Economics Questions

Re: China: "mortgages are not being spliced up and packaged"

Kakugo — Thu, 14 Jan 2010 23:46:27 GMT

There's one thing most analyst haven't taken into account about the Chinese situation, and that's the psychological factor.

Fifty years of Maoism gave the Chinese people a healthy distrust for the government and taught them how to prosper with minimal government intervention. Sure, the sons and grandsons of geriatric generals and party big wigs run large firms that can always count on a helping hand should things turn nasty but all the rest of the country have learned how to prosper the hard way. You won't hear a Chinese clamoring for his government to give him free health care or to "do more about the economy": they've learned the hard way to keep their mouth shut just in case someone in Beijing overhears them and has some wonderful idea. Compare with Europeans and Americans who think only government intervention can save them and won't rest until they have a politician promise them to "do something about this unacceptable situation". Then of course the new law turns immediately sour but as the saying goes you'd better watch out for what you wish for...

Re: China: "mortgages are not being spliced up and packaged"

Jonathan M. F. Catalán — Thu, 14 Jan 2010 22:34:50 GMT

The Economist published a fascinating article on the current state of China's economy, and it brings up some things that I should have researched on my own before coming to some of my conclusions. Although, I think the article highlights some inflationary aspects I have been pointing at, and it does not mention inflation occuring in some commodity markets, it nevertheless makes important arguments that even should China face a bubble and a subsequent credit crunch, it won't nearly be as long as many people project it to be. I generally think that the author of the article is correct, as long as the Chinese government avoids large bailouts, welfare programs and public works. Although it is true that the Chinese government did push through a massive stimulus package (although, not as big as the United States'), they also let 14,000+ factories go bankrupt. Although this led to a massive spurt in unemployment, obviously it allowed malinvestment to liquidate itself and for economic growth to continue. So, while mainstream economists have pointed out the stimulus package, I think what is more important was the government's decision to allow many industries to fail, and for capital to be reoriented towards more productive means.

The article has really made me interested on the subject, and if I can motivate myself I think I'll take this weekend (and maybe even the upcoming week) to further investigate the issue and come up with a much more accurate opinion. Some things from the article stood out:

Just as in the late 1980s, when Japan’s economy was tipped to overtake America’s, China’s strong rebound has led many to proclaim that it will become number one sooner than expected. In contrast, a recent flurry of bearish reports warn that China’s economy could soon implode.

So, it's mainly a compare and contrast between Japan in the late 1980s, and China today. It makes some good points:

Furthermore, Chinese homes carry much less debt than Japanese properties did 20 years ago. One-quarter of Chinese buyers pay cash. The average mortgage covers only about half of a property’s value. Owner-occupiers must make a minimum deposit of 20%, investors one of 40%. Chinese households’ total debt stands at only 35% of their disposable income, compared with 130% in Japan in 1990.

and:

Extraordinarily high saving and an undervalued exchange rate have fuelled rapid export-led growth and the world’s biggest current-account surplus.

Although I am less supportive of the second measure, the first one is very important. Later in the article, the author writes:

A bubble pumped up by saving is much less dangerous than one fuelled by credit.

Obviously, his definition of "bubble" is off and looking at the situation from an Austrian perspective one can definately see what is occuring. But, overall he is right that Chinese savings are stupendously high. At their height, in the late 1980s, Japan's savings rate was at a little over 15%. Today, China's personal savings rate is 45%+ (45%<X<50%). Nevertheless, we know that in an economy in which investment is only fueled by accumulated capital prices tend to drop (Jesús Huerta de Soto suggests that prices fall even during the opening phases of production, given the drop in demand [although, there is also a drop in supply[), and so the increase in prices, despite the increase in savings, is indicative of monetary inflation (probably mostly to keep the rmb undervalued, as the usd also falls in value at ever increasing rates).

In any case, my point is that it seems that although China is experiencing the formation of a bubble and malinvestment, the necessary contraction will probably be over quickly and it will not be as bad as it may be in other parts of the world where the government takes on a larger role as a provider of welfare and as a means to return an economy to full employment.

This is just a quickly formed opinion, though. As I said, I think the topic merits a very close analysis.

Re: China: "mortgages are not being spliced up and packaged"

Stranger — Wed, 13 Jan 2010 05:29:00 GMT

When the U.S. stock bubble crashed in 1929, the country still had an enormous industrial base to retool.

There is a bubble in China, but it's not a bubble from which no recovery is possible, which is what the U.S.A. has.

Re: China: "mortgages are not being spliced up and packaged"

JeffB — Wed, 13 Jan 2010 05:22:18 GMT

Marko:

da01tv:

Even though this is true, I thought China was lending hundreds of billions of dollars to troubled economies (e.g U.S.) in order for them to buy Chinese goods.

The way you describe this it would be stupid (working for nothing), but it would not be a bubble.

I personally think purchasing U.S. Treasuries is a textbook case of malinvestment. ;)

But seriously, China dooms itself to inflationary monetary policy as long as it doggedly pegs the Renminbi to the Dollar. The only way to do so is to inflate/devalue the Renminbi as fast as the U.S. inflates/devalues the dollar.

That's why other Asian countries are screaming about us exporting our bubbles over there into their economies. The "hot money" is flowing from here to there and they aren't happy about it. Some of them have already experienced the resultant boom bust cycles and they are not happy about it.

Re: China: "mortgages are not being spliced up and packaged"

wilderness — Wed, 13 Jan 2010 04:11:16 GMT

Jonathan M. F. Catalán:
The problem is one of simply looking at the housing market. The next bubble is not going to be in the housing market. Bubbles can exist in any industry which attracts the investment.

You don't see malinvestments in the housing market in China? I read your article you have linked in which you brought up barley and garlic. Is there anything else you've come across that is being excessively credited (seemingly forming a bubble)?

Re: China: "mortgages are not being spliced up and packaged"

Marko — Wed, 13 Jan 2010 03:25:31 GMT

da01tv:

Even though this is true, I thought China was lending hundreds of billions of dollars to troubled economies (e.g U.S.) in order for them to buy Chinese goods.

The way you describe this it would be stupid (working for nothing), but it would not be a bubble.

Re: China: "mortgages are not being spliced up and packaged"

Giant_Joe — Wed, 13 Jan 2010 02:03:34 GMT

ThreeTrees:

What gets out of hand is when those derivatives which have an underlying asset who's value is contingent on a liquidity spigot are used to capitalize banks.

I understand what you're saying, but the average attention span is much to short to pay attention to this. :( Hence, "animal spirits".

*As a side, I know that ABCT isn't a scientific theory that needs evidence to back it up. It's deductively derived. I'm just saying that these developments will help in providing empirical evidence in the sense that it will make the case stronger from a mainstream point of view.

Re: China: "mortgages are not being spliced up and packaged"

ThreeTrees — Wed, 13 Jan 2010 01:46:22 GMT

^Werd. Securitization can't "get out of hand". What gets out of hand is when those derivatives which have an underlying asset who's value is contingent on a liquidity spigot are used to capitalize banks.

But even if you don't understand the ABCT there's still those pesky, speculative "animal spirits" that so many believe are responsible for bubbles that (supposedly) don't rely on credit expansion or securitization to drive up asset prices.

Re: China: "mortgages are not being spliced up and packaged"

Giant_Joe — Wed, 13 Jan 2010 01:29:26 GMT

ThreeTrees:

More interesting to me is the massive breakdown in logic. Since when does the fact that mortgages are not being securitized preclude the possiblity of a bubble in housing? I'm not saying that there is I'm just saying that quote is utter nonsense.

The mainstream thought is that it wasn't credit expansion by a central bank that caused the boom and bust, but it was the securities market that just, all of a sudden, went out of control as a result of greed and the repeal of glass-stegal.

The Chinese bubble (like many other bubbles) will provide more empirical evidence in support of the ABCT, and will show that the securities market isn't necessarily the culprit. It will be something else this time.

Mainstream opinion would logically hold that railroads, banks, securities markets, the stock market, computers, houses, oil and whatever else causes business cycles. They fail to see that every time it was always a result of government intervention/monopoly on money.

Re: China: "mortgages are not being spliced up and packaged"

jmorris84 — Wed, 13 Jan 2010 00:52:45 GMT

Kakugo:

China will pull through just nicely if they can avoid a war with the US. Sure, they'll have a few bubbles but they can survive. Contrary to the US and Europe that can ill afford what the depression has in store for them.

How certain are you that when the real estate bubble there bursts, they will "pull through just nicely?" There seems to be quite a lot of inflation and devaluation of their currency, not to mention they are propping up a phony economy in the US, all while they are blowing up a real estate bubble that will eventually bust.

Re: China: "mortgages are not being spliced up and packaged"

LvMIenthusiast — Wed, 13 Jan 2010 00:43:18 GMT

Before, I went to bed last night (this morning) that article provided for some late-night laughs. Honestly, I read most of the article, but couldn't get through the rest.

No logic. Whatsoever.

Re: China: "mortgages are not being spliced up and packaged"

Kakugo — Wed, 13 Jan 2010 00:31:02 GMT

I've just read the original Forbes article. Typical fare written by a typical economist: please read the phrase about Alan Greenspan being an "Ayn Rand lover" and being staunchly against government intervention which had me laugh for a good ten minutes. This man is not insane. Nor deaf, dumb and blind. Nor he has lived under a rock for the past thirty years. He most likely hold at least one PhD and probably gets paid a few thousands a month for spouting out such hilarious lines. Sadly he's not working for Comedy Central.

China will pull through just nicely if they can avoid a war with the US. Sure, they'll have a few bubbles but they can survive. Contrary to the US and Europe that can ill afford what the depression has in store for them.

Re: China: "mortgages are not being spliced up and packaged"

da01tv — Tue, 12 Jan 2010 21:14:30 GMT

More interesting to me is the massive breakdown in logic.
...
Bubbles can exist in any industry which attracts the investment.

Someone noticed how garlic bulbs and tulip bulbs look very similar :)

Re: China: "mortgages are not being spliced up and packaged"

ThreeTrees — Tue, 12 Jan 2010 21:13:40 GMT

More interesting to me is the massive breakdown in logic. Since when does the fact that mortgages are not being securitized preclude the possiblity of a bubble in housing? I'm not saying that there is I'm just saying that quote is utter nonsense.

Re: China: "mortgages are not being spliced up and packaged"

Jonathan M. F. Catalán — Tue, 12 Jan 2010 21:04:46 GMT

The problem is one of simply looking at the housing market. The next bubble is not going to be in the housing market. Bubbles can exist in any industry which attracts the investment.