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The Party's Over?
China’s Three Bubbles
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  • fastrackn1

    It’s about time. This should have happened a few years ago. Too much government meddling has created unsustainable economic conditions.

    Anyway, the Chinese government doesn’t have enough capital to stop the fall….

    • Peter Miller

      $20 trillion in foreign reserves. Not enough?

      • f1b0nacc1


        • Peter Miller

          My bad. . .

      • fastrackn1

        I understand what you are getting at (20 trillion or not), but I don’t think they really have enough capital, and certainly not enough experience or expertise, to buy their way out of, or avoid, a crash.
        We had a hard enough time here with what we had happen in 08 and we have an economy much larger that China’s, plus more experience in dealing with a mega, modern economy…not to mention..we are the world’s reserve currency…which gives a huge advantage….

        • f1b0nacc1

          Roughly $3.2 trillion (as of yesterday, 7/7) had evaporated. That is a sizeable fraction of China’s GNP. There isn’t enough money to stop a fall like that.
          This doesn’t mean that the fall is unstoppable (it might be, but I don’t know), but on the other hand it certainly DOES mean that they cannot simply ‘plug the hole’.

          • fastrackn1

            I believe that what goes up always comes down when it comes to economies. It is the way economies are supposed to work…fear/greed, winners/losers, and all the other economic truisims.
            China has had a heck of a run, and if the party is not over at this time, it will be soon. The longer and higher the run, the more violent and farther the fall. History has proved that over and over with economies. And the problem is that no one knows/thinks the party is over until it is almost over.
            My main reason for them being in a potentially disastrous situation is partly because of their form of government (communism), but mostly their inexperience in dealing with the inevitable crash that is part of having a huge and complex developed-world economy similar to ours. Look what our inexperience caused in 1929 and before. And then there is that world reserve currency thing that they don’t have…I don’t know, but it is looking grim for them if economic history is any lesson….

          • f1b0nacc1

            I am not sure that we are in any disagreement here. I believe that the Chinese are in for a rough ride, and that there isn’t much they can do about it. This particular situation might not be the straw that breaks the camel’s back (we are less than a week into things, call me in a month), but the fundamentals of their economy are absolutely awful.
            As far as the notion of ‘what goes up, must come down’, I will add the word ‘eventually’….there isn’t some law of nature that makes this happen, merely the self correcting nature of large systems…i.e. emergent behavior.
            In any case, we shall see…

          • fastrackn1

            The only disagreement maybe, is about the probability, but not about the intensity.

            For me I am only concerned about what will happen to the small guy when it happens. Everyone there has been playing the stock and housing markets like a casino game, so I am sure they will get hit the worst…as usual. And because their government cares less about the average citizen, because there are less supports in place in their society to help dampen the affects of a crash, and less sophistication in their financial system, it will destroy many lives.
            But those on top there will hardly notice a thing….

          • f1b0nacc1

            There is a wonderful quote from PJ O’Rourke that I think of whenever I look at the unshakeable colossus (in whatever context) that we consider to be impossible to overcome:
            “Remember that the Soviet Union, with it’s gulags, its tanks, and its secret police, fell in the end because everyone was tired of wearing Bulgarian shoes”
            I suspect that the political elites in China fear precisely this scenario, which is why they stamp down so hard on dissent. Whether that stamping will be sufficient over time….I am not sure….but I do have my hopes….

          • fastrackn1

            “Whether that stamping will be sufficient over time….I am not sure….but I do have my hopes….”

            I am not sure if I am understanding you correctly here, so I would like to clarify.
            Are you saying that you have your hopes that their government continues to have the ability to stamp down dissent?

            …and I also highly suspect that their elites are shivering in their shoes about 1.3 billion extremely disgruntled citizens….

          • f1b0nacc1

            No, actually my hope is that the Chinese elites will NOT be able to stamp down dissent.
            With that said, I am well aware that ‘being careful what you wish for’ is definitely a concern here. A collapse of elite control in China would lead to chaos at best, and civil war (a VERY ugly civil war) at worst. I don’t see those as likely right now, but I am under no illusions about the risks associated with them occurring.
            And yes, the elites are terrified and with good reason. The history of popular wrath against deposed elites in China is horrifying at best….

          • fastrackn1

            So we are on the same page there.
            I would also like to see the citizens rebel and throw out the present communist system there. And like you, I am also aware of the potential ramifications of a country with 1.3 billion people doing so…as compared to say some country of 50 million…like the Arab Spring countries for example.

            But if they can, they have a lot of potential, based on what they have been in the past….

          • f1b0nacc1

            Indeed they do, I have many Chinese friends from my visits there, and it pains me to see them trapped in the police state in which they live. There is so much that they could have….
            Of course there is also the danger that we will find ourselves walking down that same road…

          • fastrackn1

            “Of course there is also the danger that we will find ourselves walking down that same road…”

            If you mean that we might someday find ourselves in a revolutionary overthrow of our government, let’s hope so…it’s time to get back to basics….

          • f1b0nacc1

            Revolutions are very ugly things…careful what you wish for….

          • fastrackn1

            Yes, they can be, and I am well aware, but some things are worth fighting for…at any cost.

            I am not happy with the direction of this country since the 60’s, and all the verbal complaining (like many on this blog do for example), is not going to change anything…and of course nothing will ever get changed at the voting booth either….that’s not how real change gets done. And both parties are useless, so why bother.
            But it’s all a moot point anyway. Revolutions are not born in soft and comfortable countries like ours where the citizens have never been exposed to the true nature of the human condition, they are born in 3rd world countries where people spent their lives living in the reality of human beings, and things have become unbearable.
            Imagine trying to get the average American off of their sofa to to do as we did on April 19th 1775.

            The average American doesn’t even want to cut their own grass anymore….

          • f1b0nacc1

            I have heard this many times before, and I find it unconvincing. If the parties are useless (by and large, I agree) the solution is to change them or replace them (before you tell me this cannot be done, explain the Whigs), not to burn down the entire system. The Revolution was designed to bring about self-government, not simply provide for the basis for an unending set of revolts when we don’t like the results of that government.
            I am not pleased with our direction either, but I have been witness to real revolutions in action…they aren’t pretty and they aren’t to be wished for as a way of settling political disputes. Remember, the worst carnage that this country has ever seen was in our own Civil War, also know as a ‘revolution’….

          • fastrackn1

            I guess I was not being clear in my comments. I do not want to burn down our system. I do not have a problem with our system of government, we have the best in the world. Yes there could be minor changes to make it better, and also to prevent abuses that the founding fathers could not have foreseen.

            What I have a problem with is our culture and what it has become…mainly since the early 60’s, but even some since the turn of the last century.
            As I said, these things are not changed at the voting booth, they are changed by force. But it will not happen because Americans are too soft and comfortable. We will just keep being dragged kicking and screaming along mainly by the left, but also in part by the right. It’s not going to stop. Most don’t even realize what has actually happening…they are too caught up in seeing things from a political perspective (Republicans and Democrats). I don’t follow political parties, it is too confining.

            BTW I am not talking about an all out civil war, that would be insane and unnecessary. I am talking about a cultural revolution that takes us back closer to our true nature…not as a bunch of self-entitled, participation trophy, whiners, whose existence is so dependent on our modern technology that we need to spend 10 minutes driving around a mall parking lot looking for a parking space less than 100 feet from the door. Or a society that is so soft that we need to call stewardesses – flight attendants, employees – associates, and blacks – African Americans….

          • f1b0nacc1

            Regarding the culture, we are largely in agreement, though I wonder if that ship has sailed. I work with a LOT of young people (both professionally and in my volunteer work) and I find it to be a bizarre mix of depressing and hopeful. Let us hope that the latter works out…

          • fastrackn1

            ” I wonder if that ship has sailed”.

            That ship has sailed, f1b…I, and those like me, just want fire a few shots INTO the bow…not just across the bow.

            BTW, thanks for using your free time to volunteer to help humans, when so much of our culture seems enamored with using their time and money to help animals. So many these days would rather send $20 a month to the ASPCA than to the March Of Dimes, Wounded Warriers, etc…what a screwed up culture we have become….

          • f1b0nacc1

            Shots into the bow rarely sink the ship, you want to hit them below the waterline, preferably amidships (grin)….
            Actually, my volunteer work is entirely selfish on my part…I have a lot of fun doing it. I work with kids building robots…they are bright kids and they replenish my heavily depleted store of hope for the future! As for the ASPCA, I adopted rescue dogs (corgis!!!) rather than donated money….
            Hope your day is a good one…

        • Peter Miller

          No, I was completely wrong on the amount. My bad. I think you’re right. However, China does have substantial reserves, operates essentially as a dictatorship and is unlikely to have any major revolt it can’t handle with a small or large dose of intimidation and violence, which it has shown no qualms in using. Ultimately the government’s main concern is preserving its power and I think it can hang onto it for quite some time, even if more of its cowed citizens become more impoverished. The problems we have had in recovering are at least 50% related to bad policies and a total absence of leadership or recognition of economic reality.

      • PKCasimir

        Chinese foreign exchange reserves stand at around $3.75 trillion.

  • wigwag

    The European and Chinese financial systems are facing the prospect of collapse at the same time. It’s hard not to wonder what this bodes for the United States. A prolonged economic downturn in China and Europe can’t possibly be good for America, on the other hand, with the U.S. economy reasonably strong, both the dollar and American securities look like they might be great ports in the storm.

    • adk

      “…both the dollar and American securities look like they might be great ports in the storm.”
      Unless there’s a falling domino effect. With the astronomical amount of debt we have accumulated– a great chunk of which is a) short-term and b) foreign-financed, and our economy’s dependence on exports, that’s far from given.

      Also, this (not yet fully materialized) financial crisis may very well tempt bad international actors, such as Russia and Iran, to up their game — then we might have a truly perfect storm, all with an incompetent administration to boot.

      • f1b0nacc1

        The Chinese own a huge amount of American debt, but it is denominated in dollars, which means in effect that they have very little opportunity for mischief with it. They don’t import all that much from us in the first place, so their collapse (if a collapse it is, and I am skeptical about that) would have a relatively small impact upon us. As for our own debt, right now we are a good safe haven, so if anything, financing it should be easier, not harder in the short to mid-term at least.
        As for the Russians and the Iranians, if the Chinese are in real trouble (and that is a big IF), then so are these other miscreants. Just who do you think Russia is selling most of its hydrocarbons to? Iran has big problems of its own, but with a huge downturn in demand (the natural consequence of a Chinese collapse), they are even more vulnerable as an exporter of primary commodities.
        There is a lot to this story that we don’t know, but right now, we are in a good position. Bismark was right!

        • adk

          Subprime mortgages were also denominated in dollars and their big holders didn’t have any rational reason to create havoc. But havoc did occur in 2008-09. The point is, our huge government debts and continuous borrowing to finance budget deficits make us very vulnerable to international crises/contagions. And next time, we’d have very little room for maneuver — interest rates are already as low as they can get and I don’t see where/how else we can borrow yet another few trillion dollars.

          I’m not predicting an imminent doom, just pointing out that it’s just as likely as the rosy scenario of being the only safe harbor in the world’s sea of calamity.

          • f1b0nacc1

            Don’t be silly. Subprime mortgages weren’t the source of the problem, it was the way that the debt was bundled to hide it that caused the crash, something we are not seeing here. More tot he point, subprime mortgages (really the bad lending that went on as a result of the CRA) were only a small part of the overall problem that affected a few banks. had these banks been allowed to fail, we wouldn’t have seen a lot of the trouble in the first place. The big holders had EVER reason to engage in mischief, as they wanted to be rid of the debt as quickly as possible, which is why we saw so many MBS. Here we are looking at an entirely different problem where the foreigners are holding the bag.
            As a side matter, 2/3 of our debt is internally financed (i.e. we owe it to ourselves), and most of that is institutional, rather than private, so even that isn’t as sensitive in terms of its impact on the economy.
            TL:DR: Zerohedge fantasies really aren’t that relevant here…

    • Oddstar7

      Everything you’re saying is true, but that just makes the US the leper with the most fingers left.

      • wheezer

        in the land of the blind, a one-eyed man is king.

        • Oddstar7

          Some kingdom.

          • f1b0nacc1

            Beats the alternatives

    • CapitalHawk

      Good points all. And all of which point to the obvious source of the Chinese and European financial problems…The United States of America.

  • Kevin

    It’s probably too late now – but I wonder if the CCP shouldn’t have come out saying they were concerned wth the stock markets being too overvalued and welcomed a correction to deflate the bubble.

    • fastrackn1

      That’s exactly what they should have done, but that’s not good for Communist politics to let the people know that the government made mistakes and doesn’t have the power to correct them….

      • tbraton

        Let me point out that Fed Chairman Alan Greenspan first uttered his famous phrase about “irrational exuberance” in 1996, four years before the market peaked in the first quarter of 2000—and he did absolutely nothing to combat that “irrational exuberance” other than waiting for the stock market bubble to burst. Unless one counts the subsequent reduction of interest rates to an insanely low level and keeping them there, for an irrationally long time, which led, as inexorably as light follows the dawning of the Sun, to the housing bubble of the 2000’s. I agree with the poster above who pointed out the absurdity of Communist Party functionaries somehow turning into masterful capitalists overnight.

        • fastrackn1

          1.) Greenspan did little to combat it, but he did mention to the public that it was getting over-inflated, and he didn’t tell everyone to go out and buy more stock (and neither did our government) like the Chinese government is apparently doing, according to an article here a few days ago.

          2.) What caused the housing bubble was not excessively low rates (mortgage rates were in the low 7’s to the low 6’s during the several year run up to the housing crash), much of the lowering to excessively low rates was done after the crash in an attempt to stop or slow it.
          The main thing that caused the housing crash was the excessive lowering of lending standards by the government (starting in about 2000), in an attempt to allow everyone to buy a house.
          When everyone could qualify for a mortgage…and qualify for much more house than they could actually afford, and then often a few months later go out and get a HELOC for 125% of thier home’s value, it caused massive over-inflation of home prices and the eventual crash…..

  • johnwerneken

    Today it’s 1939 in Eastern Asia; 1939 in the Ukraine and the Baltics; 1941 in the Middle East; and 1929 in Greece and China. Meanwhile, the New York Stock Exchange has been shut down, allegedly because of a computer failure…

  • Aqualung

    -and it’s just a correction, a healthy, but painful correction. I’ll bet they won’t allow it to fully correct. Just as with our latest recession, the Fed didn’t allow a correction in inflated prices and wages to take hold. For some reason, they applaud high home prices and high gas prices.

    • f1b0nacc1

      An outstanding insight….

    • fastrackn1

      I would be surprised if the Chinese government has the capital, sophistication, or the experience to stop a massive correction.

      Or maybe they will figure out that it is best to just let it happen as we do here, and then learn something from the experience….

      • Aqualung

        I was thinking they’ll start their own QE program(s) like we did and what the ECB started recently. Also, I wonder if the Chinese govt cares about its citizens like US and European govts must (no humor intended, but compared to Hitler, Mao or Stalin)) or whether they’ll be more inclined to protect business and investors and let a billion peasants die.

      • Aqualung

        From Market Watch:

        Last week, the Bank of China cut short-term interest rates for the fourth time this year. Regulators relaxed margin requirements and cracked down on short sellers, while state-run media tried to calm jittery investors with happy talk. That did little to stanch the hemorrhage.

        Over this past weekend, government authorities and “private” Chinese brokerages and companies announced even more dramatic moves to prop up stocks:

        • Brokerages and mutual-fund companies said they would buy billions of dollars’ worth of Shanghai shares.

        • A state-owned investment firm said it would buy China-based ETFs.

        • Twenty-eight companies said they would put planned initial public offerings on hold, as IPOs had been the focus of the most intense speculation.

        • Regulators also increased the kinds of assets that can be used as collateral to buy stocks, to include — are you ready for this? — people’s homes. I’m not making this up.

        • fastrackn1

          “Regulators also increased the kinds of assets that can be used as collateral to buy stocks, to include — are you ready for this? — people’s homes. I’m not making this up.”


          Well I see their government definitely lacks the sophistication and experience….

  • Anthony

    “The rout rippled across global markets, dragging down U.S. index futures and fueling gains in haven assets such as the yen.” On economic (market) level “investor psychology’ remains integral to market stability and positions. Regarding political capacity (CCP) and managed capitalism verdict is still out – Xi may yet have tools to stanch concerns. For related take see:

  • czervik

    Jimmy Carter has already called this one. China is ascendant. The U.S.? Not so much. When Carter…or Paul Krugman…talk economics, I listen. Then I watch for the opposite to occur.

  • Jacksonian_Libertarian

    Everyone gives credit for China’s so called economic miracle to China’s Government Monopoly, but “they didn’t build that”. Up until Deng Zhou Ping and the opening of China, the Chinese economy was a disaster. So that is their level of competence, they have shown what they can do in all its awful incompetent glory. So what changed that made China grow so fast? Foreign investors came in and built state of the art factories in order to take advantage of Cheap Chinese labor, and the large 1.3 billion people market China represented. But China no longer has Cheap Labor, nor does it have the foreign investors looking to build state of the art factories to make products to sell to their overseas markets. Most foreign investors have seen the “writing on the wall” and gotten what they can out of China. In fact China’s use of government funds to support the stock market helps the laggards get a better price. China’s belligerence and territorial ambitions on all its borders, in particular the China Seas, threatens a war which would embargo all of China’s sea ports. If this happens, China’s export markets will swiftly be taken by competitive businesses (frequently the same businesses that were making things in China will simply make them elsewhere), and China is unlikely to ever get them back. China is also the largest importer of a number of basic materials, and China is likely to see itself as dark at night as North Korea. Another factor to consider is the huge foreign reserves held by China, if there’s a war, these foreign treasuries will be repudiated. China will be left with nothing but aging factories which lack the orders, electricity, and basic materials to run. As well as the white elephants of empty skyscrapers, cities, high speed trains, etc… on a positive note the air pollution should ease with the reduced electrical demands.
    I’m thinking that a taste of the good life is going to leave the Chinese People just a bit upset with the mismanagement of the incompetent Government Monopoly.

    • fastrackn1

      They are nothing but a paper tiger….

  • craigpurcell

    Maybe China will call in the loans they have given us.

    • lukelea

      That would be a boon to US exports.

  • Jerome Barry

    I purchased some puts on YINN a couple of days ago. Every time, you just have to be on the right side of the trade. The time to panic is when you realize you’re on the same side as everyone else.

  • TorresD30

    The stature of China on the world stage is built on a foundation with multiple faults. Rapid economic growth, domination of world trade, and military power are their observed hallmarks. Each of these faults stands to fracture at any time with catastrophic results.

    China’s economic growth and the associated domination of world trade have serious under lying problems. They have the ecological philosophy of a 1901 Pittsburg steel company coupled with the personnel policy of a 1920 West Virginia coal mine. They are poisoning their water, land, air, and population with industrial pollution. Most workers toil under slave-like conditions with barely substance compensation.

    Their export products that place them at the top of world are drawing questions from their customers. Poorly made products, often falsified to appear as top quality items, are scrutinized by buyers. The list is long and wide. Governments and industry often reject pharmaceuticals, construction materials, and electronics for not meeting basic standards. Some exports from China, especially food products, contain poisons hazardous to the consumer.

    China’s money, technology, and manufacturing capabilities have given them the ability to assemble a potent military. Unfortunately they have not learned the hard lessons of command and control acquired by other countries over the years. The United States was educated through blood and toil about operating a carrier task force in the Pacific during World War II. China on the other hand has assembled a collection of loose cannons on the precipice of destruction at any time. A nuclear armed ballistic missile submarine is a remarkably dangerous thing to release into the wild without controls on the launch command.

    Everyone, please welcome China, a new international power.

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