer good will skyrocket.

Oversupply of real estate is only a problem if they are bought with mortgages with low down payments. This is not the case in China. There is also no property tax in China. That property can sit there forever without negatively effecting the market. All it does is make it cheaper for businesses to find accommodation.

What else ya got?

[InterestedParticipant]

There can be no oversupply. What happens is that the capital structure of the chinese is fucked up, that is, they are not building what their customers (national or foreign) want.

When mainstream economist talk about the nonsense of oversupply is because they just checks the keynesian agregates and so decide that there is not enough clients for that production. But that is complete nonsense, because it makes no sense to look at the production as a whole. Its not the same producing steel than producing iPods. What happens is not oversupply, what happens is that the economy is producing things nobody really wants, and producing too little of what people really wants.

Therefore the capital structure (what is being produced) is wrong. And usually this happens because of monetary manipulation (in the extreme creating bubbles) as the ABCT explains.

The chinese had an economy focused on supplying the USA consumer, now it has to change to supply other costumers, including their own. They can exchange their production themselves, but obviously that will requiere some reform on what they produce, because the consumer preference wont be the same.
What would you label thousands of empty office buildings, factories, houses and entire cities? Tell me what you would call that?

[InterestedParticipant]

You make excellent points! China's collapse is going to be worse than ours. China has been too dependent on foreign investment, and their "middle class" cannot sustain their economy. Its like a dog eating its own leg to keep from starving to death.
Ok, so what if the condition that is being created in China is deliberate? What if the resulting political upheaval in China is being fostered? Why would this be happening, and who is behind it?

[hugolp]

What would you label thousands of empty office buildings, factories, houses and entire cities? Tell me what you would call that?

An economy not building what the people needs? Dont you think that all the effort put into building those houses that nobody needs, would have been better used for producing something else that the chinese people really needs?

I am not saying that the chinese are not building too many houses. They are building too many houses. But that does not mean that the whole economy is over-producing, it just means they are building too many houses, instead of building what they need. Hence the economy is not over-producing, its just producing the wrong things (distorted capital structure).

[Bossobass]

Ok, so what if the condition that is being created in China is deliberate? What if the resulting political upheaval in China is being fostered? Why would this be happening, and who is behind it?

I've posted this before. I agree with the facts as they occurred during my lifetime and I followed them. VietNam, Rocky/Nixon to China, Most favored nation status for China, US industry moving off shore, WTO, GATT, NAFTA, CAFTA, China included in G-7 (now G-8), etc., etc.


There is a famous quote of Rockefeller's after he visited China in 1973. He wrote this in an article titled "From a China Traveler", which appeared in the New York Time on August 10, 1973.
"The social experiment in China under Chairman Mao's leadership is one of the most important and successful in history."
That was the same year that he created the Trilateral Commission. Perhaps that was when the new vision was born.


1964 - China detonates its first nuclear weapon.
1967 - China detonates first H-Bomb.
1969 - David Rockefeller becomes Chairman of Chase Manhattan Bank.
1969 - Sino-Soviet border conflict strains relation between USSR and China.
1970 - David Rockefeller becomes Chairman of the Council on Foreign Relations (CFR)
1970 - China launches first satellite.
July 1971 - Kissinger goes on a secret mission to China.
October 25, 1971 - Mainland Communist China replaces Republic of China (Taiwan) on the UN Security Council. Taiwan loses all representation in UN.
February 1972 - Nixon engages in direct talks with Chairman Mao Zedong. Nixon issues the Shanghai Communiqué which states that there is only one China and that Taiwan is part of China.
1973 - David Rockefeller visits China.
July 1973 - David Rockefeller foms Trilateral Commission.
1974-1975 - George H.W. Bush is the US "ambassador" to China. Officially the US did not recognize the PROC, so he did not hold the official title of ambassador.
1976 - Mao Tse Tung (Zedong) died at the age of 82. Hua Guofeng becomes the new Chairman of the Communist Party of China.
1978 - Economic reforms called "Socialism with Chinese characteristics" were started by pragmatists within the Communist Party led by Deng Xiaoping. The goal of Chinese economic reform was to generate sufficient surplus value to finance the modernization of the economy.
January 1, 1979 - The United States transferred diplomatic recognition from Taipei to Beijing.
1979 - Deng Xiaoping became the first Chinese leader to visit the United States. He met with Jimmy Carter in the White House.
1980 - China receives Most Favored Nation status (made permanent in 2000).
1981 - Deng finishes consolidating power in China by ousting Hua Guofeng and replacing him with persons loyal to him.
1984 - The United Kingdom signs an agreement to hand over Hong Kong to China.
June 1989 - Tiananmen Square protests in China brutally suppressed.
1991 - Collapse of the Soviet Union.
1995 - WTO is formed
1997 - Hong Kong handed over to China by the United Kingdom.
December 20, 1999 - Macau handed over to China by Portugal.
July 13, 2001 - 2008 Olympics awarded to Beijing.
December 11, 2001 - China accepted into WTO. Robert Zoellick was the US negotiator.
April 2006 - China's President Hu Jintao meets with President George W. Bush in White House.
July 1, 2007 - Robert Zoellick becomes president of the World Bank.
August 2008 - US opens huge new embassy in Beijing on the eve of the Beijing Olympics. At the same time China opens its new embassy in Washington, D.C. which is the biggest embassy in the US capital.
August 2008 - Beijing Olympics - China's "coming out party".
September 2008 - Global economic crisis triggered by the fall of Lehman Brothers.
September 25, 2009 - New Economic World Order created at G-20 meeting in Pittsburgh.

Bosso

[YumYum]

An economy not building what the people needs? Dont you think that all the effort put into building those houses that nobody needs, would have been better used for producing something else that the chinese people really needs?

I am not saying that the chinese are not building too many houses. They are building too many houses. But that does not mean that the whole economy is over-producing, it just means they are building too many houses, instead of building what they need. Hence the economy is not over-producing, its just producing the wrong things (distorted capital structure).

Producing the wrong things is just as bad as over-producing, since the capital invested in producing the wrong things could have been invested into something else. Also, even if tmosley is correct about the buildings and apartments being built without debt, the capital used to build those factories and apartments are now tied up in empty, useless buildings that are not bringing the investors an income. And since China is tightening credit, the owners of those properties cannot borrow on the equity of their properties. So, where is further investment going to come from?

[InterestedParticipant]

An economy not building what the people needs? Dont you think that all the effort put into building those houses that nobody needs, would have been better used for producing something else that the chinese people really needs?

I am not saying that the chinese are not building too many houses. They are building too many houses. But that does not mean that the whole economy is over-producing, it just means they are building too many houses, instead of building what they need. Hence the economy is not over-producing, its just producing the wrong things (distorted capital structure).
When someone produces or constructs something in greater quantities than demand warrants, I'd call that oversupply, irrespective of what the specific items or services are. If you want to call it something else, then please let us know what that is.


I've posted this before. I agree with the facts as they occurred during my lifetime and I followed them. VietNam, Rocky/Nixon to China, Most favored nation status for China, US industry moving off shore, WTO, GATT, NAFTA, CAFTA, China included in G-7 (now G-8), etc., etc.
Bosso, excellent contribution to the thread... THANK YOU!

I found the Rockefeller letter at:
http://www.scribd.com/doc/15932367/From-a-China-Traveler-By-David-Rockefeller-New-York-Times-August-10-1973

Where did you get that chronological list of events from? I think it would be even more powerful if it included the CIA bombing in Laos & Cambodia and the events around the Vietnam War, as it shows that those event were part of the larger plan regarding China.

[nandnor]

Oh noes, cheap goods! How will we ever be able to live, purchasing manufactured goods for so little!?
China has high savings and high manufacturing capacity.. wow, the author is right, they're doomed :rolleyes:

Absolutely amazing how illogical our world has become.

You dont understand. There is no real demand for the productive capacity, its all speculation and credit expansion fueled malinvestments. There has been no shift in cosumer time preferences to support the expansion of the high order capital goods production, merely inflationary wealth confiscation, so they are not sustainable. Once the inflationary party ends, the prices of their capital will fall down and China will enter a recession.

[YumYum]

I too believed Peter Schiff and Jim Rodgers that China is the Land of Oz. But the information that has been shared here is disproving the notion that China will survive while we collapse. I notice that it is the gold bugs that are pro-China, and the reason you guys are so hot on China is because they buy gold. If their economy tanks; their gold buying stops.

[InterestedParticipant]

I too believed Peter Schiff and Jim Rodgers that China is the Land of Oz. But the information that has been shared here is disproving the notion that China will survive while we collapse. I notice that it is the gold bugs that are pro-China, and the reason you guys are so hot on China is because they buy gold. If their economy tanks; their gold buying stops.
So, that is where this misinformation is coming from: Peter Schiff and Jim Rodgers?

I was wondering why there were so many here who had misinformation and an inaccurate understanding of the situation. Now it makes all the sense in the world. Rodgers works for Soros and Schiff already revealed himself long ago by putting any discussion of GATT into the world of the unspoken. These people really do a lot of damage to people's ability to understand our world, and it is quite deliberate, but that is for another thread.


"first by inflation, then by deflation, the banks...will deprive the people of all property"


-Thomas Jefferson

P.S. And when China's gold buying stops, expectations of continued demand ceases, and Gold tanks.

[YumYum]

Ok, so what if the condition that is being created in China is deliberate? What if the resulting political upheaval in China is being fostered? Why would this be happening, and who is behind it?

I'm not sure. But China has a Central Bank, and Central Banks strip the citizens of their wealth. Since their Central Bank is controlled by the Chinese government I would have to say that their government may be behind this. On the other hand, their government may have been broad swiped by the economic problems here in the U.S., and since they didn't see it coming they have been in some sort of denial: they believed that America would pull out of this. If I'm correct, this shows that China is more dependent on us than we realized, and if they are that dependent on us, they are screwed big time!

[tmosley]

So, that is where this misinformation is coming from: Peter Schiff and Jim Rodgers?

I was wondering why there were so many here who had misinformation and an inaccurate understanding of the situation. Now it makes all the sense in the world. Rodgers works for Soros and Schiff already revealed himself long ago by putting any discussion of GATT into the world of the unspoken. These people really do a lot of damage to people's ability to understand our world, and it is quite deliberate, but that is for another thread.



P.S. And when China's gold buying stops, expectations of continued demand ceases, and Gold tanks.

Haha, you keep thinking that, and I'll keep buying gold.

nandor: Excess capacity just means prices come down. Their GDP, when measered in Yuan might go down, but it will feel like a boom to those living in China, because their purchasing power is going up Up UP! The Chinese consumer will experience the double boon of a rapidly appreciating currency AND price deflation. This will take the median $5000 income to $10,000, where the equivalent purchasing power is equal to $20,000/year, and that's a BILLION people. China's economy will be the greatest the world has ever seen once it's currency appreciates.

The idiots who think a weak currency creates greater economic activity should go to Zimbabwe where they belong.

[YumYum]

Haha, you keep thinking that, and I'll keep buying gold.

nandor: Excess capacity just means prices come down. Their GDP, when measered in Yuan might go down, but it will feel like a boom to those living in China, because their purchasing power is going up Up UP! The Chinese consumer will experience the double boon of a rapidly appreciating currency AND price deflation. This will take the median $5000 income to $10,000, where the equivalent purchasing power is equal to $20,000/year, and that's a BILLION people. China's economy will be the greatest the world has ever seen once it's currency appreciates.

The idiots who think a weak currency creates greater economic activity should go to Zimbabwe where they belong.

tmosley, what is the Yuan backed by?

[hugolp]

Producing the wrong things is just as bad as over-producing, since the capital invested in producing the wrong things could have been invested into something else. Also, even if tmosley is correct about the buildings and apartments being built without debt, the capital used to build those factories and apartments are now tied up in empty, useless buildings that are not bringing the investors an income. And since China is tightening credit, the owners of those properties cannot borrow on the equity of their properties. So, where is further investment going to come from?

You are not getting it. I am arguing in favor of China being a bubble!!!

I am just saying that an economy can not over-produce as a whole, just in some areas, and that it is due to bad allocation of resources, hence its not that the economy is overproducing is that there is a distorted capital structure.

Though I believe that the chinese bubble is not as dangerous as the USA or Europe bubble. They will suffer but will get out of this easier and better than us.


When someone produces or constructs something in greater quantities than demand warrants, I'd call that oversupply, irrespective of what the specific items or services are. If you want to call it something else, then please let us know what that is.

You can call it however you want. Its just that overproducing sounds keynesian, and I would say that they are overproducing in a specific sector or simply say that they have a distorted capital structure. Anyways, besides the words, I think we agree about the state of the chinese economy.

[tmosley]

tmosley, what is the Yuan backed by?

Nothing, though the Chinese Central Bank keeps the value of the Yuan linked to the dollar. This could end at any time.

Since it is used by the Chinese in day to day transactions, you could say that it is backed by the productive capacity of China. That link remains only so long as they keep the money supply steady, either on an absolute basis, or proportional to their population (ie they only print more money as their population grows, and destroy money when it shrinks).

[keh10]

I think that China will experience something similar to America after WWII. Free markets have an amazing ability to absorb malinvestement and reallocate resources where they belong. I agree that when China's currency appreciates, they will have to shift resources and as long as the Chinese government doesn't try to control the process, it will result in great prosperity for the Chinese people. Those international investors who pull out of China as their recession hits (and remember a recession is the first step in creating a healthy economy) will be sorry as the Chinese economy rebounds to new heights. Considering the difficulty for the average investor to know when these events will happen, I recommend investing capital in china over a long extended period of time to minimize exposure to fast developments.

You all can think what you want, but I think the key to surviving in this market is to keep your cool and not flee with the other sheep.

[Bossobass]

Haha, you keep thinking that, and I'll keep buying gold.

nandor: Excess capacity just means prices come down. Their GDP, when measered in Yuan might go down, but it will feel like a boom to those living in China, because their purchasing power is going up Up UP! The Chinese consumer will experience the double boon of a rapidly appreciating currency AND price deflation. This will take the median $5000 income to $10,000, where the equivalent purchasing power is equal to $20,000/year, and that's a BILLION people. China's economy will be the greatest the world has ever seen once it's currency appreciates.

The idiots who think a weak currency creates greater economic activity should go to Zimbabwe where they belong.

I agree with your sentiments on gold.

Gold doesn't change, fiat currencies do. Fiat currencies decrease in purchasing power. Their value relative to each other (dollar index, exchange rate) is irrelevant.

I disagree with the weak/strong currency argument. Letting the Yuan float may increase its worth against a dollar, but it doesn't make the Yuan stronger to Chinese consumers.

Goods cost what the market dictates. The fact that it may take more or less of your particular currency to buy them doesn't change their price (whether it's a cell phone or an ounce of gold).

If the Yuan doubles AGAINST THE DOLLAR, it does NOT double the Chinese median income for anything but goods imported from the US. It only makes Chinese goods exported to the US cost MORE DOLLARS.

So, the question is whether or not the Chinese can maintain their 8% growth by making up for lost exports by domestic consumption.

BTW, $20 a day, assuming a 5 day work week and 2 weeks unpaid vacation, is $5000/year.

Bosso

[nandnor]

Haha, you keep thinking that, and I'll keep buying gold.

nandor: Excess capacity just means prices come down. Their GDP, when measered in Yuan might go down, but it will feel like a boom to those living in China, because their purchasing power is going up Up UP! The Chinese consumer will experience the double boon of a rapidly appreciating currency AND price deflation. This will take the median $5000 income to $10,000, where the equivalent purchasing power is equal to $20,000/year, and that's a BILLION people. China's economy will be the greatest the world has ever seen once it's currency appreciates.

The idiots who think a weak currency creates greater economic activity should go to Zimbabwe where they belong.Youre ignoring the other aspect: the credit will dry down once inflation is stopped and the bubble pops. This will grind general business activity down and the other painful aspects of the pop. Dont you remember what happened after the real estate bubble crashed? It was only last year.

[dannno]

So how much are the Chinese in debt?

I know this is the third time I've asked, but I never saw a response in the other threads (though I don't doubt the responses exist, I don't know where the threads are)

[dannno]

It does if...

the capital belongs to others, say international speculators;


So what are these "international speculators" going to do with all the capital over there? Ask them to send the tooling to..... where exactly? Moving capital around is generally very expensive. What I think will happen is that the prices of the capital will drop and the Chinese will use savings to buy it up.. Or they will go into debt buying it up, at which point there may be some malinvestment taking place, but it's still all pro-production rather than pro-consumption. Nothing wrong with consumption if there is production.




there is no demand to support the use of the capital


That's got to be one of the funniest things I've ever heard.




the Chinese are now drunk on over production and over construction. What happens when the speculation capital leaves?

I'm still not convinced that the capital is going anywhere.

And you can't be drunk on over production or over construction unless you have a problem with debt.

[hugolp]

I disagree with the weak/strong currency argument. Letting the Yuan float may increase its worth against a dollar, but it doesn't make the Yuan stronger to Chinese consumers.

Goods cost what the market dictates. The fact that it may take more or less of your particular currency to buy them doesn't change their price (whether it's a cell phone or an ounce of gold).

If the Yuan doubles AGAINST THE DOLLAR, it does NOT double the Chinese median income for anything but goods imported from the US. It only makes Chinese goods exported to the US cost MORE DOLLARS.

If the Yuan apreciates the raw material they buy arround the world will be cheaper, hence they will be able to lower their price even in yuans.

In the XIX century the USA had lowering prices while increasing (slightly) the wages (increasing real wages a lot) because of better industrial base, while having a strong currency. Instead of the currency going down, its prices that go down. And having a strong currency helps the economy mid-long term.

[InterestedParticipant]

So what are these "international speculators" going to do with all the capital over there? Ask them to send the tooling to..... where exactly?
They are going to...
crash China's economy,
suck up all of the investment that has been sent to China (including investment sent by little investors around the world);
then buy the assets in China back at a fraction of the cost;
and leverage the civil unrest to install a new ruling elite that are beholden to the globalists.

This is what they do. It's been repeated throughout history. This is nothing new.

[clb09]

How can people who presumably support liberty and free markets be so obsessive about defending the economic policies of one of the world's chief central planning, communist, anti-liberty governments?

[InterestedParticipant]

How can people who presumably support liberty and free markets be so obsessive about defending the economic policies of one of the world's chief central planning, communist, anti-liberty governments?
Thank you !

[hugolp]

How can people who presumably support liberty and free markets be so obsessive about defending the economic policies of one of the world's chief central planning, communist, anti-liberty governments?

You can argue that one interventionist system is doing it better than another interventionist system.

Also, China has de facto free market zones that push forward their economy.

[dannno]

How can people who presumably support liberty and free markets be so obsessive about defending the economic policies of one of the world's chief central planning, communist, anti-liberty governments?

Because it isn't. Did you read the article I posted? (edit: sorry, posted it in the other China thread.. http://www.ronpaulforums.com/showthread.php?t=231953&page=4 Post #39)

[tmosley]

Youre ignoring the other aspect: the credit will dry down once inflation is stopped and the bubble pops. This will grind general business activity down and the other painful aspects of the pop. Dont you remember what happened after the real estate bubble crashed? It was only last year.

Chinese growth is fueled by savings, not debt. Tighter monetary policy isn't going to have a significant affect on growth.

And for clb: China is Communist in name only. Actions speak louder than words. The US is communo-fascist, while China is de facto free market (in the economic free zones).

[InterestedParticipant]

Chinese growth is fueled by savings, not debt. Tighter monetary policy isn't going to have a significant affect on growth.
It's fueled by speculator capital.

Where the heck are Chinese getting savings when they earn $5K per year and a house costs $350K?

[tmosley]

It's fueled by speculator capital.

Where the heck are Chinese getting savings when they earn $5K per year and a house costs $350K?

$5000 is the MEDIAN income, inclusive of the dirt poor rural farmers. Look at the cities only, and you will find a much MUCH higher median income. I don't have the actual numbers, but you can bet that they are first world numbers.

[clb09]

I don't have the actual numbers, but you can bet that they are first world numbers.

Wrong.



The per-capita disposable income of urban people was 17,175 yuan ($2,514.6) in 2009, up 8.8 percent from a year earlier, said Ma Jiantang, director of the National Bureau of Statistics (NBS).

from:

http://www.chinadaily.com.cn/bizchina/2010-01/22/content_9361049.htm

[tmosley]

Wrong.



from:

http://www.chinadaily.com.cn/bizchina/2010-01/22/content_9361049.htm

There is a bit of a difference between income and disposable income, I'm afraid.


$6,500 (2009 est.)

They also have a 43% investment rate. This means that most of their disposable income goes toward investment.

from:

https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

[clb09]

most of their disposable income goes toward investment.

Nope.


Persuading Chinese consumers to spend considerably more of their disposable income will require a massive cultural shift. The Chinese savings rate is more than five times higher than that of the U.S. That's largely because citizens here can't count on the government to supply them with adequate education, healthcare or retirement benefits.

Hu Yuping, a homemaker from a rural suburb outside Beijing, said she's trained her family to survive on about $1 a day. It's the only way they can afford her son's college tuition, which costs $1,000 a semester.

Her husband had to give up a job as a taxi driver because of diabetes. Their savings helped pay his medical bills. To make ends meet, he's taken handyman assignments in his village.

"We don't buy anything big," said Hu, whose deep crow's-feet and graying hair make her look far older than her 46 years. "The last time we did was five years ago when we bought a television."

The central government has launched plans to shore up healthcare and pension plans, but the efforts are still not enough, experts said.

from:

http://articles.latimes.com/2010/feb/13/business/la-fi-china-consumer13-2010feb13

So...the impoverished citizens meager savings being lent to a massive communist bureaucracy hellbent on suppressing its fiat currency and subsidizing state-owned dinosaurs totally dependent on exports to broken, "leading" Western economies is good....how?

[InterestedParticipant]

They also have a 43% investment rate. This means that most of their disposable income goes toward investment.

from:

https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
Stop quoting figures from the CIA. They have no credibility.

[tmosley]

Nope.



from:

http://articles.latimes.com/2010/feb/13/business/la-fi-china-consumer13-2010feb13

So...the impoverished citizens meager savings being lent to a massive communist bureaucracy hellbent on suppressing its fiat currency and subsidizing state-owned dinosaurs totally dependent on exports to broken, "leading" Western economies is good....how?

Umm, your quote doesn't disprove what I said. They aren't investing in Chinese bonds, they are buying stocks, gold, and real estate (outright, not on margin). In the case of your quote, the RURAL head of household is investing in education for her child.

[tmosley]

Stop quoting figures from the CIA. They have no credibility.

On issues such as this they do. The CIA world factbook is a good source of facts and figures. You can't believe their ANALYSIS, but their numbers are real enough. The same numbers are also available from other sources, I just don't have time to do a lot of research right now, as I am at work, and getting ready for a presentation this weekend.