Comments on: The China Bubble’s Coming — But Not the One You Think

By: anthonymallgren

anthonymallgren — Thu, 03 Sep 2009 13:37:17 +0000

While somewhat informative, I also believe this article is short on facts and references. Comparing Lucent and startups to the United States and China is not exactly an apples-to-apples comparison. If Lucent fails, another company takes it’s spot. If the United States of America fails and is unable to repay it’s loans, it is a bit more complicated than liquiditating assets and paying creditors. First off, you have the IMF, the Federal Reserve and Bank of China who can duplicate buying power several times over. While companies are constrained by currency, countries are constrained by natural resources.

Even past the fact that currency is controlled by government type entities, China regained the title of the largest debt holder, and not by much, grabbing it from Japan not too long ago. Likewise, many other countries have become US debt holders. If the US defaults on loans, it would have effects more far reaching than China. It isn’t worth speculating on the domino effect it would have, but it is safe to say that losing the largest consumer country in the world would devistate the globe. Trying to invest on apolyptic type scenarios hasn’t worked out too well from what I know.

I think it is safe to say that both China and the US will continue to thrive as we unlock our money from overvalued assets through foreclosures and draining the value from homes. The get rich through owning a home with appreciating value could only go so far. Once everyone in the country is able to finance their way to riches, you know the money is bound to dry up sooner or later.

By: Royal Ugly Dude

Royal Ugly Dude — Wed, 29 Jul 2009 17:27:26 +0000

Correction: China has less than half that 2.2T amount in US treasuries (800MM, I think). Don’t know about the makeup, currency or otherwise, about the remainder.

By: Clint

Clint — Wed, 29 Jul 2009 13:42:40 +0000

Vitaly, your article is long on opinion but short on facts and analysis. China does not own $2.2 trillion US Treasuries. They have total reserves worth US $2.2 trillion, but only $801.5 billion are Treasuries. Who are you talking with in China that says they are “desperately” trying to figure out how to withdraw funds from the dollar? The fact is China is still buying Treasuries (look at their yoy increase in USTs). It’s clear that even without their stimulus package, China would still be growing (only one third of this year’s GDP growth in China is estimated to come from the recent stimulus). I would agree that GDP growth in China will slow down over time, but that’s not news.

By: Daniel M. Ryan

Daniel M. Ryan — Wed, 29 Jul 2009 05:04:15 +0000

High rates without inflation means that debtors are going to be squeezed by high after-inflation interest rates. As an example, a jobholding borrower who gets cost-of-living raises will not be that crimped by high rates and high inflation, but will be if the cost-of-living raise rate doesn’t rise along with the interest rate.

There’s lots of borrowers in the States, still, and a wave of defaults would destroy a lot of wealth. As the saying goes, loans are always paid – some by the debtors, the rest by the creditors.

By: takloo

takloo — Tue, 28 Jul 2009 12:12:57 +0000

neat article!…

i don’t understand how can u have high rates without inflation & why its worrying? “…the United States may be looking at high interest rates, with or without inflation. (The latter scenario is most worrying.)”?

By: Daniel M. Ryan

Daniel M. Ryan — Mon, 27 Jul 2009 05:24:37 +0000

One of the earmarks of a bubble in the making is an asset class [or an economy] going up “for no good reason.” Given that the Chinese economy’s metier has been producing low-cost goods for American consumers, with the help of a weak renminbi, strong economic growth in China alongside a renminbi rally would qualify as growth resumption “for no good reason.”

A confirmatory signal for a bubble is continued advancement despite wide-spread and reasonable warnings that things have gone too far. That’s what happened to American real estate in 2002 and ‘03. The adventurers get rich, and the prudent wind up looking like fools. At that point, a bubble’s being blown.

And where it stops, nobody knows.

By: johnyu

johnyu — Mon, 27 Jul 2009 03:34:18 +0000

Hi Vitaliy,

I read from many places, including your blogs, that China is a bubble waiting to burst because it’s overcapacity and its recent growth comes from borrowing. However, we need to be cautious not to mix up analysis of its macroeconomics with guesswork based on impression.

How do we know “If the Chinese government decides to build a highway, it simply draws a straight line on the map”? Have we seen their approval process? Do we have the facts? Or it’s just our impression that’s how the Chinese government works? We need to be careful not to allow the dangerous “us-vs-them” (i.e. democratic vs communist) xenophobia to affect our objective analysis.

I’ve been following a blog of a retired economist who is now living in China. He said many criticisms of China’s recent Keynesian measures were misplaced, because most of those infrastructural projects had been on the drawing board way before the global financial crisis. The government were simply bringing the schedule forward.

True. This is a hearsay I can’t verify myself. But this makes me cautious not to jump to conclusion.