I predicted over 2 years ago that the Chinese stock markets would implode dramatically, much to everybody's disbelief and skepticism. It began a few months sooner than I thought, but, that is exactly what has happened. Now for the last year or so, I have predicted that things will get VERY bad in the Chinese real estate markets over the next several years. Again, most people I have talked to about this (especially Chinese) have almost universally dismissed this notion as absurd. -Skip- The news here is actually worse than I realized. One very alarming thing is that the Chinese banks have avoided writing down bad debt. I should have assumed this would happen, since it is hard to see how it could be avoided, given the nature of the Chinese culture. This is NOT a good idea. It is like pretending that defaults and bad debt simply don't exist, and this is very bad for the financial sector in the long run. This is exactly what the Japanese banks have done, and it is partly because of this that their stock markets have imploded over the last 20 years, and their economy has been stagnant for many years---the Nikkei collapsed in late 1989 after peaking at about 39,000. Now, a full 20 years later, it is only trading at around 8800, and would have to rise another 450% just to equal the old highs, and that would not even consider the effects of the reduced buying power of the yen today vs. 1989. When you take that and inflation into consideration, the Nikkei would probably have to rise more like 700% or 800% or more from current levels to equal the equivalent of 1989 values. This is actually not very atypical for an imploded bubble. And that is exactly what the Shanghai and Shenzhen markets are looking at, since you have the exact same lethal combination in 1989 Japan as you do now in China: dual bubbles in real estate and stocks (one has imploded), and a decided reluctance to face facts and write down bad debt and defaults. In contrast, in the US in March 2000, we had a bubble in the stock market but not the real estate sector. And even though 7 trillion dollars in stock equity disappeared after March 2000, there was an increase in value of the real estate markets of 8 trillion dollars that more than offset those losses. That is a major factor that allowed the economy to expand in subsequent years, but that is not possible in China, just as it was not possible in 1989 Japan. This is a singularly ominous combination that makes China's economic future outlook over the next 25 years very grim. And that, in turn, will lead to acceleration of civil unrest. In fact, that has already happened: incidents of violent civil unrest have accelerated markedly all across China over the past year or two. But I think this could well get far more noticeable and disruptive. Some economists have said that in order to avoid disruptive amounts of civil unrest (as opposed to the more manageable baseline levels of unrest that are a constant), China's economy must grow by 8.5% per year or more, just to keep enough people quiet. I suspect that is probably more or less approximately true in principle, although I don't know where they came up with that number. But regardless of what that magic number might be, when that economy gets really bad---watch out. That's the seeds of civil war, if you ask me. If you have a very large group of desperate people coupled with an extreme polarization of wealth, you have a classic "haves" vs. "have nots" Marxian confrontation that is the underpinning of most if not all major revolutions. Then, the only missing ingredient is a charismatic leader (like Mao, for example.....).
-Skip-
The news here is actually worse than I realized. One very alarming thing is that the Chinese banks have avoided writing down bad debt. I should have assumed this would happen, since it is hard to see how it could be avoided, given the nature of the Chinese culture. This is NOT a good idea. It is like pretending that defaults and bad debt simply don't exist, and this is very bad for the financial sector in the long run.
This is exactly what the Japanese banks have done, and it is partly because of this that their stock markets have imploded over the last 20 years, and their economy has been stagnant for many years---the Nikkei collapsed in late 1989 after peaking at about 39,000. Now, a full 20 years later, it is only trading at around 8800, and would have to rise another 450% just to equal the old highs, and that would not even consider the effects of the reduced buying power of the yen today vs. 1989. When you take that and inflation into consideration, the Nikkei would probably have to rise more like 700% or 800% or more from current levels to equal the equivalent of 1989 values. This is actually not very atypical for an imploded bubble. And that is exactly what the Shanghai and Shenzhen markets are looking at, since you have the exact same lethal combination in 1989 Japan as you do now in China: dual bubbles in real estate and stocks (one has imploded), and a decided reluctance to face facts and write down bad debt and defaults. In contrast, in the US in March 2000, we had a bubble in the stock market but not the real estate sector. And even though 7 trillion dollars in stock equity disappeared after March 2000, there was an increase in value of the real estate markets of 8 trillion dollars that more than offset those losses. That is a major factor that allowed the economy to expand in subsequent years, but that is not possible in China, just as it was not possible in 1989 Japan.
This is a singularly ominous combination that makes China's economic future outlook over the next 25 years very grim. And that, in turn, will lead to acceleration of civil unrest. In fact, that has already happened: incidents of violent civil unrest have accelerated markedly all across China over the past year or two. But I think this could well get far more noticeable and disruptive. Some economists have said that in order to avoid disruptive amounts of civil unrest (as opposed to the more manageable baseline levels of unrest that are a constant), China's economy must grow by 8.5% per year or more, just to keep enough people quiet. I suspect that is probably more or less approximately true in principle, although I don't know where they came up with that number. But regardless of what that magic number might be, when that economy gets really bad---watch out. That's the seeds of civil war, if you ask me. If you have a very large group of desperate people coupled with an extreme polarization of wealth, you have a classic "haves" vs. "have nots" Marxian confrontation that is the underpinning of most if not all major revolutions. Then, the only missing ingredient is a charismatic leader (like Mao, for example.....).
Some economists have said that in order to avoid disruptive amounts of civil unrest (as opposed to the more manageable baseline levels of unrest that are a constant), China's economy must grow by 8.5% per year or more, just to keep enough people quiet.
Inability to understand dynamics strikes again.
Growing by 8.5% doubles China's economy every 6 years.
Not on this globe; not in this Universe.
Given the resulting cost of labor, which is vanishingly low, compared to western labor costs, they have been able to claim double digit growth rates since the late '80s, I believe. That seems to be coming to an end. I have long thought that a severe downturn in China would be explosive. We may be about to see. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Explode, or fall over....?
Interesting that buildings can fall over, rather than collapsing into their own footprint. No doubt the 9/11 types will have something to say.... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
