Contrarian Investor Sees Economic Crash in China

[MKSheppard]

No. I welcome a demographic collapse for the sake of the world.

Ah, there we go again. Too bad China won't demographically collapse; and will continue to churn out nuclear and coal plants to support it's lifting of hundreds of millions of people to a higher, cleaner, safer standard of living.

[mr friendly guy]

The biggest issue with the population isn't power, Shep. It's water supply and sewerage.

Yeah, if we could say build hybrid cars (electricity within metropolitan areas, while you most probably need petrol for travelling in the longer rural areas given the limitations of current electric cars) then they can be powered by nuclear. Especially given China plans a gigantic roll out of nuclear reactors. I particularly love their pebble bed ones. I think it will be a useful argument against the anti-nuclear crowd because they don't explode. But I digress.

Getting back to your point, I think with the water supply it is going to be a bigger problem though. That's why I suggest desalination plants. We are building them. Why can't China? (Although its most probably not as pressing for them just yet, but with climate change it most probably will later on.) They are quite exposed to the ocean along their eastern border.

[Fingolfin_Noldor]

The biggest issue with the population isn't power, Shep. It's water supply and sewerage.

They will then need to upgrade their water infrastructure and make it more efficient.

That, and they should seriously consider desalination for coastal regions.

[Ypoknons]

I'm not sure if you can separate the status issue from the racial one there, though. My understanding is that most people in China want someone with the same social status as their family (with men willing to look lower down and women looking a bit higher up, but still roughly equal). Is it necessarily because they are Filipino, or is it because they are low-status Filipinos?

I am not a cultural specialist, but the woman being lower in status in marriage generally just amounts to gossip here. But you don't see low-status Chinese men marrrying Filipinos whereas Cauasians have no problem marrying Filipinos. Of course, we have to account for the huge social differences between Hong Kong and the mainland. Generally mainlanders are more xenophobic than Hong Kongers, who regard us as more "international" and I don't doubt prejudice would be amplified on the mainland. Stereotypes, but again the most I have to work off are these and personal experiences - a friend's friend from Guangzhou, nice urbanized and educated, was surprised when he saw Chinese and Cauasians mixing openly on a large scale in Hong Kong. How many Chinese really deal with non-Han even on an occasional basis? How is a closed society like that supposed to deal with the mass importation of culturally different women?

[mr friendly guy]

When I was last there, I remember our tour guide saying that some Chinese men marry foreign brides. I know there are some North Korean women who escape into China to escape their country. Some of them manage to hide by marrying Chinese men. Albeit its likely poor rural areas where its harder to get wives, while richer ones may be loath to risk the law (where all illegal NK immigrants are deported back pass the border). Obviously the fact that they are non Han didn't stop them marrying foreigners.

[Lusankya]

I think they're focussing their efforts on improving the state of the Yellow River and the Yangtze, which they seem to be having some success with. Apparently bird numbers along the Yellow river were greatly increased last autumn over the previous year.

I don't really know much about Chinese plans for desal plants, or even if they have any, but I imagine that desal plants would be less useful in China than in Australia simply because they have a smaller proportion of their population in coastal provinces. Water supply itself isn't a huge problem in general for China at the moment, except in cases like last winter where it just Did Not Snow (this year its snowing heaps), but it's looming as an issue, because I don't think there are adequate measures in place for inconsistent precipitation patterns at the moment.

The biggest issue of the two presently is sewerage, because all that shit has to go somewhere. Shanghai's actually in the process of completely refitting its sewerage system, because the one they had initially was designed for 5-10 million fewer people. Other cities would be having similar issues, I would imagine, albeit with slightly smaller numbers.

[Lusankya]

I am not a cultural specialist, but the woman being lower in status in marriage generally just amounts to gossip here. But you don't see low-status Chinese men marrrying Filipinos whereas Cauasians have no problem marrying Filipinos. Of course, we have to account for the huge social differences between Hong Kong and the mainland. Generally mainlanders are more xenophobic than Hong Kongers, who regard us as more "international" and I don't doubt prejudice would be amplified on the mainland. Stereotypes, but again the most I have to work off are these and personal experiences - a friend's friend from Guangzhou, nice urbanized and educated, was surprised when he saw Chinese and Cauasians mixing openly on a large scale in Hong Kong. How many Chinese really deal with non-Han even on an occasional basis? How is a closed society like that supposed to deal with the mass importation of culturally different women?

I have never gotten the impression that the Chinese here don't want to mix with foreigners. It's impossible for me to walk through the park without at least one person deciding to talk to me and get me involved in whatever they're doing. What I have noticed, however, is surprise on their part when a foreigner actually wants to mix with them. I think that when foreigners go to Hong Kong, they go there to do business with the Hong Kongese, but when they come to Mainland China, they come to exploit the cheap labour. It makes a very different dynamic from what you're used to, I think.

Certainly, there's a lot of ignorance in Mainland China regarding other cultures, but I do not think for a second that it's related to any innate xenophobia rather than a simple lack of education.

[Fingolfin_Noldor]

It likely varies across CHina. As it is, the coastal people look down on their less prosperous inner-land brethen. Likely the more affluent people at the coast who are at the forefront of business will be likely very open to interacting with foreigners, at least from my experience when I was abroad.

[J]

See, the "First World economy" is not the only possible way to have a decent living. Having a stable Second World income but First World life indicators like healthcare, social services, etc (like the Kerala model) is actually a way to make things decent for China in the coming 30-40 decades (till 2040-2050).

Thanks, that's the concept I was trying to get at but couldn't find the words for.

I must also remind people that India faces the same economic problems as China, also compounded by extreme poverty and diseases - ills that China has curbed with enormous efforts during the six decades of 1950-2010.

No doubt about it, it's even worse in India since they're already having problems with farming. They are barely self-sufficient in grains and in the last few years they've had to a make a few emergency imports to make up for temporary shortages. They're a few droughts away from a serious food problem.

In addition to what Stas said, you also have to remember that China has intentionally been denying existent internal consumption demand by undervaluing the yuan. The government has essentially been depriving its people of wealth in order to export it to the West in return for financial security in the form of T-bills. So demand for consumption beyond current levels certainly exists -- they probably couldn't soak up all the goods they're producing, but they can soak up some fraction.

Sure, and if they let the yuan float to a fair price it destroys their exports overnight, bit of a problem there. Yes they get internal consumption up, but it now has to soak up an even larger chunk of their former goods exports.

[PainRack]

Getting back to your point, I think with the water supply it is going to be a bigger problem though. That's why I suggest desalination plants. We are building them. Why can't China? (Although its most probably not as pressing for them just yet, but with climate change it most probably will later on.) They are quite exposed to the ocean along their eastern border.

There was a reported loss of 1 million tons of water due to pipe leakage. Hopefully, part of the new stimulus bills have gone to stuff other than building roads and into pipes.

I have never gotten the impression that the Chinese here don't want to mix with foreigners. It's impossible for me to walk through the park without at least one person deciding to talk to me and get me involved in whatever they're doing. What I have noticed, however, is surprise on their part when a foreigner actually wants to mix with them. I think that when foreigners go to Hong Kong, they go there to do business with the Hong Kongese, but when they come to Mainland China, they come to exploit the cheap labour. It makes a very different dynamic from what you're used to, I think.

Certainly, there's a lot of ignorance in Mainland China regarding other cultures, but I do not think for a second that it's related to any innate xenophobia rather than a simple lack of education.

We are talking about marriage, right? Ancedote :after interaction with some mainland chinese, it seems that they are rather more phobic about marrying lower than their socioeconomic status and that includes race it seems. But then again, most of the mainland chinese I discussed this with are female, not male.


Also, has anyone discussed the issue of what happens when China middle class increase consumption of foodstuff such as beer and fatty meat?

[Lusankya]

Yeah. Girls want to marry up. The men, on the other hand, just assume that anyone significantly higher than them isn't interested.

They seem to view race as an indicator of someone's wealth (oh, you're race X, therefore you're poor, they're race Y, therefore they're rich) but they do the same thing to people from, say Henan. It would be incorrect to say that there's no racism, but there isn't enough to stop them from being willing to get wives from elsewhere, especially if it was the only option. And once the kids are born, they're far more likely to judge them based on the quality of their Mandarin than anything else.

[Surlethe]

Sure, and if they let the yuan float to a fair price it destroys their exports overnight, bit of a problem there. Yes they get internal consumption up, but it now has to soak up an even larger chunk of their former goods exports.

No, if they let the yuan float it will balance exports with internal consumption, holding capital flows and speculation constant. The process of finding a free-market price in the currency markets is simply one of balancing internal and external demand for Chinese-produced goods and services and rest-of-the-world-produced goods and services.

[Mayabird]

No. I welcome a demographic collapse for the sake of the world.

Ah, there we go again. Too bad China won't demographically collapse; and will continue to churn out nuclear and coal plants to support it's lifting of hundreds of millions of people to a higher, cleaner, safer standard of living.

The term means something other than what you apparently think it means. It does not mean "mass famine, plague chaos, everybody dies." Demographic collapse is what's happening in much of Europe and Japan currently - the older people slowly die off from natural causes but there are fewer young people to replace them because the fertility rate isn't at replacement levels, leading to a gradual decline. It's something that should be stable and clean and manageable instead of population growing ever upward until it explodes and collapses the other way.

[Fingolfin_Noldor]

I think China would prefer a more balanced population, and is doing it through the usual brute force method. And in any case, their rather large population gives them incredible leeway to make adjustments.

[Ypoknons]

I have never gotten the impression that the Chinese here don't want to mix with foreigners. It's impossible for me to walk through the park without at least one person deciding to talk to me and get me involved in whatever they're doing. What I have noticed, however, is surprise on their part when a foreigner actually wants to mix with them. I think that when foreigners go to Hong Kong, they go there to do business with the Hong Kongese, but when they come to Mainland China, they come to exploit the cheap labour. It makes a very different dynamic from what you're used to, I think.

Certainly, there's a lot of ignorance in Mainland China regarding other cultures, but I do not think for a second that it's related to any innate xenophobia rather than a simple lack of education.

Certainly I've seen the interest before, and I can understand that. Unfortunately, I must have wandered off topic - I am certain that attitudes are different towards dark South East Asianers, but I must not have investigated mainland enough lately, and for that I am grateful that you guys are filling me in. I think I'm mistaking some of the rabid patriotism I see around from the pro-China types for xenophobia, and I probably have a chip on the block on ideological differences in law with our Chinese peers as well that do not belong in this thread.

Still, Vietnamese and North Korea import wives I can believe... there are levels of cultural overlap there. Filipino ... would be stretching it for me.

[Lusankya]

Oh, folks in China are quite patriotic too, and if you're Hong Kongese, they might feel a need to go on the defensive a bit. But generally I find them super friendly, as long as they see that you're making some effort to reach out to them - being in a relatively suburban park, eating at cheap restaurants, etc. They do tend to ignore the foreigners who don't show such interest, but the fact that they're so willing to make an effort when they think that someone's actually likely to reciprocate suggests to me that that's largely due to resignation and not xenophobia.

Anyway, the important thing, really is that China can import wives from other countries and thus share their demographic imbalance with the rest of the region. And if they are richer than the other countries in the region, attracting women will be easier for them. As for me, I hope to do my bit to correct the gender imbalance. I just chose the Philippines because it was the first place that came to mind.

[Ilya Muromets]

Still, Vietnamese and North Korea import wives I can believe... there are levels of cultural overlap there. Filipino ... would be stretching it for me.

You gotta take into account ethnicity, though. Chinese-Filipinos make up quite a sizeable chunk of the Philippine population, and are usually quite well-off since most of them are descended from the Chinese traders that set up shop here in the Spanish colonial days and decided to stay. A lot of those family's usually try to make sure that their children don't forget their Chinese ancestry, and why many schools funded by such rich Chinese-Filipino families actually have Chinese Language and Chinese composition as part of the curriculum from Kindergarten to High School (I went to one until my second year of high school, just barely passing the Chinese subjects through sheer power of rote, non-comprehending memorization). Not to mention all the other Filipinos who actually don't identify as Chinese-Filipinos, but clearly have some Chinese ancestry.

[J]

No, if they let the yuan float it will balance exports with internal consumption, holding capital flows and speculation constant.

Which of course never happens in the real world so this is only useful as an idealized example for introductory economics students.

The process of finding a free-market price in the currency markets is simply one of balancing internal and external demand for Chinese-produced goods and services and rest-of-the-world-produced goods and services.

It's actually a lot more involved than that, it also involves the bond market and the perceived ability of the country to service its government bond issues among many other things. And as always the speculative component, such as carry trades, also influenced by the above. Oh. And last but not least, Goldman-Sachs. I hear they took out a bunch of currency swap derivatives contracts. Actually I have no idea if they did, but one must assume they have a hand in it somewhere.

[Surlethe]

Which of course never happens in the real world so this is only useful as an idealized example for introductory economics students.

That doesn't mean it's useless as a model - in this case, we're talking about long-run growth, so the effects of speculation are negligible, which means that the only reason China would have a trade imbalance (if it were to let its currency float) is capital flows. Actually, as everyone knows, that's how they peg the yuan: sending (financial) capital to the US in the form of purchased T-bills*.

*That is, the Chinese are financing the US debt in order to send things to the US at the expense of Chinese citizens. Can the US have it any better?

It's actually a lot more involved than that, it also involves the bond market and the perceived ability of the country to service its government bond issues among many other things. And as always the speculative component, such as carry trades, also influenced by the above.

Can you describe how the bond market is relevant to the balance of payments? Also, like I said above, speculation is irrelevant in a long-run model.

[Korgeta]

Last i heard only last week China has taken over germany to become the 2nd or third biggest econmonic country, from what am hearing it's handling the recession a lot better then others.

[Ma Deuce]

*That is, the Chinese are financing the US debt in order to send things to the US at the expense of Chinese citizens. Can the US have it any better?

You mean can Wall Street have it any better. Those are about the only Americans whom "free" trade with China truly benefits.

[J]

That doesn't mean it's useless as a model - in this case, we're talking about long-run growth, so the effects of speculation are negligible,

I wouldn't say "negligible" with regards to speculation effects, the Japanese Yen becoming the funding currency for a carry trade that's been going of for nearly two decades has contributed to their problems since their bubbles went kablooie in the early 90's.

which means that the only reason China would have a trade imbalance (if it were to let its currency float) is capital flows. Actually, as everyone knows, that's how they peg the yuan: sending (financial) capital to the US in the form of purchased T-bills*.

*That is, the Chinese are financing the US debt in order to send things to the US at the expense of Chinese citizens. Can the US have it any better?

And there's no way to control capital flows, the market will do what it feels like doing, the government has influence via jawboning and creating the right regulatory & financial investment environment in its markets. It has limited control via its central banks which can set rates and carry out currency purchases, but that money has to come from somewhere and it's not a long-term solution.

Which brings us back to the previous problem, without healthy exports to the US China has a bit of a cashflow problem, in fact based on the latest TIC report they're no longer a net buyer of US debts. The surplus which they were using to buy US debts no longer exists, therefore there's no money lying around for them to spend on their own internal economy.

Can you describe how the bond market is relevant to the balance of payments? Also, like I said above, speculation is irrelevant in a long-run model.

Except speculation is relevant in the long run, the USD for example has enjoyed decades of premium valuation because of its status as a reserve currency, everyone parks their money in greenbacks for safety which drives up its value. Whenever something happens in the world, millions of people rush out to buy greenbacks in a speculation trade. Or take the case of Japan, the Yen was used to fund carry trades for many years which kept its value below the "fair price". Oh, and Iceland, having 2/3 of its currency's purchasing power destroyed overnight is going to leave a mark.

With regards to the bond market, its influence over currencies is that it has a large part in setting interest rates, those interest rates will in turn influence where the currency market directs its funds. For example the AUD has been rising nicely since it now has the highest rates of the main OECD currencies while the USD has been declining for the past 10 years thanks in part to low and now ZIRP'd interest rates.

Obviously this isn't the whole picture since (perceived) economic conditions in a given country along with its future prospects also have an effect on where the currency market parks its cash. Using the US as an example, it's got massive holes in its budget, outsourced many productive jobs elsewhere, adopted ZIRP, started up the printing presses, and it has a host of other issues which aren't good. Put it all together and it says "SELL!!" and not surprisingly the value of the USD is going down.

[mr friendly guy]

Last i heard only last week China has taken over germany to become the 2nd or third biggest econmonic country, from what am hearing it's handling the recession a lot better then others.

China has been the second biggest economy by GDP purchasing power parity for some time. Depending on final figures it may have surpass Japan in 2009 nominal GDP to become the second largest economy using nominal GDP as well.

The news you are most probably refering to is China surpassing Germany as the largest exporter. It had a bigger economy than Germany (by nominal GDP) from memory in the last 1-2 years.

[Alyrium Denryle]

No. I welcome a demographic collapse for the sake of the world.

Ah, there we go again. Too bad China won't demographically collapse; and will continue to churn out nuclear and coal plants to support it's lifting of hundreds of millions of people to a higher, cleaner, safer standard of living.

Do you know how to read shep, or are you intentionally being obtuse? A demographic collapse is when deaths are not compensated for by births. When average fecundity is lower than 2.1 (in a western country... in china replacement is higher due to higher infant mortality). This does not have to be because mortality is high. Birth rates just have to be low. It can also happen with a male biased sex ratio. The people of China can still have a good standard of living, but their economy will go through perturbations when the aging population starts to die. It will readjust and they will be fine, but with a lower more sustainable population.

Endless population growth is REALLY bad. For everything. That includes people.

[Ypoknons]

You gotta take into account ethnicity, though. Chinese-Filipinos make up quite a sizeable chunk of the Philippine population, and are usually quite well-off since most of them are descended from the Chinese traders that set up shop here in the Spanish colonial days and decided to stay. A lot of those family's usually try to make sure that their children don't forget their Chinese ancestry, and why many schools funded by such rich Chinese-Filipino families actually have Chinese Language and Chinese composition as part of the curriculum from Kindergarten to High School (I went to one until my second year of high school, just barely passing the Chinese subjects through sheer power of rote, non-comprehending memorization). Not to mention all the other Filipinos who actually don't identify as Chinese-Filipinos, but clearly have some Chinese ancestry.

No, I am aware of the Chinese-Filipinos community and other Chinese communities in South-East Asia. In the minds of the Chinese mass, however, they would be seen as merely 'Chinese' - hence I was concerned with ethnic Filipinos. I doubt, however, that the South East Asian Chinese communities combined have the numbers to alleviate the PRC gender imbalance. In addition, I understand the Chinese in these areas tend to be relatively wealthy, further reducing the pool who would move to China for financial purposes.