China Faces Obstacles in Bid to Rebalance Its Economy

Edward Wong (NY Times)

A casual glance out the window is all it takes to witness the blistering growth that has become the signature feature of this provincial capital and of other cities in the vast Chinese interior. A phalanx of half-finished office and apartment towers flanked by yellow cranes rises above the brown waters of the Jinjiang River.

China has vowed repeatedly, most recently during the just-concluded visit by Vice President Joseph R. Biden Jr., who met in this city with Vice President Xi Jinping, to overhaul its state-directed growth model and empower its consumers to spend more on their own, something that would make its economy more sustainable and help the sluggish world economy as well. But leaders in Beijing and places like Chengdu are finding it difficult to steer China away from growth that relies largely on infrastructure projects, construction and export manufacturing, economists and financial analysts say.

… Economy more sustainable. That word here means theoretically less capital wasted on vacant apartment towers (cities) and more capital wasted on plastic crap. It means less imported dollars from the United States seeking +30% returns in the loan shark economy. It means fewer dollars period, but with motorists around the world setting the value of money at the gas pump there is little room for the Chinese to manage flows without imposing capital controls. If the Peoples Bank of China pushes up ‘official’ interest rates, foreign exchange flows to the banking side of the economy. This in turn compels the shark side to raise rates even more which attracts even more gross foreign exchange into the economy as a whole.

The outcome is the bulging China finance, large bits of it underground in a China Shadow Banking empire of loan sharks and municipal lending platforms.

Industry- schmindustry: returns from goods production cannot service the extraordinary capital costs. Even with cheap labor, China’s industries are under pressure from high fuel and money costs. The only possible avenue for ‘return’ is from real estate speculation: this means more massive, subsidized capital projects which means greater numbers of apartments in ever- larger (empty) towers in ever more depressingly gigantic (empty) cities alongside high-speed rail projects that have the trains crashing into each other over and over again, for entertainment purposes only.

In China, life is cheap, money is expensive. Wait until China starts with those 100 nuclear power stations and these start blowing up over and over again!

For entertainment purposes only …

All eyes turn to Jackson Hole, Wyoming, where the central bank honchos discuss how much more money will be made available so as to flood China with still more super-gigantic, vacant apartment cities. Is as if the United States has set out to destroy China by beguiling the innocents on the yonder- shore into paving over their entire country with an exploding, crashing, radioactive fifty-story layer of concrete. To make this plan work, no added QE funds are required, only ZIRP as far as the eye can see along with endless moral hazard. The finance industry in hurricane magnet Wall Street will do the rest, making as much credit as necessary for China to smear concrete and asphalt over what is left of its countryside.

There have been some positive developments over the past few years, particularly when considered in the light of economic prospects as viewed at the depth of the crisis. Overall, the global economy has seen significant growth, led by the emerging-market economies. In the United States, a cyclical recovery, though a modest one by historical standards, is in its ninth quarter. In the financial sphere, the U.S. banking system is generally much healthier now, with banks holding substantially more capital. Credit availability from banks has improved, though it remains tight in categories–such as small business lending–in which the balance sheets of potential borrowers remain impaired. Companies with access to the public bond markets have had no difficulty obtaining credit on favorable terms. Importantly, structural reform is moving forward in the financial sector, with ambitious domestic and international efforts underway to enhance the capital and liquidity of banks, especially the most systemically important banks; to improve risk management and transparency; to strengthen market infrastructure; and to introduce a more systemic, or macro-prudential, approach to financial regulation and supervision.

[…]

To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.

These are the ‘money shots’ of Ben Bernanke’s remarks. (Zero Hedge) Note, more sustainability is sought. US banks refuse to lend dollars to the small businesses but will launder them through corporate intermediaries overseas to loan shark ‘counter-parties’ in China. This enables the 35 – 90% ‘returns’ which show up as corporate profits.

Once the Chinese revalue the yuan higher the return in dollars will be even greater.

This is a ‘Can’t Lose Deal’ for the US: if China creates enough worthless infrastructure it will be bankrupted by it, permitting the USA to remain ‘Number One’ for a few weeks longer than otherwise. Up to the point the infrastructure bankruptcy/collapse China it will be sparking off super-high returns. This is why US multinationals are making money hand over fist. America’s Business is Business … being China’s payday lender!

Somehow, the Chinese are either oblivious to this or cannot react positively because their pop-culture self promotion as being serenely omnipotent has painted them into a corner. It is also likely that the entire political apparatus in China is on the take. If that is the case, Bernanke does not have to print any money in order for the US business rackets to succeed, China’s central bank will be happy/compelled to do so in its place!

On the Fake and on the Take.

Poor China! Right now the outcome of willful suspension of disbelief along with destruction of her resource base and the Disney-fication of her once highly adaptive and elegant culture leaves the country with little in the way of tools. It becomes harder for Chinese to come to their senses and escape the ‘sustainability trap’ they’ve created for themselves.