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?
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…
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.
Massive fiscal stimulus and the dollar carry trade, perhaps among other factors, appear to be inflating bubbles in China and elsewhere.
This was buried deep in Michael Pettis’s latest post at China Financial Markets:
I spend a lot of time talking to large hedge funds and institutional investors – with at least three or four one-on-one meetings a week – on China and market conditions. It worries me that recently I have heard investors say many times, generally very sophisticated investors, that we are clearly in a bubble and the best strategy is to ride it out as long as we can. This has almost become one of the mantras of sophisticated investors – the less sophisticated, I guess, assuming that the crisis is safely behind us.
Certainly the dramatic recovery in emerging market equities seems consistent with the new global bubble hypothesis.
As observers debate whether extremely loose monetary policy will lead to runaway inflation, Julius and I have had our own long-running discussion on the topic. My experiences in Japan have lead me to expect a sustained period of deflation, though I’m not at all confident in this view. There may be another possibility: yet another round of asset bubbles. It had seemed unlikely to me that the game could be restarted, but perhaps the combined efforts of the world’s central banks can do the job. The Telegraph raises the possibility in a recent article “Excess liquidity thesis gains traction as financial markets soar“. From the article:
in their anti-deflationary fervour, central banks may be creating more money than depressed economies require. The surplus creates “excess liquidity” – which may be feeding a new series of stock, commodity, property and bond bubbles.
Interestingly, the Telegraph suggests that the depressed state of the real economy may encourage money to flow into financial assets:
But the very decline in GDP may be causing the excess money problem. Economic activity has contracted sharply and consumer prices are deflating, so a constant stock of money buys more, in real terms, than it did a year ago. This deflationary money adjustment may be generating excess liquidity – and feeding buoyant markets.
Though I’m not a macro economist, this seems plausible: if individuals are cutting consumption to rebuild their balance sheets and corporations are cutting investment in the face of slack demand, then the money forced into the system by the central banks has few places to go. Of course, the article also notes that China is expanding the money supply so rapidly that new bubbles seem a virtual certainty. As usual, Michael Pettis has the details.
The Shanghai stock market is booming again (it has nearly doubled since last November), and a securities brokerage called Everbright recently went public in an offering that raised $1.6B, was more than 100 times oversubscribed, and valued the company at 59 times 2008 earnings. Enough said.
Michael Pettis is following the massive credit expansion in China. Loan volumes are up about 3x year-on-year in the first half. Apparently watching the U.S. immolate itself with a colossal credit bubble wasn’t enough… they’re going to try it for themselves.
Chinese statistics are said to be generally unreliable, but presumably sales results from General Motors can be trusted–so it’s interesting that GM reported record sales in China for the month of April, up 50% year-on-year. This provides additional support for the view that China’s massive stimulus measures and expansionary monetary policy have succeeded in getting the party started again. Michael Pettis sees a risk that the party could get out of control. I’m skeptical that the government will risk taking away the punchbowl, for fear of provoking a riot. That could mean drunken revelry on a massive scale.