China's Economy: The Gloom And Doom Version

Two problems with the article:

1) Chinese manufacturing isn't externally driven. Most Chinese growth exists as a result of internal demand.

2) Most Chinese companies are not highly leveraged. If you look at the balance sheets of Chinese companies, they tend to hoard cash since financing is so hard to get.

Twofish,
How about some sources for your opinions? Especially the second one - I've seen quite a few articles indicating the opposite, and based on my knowledge of bubble mentality (and, yes, China definitely has some bubbles, e.g. real estate), I suspect there is quite a bit of leveraging.

Vitaliy Katsenelson articulates the China doom thesis more intelligently than does John Pomfret in my opinion, but I nevertheless find his arguments a little unconvincing. Comparing the fortunes of a cafe chain with the national economy of an entire nation state is surely like comparing apples with oranges.

While Starbucks also markets books, music and film, it is hardly as diverse in the scope of its economic activities as China's national economy, and so it is far far more vulnerable when periods arise that are characterised by "weak consumer spending".

This aside, the ability of Starbucks to go on expanding its cafe chain is limited by the size of its potential market. Its recent downsizing here in Australia for example, has come about not because it has grown too quickly here (its Australian operation has not suffered from "late stage growth obesity") but because it has failed to understand and adapt to the Australian market. It has failed to localise. Here we have a very strong Italian coffee culture, and so most people are very serious about their coffee. Drinking coffee is ritualised, and tradition means everything. People prefer to sip their lattes from a latte glass, their cappucinos from a cappuccino cup, and they like their coffee to be strong and bitter, complex in flavour, and richly aromatic. Starbucks simply offers a very different product. Their cappuccinos and lattes are both served in largle mugs, more appropriate for hot chocolate, and the coffee itself is too milky and tasteless. It's way too bland for Australian and European tastes, and so Starbucks is widely mocked here as the McDonald's of the coffee world.

Starbucks has proved far more popular in Asia, where the fair majority prefer their coffee to be milky, sweet, and bland. Starbucks offers a product that is bland enough not to offend the Asian palatte, and they provide spaces that can be appropriated by locals as symbols of their own, newly emerging modernity. The new trendy middle classes like to be seen sitting in Starbucks, surfing the net on their laptops, and chatting with friends. They spend long periods of time sitting in such places, but consuming few coffees.

Starbucks has succeeded in Asia because its product lends itself to Asian tastes, but it has not performed so well in much of Europe and Australia, where it has failed to sufficiently localise.

Comparing the reasons behind its global downsizing with a possible future collapse of the Chinese economy then, seems to me to be rather silly.

Secondly, I'm wondering why so many people fixate themselves on China's possible future economic collapse. China weathered the last Asian economic crisis, though it may very well experience a serious and dramatic downturn at some point in the future. It's possible. But so what though? South Korea was one of the worst effected countries when the last Asian economic meltdown occured, but it didn't take too long for it to bounce back. A likely future economic downturn in China is not likely to result in a complete collapse, nor is it likely to result in a change of regime or political system. If China's experiences an economic downturn, even a sharp one, it doesn't mean that the sky is going to cave in.

Some people simply have wild imaginations. Perhaps their entertaining thoughts - their constant predictions - are litle more than manifestiations of an unconscious wish-fulfilment. They want to see China fail, though most such analyists will never openly admit to this.

I agree with Twofish. Internal demand is the real demand that sustains the growth of China's manufacturing. Also, this economic recession originated from US does threaten and kill some small Chinese manufacturers, which also serves as a big warning to other manufacturers. Most of them have realized that they need to upgrade their production and to enhance their capability of surviving further risks. I think it's a good trend and a large number of them have been serious about it. China's economy may tumble but it is not going to fall. At least, I don't see any signs leading me to think that way.

"As of today we don’t know how much of the recent growth came from wasteful, unproductive growth. Only after a slowdown will the true problems surface."

I think this is true. I'm not an economist, but I would imagine it's difficult in the short-term to assess the quality of investment in China, though no doubt there are ways. Anecdotal evidence suggests the quality is variable. Shanghai's maglev is an obvious case in point - the project will have contributed to China's GDP figures, but I don't see how a high-speed train from Pudong to the middle of nowhere will contribute to the future production of goods and services.

While China has undeniably moved away from its communist past, I don't necessarily agree that it "is moving towards free market capitalism". The Chinese leadership sees markets as no more than an instrument of growth, a means not an end. And although markets have certainly become the mainstay of the economy, the state as an economic actor has arguably become more not less powerful over the past few years - just look at the growth and profitability of assets under SASAC.

So if there are problems down the line for China's economy, I suspect the structural causes will be the nature of state-market relations. The government's economic achievements in the past thirty years have been remarkable, but I think we're moving into tougher territory now. I worry that the Chinese leadership over-estimates its ability to manage an ever more complex and developed economy by means of "scientific" decisions rather than market mechanisms. In essence, is it beginning to believe its own predictions?

Indeed, the companies that are highly leveraged are many (but not all) of the SOE's, which is where most of the banks bad loans come from.

Something else the article doesn't mention is that these low margin, low cost, low quality factories are starting to close or move as a result of chinese government policy changes (which includes currency appreciation) as well as inflation.

The article does correctly mention that there isn't any real wage inflation in the US, but then again if you take inflation into account there has been little to no growth in the average wage, which squeezes the middle class and is causing to it shrink.

For the basis of my opinion on leverage google for "Louis Kuijs". He doesn't directly talk about leverage, but he does mention that the Chinese companies savings have increased enormously since 2000.

There are have been huge bubbles in the stock market and real estate, but the stock market is largely decoupled from the rest of the economy, and the coupling of real estate is somewhat weak.

For the export/internal composition of the Chinese economy see

http://www.allroadsleadtochina.com/reports/prc_270907.pdf