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Thread: China's growth, boom, bubble and impact here

  1. #1

    Default China's growth, boom, bubble and impact here

    I've mentioned a number of times that I'm very wary of China being in a bubble and a crash in China could bring an end to the good times here.

    It's just a lay opinion/suspicion but our good times here seemed to coincide nicely with China's accelerating growth early in the last decade. As a result, I've seen China as underlying much of the rise in the price of commodities like oil. I also believe that America's offshoring of much of its old - and new - economy, massive development in China and the rest of Asia spread jobs throughout the emerging markets. I see Australia and Brazil's booms in the same light.

    So, are we at risk, or will world wide growth bail us out no matter what?



    China Savers’ Penchant for Property Magnifies Bust Danger
    By Bloomberg News Feb 4, 2014
    excerpt:

    "Chinese households’ concentration of wealth in real estate is magnifying the danger to the world’s second-largest economy of any property bust, as the nation grapples with the consequences of its record credit surge.

    Some 66.1 percent of family assets were in housing in 2013... Mortgage debt as a share of disposable income rose to 30 percent from 18 percent in 2008, according to

    http://www.bloomberg.com/news/2014-0...st-danger.html



    Maybe this should have been tacked onto this old thread.
    End of Oil Boom Coming Quick
    http://www.connect2edmonton.ca/forum...na+real+estate



    .
    Last edited by KC; 05-02-2014 at 10:18 AM.

  2. #2
    C2E Long Term Contributor
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    China's exploding middle class is going to continue to drive growth for many MANY years to come. Their real risk is environmental, be it with the health of their own citizens or their air quality/effluent issues.
    www.decl.org

    Ottawa-Edmonton-Vancouver-Edmonton

  3. #3

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    There is no doubt china will have a crash, only question is when? In our interconnected global economy is it more likely we will see busts quicker inbetween with harsh severities? With a crash in china this will be far worse then our Great Recession and the good ol Great Depression

  4. #4
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    Quote Originally Posted by IanO View Post
    China's exploding middle class is going to continue to drive growth for many MANY years to come. Their real risk is environmental, be it with the health of their own citizens or their air quality/effluent issues.

    And keep in mind the people of China are starting to organize (small) labour movements, they see the rich bosses and rich corps so the average worker wants a piece of it too. Things will slowly become more expensive to make in China and one day could affect the boom there.

    Then the companies will seek out cheap labour again and move operations to countries like Indonesia. Wash, rinse, repeat.

    I'm hoping that the fall of China will spur more manufacturing here in North America, but I doubt it.

  5. #5
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    China having "cheap labor" became a myth 5+ years ago. That tends to happen pretty quickly when wages are going up 25% a year: http://www.economist.com/node/21549956

    That article itself is nearly two years old.

  6. #6

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    China may have problems, but this scare story isn't one of them | South China Morning Post
    Excerpt:
    "In 2014, China has no such problems. External debt is small relative to GDP. And with US$3.82 trillion in foreign reserves at the end of last year, Beijing can cover China's near-term foreign liabilities more than three times over.

    Sure, the shrinkage of the central bank's balance sheet were it actually forced to sell assets in order to fund the country's external liabilities would inflict a painful monetary tightening on China's domestic economy.

    But with Beijing sitting on such a large pot of foreign reserves, such an extreme crisis is hardly likely."

    http://www.scmp.com/business/article...-isnt-one-them


    The $15 trillion shadow over Chinese banks - Telegraph
    Excerpt:

    "Drawing attention to the problems at an individual bank is never likely to make you popular, but calling time on an entire financial system is another thing entirely.
    ...
    Born and raised in America and a graduate of Yale, she has claimed in painful detail that China has embarked on an unprecedented experiment in credit expansion that far exceeds anything seen before the financial crisis that rocked Western markets six years ago.
    Working out of Beijing, Chu has ...
    In a country where the banks, even the largest, are not known for openness, Chu has warned since 2009 about a rapid expansion in lending that has seen something close to $15 trillion (£9.1 trillion) of credit created, fuelling a property and infrastructure boom that has no equal in history.
    ...
    “The FX [foreign exchange] reserves cannot be used nearly to the extent that people think they can. There are some analysts that think they can’t be used at all, but I disagree with that.
    “I believe they can’t be used in their entirety by any means because ”...

    http://www.telegraph.co.uk/finance/n...ese-banks.html
    Last edited by KC; 08-02-2014 at 05:53 PM.

  7. #7

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    Over a decade ago Buffett warned of daisy chain risks (linkages) calling derivatives weapons of mass destruction. He said:

    "History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.

    In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates... In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind...

    Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.

    Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated... The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems."

    http://www.berkshirehathaway.com/2002ar/2002ar.pdf

    What I think we have to think about is what linkages exist between our economy and China's economy.
    Last edited by KC; 08-02-2014 at 06:29 PM.

  8. #8

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    I don't think we will see a crash caused by China. It is just that they will not grow in the double-digit range anymore, hence less demand for "growth" commodities like iron ore and to some extent energy. As IanO mentioned, and I have also pointed out in another post, the emergence of middle class there will support prices of agriculture commodities, going forward.

    As for Mr. Buffet and his "derivatives" are evil, he might have some explanation to do with his sale of "exotic" put options in 2004-2007. Don't get all they say at face value, like their argument before buying Exxon, and then what happened with the latest Exxon quarterly report? Exxon fell to number 3 in market cap size from its once mighty first place.

    http://ftalphaville.ft.com/2014/02/0...s-more-exotic/

    In the comments on our last piece on Berkshire Hathaway’s very large derivative contracts we and Professor Pablo Triana learned that Warren Buffett treats the put options he sold between 2004 and 2008 as hard-to-value Level 3 liabilities that must be marked-to-model (or myth). See page 84 in the 2009 annual report.

    That helps to explain why the quarterly mark-to-market losses Berkshire reported on the contracts were not larger, given big moves in currencies and equity indices in 2008 and 2009. But in resolving one mystery it created another, because valuing large put options is typically straightforward, even if like Mr Buffett you dislike the theoretical basis for doing so, and Berkshire’s commentary and disclosure has always indicated that the contracts are of the plain vanilla variety.

    Prof Triana, of the ESADE Business School, describes a January 16, 2008 internal Lehman Brothers presentation that outlines the purchase of a “worst-of” put basket from Berkshire in 2007.

    Of course Buffett may have stuck to vanilla options. Here is how the Sage describe the puts in his 2007 letter, page 16:

    The second category of contracts involves various put options we have sold on four stock indices (the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at year end of $4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between 2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate, will be profitable and that we will, in addition, receive substantial income from our investment of the premiums we hold during the 15- or 20-year period.

  9. #9

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    I was reading the Triana work last night. Here's an article of key links (see below).

    What's missing is that Buffett wasn't attacking the derivative product as much as attacking the valuation and accounting of them. He's actual comments in the link above are a good read.


    http://www.bloomberg.com/news/2014-0...a-rainbow.html


    Another old interview...

    Interview: Brooksley Born

    "...What did you think when you heard that?

    I thought that it was exactly what I had been worried about. None of us, none of the regulators had known until Long-Term Capital Management phoned the Federal Reserve Bank of New York to say they were on the verge of collapse.

    Why? Because we didn't have any information about the market. They had enormous leverage. Four billion dollars supporting $1.25 trillion in derivatives? Excessive leverage was clearly a big problem in the market. Speculation? I mean, this was speculation, gambling on prices, on interest rates and foreign exchange rates of a colossal nature. Prudential controls? I mean, all these big banks had in essence ... extended unlimited loans to LTCM, and they hadn't done their homework. They didn't even know the extent of LTCM's exposures in the market or the fact that the other OTC derivatives dealers had been lending to them as well.

    They thought they were the only bank, and there were 13 others on the list, right?

    Well, at least there was a suggestion of that. There was some reporting of great surprise.

    The other thing it showed me, which I hadn't really been aware of before, was the risk from tremendous contagion. Not only did these instruments, which supposedly are useful for managing risk, it multiplied risk and spread it around throughout the economy, but because of counterparty risk, one institution's failure could potentially bring down or adversely affect a large number of our biggest financial institutions.

    The Federal Reserve opinion was that had the OTC derivatives dealers not stepped in and taken responsibility, this could have had a widespread, adverse, systemic impact on the financial system.

    Meltdown?

    Yes. A mini-2008, in effect.

    One decade before?

    Exactly. ..."
    http://www.pbs.org/wgbh/pages/frontl...iews/born.html
    Last edited by KC; 08-02-2014 at 11:39 PM.

  10. #10

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    I hope I am not accused of confirmation bias, but here is a strong case why interpreting Chinese credit growth data as a sign of imminent crash is not justified.

    By Yukon Huang, senior associate at the Carnegie Endowment and a former country director for the World Bank in China

    Financial Times, 11 Feb 2014:
    http://blogs.ft.com/the-a-list/2014/...#axzz2t2umXkgT

    Some market watchers, shaken by the eye-popping increases in China’s debt indicators, have concluded that a financial crisis is imminent. After all, countries whose debt ratios have risen by similar magnitudes in just a few years have all crashed soon after. China, they say, seen as no different.

    Yet when analysts drill into the balance sheets of borrowers and banks, they find little evidence of impending disaster. Government debt ratios are not high by global standards and are backed by valuable assets at the local level. Household debt is a fraction of what it is in the west, and it is supported by savings and rising incomes. The profits and cash positions of most firms for which data are available have not deteriorated significantly while sovereign guarantees cushion the more vulnerable state enterprises. The consensus, therefore, is that China’s debt situation has weakened but is manageable.

    Why are the views from detailed sector analysis so different from the red flags signalled by the broader macro debt indicators? The answer lies in the role that land values play in shaping these trends.

    Land in China is an asset whose market value went largely unrecognised when it was totally controlled by the State. Once a private property market was created, the process of discovering land’s intrinsic value began, but establishing such values takes time in a rapidly changing economy.

    The Wharton/NUS/Tsinghua Land Price Index indicates that from 2004-2012, land prices have increased approximately fourfold nationally, with more dramatic increases in major cities such as Beijing balanced by modest rises in secondary cities. Although this may seem excessive, such growth rates are similar to what happened in Russia after it privatised its housing stock. Once the economy stabilised, housing prices in Moscow increased six fold in just six years.

    Much of the recent surge in the credit to GDP ratio is actually evidence of financial deepening rather than financial instability as China moves toward more market-based asset values. If so, the higher credit ratios are fully consistent with the less alarming impressions that come from scrutiny of sector specific financial indicators.
    Last edited by FamilyMan; 11-02-2014 at 01:29 PM.

  11. #11

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    Yeah I shouldn't have said crash myself. Some bubbles deflate. So above we have several experts with boots on the ground experience. Regarding the lack of evidence in balance sheets though, we had that in the US and Europe too. There were no outward signs of extreme stress up to about 2007 and most people were blissfully ignorant of the growing risk. (That's where Buffett's comments have meaning.)

  12. #12

    Default

    Just a "progress" report...

    Bust may be looming over China property market - The China Post
    Excerpt:

    "The increases have been a key source of wealth for China's rising middle classes, and a major driver of the economy.

    Now some — including individuals who have made fortunes — foresee imminent disaster.

    “I think Chinese property is the Titanic about to crash into the iceberg right in front of it,” Pan Shiyi, billionaire chairman of commercial developer SOHO China, said at a forum, China Business News reported last week. ..."

    http://www.chinapost.com.tw/business...5/Bust-may.htm

  13. #13

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    Short-seller Chanos says China seeing faster capital flight
    BY SAM FORGIONE
    NEW YORK Tue Oct 28, 2014
    excerpt:

    "It's safe to say it's accelerating," said Chanos, speaking of capital flight out of China, and said China's quarterly drop in foreign exchange reserves was "noticeable."
    ...
    "Chanos estimated Tuesday that China was building about 20 million condominiums each year while selling just 4 million to 5 million, a sign of overinvestment. He said that he would advise investors to avoid Asian financial institutions."
    http://www.reuters.com/article/2014/...0IH2AK20141028

  14. #14

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    Well this says it all. It's definitely not defiantly crashing.

    Now China slowdown hits beer sales
    http://www.telegraph.co.uk/finance/m...eer-sales.html

  15. #15

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    Dog daze in China...



    When defaults are good: Chinese markets embrace failure
    BY LISA ABRAMOWICZ, Bloomberg News, Apr. 21 2015

    excerpts"

    "Letting companies go bust may be one way to tell the world your markets are for real. That it’s not just a one-way trade in the China bond market. On Tuesday, Baoding became the country’s first state-owned company to default on an onshore bond. A day earlier, Kaisa became the nation’s first real estate company to miss payments on its dollar-denominated debt.
    ...
    "Of course, there’s risk and potential pain associated with that outlook. China’s corporate debt is the highest in the world, former central bank adviser Yu Yongding wrote in the official China Daily last week. Companies had $14.2-trillion in debt at the end of 2013, exceeding every other country including the U.S., which had $13.1-trillion in company obligations, S&P said in a June report. ..."
    http://www.theglobeandmail.com/globe...ticle24045995/

    Once-Prized Tibetan Mastiffs Are Discarded as Fad Ends in China

    NYT, By ANDREW JACOBS
    APRIL 17, 2015

    "China’s boom-to-bust luxury landscape is strewn with devalued commodities like black Audis, Omega watches, top-shelf sorghum liquor and high-rise apartments in third-tier cities. Some are the victims of a slowing economy, while others are casualties of an official austerity campaign that has made ostentatious consumption a red flag for anticorruption investigators."


    http://mobile.nytimes.com/2015/04/18...hina.html?_r=0




    Mine Bust Halves Australia Outback Home Prices as Jobs Fade

    "In Blackwater, a town of 5,000 amid the high-plains country of Australia’s Queensland state, the shockwaves from China’s slowdown are good business for Gerard Eising."...

    "Australia is experiencing a two-speed housing market: while prices in Sydney have surged to records, the end of the mining boom is depressing home values in commodity-rich regions where prices once rivaled those in New York and London.
    The price declines in mining towns emphasize the dilemma for Reserve Bank of Australia Governor Glenn Stevens, who’s trying to soften the impact of waning resources spending by cutting interest rates to a record-low 2.25 percent without stoking unsustainable asset bubbles."

    http://www.bloomberg.com/news/articl...as-jobs-vanish
    Last edited by KC; 21-04-2015 at 12:59 PM.

  16. #16

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    Amazing amounts of money involved these days...


    China Has a Massive Debt Problem
    by Enda Curran & Lianting Tu, April 22, 2015

    excerpt:

    "China has a $28 trillion problem. That’s the country’s total government, corporate and household debt load as of mid-2014, according to McKinsey & Co. It’s equal to 282 percent of the country’s total annual economic output.

    President Xi Jinping’s government aims to wind down that burden to more manageable levels by ..."

    "All this explains why cleaning up the debt mess matters. With $3.73 trillion in foreign currency reserves, China has the financial resources to handle any future bank bailout or economic stimulus if need be."

    http://www.bloomberg.com/news/articl...-policy-makers

  17. #17

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    Devaluations don't always work that well to support or grow exports.
    Also, the move isn't much but politically, it's a pretty clear signal that they are in trouble. Anyway, hopefully it works to prevent a crash.

    TSX stocks plunge as commodities slump on yuan devaluation
    Eric Lam, Bloomberg
    August 11, 2015

    "...China, the world's biggest commodities user, devalued the yuan by the most in two decades in an effort to support its exporters. The central bank cut its daily reference rate by 1.9 percent. China is Canada's second-largest trading partner after the U.S."

    http://www.bnn.ca/News/2015/8/11/Sto...valuation.aspx

  18. #18

    Default Eight signs a global market crash is imminent

    Interesting to see the financial post, posting this Telegraph doomsday prediction:

    http://business.financialpost.com/in...s-lose-control

    Not sure what I think, people are always predicting crashes, sometimes they get "lucky" and their prediction is right, sometimes they don't.

    What I find very strange about this one, is that normally low commodity prices, you would think, should be a good thing for the world economy (eg cheap fuel, buy a bigger truck. Cheap steel, build longer bridge). I guess the contra to that, is the commodity prices are as much a reflection of demand as supply, so if they are depressed, demand is low, economy is weak. Doesn't it self correct at some point though, ie goes so cheap that economic activity ramps up, a typical commodity cycle?

  19. #19

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    Quote Originally Posted by moahunter View Post
    Interesting to see the financial post, posting this Telegraph doomsday prediction:

    http://business.financialpost.com/in...s-lose-control

    Not sure what I think, people are always predicting crashes, sometimes they get "lucky" and their prediction is right, sometimes they don't.

    What I find very strange about this one, is that normally low commodity prices, you would think, should be a good thing for the world economy (eg cheap fuel, buy a bigger truck. Cheap steel, build longer bridge). I guess the contra to that, is the commodity prices are as much a reflection of demand as supply, so if they are depressed, demand is low, economy is weak. Doesn't it self correct at some point though, ie goes so cheap that economic activity ramps up, a typical commodity cycle?
    Cycle is a nice sounding word but duration and survivability is what it's all about.

    Like Buffett says, he rejoices when stock prices fall because he can get more for his money. That's a distinctly long-term, investment minded perspective. Long-term being 15-20 years - or more. For those that are in more precarious short-term positions (with respect to their jobs, careers, livelihoods, age, family needs, facing career or economic obsolescence, etc) and especially so along those that thought they were on firm ground and slowly come to a dreadful realization that it's likely to slip away, the long-term to them is a couple years, yet they've made many long term commitments (mortgage, marriage, kids..) that they are locked into. So fear sets in and slowly rolls through the population. The self correction only occurs well after far more damage than thought possible sets in.

    (In around 2001 I was at a CFA annual forecast dinner and all the 'expert' speakers were saying that the market was going to turn and everyone around me was agreeing. The market had already fallen a lot. My WAG prediction though was for another 40% drop by the end of the next year. I was almost bang on by late October but way off as recovery set in by the end of the year. My view is that when the end seems near among the pros, you can often knock another 40-50% off. Same psychological error occurs on the upside. The more emotional the situation, the more the vested professionals underestimate the potential extremes.)

    On commodities, I think the thing people miss is that plant capacity once built can shift from owner to owner. So first cost cutting kicks in and drives commodity prices down further. As margins fall for everyone, everyone then tries to maximize their production to "make it on volume". (If the market can handle more supply.) Then bankruptcy protection kicks in and potentially only serves to encourage even deep price cuts for everyone and finally capacity changes hands. Bankruptcy potentially drives prices even lower as new owners pick up productive capacity on the cheap. It's a downward pricing spiral.
    Last edited by KC; 20-08-2015 at 09:21 AM.

  20. #20

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    Just another useless forecast... close to 50/50.

    However a useful perspective - see quote below...

    Citigroup: ‘Rapidly Rising Risk’ of Global Recession
    A global downturn fueled by China’s woes could very well soon be upon us, warns Citi’s top economist.

    "It is to be expected that economists – even economists working for the same team – have different views about the likelihood of different future outcomes. Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air. We believe we provide a better service to our clients if we don’t pretend there is a consensus if there isn’t one. It is better to provide a range of alternative forecasts, and to explain the reasons for the differences between them, than to present a phony consensus."


    http://www.barrons.com/articles/citi...ion-1441831373

  21. #21

    Default

    Same thing happened here, a large drop in the currency... kicking the can down the road.

    If China Killed Commodity Super Cycle, Fed Is About to Bury It
    Kevin Crowley, November 24, 2015

    The gauge tracking the performance of 22 natural resources has plunged two-thirds from its peak, to the lowest level since 1999. That shows it’s back to square one for the so-called commodity super cycle, a hunger for coal, oil and metals from Chinese manufacturers that powered a bull market for about a decade until 2011
    ...

    "Without fail, every single industrial commodity company allocated capital horrendously over the last 10 years,” Lapping said.

    A Fed move on rates and accompanying gains in the dollar will make it harder to mop up excesses in raw-materials supply. Mining and drilling costs often paid in ...

    "The problem with lower currencies is operations that were under water a year ago are all of a sudden profitable on a cash basis," said Charl Malan, who helps manage $31 billion at ... "Why would you shut them?"...


    http://www.bloomberg.com/news/articl...out-to-bury-it

  22. #22

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    It's still growing....


    China economic growth slowest in 25 years
    3 hours ago, From the section Business

    "China's growth in 2015 was equivalent to the size of the entire economy of Switzerland or Saudi Arabia," he said. "That's not an easy feat and shows the magnitude of the accomplishment," he added.


    http://www.bbc.com/news/business-35349576
    Last edited by KC; 19-01-2016 at 07:18 AM.

  23. #23

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    If you look at posts here on C2E and elsewhere, there has been a general consensus that China is slowing down. The "official" stats from China has always been looked at with suspicion in the investment community, though now, an "authoritative person" has told the followings to the People's Daily, official paper of the ruling Communist party:

    China's economic trend in the coming years will be "L-shaped", rather than "U-shaped", and definitely not "V-shaped", due to weak demand and overcapacity, the paper said.
    Just tells you the scale of the change. In this new landscape those companies having exposure to the mainland consumers are likely to gain the most. Here is the story of Disney opening a Disney Land in Shanghai in a month, and like anything China, the scale is mind-boggling:

    ...The world’s largest entertainment company is banking on 330 million Chinese living within three hours of the site to pay for visits to the $5.5 billion resort, famous for its iconic castle and themed rides. China’s government, in turn, is relying on increased consumer spending to boost an economy growing at the slowest pace in 25 years...

    The theme park is expected to attract 15 million visitors annually in the short-term and raise demand for travel in Shanghai, China International Capital Corp. analysts led by Xin Yang wrote in a note dated May 8....

  24. #24

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    I think we are see the impact of their slowing growth in the falling commodity prices around the world. maybe other factors were more significant but I'm not sure what factors.

  25. #25

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    ^ that surely affected the demand side (still amazes me they acknowledge they will never be the same, aka L-shaped recovery). There was also supply side factor, the shale story etc.

  26. #26

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    Quote Originally Posted by FamilyMan View Post
    ^ that surely affected the demand side (still amazes me they acknowledge they will never be the same, aka L-shaped recovery). There was also supply side factor, the shale story etc.
    Well, they've long talked about a shift away from an export market to a domestic consumer demand driven market. (Having watched Japan try to do that for a few decades now though, always made me suspicious of such claims. When the trade surplus turns towards a deficit or even becomes a smaller trade surplus, it's hard to support as lavish a lifestyle as people become accustomed to. Only the US seems to be able to perpetually survive trade deficits.)

  27. #27
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    Japan's issues don't seem to have a lot to do with balance of trade. They were a large net exporter when their economy began it's stagnation in the 90's. Their balance of trade only turned negative after the global recession in 2008, and at present is roughly balanced.

    http://www.tradingeconomics.com/japan/balance-of-trade

    Japan has long been a "domestic consumer demand driven market". For decades.

  28. #28

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    ^they don't have resources like we do / rely heavily on importing them from China, Canada, etc. Japanese companies have also shifted a lot of production to China. Like you note, still a huge and wealthy domestic market there. They are sort of a non-militarized version of the US, a place that consumes and invests, because of their previous success.

  29. #29
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    Japan's problems were directly caused by the burst of an asset-price bubble and associated over-lending. The ensuing stagflation was sufficiently bad that monetary policy ended up failing, leading to their current situation in a zero lower bound liquidity trap.

    Lesson: don't lend huge amounts of money to people based on unfounded speculation that their firm's value will increase.

  30. #30

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    Quote Originally Posted by Jaerdo View Post
    Japan's problems were directly caused by the burst of an asset-price bubble and associated over-lending. The ensuing stagflation was sufficiently bad that monetary policy ended up failing, leading to their current situation in a zero lower bound liquidity trap.

    Lesson: don't lend huge amounts of money to people based on unfounded speculation that their firm's value will increase.
    In the '70s and '80s Japan started to dominate electronics and auto manufacturing. American manufacturers even bought into their auto manufacturing sector. That's fresh capital coming into a country in a big way.

    It's somewhat like Alberta. Rising net exports bring in fresh wealth. That money / increased demand for exports triggers expansion further feuled by increasing leverage and an increasing velocity of money.* Out of this optimism broad based asset price increases and bubbles start to occur and then when the importation of wealth and credit slips (just comes off the peak) the contractions can be surprisingly harsh. Like they say, debt is a double edged sword. So is export growth in a sense.

    * in Alberta just look at the minimal development that occurred in the 1980s and 1990s. The herd behaving investors stayed away in droves after getting burned in the early 1980s, but then in the 2000s the money flowed in from the US, Europe, China, even the Middle East. Every investor jumped on the bandwagon even as costs rose by several multiples as labour and materials costs increased.

    China has grabbed a lot of the world's manufacturing and that raised their exports. They've leveraged up based on expectations of their incredible growth rate continuing for a long time - without interruption. Their lower cost structure, internal growth, etc. increased global demand and subsequently drove up demand for commodities and hence commodity prices. Global demand for many things are still growing but some of the leverage demands growth rates that no longer exist. This is how implosions start.
    Last edited by KC; 11-05-2016 at 10:31 AM.

  31. #31
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    Again, Japan's stagnation began decades before their trade balance went negative.

  32. #32

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    Quote Originally Posted by Marcel Petrin View Post
    Again, Japan's stagnation began decades before their trade balance went negative.
    Why be concerned about positive-negative crossovers? Markets are forward looking and its the change in rates that matter and a fear or recognition that the future won't be the same as the past or as good or bad as anticipated. I'd say it's more a matter of acceleration and deceleration. Back to the alberta example, I don't know the numbers but I bet global demand trended higher and higher through the 1980s - 90s, and growth rates probably didn't turn negative but excess capacity had been built into the system based on higher expectations (of prices, and demand growth). Significant fresh investment stopped flowing into Alberta for a number of years and Alberta focused on cost reductions and not so much on expansion despite what I expect was growing global demand.


    My view is that asset bubbles are just the final blowoff stage after a series of positive events create irrational expectations.

    The growth
    http://www.grips.ac.jp/teacher/oono/...re_J/lec11.htm

    The stagnation
    http://www.iun.edu/~hisdcl/h207_2002...condecline.htm
    Last edited by KC; 11-05-2016 at 11:01 AM.

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