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Bad News Gets Worse For China

Europe and China have this much in common: the bad economic news just keeps getting worse.  The latest headaches for Beijing: Growing numbers of analysts fear that a combination of slumping exports and overexposed loans could spell real trouble for the increasingly vulnerable Chinese economy.

First, the export problem. As Reuters reports:

The first quarter [of 2012] is shaping up to be especially tough because of slow European and U.S. demand, coupled with the normal spike in imports that comes with the celebration of Chinese New Year, which this year starts in late January.

Zhiwei Zhang, a Nomura economist based in Hong Kong, expects China to import $28.8 billion more than it exports during the first three months of 2012, dwarfing the $1 billion deficit posted over the same period this year. That quarterly deficit was the first since 2004, and China has not recorded a full-year shortfall in two decades.

Chinese Commerce Ministry officials have been warning for weeks that the trade outlook is “very severe.”

Perhaps even more troubling than falling exports are the conclusions drawn from this Bloomberg investigation into China’s real versus publicly acknowledged borrowing levels:

Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund.

There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt…

The findings suggest China is failing to curb borrowing that one central bank official has said will slow growth in the world’s second-largest economy if not controlled. With prices dropping in China’s real estate market, economists warn that local authorities won’t be able to repay their debt because of poor cash flow and falling revenue from land sales they rely on for much of their income.

It is unlikely that anybody in China has any idea just how much of a mess they have on their hands.  Local governments have every incentive to hide the full scope of their borrowing from central authorities — and local banks and businesses often have excellent reasons for helping the local authorities to hide their tracks and borrow and spend still more.

Every growing economy must pass through the fire of a major financial crisis and economic crash — usually more than once.  China’s new economy has not been tested by a truly wrenching crisis and downturn yet, but especially if the euro implodes, that could change.  With the political system already under stress, an economic meltdown would lead to, um, interesting times.

I hasten to add that China’s financial authorities are both talented and hardworking, but that is not the point.  Nobody dodges all the bullets, and sooner or later it will be China’s turn to take a big hit.

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  • Independent George

    …which, in turn, spells bad news for us: if the Chinese face a cash crunch and can’t buy our debts, who will? And I’m not just talking about government debts – just how much would it take to freeze the entire bond market?

  • Richard S

    Good post. To what degree does culture matter in such things? For shorthand, I sometimes hear discussion of the “honor culture” in China. Would it be dishonorable to give an honest accounting? To be sure, people cook the books all over the world. But if multiculturalism is true, it might mean that in some countries it is a more common practice than in others.

  • Ted B. (Charging Rhino)

    The Eastern “honor cultures” differ from the West in that dishonor is shame-based rather than guilt-based. Embarrassment and “looking-bad” to family or others counts more than doing right or wrong.

    A prime example is the 1.5-Billion-USD in speculation-losses that Olympus Camera’s senior management has spent the last 13-years assiduously-concealing from stockholders and the Japanese government.

  • Yahzooman

    A nudge here and push there and the world will careen into the Great Depression of 2012.

    I always thought of Mr. Obama as a reprise of Jimmy Carter. It’s looking more and more, however, like he’s Herbert Hoover.

  • Some Sock Puppet

    I smell war…

  • Harun

    Keeping your currency down, allowing massive inflation, allowing wages to soar 3 times in just a few years time…these are all dangerous things to do.

  • richard40

    “which, in turn, spells bad news for us: if the Chinese face a cash crunch and can’t buy our debts, who will?”. From Independent George.

    Obvious answer, the fed will, by printing endless money to monetise the debt, which will of course send us first into hyperinflation, and then when that reaches its natural limit, into depression. That was always inevitable result of Obamas and Bernanky’s policies. Ask the Germans, they went through the same thing in the 20’s and 30’s, and look where it led them.

    Of course we do have an alternative, cut spending, and reduce the debt and deficit. But of course the Annointed One assures us that would be entirely too cruel, and would only help the rich. Better to follow Greece or Weimer Germany.

  • boqueronman

    Serendipity! I was just reading an article on the high probability that, among all the other Rube Goldberg elements of ObamaCare, the deadlines will likely be missed for setting up 50 state health care exchanges. Once again, F.A. Hayek’s “knowledge problem” – the impossibility of centralizing fundamentally dispersed knowledge in a timely and accurate way – is being confirmed. In the ObamaCare case it is the U.S. health care industry; WRM points out that Hayek’s principle applies equally to centrally planned economies. The USSR financial authorities were also “talented and hardworking.” And look where that wound up.

  • Derek Footer

    Santayana strikes again: why is it no one foresees these financial collapses despite similar scenarios of a property bubble leading to an unstable borrowing situation that leads to financial collapse and/or economic stagnation? Thailand in 1997 and Japan in the late ’80s anyone? anyone? Bueller?

  • Marcellus

    The worst thing and threat for the future of China lie in:

    – cultural aspects (face, guanxi)
    – the egocentric inward focus (no real intention to collaborate with outsiders)
    – a weak legal system (foreigners vs local Chinese)
    – lack of a strong value basis (that includes quality as well)
    – the ageing factor (poor demographics)

    In other words: you will see people moving away from China instead of going to China.

    Visit China and see for yourself. Looks can be deceiving, but in case of China you better look twice.

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