To all the many great friends of delanceyplace.com,
Last July, Penn Press published my book, The Next Economic Disaster, which has done very well in no small part due to the wonderful support of delanceyplace.com readers. I have now extended the research of that book in an article released this week in the quarterly journal Democracy titled "The Coming Crises in China," which delves deeper into concerns regarding China's economic future. Today's selection is from that article and here is a link to the full article: http://www.democracyjournal.org.
I would add that Democracy has long been an important resource for me, and its editor, Michael Tomasky, is a highly regarded progressive political voice. It was a privilege to be included in this issue.
As always, thanks for your interest and support. Here's the excerpt:
"China is now sitting on top of the greatest accumulation of bad debt and overcapacity in history. According to the Survey and Research Center for China Household Finance, more than one in five homes in China's urban areas is vacant, with 49 million sold but vacant units, and 3.5 million homes that remain unsold. Behind those vacant and unsold units is private debt, both loans to developers and mortgage debt. Housing values in China increased on the same perilous trajectory as in the United States before 2008 and Japan before 1991--and they have now started a similar decline. Meanwhile, real estate was 6 percent of U.S. GDP at the peak in 2005; today, it is as much as 20 percent of China's GDP.
"There are other red flags. China produced 8 percent of the world's furnace iron in 1980; it now produces 61 percent, even though the rest of the world still continues to produce every bit as much as it has in the past. As China's iron production accelerated in the period from 2002 to 2011, iron prices increased twelvefold in response to debt-fueled demand. (Increases in debt cause increases in prices.) But now that iron capacity has piled up beyond need, prices have tumbled by over 50 percent, and the excess capacity is so great that even the demand generated by rapid credit growth can no longer prop prices up. Also, China used more cement in the period from 2011 to 2013 (6.6 gigatons) than the United States did in the entire twentieth century (4.5 gigatons).
"These are but a few of many examples. Researchers at a Chinese state planning agency said recently that China has 'wasted' $6.8 trillion in investment. Overcapacity is so significant in many sectors that it will take years for it to be absorbed by organic demand. Ironically, this problem is compounded by China's own continued high growth rates, since high GDP growth is a measure of the creation of additional capacity even if that capacity is not needed.
"Good and sound loans, by definition, result in commensurate GDP growth. So when private-loan growth outstrips GDP growth, much of that excess -- from one-quarter to one-half, based on evidence from other crises -- will be problem loans. Based on this formula, China today is likely to have an estimated $1.75 trillion to $3.5 trillion in problem loans -- a figure well in excess of the $1.5 trillion of total capital in China's banking system.
"Of course, China's banks and shadow lenders are not reporting bad loans close to this amount. But neither did U.S. banks: On the eve of the U.S. crisis, banks were making loan-loss provisions at very low levels. Lending booms create the false appearance of prosperity, and fraud and corruption can make the picture even prettier.
"Some dismiss these warning signs, noting that many economic prophets wrongly made the same dire predictions for China during the late 1990s. But there's a big difference: In 1999, China's overall level of private debt was 111 percent of GDP; today, it's almost double that, at 211 percent. In 1999, it had plenty of room to power growth through continued private-debt expansion, and the debt boom in the West fueled unprecedented export demand. The opposite is true today."
Author: Richard Vague
Title: The Coming Crises in China
Last July, Penn Press published my book, The Next Economic Disaster, which has done very well in no small part due to the wonderful support of delanceyplace.com readers. I have now extended the research of that book in an article released this week in the quarterly journal Democracy titled "The Coming Crises in China," which delves deeper into concerns regarding China's economic future. Today's selection is from that article and here is a link to the full article: http://www.democracyjournal.org.
I would add that Democracy has long been an important resource for me, and its editor, Michael Tomasky, is a highly regarded progressive political voice. It was a privilege to be included in this issue.
As always, thanks for your interest and support. Here's the excerpt:
"China is now sitting on top of the greatest accumulation of bad debt and overcapacity in history. According to the Survey and Research Center for China Household Finance, more than one in five homes in China's urban areas is vacant, with 49 million sold but vacant units, and 3.5 million homes that remain unsold. Behind those vacant and unsold units is private debt, both loans to developers and mortgage debt. Housing values in China increased on the same perilous trajectory as in the United States before 2008 and Japan before 1991--and they have now started a similar decline. Meanwhile, real estate was 6 percent of U.S. GDP at the peak in 2005; today, it is as much as 20 percent of China's GDP.
"There are other red flags. China produced 8 percent of the world's furnace iron in 1980; it now produces 61 percent, even though the rest of the world still continues to produce every bit as much as it has in the past. As China's iron production accelerated in the period from 2002 to 2011, iron prices increased twelvefold in response to debt-fueled demand. (Increases in debt cause increases in prices.) But now that iron capacity has piled up beyond need, prices have tumbled by over 50 percent, and the excess capacity is so great that even the demand generated by rapid credit growth can no longer prop prices up. Also, China used more cement in the period from 2011 to 2013 (6.6 gigatons) than the United States did in the entire twentieth century (4.5 gigatons).
"These are but a few of many examples. Researchers at a Chinese state planning agency said recently that China has 'wasted' $6.8 trillion in investment. Overcapacity is so significant in many sectors that it will take years for it to be absorbed by organic demand. Ironically, this problem is compounded by China's own continued high growth rates, since high GDP growth is a measure of the creation of additional capacity even if that capacity is not needed.
"Good and sound loans, by definition, result in commensurate GDP growth. So when private-loan growth outstrips GDP growth, much of that excess -- from one-quarter to one-half, based on evidence from other crises -- will be problem loans. Based on this formula, China today is likely to have an estimated $1.75 trillion to $3.5 trillion in problem loans -- a figure well in excess of the $1.5 trillion of total capital in China's banking system.
"Of course, China's banks and shadow lenders are not reporting bad loans close to this amount. But neither did U.S. banks: On the eve of the U.S. crisis, banks were making loan-loss provisions at very low levels. Lending booms create the false appearance of prosperity, and fraud and corruption can make the picture even prettier.
"Some dismiss these warning signs, noting that many economic prophets wrongly made the same dire predictions for China during the late 1990s. But there's a big difference: In 1999, China's overall level of private debt was 111 percent of GDP; today, it's almost double that, at 211 percent. In 1999, it had plenty of room to power growth through continued private-debt expansion, and the debt boom in the West fueled unprecedented export demand. The opposite is true today."
Author: Richard Vague
Title: The Coming Crises in China
Publisher: Democracy A Journal of Ideas
Date: Spring 2015
And here is the book:
The Next Economic Disaster: Why It's Coming and How to Avoid It
Author: Richard Vague
Publisher: University of Pennsylvania Press
Copyright 2014 University of Pennsylvania Press
Date: Spring 2015
And here is the book:
The Next Economic Disaster: Why It's Coming and How to Avoid It
Author: Richard Vague
Publisher: University of Pennsylvania Press
Copyright 2014 University of Pennsylvania Press
