The article kind of assumes that you understand what these "local government financing vehicles" are. Which is probably true for the median reader of the story, but it wasn't true for me, so I went looking around for an explainer and found this from 2013: https://www.ibtimes.com/chinas-local-government-financing-ve...
In contrast to state governments in the U.S., most local governments in China are forbidden to borrow money directly.
Historically, land sales have been a large revenue source for local governments, but since the global financial crisis this revenue source has diminished. Yet local government spending, especially on infrastructure investments, has accelerated...
Detroit filed for bankruptcy with debts of $18 billion on July 18, but this is the average amount of debt for many Chinese cities. A 2012 audit of 36 local governments found $624.6 billion in debt -- suggesting there are at least a few Chinese cities with debt equal to, or in excess of, the $18 billion that sunk Detroit.
So the news is that what was understood to be ~$625 billion in debt six years ago has turned into $5.8 trillion in debt today. Which is, like, 322 Detroits.
For the sake of argument, let's assume that the headline is true -- local governments have taken on more debt than they can service in a slowing economy.
What's the endgame? Here are some possibilities, would love to see some economic modeling to quantify some scenarios.
1) Central government gradually inflates the currency to monetize the debt with a few defaults along the way. Damage is funded by Chinese creditors (defaults) and Chinese citizens (inflation), and it takes 20 years to fully play out.
2) Central government bails out bad loans by selling a portion of their $3T in foreign reserves, including $1T of US government debt. Chinese creditors, investors and citizens are made whole. Foreign bond prices fall and interest rates rise, causing recession and financial crisis in the US.
3) Central government bails out a few well connected players, but mostly allows market forces to run their course. Shadow banks and local government financing vehicles go bankrupt, causing a cascade of bankruptcies in the real economy, and economic growth is 200 basis points under potential until 2022.
> 2) Central government bails out bad loans by selling a portion of their $3T in foreign reserves, including $1T of US government debt. Chinese creditors, investors and citizens are made whole. Foreign bond prices fall and interest rates rise, causing recession and financial crisis in the US.
That is unlikely to be the result. The US national debt is over $21T now. $1T is <5%. Dumping that much on the market at once would certainly affect interest rates, but not at a catastrophe-inducing level, and all of the normal tools used to control interest rates remain available.
By comparison, the US deficit this year is ~$0.8T, i.e. the US itself is dumping nearly that amount into the market. The Quantitative Easing program after the housing crisis was $3.5T over a few years.
It's also unlikely that they would dump the entire amount at once, because causing a sudden short-term rise in interest rates is not to their advantage (they would take a bath on bond prices). But if they divested something like $100B/year, the effect on the market would be minimized.
Russia recently dumped the majority of its UST, widely believed to cause the treasury rate to hit 3%. Some commentators speculated the reason for this was
1) to avoid future potential sanctions
2) a trial-run to gauge how the market would react to a similar move by China.
At its peak Russia held less than $0.2T, Russia liquidated approx $50B per month for 3 months. If China dumped $75B per month for 6 months, there would be pain that would likely spread into corporate bonds.
Did Russia liquidate their Treasurys or just move them offshore?
The Kremlin may be trying to pull off a balancing act by mostly shifting its cache offshore, rather than selling outright.
Analysts at the Council of Foreign Relations this week found that holdings of American bonds in Belgium and the Cayman Islands increased by about $45 billion in the same period that Russia was reducing its U.S.-based hoard, meaning it may have been an attempt to protect against seizure.
I'd bet on a combination of 1) and 3), more of 3), to be honest, the Chinese Central Government is known as picking losers and winners (which can be seen from the outside as "market forces running their course") and the subdued economic growth can be easily masked with aggressive foreign policy rhetoric, like building some new islets in the South China Sea. Choosing 2) will most probably escalate the dangers of a military confrontation with the US, I don't see the Chinese going that route, war it's bad for business (in most cases, anyway).
> war it's bad for business (in most cases, anyway).
Most wars are great for business actually, even world wars! Let's not forget that WW2 was mostly responsible for dragging the US out of the great depression.
I think 4) Since this is local government debt, local governments start selling off their principal assets, land. And as land prices hit rock bottom, there begins a massive transfer of ownership of local public owned land to private individuals and companies. Initially there may be a flight of Chinese capital out of the country as land prices begin falling off a cliff. Then once they stabilize, there will be a big whooshing sound as money is repatriated and people start snapping up choice holdings?
I think a large amount of bitcoin prices are attributed to western banks explaining to wealthy chinese how to transfer money out of the country on a large scale.
Bitcoins don’t work for that. If you want to buy bitcoins with Currency X you need to find somone that wants to sell bitcoins for Currency X. Similarly if you want to sell bitcoins for Currency Y you need somone to buy them in Currency Y. Net result you can’t get large net cash flows unless people can exchange currency X for Currency Y.
PS: Bitcoin mining is another story, but it’s little different than building anything in China and selling abroad.
Sincerely asking: Are you serious? Do you have sources, good or otherwise (even rumors or talk of this topic)?
What exactly is it that you think is happening, if I may ask? Does a Chinese citizen, perhaps vacationing in the US, walk into BoA or WF and ask a wealth management advisor how to move money to their newly opened account there?
Possible that the central government is more exposed to this than anyone thinks due to creative accounting practices? Result might be central government is unable to conduct its policies at the same level of robustness as before? Doomsday here being that social programs, belt and road, etc might suffer. Potential downstream impacts would include dissatisfaction with leadership and a change there? Or, you know, just straight up war as a distraction of we’re talking real downsides.
A temporary 4% drop in the S&P 500 (based on closing prices) is hardly a mini-crash. If you check the historical price charts over the past several decades, movements of that size are common. And analysts make up all sorts of explanations after the fact for the fluctuations just so that they have something to talk about on TV. The reality is that we don't know why; maybe it was interest rates, maybe it was something else.
The problem is we haven't seen a 4% drop for years, from a predictive of recent decades, many who wasn't in the Stock market during 2008, a 4% drop is a mini crash.
Of coz for those of us who are in it for multiple decades.... 4% drop doesn't surprise us.
The Fed manipulates interest rates in an attempt to stabilize the economy. The strategy goes something like this: slowly raise interest rates while the economy is humming along, and when a downturn comes along they quickly lower them in an attempt to boost the economy [0].
One of the dangers inherent in this strategy comes in the timing of the rate manipulations. Be too aggressive with raising rates and you may lose large amounts of economic momentum. Be too slow to raise rates and you may have nothing to lower in the event of a recession.
So if China sold off a ton of US debt and it negatively affected the world economy, the Fed would likely cut interest rates in an attempt to counter the downturn.
When you say "manipulate" you need to be clear about the mechanism.
The Fed doesn't just dictate interest rates, because who would listen to them? Instead, interest rates are set by the market.
If the Fed wants higher interest rates, they sell bonds in the market. If they want lower interest rates, they buy bonds in the market.
So if China sold a ton of US debt, that would reduce bond prices and increase interest rates. If the Fed wanted lower interest rates, it would need to buy a lot of that additional supply that China dumped on the market.
Aye, mostly. It's important to remember that the Federal Govt. has the ability to manipulate the money supply by printing money and the ability to nearly indefinitely borrow whenever they get into trouble. Note that borrowing implies issuing bonds, which will lower interest rates.
So the Fed cannot simply dictate interest rates, but if it wants to manipulate the rates there is not a whole lot stopping them. In a recession scenario I imagine they would not have much trouble justifying more borrowing to the American public.
With regard to the effect a Chinese selloff would have on the market (both the US bond market and the wider global economy) I don't know enough to comment. However, I am fairly confident that if such a selloff resulted in a major economic downturn the Fed would try to lower rates to stimulate the economy.
Whoops! You're exactly correct. Issuing more bonds increases the risk of the issuer not being able to repay the debt and thus the debtors will demand higher rates to offset this increased risk.
Although, unlike other bond issuers, the Fed has other tools in it's arsenal that would allow it to manipulate the yield curve.
Also, you can't magically liquidate Treasuries to dollars. China would have to find a buyer for it's $1T in bonds. And I don't know who has that kind of money. They wouldn't get full price.
The rates are better for newly issued bonds. Existing bonds become devalued. The point (IIUC) is that unwinding is a tricky proposition and dependent on the mix of maturities.
AFAIU, the Social Security Trust Fund will stop soaking up deficits some time in 2019 as it transitions to a net outflow of cash. I can't find the numbers but presumably this means (and has meant for several years, now) that the public (non-intragovernmental) share of yearly deficit funding has been steadily growing and will really take off next year. That in turns means foreign buyers will have increasingly more leverage to effect interest rates.
Forget about the share of outstanding debt. That's money under the bridge. Think about the year-over-year change in the share of deficit spending funded by foreign buyers. Considering how explosive deficit spending will be over the next decade because of the tax cuts, compounded by higher interest rates, we could be in for a very bumpy ride.
What once were irrelevant swings in interest rates, current account deficits, domestic savings rates, etc, could quickly come to dominate the trajectory of the economy.
Sure, the Federal Reserve could soak up the deficit. But that would be much more likely lead to inflation than in previous periods.[1] Higher inflation means foreign buyers pull out, which leads to greater inflation and less capacity to purchase the imported goods that we're completely dependent on. It also means less profit on the international market for the high-margin services and industrial products we specialize in. Europe is doing a much better job than the U.S. at controlling deficit spending, and the Euro could easily become the new reserve currency.
[1] And don't forget, the Federal Reserve's mandate is low inflation and low unemployment. Congress may need to step in to change their mandate to de-prioritize low inflation, which would send a very nasty message to investors. Decades of easy money because of our current account deficit (aka trade imbalance) and strong domestic savings (via Social Security) has left people with a twisted perception of the consequences of budget deficits and inflationary monetary policy.
> Euro could easily become the new reserve currency.
Surely you cannot be serious here. Europe is one (insert name)-exit away from total implosion. The Euro project was doomed from the very beginning: you cannot have a joint monetary policy without a unified fiscal policy (which never materialized through European consent - after failure of conquest i.e WW2)
And yet despite all the hemming and hawing the squabbling Euro area has de facto better fiscal policy than a United States firmly under the control of a single party.
The Euro area had a 2017 deficit of 0.9% of GDP, as compared to the U.S.'s 3.5%. And this is during a boom in the U.S.
The Euro isn't a better vehicle than the USD today, but it could easily become one. Not because the Euro improves but because USD will become less stable and attractive and the only realistic alternative is the Euro. Or maybe we end up with a more diversified system. Either way USD loses.
> The Euro isn't a better vehicle than the USD today, but it could easily become one.
Get back to me when Saudi Arabia starts selling oil exclusively in Euros, or better yet, once European union surpasses the US in the number of aircraft carrier strike groups. You don't seem to understand the concept of a "foreign reserve currency" if you think Euro has a chance against USD. There is more chance of physical gold replacing USD as an inter-nation trade/reserve rather than Euro!
Russia is the greatest producer of oil, or at least neck-and-neck with Saudi Arabia. Plenty of other top producers wouldn't mind switching away from a USD-denominated market, including Iran and China. Exclude the U.S. from the list of top producers and you may even have a majority of producers who would prefer a different system.
The U.S. is the world's reserve currency because everybody trades with the U.S. and the U.S. has run a current account deficit consistently since 1950, and with most of the world. That means everybody is holding USD and thus you can sell something to anybody else without needing sufficient imports from that buyer to cover the transaction. (Countries can't just buy USD willy-nilly; they need to find someone willing to trade USD for their local currency, which requires exporting some good or service.)
But that can change. Indeed, politicians are hell bent on changing it. And the global economy is exploding, meaning the U.S. won't be able to remain the center of the global commercial universe even if it wanted to.
In scenario (2), wouldn't Chinese companies be affected by the reduced demand from North America/Europe being in financial crisis? Is it understood that this would be devastating enough that China wouldn't use what is essentially a nuclear option?
This is why I'd love to see a quantitative model, there are too many players and too many variables for good intuition.
What matters for each scenario is (a) how much it costs, (b) who bears the cost, and (c) how long it takes.
If Chinese creditors, investors and citizens bear 100% of the cost in scenarios 1 and 3, but they only bear 30% of the cost in scenario 2, then scenario 2 is preferable isn't it?
But what if Chinese citizens don't have a vote, and the damage to well connected elites is lower under scenario 1? Maybe that winds up the preferred course even if total cost is greater.
Who knows without the ability to even roughly quantify the primary, secondary and tertiary effects?
That assumes you "only" have to deal with the static mass of $5.8 trillion debt. It gets even more complicated when you have to deal with the factors that have been building that debt in the first place.
Wouldn't addressing the causes of the debt build-up have an even harsher impact on the economy?
2) Central government bails out bad loans by selling a portion of their $3T in foreign reserves, including $1T of US government debt. Chinese creditors, investors and citizens are made whole. Foreign bond prices fall and interest rates rise, causing recession and financial crisis in the US.
Selling treasuries is a double edged sword. Driving up borrowing costs for the US also lowers bond prices, wiping out the Chinese government's portfolio value, right when they need the funds for a bailout. Dumping a lot of dollars on the market will drive the dollar down relative to the yuan, hurting Chinese exporters right when their economy needs it most. China has really twisted itself into a knot on this one.
Sure, defaulting on obligations is always an option.
Who would be hurt in this scenario? Who are the lenders that don't get paid back? Are they banks? Ordinary citizens saving for retirement?
When those people don't get paid back, what are the second-order consequences? Is there a cascade of defaults when they can't make good on their obligations?
If you want to compare numbers you need to know what metrics are used in each. Here is the S&P report that everyone's headline is based upon: https://www.spratings.com/documents/20184/0/ChinasHiddenSubn...
While it does not go back to 2012 I see nothing suggesting the kind of increase you are quoting.
It is also difficult to compare the Detroit number to a Chinese city unless we know what are included in the numbers. Detroit doesn't own many of its infrastructure. For example its prison borrows separately, and so does its water and sewer district. Presumably comparable numbers are included in S&P's LGFV total.
These numbers are meaningless on their own. Detroit went up in flames when it lost it's auto industry. Otherwise the debt would just get bigger and Detroit would be fine.
China might undergo a crisis when they start losing exports due to other countries re-industrializing (ie the US).
My guess would be that they won't go into the red on average. Their growth will slow and some very export-oriented industrial areas will suffer, but their internal market is huge by now so they'll just keep growing, but not as fast.
That's really interesting, but it's be nice to also know the average population of those cities. The per capita debt is probably the more relevant statistic. Or maybe the ratio between the debt and [assets/income] of the city.
Exactly! There are more than 100 cities in China with a higher population than Detroit, and there are at least 15 cities with 10x the population of Detroit.
Eh, I think both you and the poster below are making a mistake in using the population of the city center of Detroit. The city center is making a bit of a comeback, but the majority of the population lives in the surrounding metro area, which still has a population of roughly 3.7 million.
And before you complain about that being a much bigger area, here's the land area for metro Detroit compared to some of China's biggest cities:
Detroit metro: 1,337.1 sq mi
Guangzhou Urban: 1,483.95 sq mi / ~11 million
Shanghai Urban: 1,550 sq mi / ~24 million
Chengdu Urban: 1,760.0 sq mi / ~11 million
Chinese cities typically have boundaries roughly equivalent to US metro areas. They certainly have larger populations than Detroit, but not as much as you guys think.
But given the unique situation of Detroit, and the fact that US cities are generally organized in quite a different fashion to Chinese cities there's really no good use in comparing the two IMO.
Also, Detroit is a really weird case. It's a city that picked at a 1.9M population and was sized to handle that.
Then it fell to a 0.7M population.
When your city infrastructure and services are sized for 2 to 3 times your population, said population cannot sustain these infrastructure and services, and it's also really difficult to scale down these.
This is in sharp contrast with Chinese cities that are nearly all growing at a fast rate, maybe too fast in fact.
I'm aware it's an over simplification, but it illustrates the twos are not really comparable.
The population of Detroit has dipped below 700,000 for a city of over 130 square miles. My understanding is that Chinese cities have quite high population density compared to that.
The article mentions LGFVs, without defining the acronym or explaining much about them.
Here's another article that goes into more detail:
Local government funding vehicles (LGFVs) are companies owned and funded by a local government in order to raise funds for municipal projects. These firms stem from the taxation system in China that allocates the lion’s share of revenue to the national government, and from regulations implemented in 1994 that prevent the government from selling bonds. This strict budgetary regulation was intended to promote sound financial management and prevent local governments from spending themselves into deficits. LGFVs became prominent after the Asian Financial Crisis of 1998 and the Great Financial Crisis of 2008 when central government stimulus packages put the onus on local governments to raise necessary funds. LGFVs are effectively state-owned enterprises (SOEs).
I'm not sure why they thought everyone should know what that meant. As I looked it up, I came across articles from as far back as 2013 saying that China's collapse is imminent. Considering that still hasn't been the case, this may not be as imminent as Bloomberg is making it seem.
Your theory that a large systemic problem is only real if it blows up quickly is puzzling to me. I was working for financial traders at the time of the Orange County crisis in 1994 [1], and even then people were concerned that the rise of complicated financial instruments was concentrating and perhaps even creating risk in ways that were poorly understood.
Those concerns got louder during the repeal of the Glass-Steagall Act in 1999 [2], as that removed depression-era regulations that kept banks from a lot of financial speculation.
But this all didn't really blow up until the financial crisis of 2007-8. [3] Financial instruments with long time horizons (e.g., mortgages and long-term loans to governments) can be dangerous a long time before the truth comes out. And large organizations like banks and governments may end up exacerbating the problem by smoothing over what they think of as small problems but are really the canaries in the coal mine for major systemic issues.
Closer to home, we could look at Theranos, which took a full 15 years to go from founding to criminal charges despite never really working. Enron and Worldcom are two other good examples where booming markets covered up all manner of sins for years before the music stopped.
Lots of fringe people were predicting an imminent real estate implosion in 2005-2006 as the market got crazy.
The real collapse didn't occur for several years.
They were wrong on the timing, which is fairly common, while being right about the cause and ultimate outcome.
China of 10 or 15 years ago is not China of today, as it pertains to their debt situation. Going from a 130% debt to GDP ratio, to 300% (or higher if you count shadow debt), puts you in a fiscal place that few nations have ever navigated successfully. Now China is reversing course on deleveraging and proceeding to leverage up further, likely making the situation worse.
300% debt to GDP may be sustainable with 8% real growth. How about at 5.5% growth? 4.8%? How about 450% debt to GDP, at 5.5% GDP growth? There are limits to this sort of approach to propping up an economy with very large sums of debt and slowing growth. How much does their growth drop off if they can no longer continue to expand the debt so dramatically? And when that happens, can they still service their debts well? The question is exactly where the limits are and what the consequences will be as they're hit. That varies from country to country, depending on the unique circumstances, and depending on the type of debt. What you can be certain about with China, and what it's doing, is that it's not good. Even if that immense pile of total debt - which continues to grow rapidly - doesn't implode their economy, it is very likely to stagnate it at a minimum by robbing the economy of the growth capital it needs (diverting it to rather incredible debt interest payment sums, as is the case now). As that debt goes higher, more and more of each incremental dollar of GDP growth is going to maintain it.
While all of that is happening: China has large pension funding problems, very high real corporate tax rates that are smothering its economy, a weak social safety net, a shrinking small business market and expanding government-corporate sector that is far less efficient than the private sector, a rapidly aging demographics problem, contracting labor force, and soon to be contracting population. Now juggle all of that with their debt load, before they get rich/affluent at the median, and before they even build out a meaningful social safety net for the bottom billion people (social safety nets & welfare policies being the usual primary cause of large debt accumulation in the developed world).
Except China can't be measured in the same terms that a Western economy can be. The US can't just decide to forget all of it's debt, in the way China can given they have a command economy with the government playing a role in every business. Communist parties have nationalized entire economies in the past, and to suggest they won't do the same again is ignoring many of the actions that Xi Jinping has taken to bring back Marxist thought into the country.
Should the CCP decide to reset all debt, they could likely get away with it through measures that insure a lack of debt collection doesn't cause a dominoeing effect.
China can and should be measured by the same terms as Western economies, they're bound by the same constraints. There's nothing literally magical about China and their government isn't omnipotent, no more than the Soviets were.
The primary debt problem in the US, is the public debt of the US Government. The US Govt can decide to 'forget' their debt, they're going to use inflation to do it over time (that is, quantitative easing, debt monetization). US Government debt will increasingly be held internally as a percentage, as it expands by $700b-$1t per year. There are no external buyers for that much debt and they can't afford the high interest rates it will take to attract that much private capital over time (it'd rapidly swamp the US budget), only the Fed will be able to keep up with it. They'll follow the Japan recipe, holding rates artificially low perpetually to keep debt cheap, while debasing the dollar to stealth default on the debt in order to reduce its real value vs the economy and government finances. That's how Western nations forget their debts.
> The primary debt problem in the US, is the public debt of the US Government.
This is absolutely false. The US has been in debt it's entire existence. Debt is a problem for the private sector, not the public sector. Why? Because the debt the US is denominated in dollars, which it has the sole ability to create. Imagine a household with the same power, let's say you "adventured" are able to print "adventure dollars". When you give out these adventure dollars, you run a deficit of X adventure dollars. You are now X dollars in "debt". That's exactly how public debt is measured. It's silly to think the US could not pay any debt denominated in dollars.
>Communist parties have nationalized entire economies in the past, and to suggest they won't do the same again is ignoring many of the actions that Xi Jinping has taken to bring back Marxist thought into the country.
Yes, he could do that, but the problem is that state-capitalist economies do poorly in the modern world. That's why Dung Xiaoping abandoned Maoism and turned to the free market in the first place.
That's utter nonsense. Are you claiming that in the US today, Trump or his subordinates decides exactly what will be produced and who will be the heads of all enterprises, like was the case of, for instance, Stalin and Soviet Union?
By the way, the term "state capitalism" was invented to communicate that the economy in the Soviet Union was radically different from either a free market economy or the anarchistic, democratic socialist economy that the Bolscheviks had promised.
LGFV (Local Government Financial Vehicle) are companies set up, fully owned,
and operated by local governments that borrow money from the banking and financial
system to engage in businesses that are fiscal in nature, like infrastructure
investment and public affairs. Local governments can't sell bonds and Central government takes most of the taxes so LGFV is the only way they can finance their projects.
Most of that $5.8 Trillion valuation is not going to vanish because they are real investments into infrastructure. Most problems come from wrong cash flow estimates, and lower than estimated returns and some nonprofitable investments. The actual potential loss or haircuts investors are facing is some percentage of that sum. Probably few $100's of billions, maybe even close to $1T.
The reason why there are defaults is because Chinese government wants to fight moral hazard problem that comes from bailing them out. The government will allow certain number of LGFVs to default to set an example (like Lehman Brothers) but if the credit squeeze starts to hurt "Chinese main street" they will step in.
How much accounting regulation is actually enforced on these? How many ghost projects or empty infrastructure with revenue booked using estimated values instead of real sales?
I don’t doubt that it won’t be an entire haircut, but to say these function like regular bonds seems odd.
Is there a contagion concern here? What other products are collateralized using these? We saw this of course with well-rated packages of loans actually being manure. Anything like packaged LGFVs with hedges?
Asking because I have no idea and am legitimately curious about the possible downsides.
Serious question, as I don't really understand LGFVs: if most tax revenue goes to the central government, how does the local government intend to pay back the financed money? Are all LGFVs tied to projects that are intended to create revenue?
I could see that working for land development, maybe some infrastructure... but if they are selling bonds to cover day-to-day public affairs, that doesn't seem sustainable. If those expenses aren't covered by current tax revenue, where are they going to get the future revenue to pay the investors, plus interest, plus ongoing day-to-day expenses at that point?
Does anyone know what expectations or models they are using in issuing these, or what the buyers' assumptions are? That would seem to be important. If someone is buying a 30-year note expecting the tax base growth to be 8% p.a. over that 30 years, with that compound growth covering the principal, interest, and still keeping things going down the line, things could get really ugly if growth is even a bit below that. The municipality would have to choose between day to day expenses and interest payments, potentially.
I have a very naive question: What is the problem with letting these LGFV fail and debt disappear with them over a few years? My understanding is that it would create a bit of inflation but the volume would be manageable and inflation is not much of a problem in a growing economy.
LGFV do not look like a financial product that can be bought so there does not seem to be any risk of contagion.
This is all government matters so the moral hazard can be easily avoided if the government is willing to punish harshly the officials that put their cities in this situation. Financial punishment is not the only way to punish unwise risk taking.
Here's the thing: this sounds bad, but partly because of the massive, massive scale. However, everything in China sounds ridiculously big to me; the environmental problems, the amount of stuff being built, everything. So, my intuition for when "that's too big" turns into "that's so big it will go BANG pretty soon" is no good, when it comes to China. Thus, the question is, how big is this, on a China-everything-is-big kind of scale? What will be the thing that would make this stop? How do we know it's not just an early 90's S&L crisis kind of thing, that is, big but not catastrophic?
I'm not saying it's not a crisis, I'm just saying I can't tell if it's a crisis because it's China, everything seems way too big to me, and lots of it just continues that way for many years.
The difference between debts and environmental disasters is that debts can always be canceled or watered down.
Indeed China's MO is usually to do that indirectly every time, which is why articles like this have popped up like clockwork for the last decade in spite of China not facing a recession in that time. Counter cyclical fiscal stimulus always headed it off.
Just as I said the last time this story popped up: https://news.ycombinator.com/item?id=17542113 People cannot use their intuition built on a western context on China. Unlike western local governments whose taxes comprise of the majority of their funding Chinese local governments collect close to no tax. Their funding comes primarily from money borrowed from other parts of the government which is standard practice and not alarming.
An analogy is like a company whose sales department generate all the cash and the engineering department generates no cash and owe billions to the sales department. Is the eng department in crisis? Obviously not. Still, oversight needs to be exerted over the eng department to make sure that it doesn't overspend or develop projects that are low in ROI... an eternal challenge.
Interesting paper on LGFVs[1] which are "Local Government Finance Vehicles."
If you squint, it looks like an interesting parallel to the lending issues that plagued Japan in the 90's and eventually brought the economy there to a standstill. The monetary equivalent of "vapor lock" in a hydraulics system.
I am the first person to admit that the complexity of bond financing in the Chinese economy really challenges me because it operates on some fundamentally different assumptions about fiscal policy and monetary policy. That said, I'm not sure how they unwind that debt without sufficient domestic demand to keep the system operating.
If they were a third world country they could just devalue the RMB by 1000:1 and then settle the debt with devalued currency, but that option isn't really available to them.
[1] "The Law of China’s Local Government Debt: Local
Government Financing Vehicles and Their Bonds", D. Clarke -- https://sci-hub.tw/10.1093/ajcl/avx036
Here's something that seems simple and I've NEVER been able to get a straight answer to:
If Chinese wealth per capita is roughly 1/10th that of the average US citizen -- both in terms of median and mean -- and if Chinese wages are roughly 1/6th that of the average US citizen -- both in terms of median and mean... How on Earth are Chinese houses on average MORE EXPENSIVE per square foot than houses in the US?
Because you're comparing national average income to non-national housing prices.
The average house is not at all more expensive in China than in the US.
It is true that in particular cities like Beijing or Shanghai the average sits around $7-9k per square meter (divide by 10 roughly for square foot), far higher than the average in the US. (divide by ten roughly for square foot). That's way more than in the US. But then consider these are megacities with a GDP of roughly half a trillion dollars. About half a million millionaires live in Beijing, Shanghai and Hong Kong. These are the top tier cities of the 22nd century's superpower, prices are going to reflect the notion that property in these cities should keep its value and appreciate strongly.
Median wages are already on par in these cities with various eastern-european countries. And income inequality is among the worst in the world, so you've got this small percentage of people who can elevate property prices to ridiculous heights. Only Shanghai and Beijing each have a population equivalent to 25 times San Fransisco, so a few rich people adds up to ridiculous prices.
I'm not saying these prices necessarily make sense, I certainly wouldn't buy there. But it's also not impossible to see why they're this high.
Anecdotally, my wife owns a villa in a fifth tier city (even under another city as a prefecture!), and housing prices there seem comparable to a smaller American city (like say Spokane) of similar size.
The median income in Beijing is around 18k RMB/month. The one bedroom we were renting was 7500 RMB/month, which was considered neither cheap nor expensive...it was definitely cheap for what I was making but then I had to forgo a lot of niceties that I wanted (like a real shower). My rent in the states is much higher but I don't have to worry about the same crappiness that even a high-end Beijing apartment has.
I mean, you aren’t wrong. China just has a housing bubble, it doesn’t really have a housing shortage like SV has. So while housing might be really expensive to buy, rents can still be very affordable.
Still, paying half your before tax income on rent vs, less than 30% is really significant.
You can flush it in most higher residences as long as the toilet paper is soluable. I think the reason binning developed was that the Chinese didn't produce soluable toilet paper in the past, and now the habit carried on (my grandma told my mom, my mom told me) even though the tech has caught up. I'm not really sure about squat toilets, though.
Never drink the water though. Even boiling isn't that safe anymore, just use bottled.
Location, location, location, I would think: With more people and larger cities, there's more "prime" real estate at locations with high potential for economic networking. In this kind of situation, it's only natural that people will spend a greater percent of their income on housing (since the benefits of being at a prime location vs remote location are more stark)
The other factor is that the Chinese government places very strict controls on where rich people can "park" their money- Since they can't take large sums of money out of the country, they have resorted to using local real estate as a sort of gold substitute for stockpiling their $$$.
Because most Chinese people are in abject poverty and shouldn't even be considered a part of the market where those houses lie. The wealth-per-capita should be normalized to the population where it's actually concentrated, for which I've seen estimates circa ~100million.
> Because most Chinese people are in abject poverty
About half of Chinese are peasants, for lack of a better term. Is that 'abject poverty?' They're living primitive lives. I think applying the term 'abject poverty' may be a little inappropriate. Many enjoy a good bit of property, autonomy and are not living drastically foreshortened lives.
> and shouldn't even be considered a part of the market where those houses lie ... should be normalized
Yes, analysis of China is frequently misleading due to the vast peasant population. Unfortunately attempts to correct for this run into a very serious problem; the US CO2 per-capita figure ceases to be a multiple of China for hundreds of millions of Chinese. A highly undesirable result for a number of reasons.
So don't expect that sort of analysis to become a thing any time soon.
Different cultural norm, Chinese are willing to spend 100% of their savings on buying house. And having a house is a prerequisite to getting permission from father/mother-in-law for marriage in Chinese culture.
the prices you've heard about are the top of the top. In many other cities in China, you can get much much cheaper housing. I know a family that just bought a 1500 sq ft, 3 bedroom apartment at the top of a skyscraper for a mere (100K in US dollars) - in Yuans of course. And, there are far more remote areas that are much cheaper than that.
“The U.S. Department of Housing and Urban Development released its annual Point in Time count Wednesday, a report that showed nearly 554,000 homeless people across the country during local tallies conducted in January. That figure is up nearly 1 percent from 2016.
Of that total, 193,000 people had no access to nightly shelter and instead were staying in vehicles, tents, on the streets and other places considered uninhabitable. The unsheltered figure is up by more than 9 percent compared with two years ago.” (To scale, that would be 2.5 million homeless in China which has roughly similar figures: https://en.wikipedia.org/wiki/Homelessness_in_China).
Would you prefer to live in a tent on land you didn't own or in a cave dwelling you did?
From the article you posted it says, “The thriving market around Yanan means a cave with three rooms and a bathroom (a total of 750 square feet) can be advertised for sale at $46,000.”
I imagine that cave dwelling is a thing in many parts of the world and, though traditional, it should probably not be confused with destitution.
“In the last decade, yaodongs have been brought to the attention of scientists and researchers. These traditional dwellings have been regarded as an example of sustainable design.”
The housing market in Australia is very overvalued, having been inflated artificially (in part due to negative gearing - https://en.wikipedia.org/wiki/Negative_gearing) over a long period, also partly attributable to artificially created demand. Although prices are starting to come down in the major cities now (ie. the property bubble has pretty much burst over the last 12 months).
Another difference is that historically Australia has also had poorer quality of housing as well, eg. inadequate insulation (https://www.abc.net.au/news/2017-01-03/why-bad-housing-desig...). But yes we do have some pretty big houses, at least compared to most of Asia, much of the UK etc.
>The housing market in Australia is very overvalued, having been inflated artificially (in part due to negative gearing ...
But in Australia you cannot tax-deduct the interest on your own home, whereas in the US (IIRC) you can. I would expect the artificial inflation to be higher under the US system.
The real causes of the high house prices IMO are: a) poor government policy, from federal to council level, the net effect of which is preventing the market to be adequately supplied with new housing; and b) a range of cultural factors (notably the image of housing as a safe investment, that is being cultivated with increasing desperation by the real estate industry) that results in channeling of investment into established housing.
There was a campaign in Australia to remove the income tax deduction on investment properties as it was cited as the cause of high property prices
What most people ignored is that it would spike rents and cause more short-term harm, especially as lending tightened
Everybody was casting for something to blame and ignored the most obvious solution staring them in the face - an increase of property supply (as you've said)
I could have worded that more clearly. In Australia's case, rules regarding foreign property ownership/investment have historically had a fairly big impact on housing demand, pricing etc. The government of the day is regularly lobbied by those who have a vested interest in seeing prices continually rise to relax those rules. I'll leave it at that.
Housing is a investment vehicle in China. From what I've read, a lot of housing is actually empty and is held strictly as an investment. That implies it is a speculation driven bubble that is going to pop when everything else goes upside down in China. Or maybe the Chinese government will achieve a "soft landing."
I actually looked through a few peepholes (they didn't even have glass, they just had doors with holes where a real peephole might go!) for some of the apartments in the building I was renting in. These units weren't even renovated, they were just concrete shells! The other way to tell is to count how many lights are on during your night walk. First thing you find is that units with windows facing into the complex are usually more occupied than the outer ones (makes sense, noise is a big problem in the latter).
And traffic/parking was pretty bad at that complex, if 25% of the units were unoccupied, I couldn't fathom what full occupancy would actually look like.
The incredible thing is that these homes are often not purchased with debt financing either, and when they do, it's with a much larger downpayment than in the US as required by law. Chinese citizens have a much higher savings rate compared to Americans.
The Chinese consumer has leveraged up considerably in the last decade, to keep up with the rapid price increases in the economy. Their debt to household income ratio is quickly approaching the rate you see in the US. They appear to be making the same turn that the Japanese did from ~1998 forward, in going from being a nation of high savers to low savers and high debtors in a short span of time.
"By the end of 2017, the ratio of total household debt to disposable personal income hit 107.2 percent. This number is above the level in the US before the 2008 financial crisis. The structure of China's household debt has also diversified. Housing mortgages only increased slightly in 2017. ... But other types of loans, especially short-term loans, increased rapidly last year. One reason for this is that families have to seek other ways to finance their home purchases due to the tighter controls on mortgages. "
"China’s household finances look more stretched than those in most emerging markets, though the level of household debt remains less than that in most developed economies, Fitch Ratings said in a report on Tuesday. China’s household debt-to-disposable income ratio, a gauge of indebtedness, has jumped 9 percentage points every year since 2015, driven by mortgages and other consumer debts. If left unchecked, the ratio could hit 100 percent by 2020 versus 82 percent at end-2017, Fitch said. That would put China on par with the United States and Japan, whose household debt ratios are estimated to be at 105 percent and 99 percent, respectively."
"On the back of a boom in property prices, household borrowing has been climbing for 10 years straight, at a pace that rivals any such run-up in major economies. At $6.7 trillion, and a record 50 percent of gross domestic product, private debt is now approaching developed-world levels and crimping consumer spending power."
To me, everything seems to point China's current situation mirroring almost perfectly Japan in the 90s. I must be looking at things wrong. It seems like no one is betting on it.
Umm after 2008, the investors in mortgage backed securities didn't take a loss. Their securities were purchased en masse by the Fed via Quantitative Easing programs - about 4 Trillion worth.
Edit: it might be interesting to see if there is a recession in China (or globally), how the central bank there might respond in contrast to QE schemes that the US and European central banks used.
Many investors in mortgage backed securities lost quite a lot in 07-09. Your statement is false. The fed bailed out the big banks but smaller players wrote down many positions to 0.
Sure, not every dollar of every mortgage backed security was rescued in that way. But the imbalance you reference was yet another way that the rescue really didn't set up the economy for a healthier future - especially larger sophisticated investors were rescued, and both smaller players as well as many people bore the hardest hits.
Houses in Tokyo once were considered expensive globally, but currently prices in Tokyo are only about 28% more expensive than in China on average. Japan on average is cheaper than China. And Tokyo compared to Shenzhen is only about 13% more expensive.
But wealth is about 2000% higher and wages are 440% higher in Japan.
No private property rights in China, correct, it's 99 year leases. This is why rich Chinese use their money to purchase assets (including real estate) overseas.
I'm curious about the no property taxes comment though - does that refer to China or Japan? I thought China had taxes on everything, including property.
yes, but functionaly it's the same thing. "Ownership" in other countries is just a legal construct. It's not like you can do whatever you want with it. There are countless rules and regulations you must follow - you can't build on it or touch in anyway without getting permits and your "property" can be confiscated if you don't pay taxes on it. So, I would argue no property rights with 0 property taxes is more like true ownership.
Who's buying these bonds? I'm assuming it must be mostly Chinese investors and financial firms?
Also, does it ultimately matter with an economy as productive as China's? Other commenters are comparing it with Detroit, which has lost most of its tax base, so I'm not sure that's a fair comparison.
And, if they are state run funds/bond issuing, than isn't it roughly equivalent to any other kind of monetary stimulus? (genuinely asking, this isn't my area of expertise)
It seems like a lot of Chinese cities have equal to or greater debt than Detroit. How bad this is depends on the tax base of said cities and how the debt is structured, but it’s eyebrow raising at best.
As far as I understand, a lot of valuation of the risk in muni bonds is based around the assumption that municipalities won’t go bust together at once. It’s this way in the US. This let’s someone spread their money safely, in theory.
The Chinese economy is so export and manufacturing dependent, it wouldn’t surprise me to see a lot of cities go bust together at once if the economy shrinks. They have very little other economic activity to fall back on.
For my part, I think any good usage of debt requires transparency about the amount and purchase. Any entity, private or public, that tries to hide its total debt load is suspect at best. I would expect such an entity to have other hidden debts, and possibly be leveraged to an insane degree, hence the privacy.
China builds ghost cities and also tears down cities and combines them into new ones. They also have built bridges 26.4 miles long miles long over water (Jiaozhou Bay). Just the materials alone must cost a great deal even at the reduced prices the Government pays and the low wages for employees. Not to mention the huge Government security surveillance and incarceration system. China chides the USA for it's foreign wars but China is at war with it's population to control them, the cost must be similar or higher.
Please do not treat all infrastructure projects as money blackholes.
I'll just contribute a little bit about the Jiaozhou Bay bridge. My grandparents live near there. It actually makes much sense if you take a look at the map below:
Basically, Qingdao is already a mega city with over 6M population in urban area. But it just cannot expand because it is located on a peninsula (similar to San Francisco) with its back facing a big mountain. So it's kind of natural to expand on the other side for more and cheaper land. So to reach the other land, options are:
1. Connect the tip of the peninsula to the other side. This is shorter but you're connecting city centers together (Brooklyn-alike), which doesn't work well for cargo traffics (Qingdao is also a major seaport). Actually this tunnel is already built and many people use it for commuting.
2. Connect the seaport area inside the bay to the other side. This is what you mentioned. With that, cargo can reach factories on the other side in a faster fashion without crossing the city center.
3. Improve the highways around the bay to handle increased demand. First it's a lot longer, which is something you cannot change. Second it's not cheap either given you need to get more land and might need more time.
And 2's price tag is not that high (roughly the same cost as San Francisco - Oakland bay bridge). If you were the decision maker, would you want to build it?
BTW, with 1 & 2's open, the other side already officially became part of Qingdao metropolitan area and cross-bay subway will open this year.
For the bridge I am saying it is a big infrastructure project and must have cost a lot of money. I am fascinated by the Chinese ability to just point and create amazing things but...
I am not sure where are the money comes from and I am afraid if everything comes crashing down for China they will go the military route and turn their economy into a military economy then take the whole 9-dash line area by force (as a keep people busy jobs project). I feel the 9-dash line thing is fake and designed to be able to stop shipping like we can stop oil coming out through the middle-east closing by closing shipping lanes.
China's incarceration rate, including people in detention centers and at least if you believe the numbers cited by Wikipedia, is less than a quarter of the USA's.
Putting "gamer addiction" re-education claims to one side – these are all about mass Muslim internment based on a UNHCR report, the same UNHCR that the US has quit calling it a, "cesspool of political bias"[0].
I mean, if the US doesn't consider it a credible organization, and if your sources are the Saudi owned AlArabiya, the Murdoch owned WSJ, and Bill Kristol's Weekly Standard then why shouldn't I believe what I read in the Irish Times?[1]
""
China blames anti-China forces for the criticism and says Xinjiang is under threat from Islamist militants. Foreign ministry spokeswoman Hua Chunying said the UN experts remarks were “without factual basis” and said that Chinese people’s satisfaction with Xinjiang’s security and stability had risen dramatically.
“The policies and measures in Xinjiang are aimed at preserving stability, promoting development and unity, and improving livelihood,” Ms Hua said.
In a letter to The Irish Times on August 27th, a Chinese embassy spokesman said measures taken by the local government of Xinjiang, “are in fact continuous actions supported and embraced by all the people in China fighting against terrorism”.
""
and
""
There have been terror attacks by Uighur separatists in China, including an attack in 2014 where a group of Uighurs attacked Kunming train station with knives and killed 31 people.
Beijing says there are links between Uighur separatists and fundamentalist Islamist groups. Uighurs have fought with Islamic State and the al-Qaeda affiliate group Jabhat al-Nusra in Syria.
""
You don't oppose a government's efforts to counter radical Islam, do you?
It may have been a bit subtle but I was implying that if one opposes the Chinese government's method of dealing with Radical Islam then one ought to oppose the US solution in the Global War on Terror which is boots on the ground and bombs from the air – in what?, 15 countries with combat troops and 7 countries with air & drone strikes at the moment. If, however, one supports US intervention in these places then one ought to support the Chinese in their methods. To support one and not the other is jingoism and misplaced patriotism.
A big difference between the USSR and China, and the overall situation is the wars are now no longer about invasions, military and colonialism. But about economy and intellectual might.
As a matter of fact China not needling into military affairs is a huge disadvantage for the US.
One of the underlying themes of Donald Trump's campaign was to convince people regular politicians can no longer stop China. Because China is fighting it in an arena very different to what the US is used to fighting since a century.
US also has a lot more assets though and is an already developed economy. China’s economy will inevitably slow and for an emerging market, their debt is significant. Also, this is only local Chinese debt and not even the full picture for that. According to nationaldebtclocks, China govt debt is $5.2 trillion on paper but they suggest multiplying by at least 3.25 to account for shadow banking not on the official ledgers and local govt debt the article was talking about.
The US has a debt problem but it is nothing compared to what the article is speaking of. The US has tons of assets, a low tax rate (which could be raised in the event of a debt problem) and a pretty resilient and diverse economy. China is not a diverse economy and have tons of black pools of debt.
It seems to me that China is riding easy money and sinking it into tangible assets that, beyond default, are at least usable and semi-permanent. You can't unbuild a bridge and get the money back. It may collapse in the future, but not before reaping benefits for the economy where it's sitting.
Something is seriously wrong pretty much everywhere.
We are at the end of generations of solving one bubble collapsing by inflating another one. There is a lot of money on paper. But in reality there are three main places where money can go.
1. The USA, which has been effectively printing money like crazy with low interest rates since 2008. This has been transferring wealth from the real economy to the paper economy.
2. Europe, whose common currency is unsustainable without political integration. There is no general support for political integration, and no reasonable way to untangle the common currency. (Plus Brexit will be a disaster.)
3. China, which has the largest asset bubble in history. When it pops they are likely to wind up in a deflationary spiral, like the one that Japan has been struggling with for decades since its real estate market collapsed in the early 90s. Our last deflationary spiral was during the Great Depression.
Of those options, investors see the USA as the least bad.
And add to the confusion the fact that inflation remained quite low. So this money really went straight from central banks to financial assets, without ever reaching the pocket of general consumers.
At which point does all this madness stops ? Whenever a new economy emerges that provides more sanity and so drains the inflated assets, i suppose ?
A more sane economy is unlikely to outgrow the existing (at least one paper), so that isn't a viable route out.
What's left is that some day, one of the financial disasters turns into a real collapse. We're talking a sufficient run on the banks that people stop believing that banks really have money. The last time this happened was 1933, and it was resolved by FDR closing all banks, auditing their books, deciding which to save, and then opening them up again.
Given our tighter electronic integration these days, the complications are likely to be greater. Think credit cards being refused, ATMs not working, and general chaos. For values of chaos that include people not knowing if their employers can pay, or how to buy food in supermarkets.
The possibility of that happening was the nightmare scenario that was used to convince lawmakers to pass TARP a decade ago. And it is a nightmare with a low but non-zero probability of happening each crisis.
Unfortunately every time we face that threat and successfully get rescued the markets become more convinced that big players will be rescued the next time as well. Which encourages more extreme financial brinksmanship and makes the next crisis more likely. That phenomena is called "moral hazard". See also "too big to fail".
Money is both a medium of exchange and a store of value. The "medium of exchange" function is traditionally represented in accounting with the income statement - it's a measure of how much money changes hands in a given time period. So a company's GDP measures the total value of all transactions performed within a year.
The "store of value" function is traditionally represented by a company's balance sheet, which is a measure of how much value has been accumulated at a particular instant in time. So when local governments in China have $5.8T in debt, that means that some other entity has previously loaned them $5.8T, collectively, and at some point in the future, has a claim on that. Note that this time period might be very long; it's not unusual for debt terms to be 30 years (eg. with T-bills or mortgages). Note also that everybody's debt is somebody else's asset; for example, you could have $5.8T in debt where each local government just deposited their working capital in a bank in the next town over and borrowed from the town to the other side, with no actual outside holders. (This is actually fairly close to the situation with the U.S. national debt, where 50% of the debt is actually owned by other portions of the government - notably the Social Security trust fund and Federal Reserve - and another 10% is owned by state governments.)
Here's a classic parable that illustrates the difference:
As an engineering with an accounting degree, it is rare that I get to point out that this is fairly well understood by the bean counters. I'm not saying that you are wrong, but I think that we can simplify it. Once you get a handle on what accountants do (although I think many people just assume they hide stuff!), the parable becomes a non-problem.
If you take first year accounting in school, you'll find out that balance sheets are simply a static representation of your asset, liabilities, and retained earnings. Retained earnings is basically the difference in what you owe vs what somebody owes you.
In very, very simple language, balance sheets add everything to show your wealth. I think this is a bit simpler than "store of value," but basically says the same thing. Or, as my accounting professor, and probably every accounting professor likes to say, "they are snapshots."
Now you can say "but money can be used as a medium of exchange," but I think this really adds complexity. In accounting 101, we simply say income statements show the path by how those quarterly balance sheet snapshots change. If you balance sheet change, it is because some activity happened. Now we don't normally say "medium of exchange" for income statements.
Instead, we simply write the steps of making money, which is as follows:
Revenue = What you sell
-COGS = What it cost you
-----
=GM =The results in after the sell
-SGA&RDA =What you paid your employees
------
=Net Income = What you made
You then add that profit to the balance sheet (less taxes and one time events). Your income statement bottom line perfectly shows up as a change in your retained earnings. So they are perfectly tied together.
The "classic" parable that you linked simply misses the point of accounting 101. In the parable, they talk about the "debt" that mysteriously goes away because a stranger comes into town and basically lends a $100.
This mystery is not new, and is well understood in accounting, and this is why we have "double entry" bookkeeping. This "paradox" was noticed by various cultures around 800-900 AD. However, the written rules was done by Luca Pacioli, a friar, in 1000 AD. To make it clear what actually happens, Pacioli pointed out that every transaction is both a lending and obligation to payback. Therefore, Pacioli said that all financial transactions have to be recorded twice. So, all of his ledgers recorded transactions on the left side of the T-ledger and on the right side of the T-ledger. Double entry bookkeeping was invented, and a thousand CPAs found lifetime security.
Thus all transactions generated a "owed something" and it was recorded on the left side of the ledger, which was something owed or latin debitum, or what we call "debits" today. Each debit entry must be also recorded on the right side with an offsetting entry of the same amount, or what you believed would be paid back or creditum (trust) at the same time. Both sides need to equal zero.
Thus if you were a bicycle store, and if you had a $800 bicycle (price you paid) on your balance sheet, and if you sold it for $1000, you would debit your cash by $1000 (add it), you would credit your bike inventory by $800 (remove it), and you would add the $200 profit to your retained earnings. (Well sort of. In your bicycle store, you probably had to pay employees, which would have been taken from the $200 profit, but I'm simplifying.)
In the "brain teaser" that you linked, they only do single side entry, which makes it look like everybody is in debt and was down $100. This is not true. Everybody in town both had "owed something" but also an offsetting "trust of being paid back." These two sides equaled zero. Before the $100 was circulated, everybody had a net worth of zero, and afterwards everybody had a net worth of zero.
With double entry, everybody in town would have recognized that everybody had an offsetting credit for the debit. Both before and after the exchange their net worth is zero, thus no change.
But this is an old thread, and I'll be typing this probably to myself and nobody will ever see it. However, I feel better for explaining it.
Thanks a lot for that explanation. I already knew about modern accounting (with a left and a right side), but it never occured to me how it was used to solve the scenario mentioned in the brain teaser of the parent post.
60% doesn't seem that bad. Compare USA: 82%, UK 78%, Italy 120% etc. And at least China is still growing fast unlike say Italy which does have some issues.
When I look at the jump in defaults this year, all I can think about are all of the home loans people stopped paying in the lead up to the mortgage crisis and how they were systematized into the rest of the economy by securitization. If China's system was built around those so-called "implicit guarantees for debt," isn't it due for a similar or more severe correction?
It seems like the same story--different sector and different culture, same greed and assumptions.
Can anyone please do an explain like I am five on this? The article assumes lots of background which probably is fine considering their target audience.
I believe China is about to tank as hard as the Russian empire. There is going to be a revolution. What the trigger will be remains to be seen, but it can be just about anything. Most likely it will be something within that we see as inconsequential.
The chinese gov prints money electronically and buys the bad debt off the banks and the banks keep lending. We don't do this in the west because the government has to borrow money to create it and sticks the taxpayer with the bill. The cognitive dissonance on this is astonishing.
Wouldn't they just take whatever they need from the citizens and then make the numbers say whatever they want? Any objections from the citizens would be put down or censored appropriately. Seems like a no brainer for China.
I have always found the idea that we in the US shit on China's accounting practices rather hysterical.
If "The pot calling the kettle black" ever applies it is for that.
Chinese nationalistic fervor however may give the population the incentive to outlast Americans on the pain of the trade war. Hard to tell, but US is politically divided while China appears more unified at the moment.
You say "stagnation" like that's the worst thing that could possibly happen. My fear is that the next 10-20 years will make us wish we had a stagnant economy.
Indeed. Financial implosions tend to have bad effects on the political system. If this situation does lead to financial problems the effects probably won't just be limited to China.
> Financial implosions tend to have bad effects on the political system
This is the primary driver behind my suspicion that some form of financial crisis the US economy has begun, but it's not yet visible when people look at the fundamentals. Unemployment is great, wages are rising, assets prices are growing, etc.
According to the indicators, the economy is as healthy as it can be. But our political situation suggests something is awry, people are way more pissed off than they should be.
I meant them to be the indicators listed immediately preceding that statement.
You can't deny that most people are saying the economy is doing very well. Unemployment is low, wage growth is happening, large business profits and revenues are up, manufacturing activity is high, retail sales are the highest they've been.
Just about every economic indicator captured by the US Census Bureau is very strong. But people are still pissed the fuck off.
It's possible that people being angry and the economy are not connected. We've never been able to communicate as fast as we have in the past. Right now we live in a culture of "what to be outraged about next". Best thing to do, is not participate in the toxic culture.
One of the first things Trump did in office was set us up for a massive debt crisis in a couple of years. Same thing George W. Bush did in fact. It worked perfectly, Obama was harshly criticized for running such a massive deficit, and the Congress took the opportunity to sign pledges and cut social programs and blame the president. They generated a ton of anger at the government for the fiscal irresponsibility and for saving the too-big-to-fail banks (effectively creating the Tea Party that handed the Congress to Republicans). No reason to think it won't work again. Even better is that it funneled trillions of dollars to the 1% in the process. A win-win-win.
>“I think we are going to have a dollar crisis—you think the Turkish lira looks bad now, wait till you see when the dollar is imploding and we have a sovereign debt crisis in the U.S.,” Schiff told the Post. “The U.S. government is going to be given a choice between defaulting on the debt, or else massive runaway inflation.”
And people call me crazy to think BTC is going to perform better than USD over 10 years....
Not exactly a Trump supporter, but he got elected in 2016, which makes it, well, about a couple of years back from now. So where is the massive debt crisis you are talking about?
The Bush tax cuts began in 2001. The effects depend on who you ask, but the non-partisan Congressional Budget Office "estimated in June 2012 that the Bush tax cuts (EGTRRA and JGTRRA) added about $1.6 trillion to the debt between 2001 and 2011, excluding interest." Of course, the financial crisis and subsequent government stimulus didn't come until 2008. [1]
Meanwhile, the Trump tax cut "increases the total projected deficit over the 2018–2028 period by about $1.9 trillion" after accounting for tax-cut-stimulated GDP growth, according to the CBO. [2]
For all we know, we could enjoy another 2 (or 6) good years before it all comes crashing down in 2020 with a Democratic president in power. Or not. If I could predict the future, I'd probably have better things to do than respond to Internet comments.
Right, the seeds are sewn, all we have to do is wait.
The President and Congress ignored the CBO predictions publicly, because privately the intended purpose is to facilitate another debt crisis, as that is the only way to cut popular social programs.
> The federal deficit ballooned to $779 billion in the just-ended fiscal year — a remarkable tide of red ink for a country not mired in recession or war.
Do what other economic immigrants do. Move to a high growth country.
At some point, a lot of us in the US will be asking:
"Is a trillion dollars in interest payments every year, with social security cuts, medicare cuts, bad school funding, high taxes and abomination-level healthcare costs worth it?"
Or you could treat this as something other than a fait accompli, make sure your voter registration information is up to date, and vote on November 6. https://www.vote.org
Vote how? Both parties [with a chance of winning] will increase the debt. The exact amount will be different, as will the exact things they spend money on, and how/if they change taxes. However both will continue to spend more than they take in and blame the other party.
This is nonsense considering the last time the Democrats controlled the budget that wasn't also during the worst financial crisis in decades, they balanced the budget.
Not so fast. In 1993/4, Clinton had a plan to cut the budget, with the bulk of the cuts set to happen after he left office, even if he had two terms (which was not a given then). Then the Republicans took Congress in 1994, and they basically starved Clinton of money, and the result was not just a balanced budget, but a surplus. But Clinton doesn't get the credit - he wasn't going to do it on his own. Congress forced him to.
For that matter, the previous Democratic president to balance the budget was Andrew Jackson, so don't act like the Democrats are the party who balances the budget.
But Republicans only seem to care about financial prudence when they're not in power (or at least, not in the White House). If you actually care about a balanced budget and financial responsibility... the US may not be the right country for you. (Maybe Switzerland?)
Republicans only care because it’s a wedge issue to get elected. But you are correct, they are the party of hypocrisy. The real problem is that nobody cares and that not enough people who do actually vote.
LBJ was the only President since WWII to actually reduce government spending in a given year.
Carter made the tough call of appointing Volcker and taking an economic hit to fix the inflation problem.
Bill Clinton did in fact leave office with a budget surplus. He deserves at least 50% of the credit, maybe more, for keeping the government running effectively while being starved by the Republicans.
Obama inherited a record deficit and economy in free-fall, he still managed to cut that deficit in half.
I'll take that record on deficits over those of Reagan, GWB and Trump any day.
Because he made huge cuts to social welfare programs as he was required to do in order to get a budget passed through a heavily Republican congress. Taxes were also raised and military spending was held steady throughout the 90s.
Yeah, but at least Democrats generally seem to get that you can't pair big spending increases with big tax cuts. Republicans don't seem to have figured that out yet.
McConnell is all over the news today saying the big deficit increase just announced had nothing to do with the tax cuts or the big increase in military spending. He's trying to blame it almost all on not cutting social security and medicaid.
Both parties like to drive toward cliffs, but the cliff the Democrats drive toward is farther away. I'd rather not be driving toward any cliff, but if I have to I'd prefer the farther one--that gives more time for someone to figure out a better course.
> Yeah, but at least Democrats generally seem to get that you can't pair big spending increases with big tax cuts.
That's gonna need citations. The way I see it, government spending has ALWAYS been increasing and taxes as well. Maybe both parties should stop sending money to countries for foreign aid and start paring back spending.
note, this is from 2012, but still relevant because the upward trend is still happening.
OK, let me revise that since I can't actually say that Democrats "get" that you can't pair big tax cuts with big tax increases.
However, for whatever reason, Democrats don't seem to do big tax cuts coupled with big tax increases. In fact, I don't see offhand any major Democrat Federal tax cuts since the '60s (Johnson administration).
The truly important thing to realize is that the 10y yield has fallen back to 3.15% already.
What this tells us is that no matter how much debt we rack up, the rest of the world will fund our profligacy at whatever bid we demand not only at auction, but in secondary markets as well.
No matter how much we anger China or KSA, they will buy our debt at any price, at any coupon, and beg for more. And of course our allied central banks like ECB, BOJ, SNB, will always be there at our beckon call.
Politicians know this, and so they are not overly concerned with deficits. Given human nature, I wouldn't count on any politician, R or D, to care even the slightest bit about this until the rest of the world bothers to demand a non-negative real rate of return on their investments.
This is somewhat tone deaf considering the difficulty level of migrating to other countries unless you are exceptionally skilled. More likely, the outcome will be (rightfully so) revolt.
I hear you and that's the dire situation. Our whole economic system caters to stock owners while the vast majority of the population is not (and should not) be invested in that casino.
But we (average citizens) vote to keep making the rich richer and then complain that the rich get richer at our expense? Something is off and most people don't even know it.
May? Well do they have it or not? So sick of these clickbait nonsense.
If you want to know why bloomberg and financial "news" is a joke and a waste of time. Nobody in the industry takes them seriously. Only the masses who don't know better think this is news.
There's more but you get the idea. I guess eventually they'll be right. Wish they'd throw in a "ghost city" or some other china doom story for variety.
Well, the debt didn't just magically pile up in the last two years - it's just reaching alarming levels in tough times for the country (deleveraging, trade war, worsening international relations).
Please keep generic ideological flamewar off HN. It's extremely tedious, we've all heard it a zillion times, nothing new will come of it, and therefore it's off topic here.
Try Hosking's The First Socialist Society: A History of the Soviet Union from Within.
Mind, it's just an intro. And its not a happy book. But one doesn't need to exaggerate or parrot shallow condemnations of a part of the world that had its triumphs as well as its tragedies.
Cool, I haven't seen that one. I'll look at some reviews. It's easy to allow biases to creep into one's thinking when the only books on socialist history one's read were written by people like Bo and Solzhenitsyn. Those were "histories written from within," too, but they neglected the bright spots like pioneering work in certain scientific and technological disciplines.
My understanding (and, yes, my bias) is that those few bright spots in Soviet life weren't worth it. We might disagree if, for instance, Hosking extols the fact that the Soviets were first to feed, clothe and house their entire population, because I don't agree that housing a large fraction of them in prison camps while exiling another is a valid solution to that particular problem.
As an additional example, my thinking is someone, presumably the US, would have been first to launch an artificial satellite in the absence of Sputnik. Someone, again presumably the US, would have educated and encouraged the first female astronaut. It's true that we missed out on those 'firsts'... but how many opportunities did the Soviets miss because the prerequisite researchers and teachers died in a gulag somewhere for purely-ideological reasons?
Am I overlooking any other instances of triumph mentioned by Hosking?
Anyone else notice Bloomberg's negative focus on China lately? With that "China Hacking Chips" piece where Bloomberg never backed it up with any evidence and the companies said it was fabricated. Does management at Bloomberg have an agenda against China or is this just reflecting what the people want to hear?
Not really recent. I read Bloomberg often and don't notice a concerted effort to make China look bad. Negative stories come out regularly and not infrequently but that should be considered normal. There are just as many non negative stories and quite a few positive ones as well. What I will agree with though is that the negative ones have a way of making their way to HN while the positive ones don't. That's really disappointing but that's what HNers up vote so would not blame Bloomberg for this.
In my head I see the typical HNer as a scared American, being comforted by the powers that be, that they will be able to retain and improve their quality of living by the imminent collapse of their "predatory enemy".
Relax. It's just another country, with a different system, which is managing to improve the quality of living of millions of people, within and outside China.
I ask the same question. As far as I'm concerned, Bloomberg has lost all credibility due to their horrible covering of the "backdoor" implants.
Remember that implant they found about a week after the main Chinese implant story broke? "Chinese Implant Found In US Telecom"
Yeah, that was an NSA backdoor (FIREWALK) that was discovered, not Chinese. Good job Bloomberg.
https://en.wikipedia.org/wiki/NSA_ANT_catalog#/media/File:NS...
Pure speculation on my part. I'm just putting the pieces together in a way that makes sense to me, so take it with a grain of salt.
However, my conclusion is based on how the reporting on this is being done, and the fact that we already know that the NSA has backdoored the entire telecom industry, or close to it.
When every statement says "we do not allow governments direct access to servers"...well, what's the logical conclusion? Indirect access, via hardware backdoors, that were leaked and are now widely known to exist. To me, it does feel like there's a wave of 'Blame China' right now, and that maybe Bloomberg is being disingenuous with its reporting on this, if there's even a story to report.
There was an article on HN last week on how Bloomberg pays more to journalists who write stories that "move markets". Seems to be a lot of market moving articles recently. Excuse me while I go back to my corner with my tinfoil hat.
I think this is kinda funny. Talks about this "hidden debt", talks about the huge debt the USA has, and so on and so on. And what happens?
In the end, I really wonder if any of it actually matters. The people suffer because of this magical, invisible money, sure, but only because we let it matter.
Long term, I don't think it matters in the end, because governments will try to prevent any sort of huge collapse (which will happen anyway, but will recover over time).
In contrast to state governments in the U.S., most local governments in China are forbidden to borrow money directly.
Historically, land sales have been a large revenue source for local governments, but since the global financial crisis this revenue source has diminished. Yet local government spending, especially on infrastructure investments, has accelerated...
Detroit filed for bankruptcy with debts of $18 billion on July 18, but this is the average amount of debt for many Chinese cities. A 2012 audit of 36 local governments found $624.6 billion in debt -- suggesting there are at least a few Chinese cities with debt equal to, or in excess of, the $18 billion that sunk Detroit.
So the news is that what was understood to be ~$625 billion in debt six years ago has turned into $5.8 trillion in debt today. Which is, like, 322 Detroits.