Sunday, February 28, 2010



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                                                                                                           28 February, 2010.




"Let China sleep, for when she wakes the world will shake", Napoleon Bonaparte


Having never been posted east or north of India my knowledge or feel for China is not much ,in spite of newspaper and book reads. Li, La, Chou convey nothing to me.


Still there is no choice but to study China , now that it is awake and ponder on its future and the ramifications . In my opinion the jury was still out regarding a soft landing for China ( a phrase Shankar Menon then Joint Secretary dealing with China , used in late 1980s when quizzed ) but I am now inclined towards possible economic and social problems and political turmoil in China's  periphery like Xinxiang and Tibet .Perhaps earlier in the former which adjoins other Muslim and Turkic republics which gained freedom after the collapse of the USSR . China is almost the next bogey attached to 'Runaway US Train' which it is by now agreed is hurtling towards a hard landing leading and an end of  US led West's era of almost total dominance since last few centuries.


One can at worst be wrong .Remember western triumphal forecasts at the beginning of this millennium or the failure of the vaunted CIA and a gaggle of Kremlinologists to forecast the collapse of the Soviet Union earlier.


I had done my first piece ,"Decline of American Century ' for Asia Times a year after 119 , which many people now suspect was an inside job.


The URLs of articles updating this epochal change are as follows.


The decline of the American Century  Sept11, 2002 Atimes


The US EmpireBeginning of the End Game   24Nov, 2006


The Decline And Coming Fall Of US Hegemony   March 30 ,2008



Corporate Culture and Greed Sink the American Republic  17 May, 2009
by K. Gajendra Singh

Confirmation of Pressure on Dollar and US Decline  8 October, 2009


So how about looking at what some knowledgeable experts say on China's future.


Is China headed toward collapse?


Some say a much-vaunted Chinese economic miracle is nothing but a paper dragon.


Wrote EAMON JAVERS in Politico on 11/10/09  

"The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It's China's turn, the theory goes, as American consumers — who propelled the last global boom with their borrowing and spending ways — have begun to tighten their belts and increase savings rates.

The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as "socialism with Chinese characteristics," are still thriving, though, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles.

That's prompted some cheerleading from U.S. officials, who want to see those Chinese consumers begin to pick up the slack in the global economy — a theme President Barack Obama and his delegation are certain to bring up during next week's visit to China.

"Purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past," Treasury Secretary Timothy Geithner said during a trip to Beijing this spring. "In China, ... growth that is sustainable will require a very substantial shift from external to domestic demand, from an investment and export-intensive growth to growth led by consumption."

That's one vision of the future.

But there's a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.

A Chinese collapse, of course, would have profound effects on the United States, limiting China's ability to buy U.S. debt and provoking unknown political changes inside the Chinese regime.

The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.

Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market. 

His most famous call came in 2001, when Chanos was one of the first to figure out that the accounting numbers presented to the public by Enron were pure fiction. Chanos began contacting Wall Street investment houses that were touting Enron's stock. "We were struck by how many of them conceded that there was no way to analyze Enron but that investing in Enron was, instead, a 'trust me' story," Chanos told a congressional committee in 2002.
Read more:


PIVOT CAPITAL MANAGEMENT - China's Investment Boom the Great Leap Into the Unknown

China's Investment Boom: the Great Leap into the Unknown

We conclude that the capital spending boom in China will not be sustained at current rates and that the chances of a hard landing are increasing. Given China's importance to the thesis that emerging markets will lead the world economy out of its slump, we believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the US subprime and housing boom. The ramifications will be far-reaching across most asset classes, and will present major opportunities to exploit. There are three key reasons why we take this view:

China's expansion cycle surpassing historical precedents: It is widely believed that China is still in an early development phase and therefore in a position to expand capital spending for years to come. However, both in its duration and intensity, China's capital spending boom is now outstripping previous great transformation periods.

Policy actions not sustainable into 2010. This year's burst in economic activity has been inflated by a front-loaded stimulus package and a surge in credit growth. Given their exceptional and forced nature we believe growth rates in government-driven lending and capital spending will collapse in 2010.

Overcapacity and falling marginal returns on investment: Analysis of industrial capacity, urbanisation and infrastructure development shows that China's industrialisation and structural modernisation are largely complete.

Combine this with falling returns on investment, and it becomes obvious that China's long-term investment needs are grossly overestimated.

Read More…

 From Short-Term Trading Saturday, January 30, 2010


"Is there a China Bubble


The idea is that capital spending in China cannot continue at this rate.  The coming slowdown will have global consequences.


Let's see the main points supporting this thesis:


- China' s investment boom is unprecedented with growth highly dependent on capital spending.  However, decreasing marginal returns on investment will lead to a pullback in capital expenditures. This can happen in a soft landing scenario or a hard landing one where a banking crisis would occur.


- Credit has played an important role in Chinese growth. Credit has expanded 50% more than GDP. If loans continue at this rate, in 2010 credit to GDP ratio will be 200% (similar to Japan in 1991 and US in 2008).  Credit is going to luxury property and stocks, but not much into the real economy.  


- Some say that China can afford this level of spending because of the low debt (23% of GDP) and huge reserves.  However, the size of debt is understated. There are also other off-balance sheet liabilities that would bring the debt to GDP ratio to 62%.  Moreover, inflows of money into China cannot fuel further capital expenditures.


- Capital expenditures went into manufacturing, real estate and infrastructure in the past years.  Further expansion will not impact as much on growth as in the past. 


The manufacturing capacity is at developed country levels.  The manufacturing base is mature with few areas for further expansion especially in traditional sectors (steel, cement, aluminium, energy).  There is excess capacity in many sectors.

- Urbanisation rate is actually low in China.  Moreover, the lending boom has boosted housing construction. There is an excess housing construction compared to the household formation.  The price to income ratios are at extreme levels.


- China infrastructure is relatively well developed. Economic justification behind latest infrastructure projects is questionable


- Consumption growth cannot replace the investment boom. Private consumption would have to grow 3 to 4 times faster than in the past decade to compensate for the imminent retraction in investment.


A slowdown of China would have global consequences (China Economic Growth And Global Risks). As signs of weakness appear, other governments would introduce further stimulus.  This may prolong the top.  However, the transition from a model based on investment to one based on consumption, although with a slower rate of growth, cannot be avoided.  The crunch could come in H2 2010.  The issue is when markets will start discounting the slowdown.  The impact would be on cyclicals, industrial commodities, equities and credit.  There would be a move toward more defensive assets.  What is the role of China in the debate on deflation vs inflation?  The slowdown should be deflationary, given their overcapacity.  However, depending on how aggressive the policy response will be there may be inflationary risks again.         


I find the report interesting.  All points have a merit although I am not an expert about China, so I cannot really judge the data presented.  Provided that the scenario presented is correct (but I am sure there are many who see things quite differently), I think, however, that there are some areas that should be further discussed:


- Systems of these complexity and size continue to run with an impressive inertia and do not change direction until the inevitable happens. I do not believe in a soft landing scenario.  There would be a crash some time in the future (Global Bear Rally: Apocalypse Ahead). 


- Is it going to have political and social implications in China


- The strategy to prepare for such an event is not clear. When is this going to happen? Is second half of 2010 realistic (what they continue to go on for another 2-5-10 years)? What are the defensive areas where money should go? What happens to the US dollar and the Treasuries? Will they be a safe haven again or China will be forced to liquidate their assets?


- The inflation and then deflation scenario is not substantiated enough.

- What will be the opportunities generated by this crisis if there will any?

- What are the global implications of a slow down in China? Will it be possible for western countries to inject in the system further stimulus? How will western countries react politically and economically to a second round of the crisis? (Through bailouts, nationalizations and protectionism? Will they have the strength to do it given their high levels of debt?) Will emerging countries react better than western countries?


All this looks a little bit a fanta scenario.  However, things develop quite quickly once the ball starts rolling. The main problem of these studies is that the number of variables involved is so high that eventually things unfold  differently from what was envisaged. It is very hard to forecast the implications at the various levels.  From an investor perspective it is even more difficult because timing is important. "


From Short-Term Trading Saturday, January 30, 2010


Jim Chanos Is Wrong: There Is No China Bubble

Shaun Rein, 01.11.10, Forbes .com

He misunderstands basic facts about income, real estate and the currency there.

The famed short-seller Jim Chanos has been making waves lately by saying he thinks China is in a bubble and ready to collapse in 2010. He argues that easy credit has let real estate and stock market prices shoot upward. He also says the Chinese government is cooking the numbers to show 8% growth in gross domestic products, when actually China can't keep growing when the rest of the world has been hit so hard by the financial crisis.

Chanos called it right on Enron and Tyco ( TYC - news - people ) before they collapsed. He is no lightweight observer of the economic scene. However, he is wrong about China. For once I agree with the famed investor Jim Rogers, who cofounded the Quantum Fund with George Soros. He says China is not in a bubble and adds that he finds "it interesting that people who couldn't spell China 10 years ago are now experts on China."

Betting against China in 2010 is a bad mistake for investors and companies alike. Here are three reasons why Chanos is wrong and Rogers is right about the strength of China's economy:

Chanos' first error is his belief that China's real estate sector soared in 2009 because of speculation triggered by a loosening of credit by China's banks. Lending in China doubled to $1.35 trillion in the first 11 months of 2009. Real estate prices rose sharply throughout the country and almost doubled in cities like Shenzhen. Chanos calls that a bubble--"Dubai times 1,000--or worse"--that could lead to fallout like the subprime mortgage mess in the U.S.

There are, however, fundamental differences between China's real estate and consumer finance markets and those of the U.S. and Dubai, which Chanos compares them to. First, when buying residential properties, consumers in China have to put down 30% before taking out a mortgage. For a second home, they have to put down 50%, no matter what their net worth. Therefore, China doesn't have the reckless consumer behavior that occurred in the U.S., where people with bad credit were taking out huge loans from Countrywide with no money down, or were buying 10 homes without deposits in the hope of flipping them in a few months. People who buy homes can afford it.

Also, mortgages are not being spliced up and packaged and securitized by the likes of Citigroup ( C - news - people ) and Bank of America ( BAC - news - people ). Instead mortgages are held by the original lenders, the way they were in the U.S. before financial innovation and lack of regulation broke down the old rules.

The Chinese government also has no qualms about overseeing the market and has not been run by Ayn-Rand-loving free marketers like Alan Greenspan, who seemed to believe that no government intervention at all was best. The Chinese government is gravely concerned about social stability because of the widening gap between the rich and the poor. It is therefore limiting the sizes of new apartments and restricting the construction of stand-alone luxury villas. (Most people in China's urban areas live in high-rise apartment buildings. I myself live in a 60-story building.) The government is also forcing developers to build low-income housing. And to prevent flipping and excess speculation, it is heavily taxing sellers who unload their properties within two years of buying them.

The real estate business to be concerned about is commercial building. There has been way too much construction of large office towers, especially in Shanghai, which is gearing up for its World Expo this year. Too many gleaming skyscrapers sit empty of tenants. The glut of office space has already caused rental prices to drop in places like the Shanghai financial district, Pudong.

Too much leverage, not high prices, caused the problems with real estate in Dubai and the U.S. There just isn't that much leverage in China. So even if prices are too high, a drop of as much as 20% or 30% wouldn't cause anything like the tsunami that hit the American and Dubai markets.

The second way Chanos is wrong about China is that he, like most economists and Wall Street analysts, underestimates income there. I have recently been debating several Harvard economists who worry that incomes haven't risen as fast as GDP in China. They argue that it shows that too much of China's growth has been a matter of government investment in unsustainable infrastructure projects like bridges and highways, as happened earlier in Japan. They point out that Chinese consumers account for just a third of the economy in China, vs. two-thirds in the U.S. However, my firm, the China Market Research Group, estimates that Chinese consumers will come to account for half of the economy within the next three to five years as the role of exports diminishes. (See my "Three Myths About Business in China.")

If anything, incomes are grossly underreported in China. A simple look at how accounting works will show why. Whereas in the U.S. individuals must report their income to the Internal Revenue Service every year, in China all individual tax is reported and paid for by companies, except for that of high earners. Many Chinese companies limit the tax they pay by reporting low salaries and then paying their employees higher amounts while accounting for the difference as business expenses like phone bills. The employees are happy because they make every bit as much as they were promised, and the companies are pleased to lower their tax exposure.

Also, many companies pay for housing and cars for their employees, a holdover from the old system of state-run businesses. Most Western economists don't count those expenses as income, but they should. Deceptive accounting of income is so widespread that the government has announced plans to tax some business expenses in state-run enterprises--the kinds of expenses that let executives pay taxes on earnings of $300 a month while living in multimillion-dollar homes and driving Mercedes.

The third thing Chanos gets wrong about China is the notion that the yuan is likely to appreciate. In the short term, it would be disastrous for China to let that happen, as I wrote in "Why Krugman Is Wrong About The Yuan." It would cause China's exports to plunge, swell the Chinese unemployment rolls by millions, and destabilize the financial system. In the long term, however, once the world's economy stabilizes, appreciation of the yuan might make sense. Getting exposure to Chinese assets now would benefit an investor when that time comes.

Chanos has an excellent track record in divining the future. However, part of his job as a short seller is to make money by causing markets to question good things. That can be useful for keeping companies honest and in check. But in this case he clearly doesn't understand the economic system he's talking about. China is not in imminent threat of collapse, and investors and companies are wise to stay involved with it, as Rogers argues.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. Follow him on Twitter at @shaunrein.

Alert | China    By RBS ( Royal Bank of Scotland) February 2010

Is there a bubble in China?

Worries about a bubble in China have shaken global

markets. These worries are unlikely to disappear.

GDP growth is forecast at 10% in 2010, inflation is

rising, and policy has yet to be tightened materially.

The lack of published data also makes it difficult to

argue decisively for or against the existence of a



Bubbles are not new to China. The soybean crushing

sector collapsed in 2004, the auto sector overheated

in 2005, and Shanghai property prices fell sharply in

2006. However, these examples were limited to

specific sectors or cities. Today's worry, by contrast,

is that there is a systemic bubble that threatens the

overall economy.


It is the aggressive fiscal stimulus of 2009 that lies at

the heart of concerns. The speed at which GDP

growth slowed surprised many, and officials

responded by easing policy dramatically, Two year's

of credit was pumped into the economy in less than

six months, while fixed investment growth

accelerated markedly.

There is thus good reason to worry about a bubble.

Fixed investment was already the largest driver of

growth prior to the economic crisis and officials were

talking of the need to rebalance the country's growth

drivers. However, fiscal stimulus worsened

imbalances with a large share spent on road, rail,

and other capital projects.


The chances of a bubble bursting in 2010 remain

small. The infrastructure needs of the poorer interior

provinces, the fact households put at least a 30%

payment down on their home purchases, or the way

robust nominal GDP growth helps to absorb the

outstanding stock of non-performing loans, all argue

against a short-term bubble today.

However, the medium-term risks of a bubble remain

high if no corrective action is taken.

Rapid credit growth and over reliance on capitalintensive

growth means supply may outpace

demand. Worries about a double-dip in the global

economy may also discourage the government from

tightening. But eventually, aggressive tightening will

be needed producing a sharp, and painful,

correction in growth.

Simultaneously, high savings rates, tight capital

controls, and a lack of investment alternatives mean a

large pool of trapped liquidity will continue to search

for higher yields. Expectations of higher inflation will

only accelerate the switch out of deposits into other

assets, especially housing, and the risks of an asset

bubble will grow.

What follows are answers to the most commonly

raised questions. The final page looks at likely

triggers of a bubble.

Fixed investment is 42% of GDP. Surely, this is


China's gross fixed capital investment as a share of

GDP is indeed high. The sudden increase in China's

spending is unsustainable.


China's fixed investment is undoubtedly high as a

share of GDP, but the data is also exaggerated.

Having lived in a handful of emerging markets in the

past two decades, I am constantly struck at how fast

China replaces its capital stock relative to the other.

emerging markets. Airports are knocked down, roads

are ripped up, and steel plants are relocated.


A good example is Guangdong's cement industry.

The industry suffers from oversupply. However, an

estimated 40% is accounted for by vertical kiln

cement and is heavily polluting. The provincial

government has proposed replacing such factories

by 2011 and thus deal with its overcapacity problems

while also spur more spending. It is for this reason that

the character for demolish, or chai, has become symbolic

 of China's growth over the past decades.

The phenomenon owes in part to the way officials are

measured on the basis of targets. Faced by a growth

target, a county official will be tempted to build

bigger and better public infrastructure or residential

apartments. In many instances, this will mean

demolishing existing structures to make way for


Fixed investment as a share of GDP is still excessive

by any measure. However, after accounting for the

country's rapid consumption of capital, there is

arguably less reason to worry about a large build-up

of excess capacity. And while it is not possible to

measure the net capital stock owing to a lack of data,

it is likely lower than popularly believed.


Coastal provinces Central and Western provinces

emerging markets. Airports are knocked down, roads

are ripped up, and steel plants are relocated. The phenomenon

owes in part to the way officials are measured on the basis of

targets. Faced by a growth target, a county official will be

tempted to build bigger and better public infrastructure or

residential apartments. In many instances, this will mean

demolishing existing structures to make way for replacements.


Fixed investment as a share of GDP is still excessive

by any measure. However, after accounting for the

country's rapid consumption of capital, there is

arguably less reason to worry about a large build-up

of excess capacity. And while it is not possible to

measure the net capital stock owing to a lack of data,

it is likely lower than popularly believed.


So isn't fiscal stimulus resulting in more "roads to



Not all such spending is wasteful. For instance,

building a more efficient steel factory reduces its

water consumption. Building a better road to a

coastal port improves the competitiveness of export

factories. Nonetheless, there are also examples of

wasteful spending that amount to little more than

digging holes and filling them in again.

Still, a large share of today's fiscal stimulus is aimed

at the less developed interior provinces..

The statistical bureau of Zhejiang, a large coastal

province, underscored the imbalance in a report

issued last year. The report noted that while fiscal

stimulus spending had prevented a deeper

contraction in growth, it had not benefited Zhejiang

greatly, as the province's infrastructure was already

well developed. A trip around the interior provinces shows

the region's infrastructure has a long way to catch up.

GDP per capita is just 17,500 yuan ($2,600 at today's

rate) against 39,000 yuan ($5,800) in the coastal

provinces. Indeed, the interior provinces only have

the same GDP per capita as the coastal provinces

did in 2001.

The rising nominal value of China's

GDP is fast overtaking Japan's.


It is China's size that also makes comparisons with

other emerging economies misleading. Its interior

provinces have a population of over 700 million, or

larger than that of South East Asia combined. This a

major source of demand. Being able to turn to the

interior provinces, each equivalent to another

Malaysia, Thailand, or the Philippines, provides a new

source of investment demand, prolonging the

investment boom.


Of course, infrastructure is not the only area of

concern. There are also fears of excess

manufacturing capacity. An excellent report by the

European Chamber of Commerce in 2009 identifies

six areas of special concern, specifically, steel,

aluminium, cement, chemicals, refining, and wind



It is important that all are heavy industrial sectors. It

was heavy industry that has benefited most from the

recent investment boom. Light industry, by contrast,

experienced its own bubble in the 1990s, as money

poured into the sector ahead of WTO-entry and after

Deng Xiaoping's economic reforms. However, light

industry has since largely restructured and has

attracted less fixed investment in recent years,

underscoring that overcapacity problems are not

necessarily widespread.

Won't the economy eventually collapse under a

growing NPL burden?

Certainly not all investment is productive. And where

structures are demolished before they are obsolete,

the result is rising non-performing loan (NPLs). Add

to this the surging credit growth of the past year and

risks of additional capacity, and there is a high risk

that rising NPLs will ultimately drag on medium-term

economic growth.


Yet, the rapid credit growth in 2009 amounted to 29%

of GDP. Even if twenty-five percent of this resulted in

NPLs it would translate into a not small, but still

manageable 7.0% of GDP. Moreover, infrastructure

loans tend to have a longer tenure, at near 5 years,

and have lower historical default rates, albeit their

quasi-sovereign status is partly to blame.

Equally important is strong nominal GDP growth. In

the past ten years,

"Overcapacity in China: Causes, Impacts, and

$1,320 billion to $4,930 billion, an average 14%

annual increase. Strong nominal growth helped to

absorb the stock of NPLs created during the 1990s

boom, and the financial sector's official NPL ratio is

below 2.0%.


The risk is that the rapid credit growth of 2009 is

repeated in 2010. January's credit growth surged by

1,390bn compelling the PBOC to hike its required

reserve ratio the same month. And this rate will have

to slow substantially if annual credit growth is to fall to

a more tolerable 7,000bn yuan against near 10,000

yuan last year.

Why is the government ignoring the risks of a


The government is aware of the risks of a bubble. In

an unusual step, the Party Central Discipline and

Inspection Committee and Ministry of Supervision

sent out joint- teams from late-2008 to inspect fiscal

stimulus projects. The central government has since

cracked down on wasteful investment, and has also

required that provincial governments match central

government spending dollar for dollar.

The banking regulators have meanwhile tightened

mortgage lending, reduced off-balance sheet

lending, and proposed raising capital ratios in a flurry

of decisions all taken in the past six months. The

Property-related loans have only recently started to surge

Is there a bubble in the housing sector, and what

if it bursts?

There is no consensus on the risks of a housing

bubble. This is unsurprising. The housing sector was

liberalized only 10 years ago and published data is

limited. Conditions vary by city, and even by suburb.

Vanke, the country's largest listed-developer,

accounts for just 2% of the market. The upshot is that

opinions on the housing sector's outlook can vary

widely even among experts.

Underscoring this point, I heard estimates last year

on the stock of unsold homes ranging from 3 to 18

months, all from experienced observers of the

property market.


For this reason, measures of price to income ratios

are unreliable. The popular NDRC's measure shows

prices rising nearly 10%y/y in December, or not far

above estimated wage growth. However, other

official measures put the rise at a higher 25%y/y,

signalling risks of a bubble. Still, the change varies

widely between cities with some having barely

registered an increase.

There are certainly risks of bubbles in specific cities,

especially first-tier cities. However, it is not worries

about bubbles in, for instance, Beijing or Shanghai

that are the worry—these two cities account for only

10% of the market. It is worries about a national


Yet, worries about speculative froth must also be

balanced against powerful structural drivers of

demand. Rising urbanization is one such driver.

Unfortunately, it is no easy thing to measure.

Critics argue that China's low rates of urbanization are

underestimated, for example, by excluding outlying

suburbs or not taking into consideration the

industrialization of rural areas.

Maybe so. But the residency system, or hukou, still

makes it difficult for many migrants to settle


Nonetheless, if housing sector activity slows, or

collapses, its impact on GDP growth would be



How big an impact? The usual caveats apply when

working with China's data. First, there is no real

expenditure-based GDP data to accurately measure

the importance of fixed investment to GDP growth.

Second, the supply-based GDP data offers only

limited details on the construction sector's

contribution. Thus estimates of the sector's impact

are, just that, estimates.


Proxy estimates suggest residential investment

accounts for 14% of fixed investment and 6% of GDP.

The latter figure is equivalent to what the United

States was investing in 2005 before its bubble burst.

This certainly rings alarm bells, although China has a

less mature market, while urbanization and

upgrading demand provide stronger structural


Housing does have a knock on effect for other

industries. Its demand for steel beams, copper pipes,

and home furnishings, to name just a few items, is a

major reason for the strength of manufacturing

activity. Manufacturing accounts for a large 33% of

GDP in China and slower demand would seriously

drag on growth.


The risks to the financial sector are, however, smaller.

Most mortgages require a 30%, or higher,

downpayment, while speculators often pay for highend

properties with cash. Property-related loans

account for 18% of banking assets versus 32% and

38% in the U.K. and U.S., respectively, thus limiting

the systemic risks to the banking sector.

So there isn't any reason to worry about a


While there may not be a bubble today, there will be

a bubble in the medium-term if the government does

not tighten policy and speed up economic reform.

There are two major sources of bubbles that must be

addressed. First, is reducing the economy's reliance

on capital-intensive growth. Second, is reducing the

level of surplus savings.


I have argued that worries about excess capacity are

overstated. The anecdotal consumption of fixed

capital is high as roads, bridges, and factories are

torn down. Infrastructure demand in the interior

provinces is also strong. Nonetheless, China's capital

intensive growth strategy is about to run into some

major challenges.


First, the focus on capital-intensive growth was

helped by opening up new, or "untapped", industries.

In the 1990s, it was the export sector. In the 2000s, it

was the auto and metals sector. But, as the economy

matures, it is increasingly difficult to find untapped

industries, and fixed investment is focused on

already mature sectors thus raising the risks of

excess capacity.

There must be a shift towards less capital-intensive

growth. The services sector, especially logistics,

health, and tourism, is a good candidate for an

"untapped" and non-capital intensive industry.

Services accounts for just 40% of China's GDP, a

figure that is low even when compared to Korea

(51%) and Taiwan (70%), the region's other big


Second, the focus on capital-intensive growth was

helped by opening up external markets. But external

demand is slowing, and China's private consumption

is worth just $1,600bn versus a combined $17,400bn

in Europe and the United States. The risk is that fixed

investment is accelerating at the same time that

overall demand is slowing relative to its earlier rapid rate.


Critics argue that consumption growth in China is

relatively faster than in Europe and the United States.

But this misses the point that the biggest gains in

external demand came from market share expansion,

as opposed to consumption growth, and it is difficult

for China to capture market share at home as it

already owns near to 100% of the market.

The risk is supply will race ahead of demand even as

the number of "untapped" industries fades and

external demand remains sluggish.


The problem of surplus savings is meanwhile well

documented. Gross domestic savings account for

49% of GDP, among the highest rates in Asia.

Nonfinancial sector deposits have risen from 117% to

167% of GDP between 2005 and 2009, albeit with

recent research indicating that the corporate sector

accounts for the larger share.

The temptation to invest these savings in equities,

properties, and other non-deposit assets is strong.

Nominal 12-month deposit rates have averaged

2.4%, in the past decade, compared to nominal GDP

growth of 14%. This owes to the fact that the PBOC

sets deposit rates while cheap funding has

supported the country's growth.

The risk for 2010 and beyond is that rising inflation

spurs the flow into non-deposit assets. CPI inflation is

forecast to reach 3% in 2Q pushing real deposit rates

into negative territory. Inflation is not forecast to spike

markedly from 3%, but the medium-term trend will be

for higher prices owing to growing shortages of land,

raw materials, and youth labour.


The problem is compounded by tight capital controls

and a dearth of investment alternatives. This traps

surplus savings in China and funnels a large share

into a limited number of assets, mainly equity and

property assets. The risks have only grown in the

past decade with the liberalization of the equity and

property markets.

What are the triggers for a bubble?

I do not expect a bubble in 2010. However, there are

a number of responses that are necessary to prevent

a bubble in 2012.


The PBOC must more aggressively curb credit

growth to keep the annual increase at around 7 trillion

yuan. The problem with bank credit is that it tends to

fund heavy-industrial and state-owned projects,

further concentrating investment in a few specific

sectors, such as steel, and raising the likelihood of

over capacity.


Inflation must be prevented from rising above 5%.

Inflation expectations are already worsening as food

prices are firm, home prices are rising, and there are

tentative signs of wage inflation. January's CPI eased

worries that food prices may spike, and inflation is

likely to stabilize around 3% in 2010, but risks are

biased higher.

A combination of tighter restrictions on second-home

purchases combined with increased construction of

low-cost housing will help to reduce risks of a

housing bubble.


A pullback in fiscal stimulus, deemphasising growth targets, the

resumption of CNY appreciation and restructuring in

the export sector will help reduce risks of excess

capacity. Accelerating service sector liberalization

will shift the focus to less capital-intensive growth.

Accelerating capital account liberalization will help

release trapped liquidity.


Is all this likely? The challenge for the government is

tightening policy in spite of fears about a double-dip

in the global economy. The export sector is an

important driver of employment growth, so signs of

renewed global weakness would tempt officials to run

with an easier than optimal policy and, most

worryingly, rely excessively on the property sector to

drive growth. The upcoming leadership change in

2012 may also harden views on the economy and

discourage the government from pursuing policy reform.


There is reason for optimism. It is important that

Shanghai recently dropped its ranking of

municipalities by GDP, focusing on the quality, as

opposed to the pace, of growth. Jiangsu and

Guangdong have similar lowered their GDP forecasts

for 2010. Nonetheless, the changes are not yet

material enough to prevent risks of a bubble

emerging in the medium-term.


Finally, a note of caution. There will be bubbles in

certain sectors and cities over the coming years,

such as in the steel sector or Shanghai's property

market. I expect that media coverage of these

bubbles will regularly shake global risk appetite.

However, the challenge will be in determining

whether they do in fact threaten the economy's

overall health.

Beginning of the end of the Chinese miracle  May, 2009

By: Gordon G Chang
HIMAL South Asian, May 2009..

After two decades of uninterrupted prosperity, the initial stages of the downturn are exposing the inherent weaknesses of China's economy, and those fissures will be felt near and far.


China has the world's fastest-slowing economy. According to official statistics, gross domestic product skyrocketed a staggering 13.0 percent in 2007. In fact, in all likelihood that figure was even higher, with poor sampling procedures failing to properly take into account the output of small manufacturers, which at the time constituted the most productive part of the economy. Even without that extra bump, however, this put China in the top echelons in terms of economic growth.

Last year, however, the economy tumbled. GDP growth,
Beijing tells us, was 10.6 percent in the first quarter, 10.1 percent in the second, 9.0 in the third, and 6.8 percent in the fourth. The decline continued this year, with growth reported as 6.1 percent in the first quarter, the lowest rate since China began issuing quarterly GDP statistics in 1992. The falloff is even more dramatic if we dig a bit beneath these numbers. China's National Bureau of Statistics reports GDP by comparing a quarter with the corresponding one during the preceding year. If, instead, it compared a quarter to the preceding one – as most countries do – it would have reported essentially no growth during the fourth quarter and, possibly, a contraction. And we have to remember that small manufacturers are suffering more than other producers, so current statistics still do not reflect the real drop-off in output. When other distortions in the statistics – some the result of fakery – are taken into account, it becomes clear that no economy is currently falling faster than China's.

-- Chinese output will contract this year. Such a scenario has not occurred since Beijing policymakers dramatically overhauled the contours of the Chinese economy three decades ago; China's economy has not shown a year-to-year decline since 1976.

What are Chinese leaders doing about the alarming deterioration of the economy?
Beijing's technocrats, to their credit, saw problems coming by the middle of 2008. In late July of that year, the Politburo officially reversed course from fighting persistent inflation to attempting to 'lift growth'. Since then, the technocrats decided, among other things, to provide tax rebates, hand out incentives for home purchases, adjust currency policies, and cut interest rates. Nothing, however, seemed to work. Late last year, Chinese leaders adopted a rescue strategy to tackle the situation, with tactics designed to increase domestic investment through fiscal stimulus.

In November 2008,
China's State Council unveiled its stimulus package. The body, the central government's cabinet, said it would spend an "estimated" RMB 4 trillion, about USD 586 billion, over the next two years in ten major areas. In addition, Beijing promised to loosen credit and reduce taxation. The plan, at least as announced, disclosed few details and, therefore, had a distinct made-up-on-the-spot quality to it. Since then, the central government has adjusted the programme, but, even with improvements, the plan appears deficient in important respects.

First, as big as it is, the contemplated spending is not sufficiently large. (Indeed, this assessment comes from the government itself. The State Council's National Development and Reform Commission, the NDRC, estimates that the November stimulus plan will add only one percent to GDP over its existence.) Second, the stimulus programme does not look as though it will work fast enough. Third, the spending plan is pushing the country in the wrong direction, with the policy having an apparent bias toward large-scale infrastructure projects.

Overbuilding has also plagued the country's great cities. I recently stayed at a brand-new hotel in the central Wangfujiang shopping section of Beijing. Even though this was a high season for tourists, the place was almost empty, as were the others next to it. I was certainly impressed – even astounded – by the ambition of Chinese officials, but inevitably wondered about the economic viability of their grandiose plans. In a country with too much of most everything, the government's concept now appears to be simply to build more. Eventually, and inevitably, inefficient investment is counterproductive and catches up with an economy.


Critical consumption
Many observers at the moment unthinkingly say that
Beijing can solve the country's economic problems by engineering increased domestic consumption to take up the slack. This is indeed true as a theoretical proposition, and it is also something that Chinese technocrats understand is exactly what China must do in the long run. Optimists point to the fact that the list of ten areas in the original announcement of the stimulus plan includes some – such as affordable housing, health and education – that look like they could boost consumption. Yet, as we have seen, the plan instead overemphasises government investment. Only a small percentage of the USD 586 billion spending plan will go to desperately needed social services – a clear indication that Chinese leaders are still operating within the mindset of a state-investment-dominated economy.

As a practical matter, it is unlikely that
China will have a consumer economy either this decade or next. For one thing, the country is currently moving in the wrong direction: consumption's role in the economy has been sliding, dropping from its historical average of about 60 percent of the overall economy to just 35 percent today. That is almost certainly the lowest rate in the world; and while some may say consumption cannot go any lower, it most definitely can. First, Chinese consumers, reacting to grim economic news from home and abroad, have in recent months been pulling back in terms of spending, especially as property values on the coast collapse and as stock markets, despite a few upticks, slide.


Labour unrest has spread throughout China, but especially in southern Guangdong province, where many of the country's toy manufacturers are located. Incredibly, factory owners facing the prospect of closure have demonstrated against the government there. Protests in coming months are bound to become larger, more frequent and more violent as the economy continues to weaken and as workers begin to feel safety in numbers. Chinese workers, even poor migrants, are starting to think they can get what they want by defying local authorities. So far, local governments have tried to buy off protestors with small payments, but this in turn is fuelling more protests. Yet with the accelerating failure of industry – more than half of China's toy factories went out of business in the first seven months of last year, for instance – local officials will have fewer resources to fund benefits to those who have suddenly lost their jobs. As Guo Cheming, a Communist Party cadre, noted late last year as he watched a workers protest in southern China, "When times are bad economically, a small incident can rapidly become a big one."

Chinese citizens and businesses sense this instability, and therefore foresee the end of the so-called 'Chinese miracle'. They evaded
Beijing's strict currency controls, and smuggled out some USD 126 billion from China from last October through December. Another estimate, using a broader definition of 'hot money', put the figure as high as USD 240 billion for the same period. By ferreting their money out of the country, the Chinese people are sending the rest of the world an important message: among other things, they are saying that China's economy is slowing fast. The ramifications will be felt inside and outside the country.

Gordon G Chang is the author of The Coming Collapse of


The End of the Beijing Consensus


Writing in the 'Foreign Affiars ' of 2 Feb , 2010, Yang Yao , Deputy Dean of the National School of Development and Director of the China Center for Economic Research at Peking University says thet since China began undertaking economic reforms in 1978, its economy has grown at a rate of nearly ten percent a year, and its per-capita GDP is now twelve times greater than it was three decades ago as a result of mixed ownership, basic property rights, and heavy government intervention. Time magazine's former foreign editor, Joshua Cooper Ramo, has even given it a name: the Beijing consensus.

The Chinese economy has moved unmistakably toward the market doctrines of neoclassical economics, with an emphasis on prudent fiscal policy, economic openness, privatization, market liberalization, and the protection of private property. Beijing has been extremely cautious in maintaining a balanced budget and keeping inflation down. Purely redistributive programs have been kept to a minimum, and central government transfers have been primarily limited to infrastructure spending. The overall tax burden (measured by the ratio of tax revenue to GDP) is in the range of 20 to 25 percent. The country is the world's second-largest recipient of foreign direct investment, and domestically, more than 80 percent of its state-owned enterprises have been released to private hands or transformed into publicly listed companies. Since the Chinese Communist Party (CCP) lacks legitimacy in the classic democratic sense, it has been forced to seek performance-based legitimacy instead, by continuously improving the living standards of Chinese citizens. So far, this strategy has succeeded, but there are signs that it will not last because of the growing income inequality and the internal and external imbalances it has created.

The CCP's free-market policies have, predictably, led to major income disparities in China. The overall Gini coefficient -- a measure of economic inequality in which zero equals perfect equality and one absolute inequality -- reached 0.47 in 2008, the same level as in the United States. More disturbing, Chinese city dwellers are now earning three and a half times as much as their fellow citizens in the countryside, the highest urban-rural income gap in the world.

As the Chinese people demand more than economic gains as their income increases, it will become increasingly difficult for the CCP to contain or discourage social discontent by administering the medicine of economic growth alone.

China's astronomic growth has left it in a precarious situation, however. Other developing countries have suffered from the so-called middle-income trap -- a situation that often arises when a country's per-capita GDP reaches the range of $3,000 to $8,000, the economy stops growing, income inequality increases, and social conflicts erupt. China has entered this range, and the warning signs of a trap loom large.

In the last several years, government involvement in the economy has increased -- most notably with the current four-trillion-yuan ($586 billion) stimulus plan. Government investment helped China reach a GDP growth rate of nearly nine percent in 2009, which many applaud; but in the long run, it could suffocate the Chinese economy by reducing efficiency and crowding out more vibrant private investment.


Paul Krugman bluntly remarked last April that "China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place." Against this backdrop – of a Chinese confidence in its fiscal economic strength that had staved off an immediate collapse of the Chinese economy but also a deeper fear of the vulnerability of its asymmetric interdependence with Western economies suggests that the Chinese political economy was itself in a state of flux.


Be prepared for a ChinaUS struggle and not a G-2 Tango


Zorawar Daulet Singh wrote recently;

 " A fundamental weakness of the G-2 image, aside from the comprehensive national power asymmetry between the two potential collaborators was the fatuous presumption that the national interests of America and China were convergent enough to seriously consider seamless geopolitical cooperation on diverse issues such as North Korea, Iran, Afghanistan, Pakistan, energy security, climate change, non-proliferation, and reforms of the international financial system. And since the terms of resolution to most of these strategic questions were largely being conceived in Washington, the G-2 in retrospect was probably a euphemism to extract Chinese concessions.==


"China's post-crisis massive fiscal expansion and its apparent success combined with a declining confidence in the Anglo-Saxon financial system created an impression among Beijing's rulers that their improvised model of capitalist development, which had cultivated powerful state-owned enterprises, had been vindicated by the financial crisis. Such triumphalism was palpable in Chinese commentary in the months following the crisis. This optimism, however, soon gave way to a rising concern over China's dependence on the dollar, which in turn was linked to China's structural dependence on Western consumer markets to sustain its high growth rates. Nothing captured this anxiety more than the laughter the US Treasury Secretary, Tim Geithner, invited from his Chinese audience last summer when he declared that "Chinese assets are very safe".


"By mid-2009, the consensus among Chinese economists was that China's dollar holdings posed great risks to its future economy. Yet, China grudgingly recognized that not only did its dollar holdings provide it with little actionable leverage in a world with a single reserve currency but that the post-crisis US response to revive its economic system via unrestrained fiscal and monetary expansion was tantamount to shifting a major portion of the financial risks of US debt to creditor economies. "

In January , 1993 , after having discussed with a large number of  Turkish leaders , many I had known in my first tenure ( 1969-73) , who had visited Russia and Turkic speaking republics in central Asia , it was clear that the west propagated charade , in which some even believed ,that democracy could be quickly ushered in and golbalisation would transform the new states into vibrant market economies , was a fraud .US led West used Globalisation to transfer a trillion dollars of wealth from Russia to the west , creating 7 Oligarchs , 6 of them Jews .Something similar has happened in East Europe , where foreign and local mafias have acquired hold over power .

Seeing how in India it took 3 generations to transform a trader ,GD Birla into an entrepreneur Aditya Birla , claims of transforming socialist economies into market economies were  just pipe dreams .

I had surmised that while the Chinese , a practical and hard working people have little real economic philosophy and hence longterm view , they have a tendency to go bersek after decades of hard work , call it let thousand fowers bloom , cultural revolution or some such thing .

I must confess that based on IMF and IBRD forecasts I had said that Indian GDP for 2009-10 could be less than 6 % .The figures are closer to 7 % but the government doesnot seem to be in a truimphal mode .The models and instruments being implemented like stimulus are the same as by Washington , leading to high inflation rates , partly caused by speculation participated by a corrupt ruling elite  and their hangers on. Something has to break down .The Maoist like political violence is not going to be supressed or disappear .

Unfortunately ,India is under siege externally as well having put all its strategic eggs in a sinking US basket .All kinds of jokers in Pakistan created by US and Saudi Arabia threaten India with violence everyday .India is now wants Saudi Arabia as an interlocutor to protect India .It is just unbelievable .The poisonous Pentagon of US-Israel –UK- Saud dynasty/Wahabi-Pak/ISI nexus is the fountainhead of all encompassing problems of state sponsored violence troubling this part of the world ,India being the greatest victim of the collatral damage .The greatest sufferers are the normal Muslims .

US politician Larry Pressler on a visit to India recently said that India protest  to Washington for creating a monster next door. Some hope!

"It was by force that the sons of Osman seized the sovereignty and Sultanate of the Turkish nation; they have maintained this usurpation for six centuries. Now, the Turkish nation has rebelled and has put a stop to these usurpers and has effectively taken sovereignty and Sultanate in its own hands."

Thus admonished Kemal Ataturk in the Grand National Assembly in
Ankara in 1923, when some members, including Islamic clerics and scholars, opposed his proposal to abolish the Sultanate. Many, including some of his comrades, had wanted the Sultanate to continue. A vote by applause after his intervention abolished the six-century-old institution.

Sovereignty has to be protected by a people , 1.1 billion strong ,by its own efforts.

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