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Big Trouble in Big China
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  • Anthony

    China’s spectacular stock crash poses three questions. First, what caused it? Next, will it harm the real economy of spending and hiring, inside China and beyond? And, finally, will it affect China’s Communist Party and its economic strategy?” As well, above short piece premised on Western assumption on how capitalist model works. China, Xi may operate from different premise despite thoughts/worries of…investors! A companion piece: http://www.vox.com/2015/7/9/8922727/china-economy-stock-market-problem/in/8677926

  • iconoclast

    While the underlying mechanisms are certainly different I have always been struck by the similarity between the concern about China in the last decade as compared to the concern about Japan in the 1980’s.

    • Jacksonian_Libertarian

      The situation is similar but much worse for China than it was for Japan. Japan was a mature industrial country with dozens of innovative and competitive companies, like Sony, Toyota, etc… China on the other hand was uplifted by foreign investors building new state of the art factories to take advantage of the Cheap Chinese labor and potential 1.3 billion Chinese customers. Now, the foreign investors are gone, and there’s nothing China makes that can’t be made better elsewhere for less. Also, China’s belligerence and territorial ambitions, combined with its extreme strategic vulnerability to being blockaded, make investing there much too risky. In addition any foreign investor that hasn’t already gotten their investments out of China is likely to have them confiscated as Communist countries always do. 40% of China’s economy is dependent on exports and imports, when China’s belligerence eventually causes a war and blockade, China’s economy will implode by 50%-75%. No nation in recent history has suffer such a swift economic decline, and the Chinese people will be enraged and kill all the politicians for their incompetence. Unlike Japan who’s Real Estate Bubble burst sent their economy into a 26 year and counting deflationary depression. China hasn’t a single recognizable world quality brand name, so any lost world market share will be permanently lost.

      • iconoclast

        Very interesting points. Thank you for sharing them.

  • Greg Olsen

    What is being described is a classic example of the Minsky financial instability hypothesis at work. Hyman Minsky looked at banking, as the mechanism of financing investment in the capital stock, from the point of view that banking is not a public utility but a profit seeking enterprise and that during an economic expansion, there is a gradual relaxation of lending standards as good places to put deposits to work dry up. At the beginning of an expansion, lenders lend to borrowers who are likely to be able to repay the principal on the loan. Then as the number of opportunities for making those “hedged” loans dry up, yet deposits increase with economic expansion, the lenders relax standards to make speculative loans to those likely to be able to make interest payments and hopefully roll over principal at maturity. The “Ponzi” stage occurs when loans are made to borrowers of such low quality that they must borrow in order just to pay interest on previous loans (or sell assets to pay). At that point the economic edifice becomes unstable as the Ponzi finance collapses, causing a macro economic bust. Chinese authorities are playing the role of lenders in this scenario. In order to keep the party going, they’ve been lending in the Ponzi stage. It is now unstable.

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