China economic problems are increasing, inflation is rising, supply chains faltering, The pandemic lingering, Debt Ceiling issues brewing, Government Shutdown coming, workers don't want jobs... How can China keep growing at the rate they are with not enough of a middle class to sustain future growth? One suspects that China's lack of transparency means the problem is even worse than it looks. The affect of Evergrande crash has caused financial distress to spread faster and more vigorously than the chinese regulators were expecting, putting pressure on them to move quickly to stop the contagion. They cannot redeem Evergrande’s creditors without also undermining their fight against bad debt. If the government does not retreat, they will have to provide a helicopter money of epic proportions in order to terminate the contagion. China's real estate problem has been years in the making, complete with stories of empty office buildings even as more are being built rather common for awhile. Now it has resurfaced again, worse then ever. The question is will the government save this obvious racket, or do the right thing and let it fail. Suspect China will just say no to true capitalism and continue to prop up this teetering racket. Begs the question how many more rackets are they hiding. The problem about letting the wildly inflated real estate market fall is that the Chinese economy is likely to be badly damaged as well. And as the economy collapses, chances are that the current government will collapse, too. It's hard to believe the conditions under which the Evergrande situation developed are unique to this one large firm. To me the big question is: how widespread is the malaise in China's property sector? It's not just widespread. It's ENDEMIC. Literally every single property builder and management company is in the same basket. This is due to State Management of the building and finance sectors. Some may not be as badly over-extended, but they are all REQUIRED to operate their business according to rules that work for the State's goals even more than the property company. Evergrande builds apartments, sells them as 'investments to citizens then takes the proceeds and moves on, It is just an elaborate pyramid scheme, New money paying old investors. And if new money does not come in,, the company will implode. It is a pyramid scheme. Because no one is moving into the apartments. The exact same thing is occurring here in the US. More and more, especially since 2008, the government has taken an active role in making sure anything that is “too big to fail” never fails. What you get, both here and in China, is a form of socialism where the super rich get a safety net provided by the government. If you are extremely wealthy you’re investments never fail because middle-class taxpayer dollars will insure you in case of a recession. All the rest of us, those who aren’t too big to fail, we can still get clobbered. We should not get complacent. Our own financial system is also due for a brutal reckoning which our Federal Reserve has been working very hard to put off. the trouble is in seeing the goodness of a crisis as having a cleansing effect. There's a certain Hoover-esque echo here. Chovanec has been urging a financial house-cleaning in China for years, and yet it never arrives because the Chinese government simply doesn't see its role as sacrificing social well-being on the altar of the market gods. There is no doubt that China's unorthodox approach creates many distortions and problems across the economy, but none that can't be solved temporarily with infusions of cash or loans to paper over npl's. Thirty years of mini and major crises show their approach works despite all the flaws and issues one might raise about them. Wishing for a crisis is a failure to understand the priorities of the Chinese leadership. Sure, China's economy is excessively reliant on investment to grow, and eventually it all has to start making money. The reliance on real estate and construction is also a problem. But Chinese leaders have also looked across the Pacific and seen what happens to a country that experiences a severe financial crisis. It's not good. They would rather plow massive resources into plugging holes and jerry-rigging everything while building a bridge to a stabler economy over time. It's a dicey proposition, for sure, but probably beats crushing the wealth accumulated in household investments in real estate, like we experienced in the US. Chinese leaders see these suggestions coming from Western libertarians and roll their eyes. As if they would take the obvious risk of a financial meltdown instead of shoveling their very ample money on hand into the economy in admittedly highly inefficient ways to prop up certain sectors. It's not really a choice unless you think placating the accounting gods is the highest good. Recessions are a healthy thing in any capitalist economy. They flush out the losers, like a forest fire clearing away the dead plant life so new life can grow. Now we have the so-called communists in China stepping back and saying let market decide who wins and who loses, while here in the US the so-called capitalists are demanding bigger government and more stimulus. Here in America, we bail out the rich people at the expense of the poor taxpayers. (Private profit, socialized losses). In China, the builders are required to do things they would otherwise NOT do, with the goal of providing full employment for workers and overall growth in the economy. So the CCP is not interested in protecting Evergarde if they can find a better way to provide full employment and economic growth. They are literally more concerned with the average citizen than the giant corporation and it's profits. The end result looks very similar, because the CCP is almost certain to prop up Evergarde as this unfolds. But their motivation is almost exactly the opposite of why we did what we did in 2008. So if they DON'T prop up Evergarde, we should be looking to see what they do do in order to support their goals of full employment and growth. The decaying economy of China reminds us of the causes of the break down of the Soviet Union. One of the fundamental causes for it was due to be extensive military spending while disregarding the economic growth. The recent Evergrande episode has pushed forward the weakened economic position of China. The Chinese real estate colossus Evergrande is reported to be under $300 billion debt and is unable to refund the invested amount to investors, who are queuing up before its offices demanding the refund of their deposits. The current situation has been built up since the late 80's when their government started giving private loans for people to start businesses. They NEVER foreclose, they NEVER allow bankruptcy and they ALWAYS float new loans to the least credit worthy companies and people if that's what it takes to prop or their prior lending errors. Our financial sector exists to manage clients money in a way that lets them return more than the client put in AND keep a slice as their profit. They have to be efficient, productive and effective. China's entire financial system is the opposite. They have NO requirement to be good custodians of the people's deposits. A return on investment to their customer is less important than meeting the State Defined goals about growth and full employment. Do that for a few decades and yeah, your financial system will look like a disaster from the outside. Important transitions are underway in China. Adverse demographics is a problem it shares with the developed world, accentuated by its one child policy. Always an excessive reliance on investment and exports. Creation of infrastructure like the high speed rail network that does not pay for itself. 2. Real estate a major imbalance, as Evergrande shows. 30% of GDP, 15 million new houses built each year, five times the number for America and Europe combined. Urban households have 80% of their net worth tied up in it, making them vulnerable to a crash. 3. This is a time when China needs far sighted, sagacious leadership, to manage several difficult transitions. A supercharged military build up, stoking nationalist passions, worsening international relations, starting from its immediate neighbourhood, do not reflect the exceptional pragmatism demonstrated by Paramount Leader Deng. Recent clumsy interventions have erased shareholder wealth of over $ 3 trillion. 4. Since I was a young man, the debate has been whether China will have a hard or a soft landing. We pray for good outcomes. But the trouble is in seeing the goodness of a crisis as having a cleansing effect. There's a certain Hoover-esque echo here. Chovanec has been urging a financial house-cleaning in China for years, and yet it never arrives because the Chinese government simply doesn't see its role as sacrificing social well-being on the altar of the market gods. There is no doubt that China's unorthodox approach creates many distortions and problems across the economy, but none that can't be solved temporarily with infusions of cash or loans to paper over npl's. Thirty years of mini and major crises show their approach works despite all the flaws and issues one might raise about them. Wishing for a crisis is a failure to understand the priorities of the Chinese leadership. Sure, China's economy is excessively reliant on investment to grow, and eventually it all has to start making money. The reliance on real estate and construction is also a problem. But Chinese leaders have also looked across the Pacific and seen what happens to a country that experiences a severe financial crisis. It's not good. They would rather plow massive resources into plugging holes and jerry-rigging everything while building a bridge to a stabler economy over time. It's a dicey proposition, for sure, but probably beats crushing the wealth accumulated in household investments in real estate, like we experienced in the US. Chinese leaders see these suggestions coming from Western libertarians and roll their eyes. As if they would take the obvious risk of a financial meltdown instead of shoveling their very ample money on hand into the economy in admittedly highly inefficient ways to prop up certain sectors. It's not really a choice unless you think placating the accounting gods is the highest good. There is one major difference between a Chinese recession and a US one: in China, it is guaranteed that people will end up in jail for the role they played. They will not always be the actual perpetrators, but there will be consequences. Remember the CDO/mortgage crisis? Look for the 2015 movie "The Big Short" if you need help understanding what went on there, but as a reckoning it did exactly zero. The taxpayer coughed up to bail out the banks and bankers (who are now again the parties that stand well back from helping with any recovery), and absolutely nobody in Wall Street went to jail for the role they played. Well, one, but he was merely doing what every other banker was doing, just less careful, and that wasn't related to the whole CDO scam. No, instead, these people STILL got bonuses while ordinary people lost homes and livelihoods (as it's happening yet again, this time due to the economic impact the mishandling of the Covid epidemic had) and that was excused away. It'll be interesting to watch.
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