The Balcony Box

Commentary on global economic theatre

How much longer can China bubble?

David, 25 April 2010

At this point, all indications seem to be that China will prolong the party as long as it can.  Given the considerable momentum and deeply embedded structural factors driving the bubble, the government’s relatively gentle countermeasures (tougher requirements for mortgage loans, etc.) seem unlikely to have much impact.  Of course, the bubble has probably inflated to the point where the government doesn’t dare pop it, so half measures are probably all they can muster the courage or political will to implement.

So how much longer can the bubble inflate?  Well, eventually economies must face reality, even centrally administered economies with hoards of foreign exchange reserves.  As Julius pointed out, China has swung to a trade deficit.  Given the deteriorating quality and increasing scale of Chinese investment (consuming more to produce less), China’s rapidly growing automobile fleet, and essentially stagnant demand in the US, Japan, and Europe, it seems likely that China could develop a large, structural trade deficit in short order.  Of course, China can run large deficits for a long time, but, if foreign investors realize that a bust has become inevitable, hot money outflows could accelerate the drawdown of reserves.  It’s by no means clear that such a scenario will materialize, but Chinese trade statistics bear watching.

And then there’s the possibility that the central government may rebalance the economy masterfully, strong growth will absorb all the excess capacity, the oil shortages forecast by the US military will fail to materialize, and China will enjoy 10% growth for the rest of the twenty-first century. Good luck with that.

In any case, for the time being, the party goes on: China’s super-rich are driving luxury car sales boom

Julius, thoughts?

China in Deficit

Julius, 11 April 2010

Speaking of China David, you may remember discussing a Chinese trade deficit in terms of a mechanism to deflect any pressure to revalue the yuan.  It appears that you were right: China has just posted its first trade deficit in some time.  Of course, I realise we can’t trust Chinese statistics completely, and this may be a politically convenient release (remember Geithner’s report for April), but it does make some intuitive sense that as China develops they will begin to import more than they export.  And, if China has ambitions to make the yuan one of several major reserve currencies, then they have to get eventually their currency “out there.”

But first they may want to work down their dollar reserves, though I suspect that China has years if not decades before they work them down through trade deficits.  Perhaps they will blow up before then.  What do you think?

Waiting for China to pop

David, 23 March 2010

I’m in Tokyo at the moment and a bit preoccupied, but here’s an insightful article by Edward Chancellor at GMO on the China bubble.  How anyone can argue this isn’t a bubble is beyond me, but I guess that’s why we have bubbles!

Julius, perhaps we should start a parlor game where we try to guess the timing and circumstances of the implosion…

More Roast Beef, Mr. Krugman?

Julius, 15 March 2010

Paul Krugman isn’t playing ball with the administration.  Again.

This time, instead of advocating restructuring the banks, he is arguing for a more aggressive response to China’s currency manipulation–import tariffs:

Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.

…In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

I imagine that this strident view is causing headaches at the White House, the Treasury, and the Fed.  Obama has recently angered the Chinese party several times, and I doubt he wants another confrontation.  Treasury appears to be captured by a free market ideology, and may slightly fear retribution in the bond market.  And the Fed probably fears the impact of higher domestic inflation on inflation expectations, and, ultimately, the need to raise rates prematurely.

Looks like Mr. Krugman is going to get another roast beef dinner at the White House!  Speaking of dinner, David, when are you back in Boston?

Greek Bailout Coming Tonight?

Julius, 28 February 2010

It appears that the European Union, led by Germany, are about to pony 30 billion Euros to bail out troubled Greece.  The cost for Greece?  Austerity.

Don’t make me laugh.  Given the widespread strikes seen these past two weeks, I very much doubt that the Greek government has enough power to enforce austerity measures.  So does this mean there will be no bailout?  I highly doubt it: what emerges from this weekend will likely be worded as conditional, but privately known to be unconditional.

In my opinion, what will ultimately happen will be broad unrest in Germany as unemployment benefits are cut at the same time as the Greeks are partying as usual.  Think riots can’t happen in Germany?

Toyoduh

Julius, 21 February 2010

David, what’s going on with Toyota?  Is this just an instance of bad luck blown out of proportion?  It seems clear to me that at the very least, Toyota is getting bad press advice, at least as regards the sensibilities of American customers.

I do find it hard to believe that all of the ex-post narratives in the press regarding Toyota’s terrible “culture of centralization” have even a grain of truth in them.  What do you think?

Subprime sovereigns

David, 9 February 2010

According to Spiegel Online, Greece has been getting liar loans from everyone’s favorite subprime lender.  In this case, the lying was about the exchange rate (the loans were structured as currency swaps with “fictional exchange rates”) and the national balance sheet (the “credit disguised as a swap didn’t show up in the Greek debt statistics”). As with many subprime loans, these are designed to explode in the “long term” (i.e., after the insiders have gotten the hell out).  Of course, the insiders got out quickly: “Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005″ (one would expect nothing less!).

So how big are Greek debts? “In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today’s records, it stands at 5.2 percent.” Hey, what’s a few percent of GDP between friends?

Whatever credibility Greece may have had, it’s gone now.  And does anyone think that their able bankers didn’t sell similar products to other greedy piigs?

Michael Pettis takes down Thomas Friedman

David, 2 February 2010

Michael Pettis calls out Thomas Friedman on his careless economic analysis–a very entertaining read.  The punchline? China, with its $2-3T in reserves, has striking similarities with the USA before the Great Depression and Japan before the Bubble Economy burst. Pettis concludes:

We must be careful how we read history. The fact that the US and Japan had terrible decades following periods during which they had amassed levels of reserves that China has subsequently matched, and under conditions similar to those of China, does not necessarily mean that China too must have a lost decade or two.  Chanos is not being crazy when he worries, but it is still an open question as to whether or not he will turn out to be right.

But the history does indicate that facile statements about central bank reserves should, at the very least, be measured against the obvious historical precedents. Chanos might still lose this debate, but Friedman has already proven himself to be hopelessly wrong.

Watching and waiting

Julius, 30 January 2010

Is it just me, or does the world economy seemed to be in suspended animation–a butterfly pinned to the corkboard?  Or perhaps a weightless astronaut at the apex of a parabolic rocket shot?

The much-ballyhooed restocking effect finally showed up in the Q4 GDP report, but all was not well in other areas: notably consumption, whose growth delined on a quarterly basis.  Where is the final demand coming from?  Build it and they will come?

An then there is Greece and Spain and Japan and Ireland and the UK and…how will any of them avoid outright default or the printing press?  The overly subscribed Greek debt issue was completely underwater in the span of two days, as spreads continued to widen.  Buyers’ remorse indeed.  How long until catastrophe?

And then Obama’s call for doubling exports in five years.  How will that be possible without a dramatic weakening of the dollar against the people’s currency?

Big changes are brewing.  Don’t look down.

How long until China pops?

David, 28 January 2010

Given its centrally administered economy, who knows.  But the latest real estate market statistics suggest a bust cannot be too far off.  According to NPR:

  • Chinese property sales rose 75% in 2009
  • The price of a new apartment in Shanghai is up 68% year on year
  • 85% of Chinese cannot afford to buy properties

Of course, “not everyone is convinced there is a property bubble”.

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