More concerned about China than Greece

[red-beard]

China's stock market has lost the equal of 11 years of Greece's whole GNP in a matter of days.



Here is the 1929 sell-off in the USA - look at the initial sell off, 25% loss.



This could have a far bigger impact than the Greece issues.

[Scuba Steve]

Bump for enlightening commentary, which sadly I have none to offer...

[creaturecat]

communists. with zero regard for human rights.
let 'er drop

[wdfifteen]

Communist stock market is an oxymoron.

[masraum]

China is a huge economic market/power in the world, so I agree, their drop could have wide reaching impact. But, assuming we recover quickly and easily from any effect it had on the US, I'm not too broken up by it. There are so many issues with China and the way they do things. They needed to get knocked down a peg or three.

[creaturecat]

Perhaps, at some point, Canadians will be able to afford a house in Vancouver.
The number of shifty communist embezzlers in Vancouver is simply astounding.

[Hawkeye's-911T]

This impacts all of us to varying degrees as the 'financial schitt-train' is just startin' to get rollin'

Cheers
JB

[Hugh R]

I was in Vancouver two weeks ago. The headlines said the average 1,800 sq.ft. house in the flatlands was $1.2 million Canadian.

I think a similar house in the San Fernando Valley is about 1/3 of that.

[jyl]

Chinese economy has been accumulating a build-up of problems.
- Too much infrastructure investment. Can't keep driving the economy through big capital projects because they are running out of airports and roads and trains to build. So the first leg of an economy, capital spending, is slowing.
- Slowing export growth. The pendulum has swung about as far toward "made in China" as it can, I don't know that Mexico, America, Thailand, etc are taking or will take back that much manufacturing share, but China's share is growing more slowly, if at all. So the second leg of an economy, trade, is weakening.
- Slow to develop a consumer economy. I'm not completely sure why this is so, Chinese certainly like spending money and material things, but anyway the third leg of an economy, consumer spending, hasn't developed enough. The government is trying to encourage this sector, so it encouraged a huge property bubble which is slowly deflating, and encouraged a huge surge in automobile sales which is running into traffic/environmental jams.
- Excessive debt, more by local governments and state owned enterprises, but also by private companies. Over investment means the returns on investment is low, hence the debt issued for that investment is iffy. China also has very little effective regulation and lacks a reliable legal system, both necessary for a debt market. Finally, the Chinese government never wants a SOE or local government or bank to default, because it makes the government look bad, which means they always deliver bailouts, which leads to riskier debt.
- Aging population. A legacy of the one-child rule. China is aging faster very fast. Older population means slower growth. China is in a desperate race to get rich before it gets old. (Japan got rich and old at the same time. The US is both rich and relatively young, for which you can thank immigration.)
- Paranoid government, well that might not be the best word for it, but anyway the Chinese government feels always under threat. The bargain in China for the last 50 years has been government delivers ever-growing prosperity, citizens tolerate lack of freedoms/rights. So the government feels that it cannot let economic growth slow down. And the government seems to not fully understand markets and/or to over-estimate its ability to control markets.

So the Chinese government decided to develop the local (domestic) stock market in Shanghai and Shenzen. (This is different from the Hong Kong market.) Citizens would make money and feel prosperous, SOEs and other companies would replace debt financing with equity financing, China would gain prestige and supplant the US as the world's best stock market.

This required the local stock market to be a bull market, of course. So the government encouraged people to invest in stocks, permitted (encouraged) excessive levels of margin debt, discouraged bearish analysis or shorting, and did not require anything approaching reliable financial reporting/auditing.

So the domestic stock market in China soared in the last year, SHCOMP up from 2000 to 5200, driven by individual investors using lots of margin debt. This move was totally disconnected from fundamentals, was purely speculative. Individual Chinese investors, the stupid ones anyway, thought the government wouldn't permit the market to decline, because China's stock markets are "different". Bullish analysts said, sure, the P/E is 80X for companies with mediocre businesses in a weakening economy, but M&A and margin loans and government support and international investors will keep driving the market up.

My mom wanted to invest in the domestic Chinese market this spring, but I wouldn't let her. She would have been an example of the ignorant individual investor who is now losing their money.

What is going to happen?
- The government will pull out all the stops to support the domestic market.
- It will fail, I expect. Doesn't mean the market will go to zero, but maybe to 3000.
- Instead of stimulating the consumer economy, the government's scheme will cause Chinese consumers to pull back. More businesses, banks, and local governments will have to be bailed out, and the government will be less wiling to let any publicly fail.
- The government will tighten its control over the rest of the economy, not just financial but also on security and speech.
- The direct impact on other countries will be minimal. Very little foreign money is invested in the domestic Chinese market.
- The indirect impact on other countries will be modest. The Chinese economy has been slowing anyway, which has already impacted imports from the West. I don't think there are a lot of dependencies between Chinese banks and the Western banking system. Maybe it depresses oil prices and incrementally hurts the oil industry.

[Iciclehead]

Spot on Jyl.....

Dennis

[MRM]

With a 25% sell off today, the Shanghai Index is now selling at about the same level it was in March of this year. One year ago it was roughly double what it is today, even with the 25% drop. It's not the same as a 25% drop in an American or European market.

Investment in China's stock markets is so speculative that I don't think a collapse would hurt American markets much. Not very many Americans or large US institutional investors have much exposure to the Chinese stock market.

The larger danger is that if losses in the Chinese stock market are a precursor to the Chinese economy going into recession, the World and the US will see a big drop in demand for our products - everything from exporting raw goods like lumber and intellectual property like iPhones to Chinese buying real estate will dry up.

[cockerpunk]

Originally Posted by jyl

Chinese economy has been accumulating a build-up of problems.
- Too much infrastructure investment. Can't keep driving the economy through big capital projects because they are running out of airports and roads and trains to build. So the first leg of an economy, capital spending, is slowing.
- Slowing export growth. The pendulum has swung about as far toward "made in China" as it can, I don't know that Mexico, America, Thailand, etc are taking or will take back that much manufacturing share, but China's share is growing more slowly, if at all. So the second leg of an economy, trade, is weakening.
- Slow to develop a consumer economy. I'm not completely sure why this is so, Chinese certainly like spending money and material things, but anyway the third leg of an economy, consumer spending, hasn't developed enough. The government is trying to encourage this sector, so it encouraged a huge property bubble which is slowly deflating, and encouraged a huge surge in automobile sales which is running into traffic/environmental jams.
- Excessive debt, more by local governments and state owned enterprises, but also by private companies. Over investment means the returns on investment is low, hence the debt issued for that investment is iffy. China also has very little effective regulation and lacks a reliable legal system, both necessary for a debt market. Finally, the Chinese government never wants a SOE or local government or bank to default, because it makes the government look bad, which means they always deliver bailouts, which leads to riskier debt.
- Aging population. A legacy of the one-child rule. China is aging faster very fast. Older population means slower growth. China is in a desperate race to get rich before it gets old. (Japan got rich and old at the same time. The US is both rich and relatively young, for which you can thank immigration.)
- Paranoid government, well that might not be the best word for it, but anyway the Chinese government feels always under threat. The bargain in China for the last 50 years has been government delivers ever-growing prosperity, citizens tolerate lack of freedoms/rights. So the government feels that it cannot let economic growth slow down. And the government seems to not fully understand markets and/or to over-estimate its ability to control markets.

So the Chinese government decided to develop the local (domestic) stock market in Shanghai and Shenzen. (This is different from the Hong Kong market.) Citizens would make money and feel prosperous, SOEs and other companies would replace debt financing with equity financing, China would gain prestige and supplant the US as the world's best stock market.

This required the local stock market to be a bull market, of course. So the government encouraged people to invest in stocks, permitted (encouraged) excessive levels of margin debt, discouraged bearish analysis or shorting, and did not require anything approaching reliable financial reporting/auditing.

So the domestic stock market in China soared in the last year, SHCOMP up from 2000 to 5200, driven by individual investors using lots of margin debt. This move was totally disconnected from fundamentals, was purely speculative. Individual Chinese investors, the stupid ones anyway, thought the government wouldn't permit the market to decline, because China's stock markets are "different". Bullish analysts said, sure, the P/E is 80X for companies with mediocre businesses in a weakening economy, but M&A and margin loans and government support and international investors will keep driving the market up.

My mom wanted to invest in the domestic Chinese market this spring, but I wouldn't let her. She would have been an example of the ignorant individual investor who is now losing their money.

What is going to happen?
- The government will pull out all the stops to support the domestic market.
- It will fail, I expect. Doesn't mean the market will go to zero, but maybe to 3000.
- Instead of stimulating the consumer economy, the government's scheme will cause Chinese consumers to pull back. More businesses, banks, and local governments will have to be bailed out, and the government will be less wiling to let any publicly fail.
- The government will tighten its control over the rest of the economy, not just financial but also on security and speech.
- The direct impact on other countries will be minimal. Very little foreign money is invested in the domestic Chinese market.
- The indirect impact on other countries will be modest. The Chinese economy has been slowing anyway, which has already impacted imports from the West. I don't think there are a lot of dependencies between Chinese banks and the Western banking system. Maybe it depresses oil prices and incrementally hurts the oil industry.

this is spot on. china's economic powerhouse myth is a paper tiger.

the main problem is that they have failed in this economic boom of the last 30 years, to build a real middle class. there economic boom was built on keeping wages and there currency artificially low keeping exports flying, while almost none of that money is given to the laborers that are required to keep the domestic economy going. instead of, like in the USA, labor pushing back, and eventually taking a solid share of the economy for the workers, which would later form the middle class, they have artificially suppressed it. combined with there currency being artificially kept low, this created the "powerhouse" ... it will also be its undoing.

and eventually, like the USA is learning, a top only economy cannot function. it topples over.

[Hawkeye's-911T]

china's economic powerhouse myth is a paper tiger.

I am not so sure I totally agree but on another relatively important tangent, China's supply (or lack thereof) of potable water should be one of their bigger concerns along with sustaining or the managing their economic boom.

Cheers
JB

[Rick Lee]

Originally Posted by creaturecat

communists. with zero regard for human rights.
let 'er drop

China is far more capitalist than the US and we have a far higher incarceration rate than they do.

[gordner]

you don't have to incarcerate those you just shoot with no process, that may skew the numbers some.

[Rick Lee]

Originally Posted by gordner

you don't have to incarcerate those you just shoot with no process, that may skew the numbers some.

It's been a long time since it worked that way. They use lethal injection now and execute the worst of the worst and some higher-up political scapegoats. I'm not saying they have a great justice system, but they have almost five times our general population and we have almost four times their prison population. For being an authoritarian state, they don't seem real intent on filling their prisons the way we do. And unlike the US, they don't claim their justice system is the envy of the world.

[red-beard]

Originally Posted by MRM

The larger danger is that if losses in the Chinese stock market are a precursor to the Chinese economy going into recession, the World and the US will see a big drop in demand for our products - everything from exporting raw goods like lumber and intellectual property like iPhones to Chinese buying real estate will dry up.

Not by official Chinese government numbers, but I think they already are in recession.

[red-beard]

Originally Posted by Rick Lee

It's been a long time since it worked that way. They use lethal injection now and execute the worst of the worst and some higher-up political scapegoats. I'm not saying they have a great justice system, but they have almost five times our general population and we have almost four times their prison population. For being an authoritarian state, they don't seem real intent on filling their prisons the way we do. And unlike the US, they don't claim their justice system is the envy of the world.

Mostly we need to stop passing stupid laws and incarnating people like Martha Stewart...

[MRM]

Originally Posted by Hawkeye's-911T

I am not so sure I totally agree but on another relatively important tangent, China's supply (or lack thereof) of potable water should be one of their bigger concerns along with sustaining or the managing their economic boom.

Cheers
JB

China's supply (or lack thereof) of breathable air should be an even bigger concern. Without seeing it first hand it's hard to fathom how bad it is. China is poisoning its environment for generations to come. It's already choking (no pun intended) their economic capacity. Soon their toxic environment is going to be THE limiting factor on their economic capacity.

China really needs to grow at close to 10% just to stay even, because of the mass migration from the countryside to the cities, so anything less than 10% real growth should be considered a recession. No one believes the government numbers, but even so, the economy is still expanding somewhat, so under a traditional definition they're still not in a recession. There will be serious pain when the economy actually contracts in absolute terms.

On the plus side, most economists think the RMB is now fairly valued against the Dollar and isn't being manipulated any more. At least not manipulated any more than the USD is.

[jyl]

I was thinking, maybe wishfully, that the Chinese government could make their environment the next big national mission and economic growth engine.