China's outlook from McMaster

[0R0 + 6,251]

1 hour ago, Marcin2 said:

Again Sun Tzu: Appear weak if you strong, appear strong if you are weak. China is not critisizing or argumenting with Western claims that China is weak. It is the deliberate work of CCP Propaganda Department.

 

That was in Deng's time and was what Gave points to, in that the Ministry of Propaganda did not counter the claims of the China bears like Jim Chanos. They didn't start faking their overall numbers in a systematic bias till 2013 when the wheels were shaking. Since then, the propaganda value of the numbers and their departure from describing the Chinese economy have increased, even births are systematically inflated. They didn't start countering claims of fake numbers and arguments of their weak economic prospects till just these past few years. They didn't mind leading Chinese academic economists presenting their economic dirty laundry till 2018. Those people retained their positions after publishing scathing criticism of CCP policy and continued with the publication of negative estimates and forecasts. They don't anymore. Now many of them suddenly go silent.

The troll farms that were ignoring bad China economics discussions are now intruding into the investment and economic forecasting forums where these issues are discussed. Just as their silence indicated a Deng like silent progression, their loudness and denials today indicate a fear on their part that their economic unraveling becomes public knowledge and accepted consensus. 

[Marcin2 + 726]

I do, but it often needs too much of effort from me so I skip. Plus I am numbers guy, all the reality are just numbers, I do not feel confident with words.

"I have been doing economic analysis for financial market forecasting for 20 years. The perspective is from a quantitative adaptation of Austrian school economics, and the structure of debt and monetary balances (rather imbalances). I point out financial and economic statistics and demographic factors and you never react to the content.  "

 

Demographics: In economic development China is just South Korea in 2002-2005 or Japan in 1990-1995. Gavekal and McKinsey told me so, and I checked metric later. I know you are smart but I do not understand you being stubborn about vulnerability of Chinese banking system. Of course they had problems with bad debts in the past. They are hiding bad debts to state owned companies now, but at the end of the day this means nothing cause these are just accounting entries, no real flows are in the economy. I think that with current automation (largest consumer of industrial robots I am writing from my memory but it is in the range of 35-40% of global consumption) they are going along SK and Japan path, and they still have too much labour resources, outside of cities and in migrant, fluent workforce without hukou, last I checked 270 million.

I am a big fan of Vincent Gave and his company. But the straight line analysis he provides along with his coleagues you mention are a clear case of relying on the well documented past for the statistical projection of the future without considering basic cyclical and demographic factors and actual leverage statistics that are hidden by the PBOC rather than published. His statistics of home ownership and sqft/capita vs. GDP/capita are very striking but miss the point that the values are in the Tier 1 cities while the volumes are in the low tier cities. Where occupancy in Tier 1 has remained in the 96% range till just recently, it was falling and continues to fall in Tier 2 and 3 cities and is below 75% as of 2017 and likely now at just over 70%. The recent building boom in Beijing actually managed to finally lop off the occupancy rate from >92% to >86%. 

He is very smart. sqft/capita data are amazing for all of China. It is 40 sq meters/capita in cities and 50 in rural areas. It is better than Poland and China was starting from  10 sqm/capita in cities.

I do not know occupancy, but per your numbers it is really high.

"You keep insisting that only the numbers that China reports to official institutions are to be trusted, while the literature is saturated about how those are fake and how the gap between reality and the reported numbers keeps rising over this decade. The financial data obtained by GNS' Malinen, Kyle Bass, Brian McCarthy and Zeihan on the shadow banking system and the analysis generated from the forex administrator in China, SAFE, somehow don't matter and the doubtful statistics from China mysteriously gain superior value.

The leverage ratio in China is >>280% of GDP even by available numbers, as state bank's participation in the Shadow banking sector is recorded and provided by the PBOC, which brings China into the 330% range. But the big deal is the enormous credit impulse of 2016-17 and the resulting stepwise increase in real estate values and volumes. 

I should say that since you never quote significant data and post no sources I do need to go check what you are talking about. Then I find the stats and they essentially stick "orange" labels on grapes and count them all as equal to come up with aggregate numbers of "oranges" and "equivalents". 

OK, maybe I should quote the sources, I will try to do it. Yes major sources are Chinese. Yes they could be fraudulent, but I am trying to utilize the once that are difficult to manufacture. Bad loans rate is easy to fraud, but banking system asses or overall debt is difficult. why should they.

But I am not that sure whether some data are correct. Maybe I should consider more what you write about these numbers.

"While the huge numbers from China appear to impress the consensus analysts, it does not impress the stock markets, and China's stock markets are stuck in a post bubble plateau, propped up by perpetual stimulus. That is because Stock values weigh net margins and place discounts on the relative values of outputs vs. inputs. Those have been declining since the Shanghai market bubble popped a few months after the great financial crisis started.  Stock market is overestimated in China. They are typical continental not Anglo-Saxon economy. Bonds 9 trillion Us dolars, and bank loans (30 trillion ?) are what counts. Capitalization of Chinese companies does not matter as 40% of the market is owned by government, and large % by private owners, employees. Market does not have US liquidity.

 

[Marcin2 + 726]

1 minute ago, 0R0 said:

That was in Deng's time and was what Gave points to, in that the Ministry of Propaganda did not counter the claims of the China bears like Jim Chanos. They didn't start faking their overall numbers in a systematic bias till 2013 when the wheels were shaking. Since then, the propaganda value of the numbers and their departure from describing the Chinese economy have increased, even births are systematically inflated. They didn't start countering claims of fake numbers and arguments of their weak economic prospects till just these past few years. They didn't mind leading Chinese academic economists presenting their economic dirty laundry till 2018. Those people retained their positions after publishing scathing criticism of CCP policy and continued with the publication of negative estimates and forecasts. They don't anymore. Now many of them suddenly go silent.

The troll farms that were ignoring bad China economics discussions are now intruding into the investment and economic forecasting forums where these issues are discussed. Just as their silence indicated a Deng like silent progression, their loudness and denials today indicate a fear on their part that their economic unraveling becomes public knowledge and accepted consensus. 

I did not know about this. Maybe I am really CCP "useful idiot". Please give some links, I am not checking your credibity It is for educational purposes. They would be also beneficial for other readers.

[Marcin2 + 726]

3 hours ago, 0R0 said:

I am not making the argument that they would go to war. @Wombat is the one making the argument that China will have to have its navy sunk in order to prevent a later war when it would have equivalence in technology and capacity and can actually back up its aggressive and loudly expounded expansion plans with an actual navy to enforce it. They are not waiting for the US. But have joined US exercises. 

I am of the opinion that the tradeoff for China to engage in actual war now is equally as bad as it is for its "trade partners" that are decidedly not anywhere near friendly with China that claims that they will be its vassal states. That was the point of putting up McMaster's piece. China has blusteringly bloviated in regional political forums demanding acquiescence of its neighbors to China. It has been actively bullying them all with its military and commercial activities. It has no such things as regional friends.

Your  observation is precisely inverted to historical reality. It is heavy trade partners that go to war with each other. Not nations with nothing to do with each other. It is in order to secure those suppliers or end markets that they go to war. 

 China is nuclear power. I do not believe they have 280 warheads, I think 1,500-2,000 hidden in 3,000 km tunnels, again Sun Tzu. Maybe it was in the past, that heavy traders gone to war, but due to them being neighbours. At present I think that people to people contacts and Japan in 3 months nuclear power if needed (they have weapon grade plutionium 30 tons if I remember well, did not want to get rid of, even that US insisted, they have their missiles) and China nuclear power is sufficient deterrent.

I do not believe in war, I believe in China decoupling:

US and whole of North and Central America,

EU,

East Asia,

Australia, NewZealand,

India

Middle East

This is enough. 2.5 billion people and 50% of global GDP.

But US need to lose battle to win war. Do not fight with EU or Middle East. Please treat them like equal partners for 3 years. This costs US less than 100 billion a year. they are not equal partners but they are proud. Lead crude oil cuts. Make bail out program for US producers. And insist that SA and Gulf decreases production by 10 m bbl/day.

Well they are barely profiting with current prices.

Edited May 4, 2020 by Marcin2
typo

[0R0 + 6,251]

58 minutes ago, Marcin2 said:

Demographics: In economic development China is just South Korea in 2002-2005 or Japan in 1990-1995. Gavekal and McKinsey told me so, and I checked metric later. I know you are smart but I do not understand you being stubborn about vulnerability of Chinese banking system. Of course they had problems with bad debts in the past. They are hiding bad debts to state owned companies now, but at the end of the day this means nothing cause these are just accounting entries, no real flows are in the economy. I think that with current automation (largest consumer of industrial robots I am writing from my memory but it is in the range of 35-40% of global consumption) they are going along SK and Japan path, and they still have too much labour resources, outside of cities and in migrant, fluent workforce without hukou, last I checked 270 million.

 

The fact that your financial system has piggy bank lending to piggy industry guaranteed by piggy government's printing press and providing piggy employees mortgages to live near piggy bosses does not mean that the accounting means nothing. Pig on pork accounting is used to hide losses and transfer hidden risk to unsuspecting investors. Like a Ponzi scheme, it all works out fine till the cash flows break down and the incoming flows don't cover the outgoing flows.

In China the incoming flows are the savings of older folks at the peak of their earning power nearing retirement. They will retire and start drawing funds instead, so the flows will gradually shrink as the  savers to retiree ratio rises. It passes 1 in 2025 IIRC. and slowly turns negative into 2030 and then crashes. That is when outflows from the financial system increase beyond inflows. So the financial system has to obtain cash from the operations of its investments (only 60% are above breakeven at any time this decade except during the 2016-17 bubble) which it can't. So the hole in unpaid interest will have to be coupled with the hole in net savings flows to have them bankrupt the financial system, or have them plugged in with money printing. However, you are no longer having net savings on the other side, so that money is being spent while the people drawing it are not working so no production output to balance the new money. Thus you have inflation (concentrated in foods, necessities and medicine). Once you have inflation you get a reduction in the purchasing power of ALL savings so you have made your general demand (rent, cars, furniture appliances services fashion consumer electronics cosmetics) problem that much worse. 

The savers move a large portion of their savings into real estate once in a while. But the liabilities remain, just having been transferred to property developers (biggest borrowers in HK, China shadow banks and global debt market). So if they are no longer making money then they will not re-borrow that money and will shrink the bank balance sheet. That money returned also is money not bidding on provincial land auctions that provide 70% or more of provincial revenue. It means no revenue for stimulus and more provincial SIV borrowing to replace commercial activity employment and lost revenue. That makes more useless infrastructure (the typical 4th metro airport with no traffic), the empty high speed rail line that cut the time from cities A to C by 10-20 minutes compared to the existing lines through city B. Was really worth the hundreds of billions of Yuan. Just think of the millions of minutes saved. What about the profitability of the AB and BC lines now that you took out say 1/3 of their traffic? They don't look like that smart an investment any longer. 

 

I don't know how well they will do with industrial robots. According to Michael Beckley - quoting someone elses' research, the Chinese Skills Gap is 44 million in 2016 and growing rapidly. Their middle school semi literate industrial labor force can feed the robots but not run them. It will be like the GM boondogle of the late 1980s and early 1990s when they installed robotics on a commercial scale for the first time and they stumbled badly with never ending production halts, defective products and recalls. Turns out they weren't Japanese, but the robots were (and German). It took another decade of tearing out the old robots, training people over the 2000s till robotic lines worked smoothly. I don't think this is going to help the Chinese as much as they think it will. The first decade of automation actually reduces productivity substantially and requires diverting talent from other technical operations. Rather costly. 

[0R0 + 6,251]

1 hour ago, Marcin2 said:

He is very smart. sqft/capita data are amazing for all of China. It is 40 sq meters/capita in cities and 50 in rural areas. It is better than Poland and China was starting from  10 sqm/capita in cities.

I do not know occupancy, but per your numbers it is really high.

 

Yes, you don't get a real estate bubble in Tier 1 cities because nobody wants to live there. The problem is that there is no remaining development land. 

The real estate expansion problem for China is that extending their living space in proportion to GDP/capita is a problem in the places people are willing to live in - the coastal region where 95% live each development is being built on top tier agricultural river delta land that is already very stressed. They already lost 21% of arable land to coastal development. They are at the point that dumping the peasants off the land and sending them to the dry inlands produces increasingly expensive food and reduces food security. It just doesn't work any longer. Much as the provincial governments want this land revenue to continue, they know it can't. It is year 6 that agricultural productivity has been flat. You can't convert more of that land into real estate and high speed rail and highways. It gets converted into food inflation that lowers real returns to real estate investors. I am sure they are noticing that in real time right now. 

[Dan Warnick + 6,100]

3 hours ago, 0R0 said:

Yes, you don't get a real estate bubble in Tier 1 cities because nobody wants to live there. The problem is that there is no remaining development land. 

The real estate expansion problem for China is that extending their living space in proportion to GDP/capita is a problem in the places people are willing to live in - the coastal region where 95% live each development is being built on top tier agricultural river delta land that is already very stressed. They already lost 21% of arable land to coastal development. They are at the point that dumping the peasants off the land and sending them to the dry inlands produces increasingly expensive food and reduces food security. It just doesn't work any longer. Much as the provincial governments want this land revenue to continue, they know it can't. It is year 6 that agricultural productivity has been flat. You can't convert more of that land into real estate and high speed rail and highways. It gets converted into food inflation that lowers real returns to real estate investors. I am sure they are noticing that in real time right now. 

Back in 1990 or thereabouts, it was well known that China had already exploited every meter of land in the country for the production of food, and that it wasn't enough to feed their people.  Deng Xiaoping understood this, apparently and according to a number of books written in the era (there wasn't official government data available back then; they just used the number of deaths due to famine as a basis) and sought to open to the world.  Deng knew they needed both international trade in foodstuffs, ag products, and efficiency in agriculture if they were to stand a chance at feeding their people and ending the constant cycle of famine that had become the norm.  Given the West's, and in particular the U.S.'s efficiency in agriculture, he (Deng) knew it offered China a chance, but it had to be tapped immediately.  Diplomatic envoys were sent to Washington and we ended up with "I am not a crook" in Beijing to cut the opening up ribbon, if you will. The problem was, the efficiency they sought from the West was not near enough to solve the problem. 

Now, to @0R0's and my points, virtually all land had already been exploited by 1990 and with the coming buildup of cities, the rapidly expanding industrial complex and growing transportation systems (in 1990 there weren't paved roads to the major city airports let alone between cities or across country; and now there are massive highway systems and rail lines where there had been none before), China lost ag-land instead, thus multiplying the problem of FOOD.  Deng Xiaoping is now gone and his strategy for feeding China has somehow been lost in the drive for power and riches.  Until the last few years.  With the advent of the trade war, these realities have come back to the fore.

Some have recently implied that by dropping tariffs on U.S. goods the CCP is merely showing the U.S. as the villain in the trade war.  I strongly counter that it has much more to do with feeding their people.  And it is happening now, before Donald Trump and the U.S. government further isolates China, which could end up leaving China without the U.S. agricultural imports it needs to survive.  Some agricultural goods may be sourced from other countries, for a time, and in some years, but none with the capacity and consistency of the U.S. 

I believe the CCP will come back to the table with the U.S., within the next year, and work hard at making good on promises to end IP theft, currency manipulations, closed internal markets, and so forth.  They will turn up the dial to maximum on the import of U.S. agricultural and other products, and feed their people, or else the CCP faces extinction.