How China Fooled The World
T his synopsis of the BBC' Robert Peston on China and its growth is an interesting look at what China has become and where it is heading along with our thoughts on their future for you to consider.

In the last five years China has spent £400bn on a stimulus package. The result of which follows:

  • New Sky scraper every 5 days
  • 30 new airports
  • 25 underground metro networks
  • 6000 miles if high speed railway track and stations
  • 3 longest bridges in the world
  • 26000 miles of motorways
  • Bank funded loans
  • Credit funded investment, largely by state owned banks

£1 trillion in 1st year and in particular there has been a rise in off balance sheet lending. This growth outside banking system, or shadow banks has been immeasurable which has given cause for concern.

Huge proportion of China's debt is hidden but not measured accurately.

Drivers:

  • Transport and infrastructure
  • 400 million people moving from rural to urban China
  • 10 million homes per year
  • 20% price rise in property values per year
  • Average salary £4000 pa
  • Property mainly being bought and held by the rich minority
  • It is estimated that 15% of property in China is empty
  • The more valuable the property, the higher the vacancy rate

Analyst say that the political structure encourage local government to undertake successive projects creating a glut of property with no one other than the elite to buy, therefore the return may not justify the investment.

The question is... Who is financing the building of it?

  • Answer: the Chinese government?!
  • It is said that local party officials have become the principal beneficiaries of the financial boom
  • Officials allegedly have been receiving back hand payments
  • The system has enriched the local party members
  • Increased government crackdown on local officials
  • Poverty for decades has driven the opportunity to make hay while the sun shines
  • In 5 years the Chinese banking system
    • 10 trillion in 2008
    • 24/25 trillion in 2013
    • Replicated the entire USA banking system in half a decade
    • Lending 200% of GDP
    • Chinese households save 1/3 of their earnings
  • Whereas 1/20 of earnings are saved by western households
  • This is an imbalance
  • To rebalance is to increase spending on consumables
  • Consumption accounts for 1/3 of China's economy compared to 2/3 of the west
  • Investment represents 1/2 of Chinese economy
  • It's physically not possible to replace investment for consumption as the engine of growth
  • Credit growth remains double that of GDP growth

There is a school of thought that says China can grow out of its imbalance but mathematically it's not possible when credit is twice the size of GDP growth.

  • The borrowers
  • Local governments
  • The developers
  • Households
  • Will be unable to pay back the loans
  • When the bill arrives China will be unable to pay

What will they be left with?

Majority of state run businesses are not running at a profit they are running at over capacity nor are they efficient enough to compete on global markets. The government are considering rationalisation but this would involve making Millions of workers unemployed which is contrary to a state run communist system.

If China does not correct it's imbalance the property market will collapse, which will prevent borrowers from paying back loans. Corruption is a huge problem in China. The power rests with the state and the people in office. A sustainable level of growth is realistic at 4%. Some say China in 2014 is where the west was in its economic cycle in 2005/6 so collapse is not imminent but it draws near. Others say it’s a brave man that bets against China's ability to manage its problems but some sort of financial crunch is inevitable.

Hank Paulson says:

The good news is, we've got very strong leaders in China. The bad news is we've got some really difficult challenges ahead of them

he goes on to add:

I believe they will surprise with their ability to get things done

Another commentator suggests:

The Chinese leadership is very enthusiastic about economic reform, very adamant that there will be no political reform, I don't think you can have one without the other.
There is no precedent for anyone to compare to China for as long as or as fast as, China's growth. This is referred to as Chinese exceptionalism.
What goes up, must eventually come down

Our view and analysis:

The facts speak for themselves, but China has been presented with a population living in poverty on such a scale unknown in history. It's manufacturing and technological disadvantage compared to the west left it with little or no choice but to embark on an aggressive, rapid, state controlled expansion the likes of which have never been seen before. If there is an implosion then the state run business and banking sector will take the hit. Simultaneously it will have transported the lives of hundreds of millions within a generation, it will have modernised a whole country and if the corrupt officials are the major stakeholders If the property markets, they will be the largest losers, but for the state and it's people it's a win win situation.

A credit fuelled change in a whole people, a mass improvement in the infrastructure, education and access to opportunity for growth and improvement is a risk worth taking. It's their risk, their loss, a strong china with an educated people, will balance the world in years to come, a disparity in living standards creates instability.

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