Rotting Vegetables

“As long as you’re green, you’re growing.  As soon as you’re ripe, you start to rot,” once remarked Ray Kroc, mastermind of the McDonald’s franchise empire.

At the moment, no truer words can be spoken for China’s ripe economy.  The Middle Kingdom’s 30-year economic boom is being overcome with the unpleasant odor that befalls rotting vegetables.  What’s more, there’s no way to reverse it.

 

P1180759Photo credit: fmh

 

Economic activity in China is stalling out.  All of the sudden, the mistakes that were hidden by a growing economy are surfacing en masse.  Excess capacity is turning up in all corners of the economy and no one knows what to do about it.

Each day, it seems, new rot comes to bear upon Beijing’s central planners.  Somehow the miracle workers have lost their hot hand.  A slowing economy, falling stock market, exodus of wealth, and weakening currency are not conforming to the graphs and statistics reported in the latest blueprint for the planned economy.

How could it be that the professional politicians, who’d sparkled with genius all these years, so grossly missed their targets?  Aren’t the talented men, who’d lorded over a contrived capitalism all these years, capable of fixing this?  Perhaps these are the wrong questions to be asking.

 

China's new Politburo Standing Committee members (from L to R) Zhang Gaoli, Liu Yunshan, Zhang Dejiang, Xi Jinping, Li Keqiang, Yu Zhengsheng and Wang Qishan, line up as they meet with the press at the Great Hall of the People in Beijing, November 15, 2012. China's ruling Communist Party unveiled its new leadership line-up on Thursday to steer the world's second-largest economy for the next five years, with Vice President Xi Jinping taking over from outgoing President Hu Jintao as party chief. REUTERS/Carlos Barria (CHINA - Tags: POLITICS TPX IMAGES OF THE DAY) - RTR3AF6Q

China’s Politburo – from left to right, Zhang Gaoli, Liu Yunshan, Zhang Dejiang, president Xi Jinping, prime minister Li Keqiang, Yu Zhengsheng, Wang Qishan (Wang is running Xi’s anti-corruption effort. If you want to find him, go to Zhongnanhai and ask for Wang’s wing).

Photo credit: Carlos Barria / Reuters

 

Individual Preferences

Simply put, an economy cannot be executed by a central government to fulfill the objectives of a five year plan.  At times this may appear to be so.  But these instances are mere coincidence…not the result of an erudite centralized mastery.

Time and time again, the effects of government intervention into an economy and markets have proven to cause more harm than good.  Price controls, minimum wage laws, tariffs, taxes, subsidies, corn ethanol, federal medical insurance…you name it.   The greater the intervention that takes place the greater the harm.

Certainly, a central government can coerce its population to act in certain ways to a point.  But it cannot make discrete choices for each individual.  Trying to do so is futile.

 

the-use-of-knowledge-in-todays-society-3-728In 1945 F.A. Hayek published his famous essay “The Use of Knowledge in Society”. The argument had ripened in the course of the debates he and Lionel Robbins had with representatives of “market socialism” and “trial and error socialism” like Oskar Lange, Henry Dickinson and Fred Taylor in the 1930s. As Hayek argued, the knowledge of individual actors in the economy is widely dispersed, highly situational and local, and often tacit (i.e., non-verbal). It is simply impossible for a central planning body to even acquire this knowledge. Mises in turn had shown that even if it were possible for the planners to acquire this knowledge, they would not know what to do with it. The central problem of socialism was already made clear by Mises in his essay on the calculation problem: once prices for the factors of production no longer exist, economic calculation becomes impossible.

 

What central planners of all stripes discount is that an economy is made up of individuals, with individual preferences.  In China’s case, the economy is made up of over a billion individuals.  On any given day, these billion individuals will make thousands of discrete choices.

For example, some people like to sprinkle salt on their rice.  Others like to rain soy sauce all over it.  Some like their rice plain.  Others like it dry and sticky.  Some like it fried with chopped vegetables.  Others think rice is disgusting and don’t eat it at all.

Choices like these, and countless others, must be made by each individual.  Planners cannot make these choices for their entire population.  They can attempt to declare the price of rice, salt, soy sauce, and vegetables by edict.  But they will always be utterly wrong.

Supply gluts and shortages will quickly result from their efforts.  The wisdom of bureaucrats is no substitute for market pricing.

 

China’s $6.6 Trillion Toxic Loan Problem

The addition of government intervention into money and credit markets opens a whole new can of worms.  Like in the United States, but on a much greater scale, Beijing’s attempts to stimulate growth through cheap credit and massive government spending programs have had the ill effect of misleading the Chinese countrymen in ways that could have never been imagined.

Debt, backed by debt, has been piled up to heights beyond comprehension for purposes that don’t pencil out. According to Charlene Chu, of Autonomous Research Asia, Chinese banking assets increased from $9 trillion in 2008 to $30 trillion at the end of 2015.  Chu estimates that 22 percent – or $6.6 trillion – of these assets are nonperforming.

 

ChinaNPLsVarious estimates of the percentage of non-performing loans in China’s banking system. To the left, the utterly useless official NPL ratio. Thereafter, NPLs including loans that are also NPLs but are allowed to masquerade as something else, followed by CLSA’s overly generous “minimum” estimate, BNP’s estimate and lastly Ms. Chu’s estimate – click to enlarge.

 

“The world has never seen credit growth of this magnitude over a such short time,” said Chu.  “We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”

Despite the government’s driving impetus to keep the bubble inflating, there are natural limits to policies of perpetual debt expansion.  If you can believe it, Chinese banks tapered back on their lending in December.  They’ve crested the credit peak and are now entering the downside.  In other words, Chinese banks are exiting from a period of mass credit expansion and entering a period of mass credit contraction.

 

YuanThe Chinese yuan (or renminbi) – here in the onshore version – has entered a downtrend in late 2014 – incidentally, precisely at the point in time when the US stock market’s internals peaked, along with the Dow Transportation Average. This is not a coincidence – click to enlarge.

 

Decades of green growth have ripened.  Now, just like Kroc said it would, the growth is rotting.  A yuan devaluation of 30 percent – or more – could transpire over the next six months.  If the central planners try to resist the downside like we think they will, it’ll take a generation – or two – to purge the rot from the system.

 

Charts by: Bloomberg, BigCharts

 

Chart and image captions by PT

 

M N. Gordon is the editor and publisher of the Economic Prism.

 

 
 

 
 

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4 Responses to “China’s $6.6 Trillion Toxic Loan Problem”

  • They will do what governments always do. Attempt to rig the system and pretend nothing is wrong. That is what happened in Japan. It happened in the US, as the Fed attempted to hide the losses. At least the US recapitalized, but the junk will rise again. In the meantime, they destroyed the capacity for savers to consume.

  • therooster:

    Kafka … Gold is in addition to, not in place of. Think of it as a hybrid …. a yin-yang of real-time liquidity, debt based and asset based, both. We need some yang with our existing yin is all. It’s already taking effect. The people there (and all over the world) can open gold currency accounts, fully backed and where mass (grams) is the only unit of account. The participating countries are listed in the pdf link. China is there along with over 195 other countries.

    http://assistly-production.s3.amazonaws.com/210095/kb_article_attachments/65562/List_of_Supported_Countries_23_Sept_2015_original.pdf?AWSAccessKeyId=AKIAJNSFWOZ6ZS23BMKQ&Expires=1454784734&Signature=FaqpBUGjDi4gSLp%2B2DLHh0sxBPo%3D&response-content-disposition=filename%3D%22List_of_Supported_Countries_23_Sept_2015.pdf%22&response-content-type=application%2Fpdf

    No country would dare create a fixed exchange rate between their currency and gold bullion. Why give up the flexibility while fucking up the global balancing act ? Makes no sense at all. The stories about the yuan’s peg to gold are complete market head fakes. It would ruin the Chinese economy, which already has its challenges. They , too, can utilize the gold, by mass if they so choose. No need for the peg, however.

    Clusterfuck ??? LOL Is that like a mustard tree ?

  • Kafka:

    therooster:

    So you are suggesting the Chicoms are going to let gold become the means of transaction instead of the Yuan?
    Are they going to abandon their own fiat currency ? Are they going to enforce a fixed exchange rate between gold and Yuan? Will they be paying for imports with gold ? Sounds like an economic clusterfuck, not well thought out policy.

  • therooster:

    China has laid the foundation for recovery by lifting the long standing ban on gold ownership back in 2003. It had been in place since 1949. This provides the economic means to create a decentralized gold payment portal where privately owned bullion can support economic activity and growth with no need for debt in the bullion based transactions where gold weight acts as the currency and unit of account , be it digital weight (fully backed) or hand-to-hand bullion payments. Either way, the Chinese have the structure decentralized at the causal level where demand and consumption begin.

    Did anyone suggest an ounce of gold for a man’s new tailored suit ???

    “The journey of a thousand miles begins with a single step.”

    ― Lao Tzu

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