China Not Being A Team Player

[Kidlicious]

As I've stated before, the rate of investment in China is amazing. They are building up way too much capacity for the world to consume. This capacity build up has been concentrated in industries of goods that they now import.

According to Anderson, "China is not in danger of overheating. China is overheating." While the official growth rate for 2003 is likely to be 8.5%, Anderson says the real figure is much higher -- closer to 11.5%. "The economy is already running much faster than we think is sustainable," he says. The cause: "Investment and more investment -- in residential property, autos, steel, aluminum, cement, the tech sector. There's just an enormous amount of capacity."

China has been contributing so much to world economic growth because of this build up in capacity that when it stops building its capacity it will cause a crisis, and China will use its capacity in an attempt to export its way out. That will hurt Asia and probably the US.

[Imran Siddiqui]

How is this different from any products that has two competiting formats?

Because usually one of the two factors isn't backed by the government .

[Urban Ranger]

I'd say some of the corporations are bigger than a lot of governments.

[Kidlicious]

This is the most recent China thread, right?

Can China engineer a soft landing? I don't think so. Growth is too important to their economy. They have to keep creating jobs. Once the slow down starts things will escalate. Control will not be possible. There may even be political unrest.





When China slows

The Chinese economy has been growing at a breakneck pace, but in 2004 that may change.
January 16, 2004: 2:34 PM EST
By Justin Lahart, CNN/Money senior writer



NEW YORK (CNN/Money) - Chinese officials recently said the Chinese economy grew at 8.5 percent in 2003 and most observers say the real pace of growth was much higher than that. But that is last year's story.

The story for this year is that China is likely to slow as its government, worried over overheating, tries to bring the economy in for a soft landing. The danger is that the economy slows too much -- an outcome that would have profound consequences around the world.

Signs abound that the Chinese economy is already running too hot. With investment from overseas gushing into the country, a laundry list of industries -- from steel to mobile phones to automobiles -- are seeing their production capacity grow at a breakneck pace. Money supply is up sharply. China's M2, which includes cash in circulation and money held on deposit, grew by 19.6 percent in 2003.

Heap on the more anecdotal evidence of overheating. Credit Suisse First Boston chief non-Japan Asia economist Dong Tao points out that there are 86 subway lines under construction or being prepared for construction in the country. Morgan Stanley China economist Andy Xie notes that despite electricity production growing by 14.3 percent in the first 11 months of the year, China experienced frequent brownouts in the summer. And then there's the traffic.

For officials, reining in growth is a bitter pill. Rural Chinese are flocking to the country's urban centers in droves, and the economy must grow quickly in order to absorb the flood of workers -- or risk civil unrest.

Yet there are signs the government is starting to move. In September, China's central bank lifted banks reserve requirement ratio to 7 percent from 6 percent. Many observers also believe that, in a shift, Beijing now believes that the prospect of inflation is now a bigger threat to the Chinese economy than deflation.

"It's clear that China needs to slow down a little bit," said Lehman Brothers chief international economist Russell Jones. "We think that the government can engineer a softish landing."

When a butterfly flaps its wings in China...
Even a slightly slower China could have important ramifications for investors, points out Carlos Asilis, a portfolio manager at the hedge fund Vega Asset Management.


A wide array of commodity prices -- copper, cotton, nickel, to an extent even oil -- have been pushed up because of heavy Chinese demand. China slows, and those prices could get pushed lower. Bad news for commodity producing companies and bad news for the commodity producing countries of Latin America.


A slowdown would also likely mean that China's trade surplus with the United States would widen, since it would slow domestic demand, reducing the demand for imports and prompt Chinese companies to export more in an effort to maintain profits.


This would leave China with a lot of dollars on its hands and, because the country's currency is pegged to the dollar, it would have to park those dollars someplace. (The peg may be adjusted in 2004, but is extremely unlikely to be abandoned.) China, already a big buyer of U.S. Treasurys and agency securities, could step up its purchases in the year to come. This would keep U.S. interest rates lower than one might otherwise expect.


Asian economies would also suffer, first because China has been an important driver for growth in the area, second because if Chinese companies up their exports in reaction to a slowdown, other exporters in the region will get shouldered out of some sales.

Many of these effects could get dangerously amplified, however, if China's slowdown isn't mild. The potential for a sharp drop in growth cannot be discounted, according to Julius Baer head of international equities Riad Younes.

The way Younes sees it, much of China's growth story is due to the huge amount of foreign investment that continues to pour into the country. Last year China's foreign direct investment came to $53.3 billion according to official figures, but it's important to understand that total economic effect goes beyond the dollar figures. You build a plant that employs 2,000 people, that means somebody is going to build 2,000 apartments, somebody is going to sell 2,000 air conditioners, etc.

You cut the capital off, things slow in a hurry. And Younes reckons that, as foreign companies come to understand that they are adding far more production capacity in China than they need, the capital will get cut off.

"When foreigners realize that they're overbuilding, then we may get a hard landing," said Younes.

[Dr Strangelove]

Does the WTO require members to use set standards for electronics? Who sets the standards? If a technology is still in development, like higher compression ratio DVDs, how can a standard be established in advance? OTOH competing standards can produce unpredictable results. Anyone remember Beta VCRs?

[DanS]

I think it's quite a hodgepodge of standards-setting bodies for consumer electronics. Computer standards are set internationally. Currently, DVD standards are set by industry. Some TV-related stuff is set at the national level by governments with input from industry; other TV-related stuff is set by professional standard-setting bodies, with strong input from industry.

DVDs are an interesting case, since the stuff that is costing Chinese manufacturers are standards that are largely set by Japanese industry. The government setting standards in an area where industry has set standards for decades is interesting.

[DaShi]

Originally posted by Q Cubed
if it's ok for the us to be a total ****ing *******, then it's ok for china to be one too.

It's not ok. But the Chinese want it to be. They generally try to keep their mouth shut about much of what the US does, in hopes of being able to do it themselves someday. The pace at which China is becoming an America clone is staggering.

[Urban Ranger]

Originally posted by Kidicious
This is the most recent China thread, right?

Can China engineer a soft landing? I don't think so. Growth is too important to their economy. They have to keep creating jobs. Once the slow down starts things will escalate. Control will not be possible. There may even be political unrest.

AFAIK, they were able to made a soft landing a few years back, at least in some of the sectors such as real estate development.

[DaShi]

When the momentum slows down, the east of China will have little unrest as it has a strong middle class to support it. The west, however, is a completely different story.

[Q Classic]

It's not ok. But the Chinese want it to be. They generally try to keep their mouth shut about much of what the US does, in hopes of being able to do it themselves someday. The pace at which China is becoming an America clone is staggering.

was that a serious comment? mine wasn't.

[DaShi]

Not entirely.