Tag Archives: debt

Chinese stocks lost 30% this year, has China’s lost decade begun?

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I predicted dire times for China six years ago, when Xi Jinping amended the constitution to make himself leader for life, in charge of the government, the party, the military, and the banks. Emperor, I called him, here. It now seems the collapse has begun, or at least stagnation. Chinese history is cyclic. Good times of peace and plenty give rise to a supreme emperor whose excesses bring war and famine, or at least stagnation. The cycle repeats every 50 to 100 years. Since Nixon opened China in 1973, the country has seen 50 years of prosperity and spectacular growth, but the growth has stopped and may be in decline. The stock market (Shanghai Shenzen 300) peaked in 2021 and has declined 50% from there. It’s down 30% for the last 12 months to levels seen in December 2010. US growth seemed slower than China’s but it’s been more steady. The main US stock market, the S+P 500, has more than tripled since 2010, up 24.5% this year.

Five years of the Shanghai 300 index with hardly any change. There has hardly been change in 15 years. One could argue that the lost decade is here and on-going. .

Each year Chairman Xi’s behaves more dictatorial. Last year he arrested his predecessor, Hu Jintao in front of the Communist party. He now tracks all his citizens actions by way of face recognition and phone software, and gives demerits for wrong thinking and wrong behaviors. You lose merits by buying western cars or visiting western internet sites. Taking money abroad is generally illegal. Needless to say, such behavior causes people to want to take money abroad, just in case. Last week, Xi proposed a limit on video game playing and clamped down on banks, demanding low interest rates. This is bad for the gaming corporations and teenagers, and banks, but so far there are no protests as there is no war.

Kissinger said that war was likely, though. Xi is building the navy at a fast pace, adding fast surface ships, nuclear submarines, aircraft carriers, and new attack airplanes. They’ve added hypersonic missiles too, and added listening stations and bases. There’s now a naval base in Djibouti, at the entrance to the Red Sea, where they oversee (or promote?) Iran’s attacks on Western shipping. Then there are the new Chinese Islands that were built to take oil and fishing rights, and to provide yet more military bases on key trade routes. These could easily be a trigger for war, but so far just one military interaction in the region. Last month, the Chinese and Philippines navy clashed over fishing!

In the Gulf of Finland last Month, a Chinese ship, New New Polarbear, destroyed the offshore cables and gas pipes between Finland and Estonia, in protest of Finland’s entry into NATO. It’s belligerent but not war. Undersea cables are not covered by the UN charter, law of the sea. Then there is the evidence that COVID-19 was the result of Chinese bioweapon development, and the Chinese spy ballon that was sent over the US. We maintain at peace, but an unsettled sort of peace — is it a preface to war? Wars don’t have to be big war against the west or Taiwan, more likely is Vietnam, IMHO.

China’s negative population growth means that property values will drop along with product consumption. Kids buy stuff; old folks don’t.

News from China is increasingly unreliable so it’s hard to tell what’s going on. There were claims of a coupe, but perhaps it was fake news. Reporters and spies have been arrested or shot so there is no window on anyone who knows. There are claims of high unemployment, and COVID deaths, and claims of a movement to “lie flat” and stop working. Perhaps that was behind the ban on excessive gaming. Who knows? Xi claims that China is self sufficient in food production, but record food shipments from the US to China suggest otherwise.

Major businesspeople have disappeared, often to reappear as changed men or women. Most recently, Jimmy Lai, the Hong Kong clothing magnate, was indicted for sedition by tweets. Perhaps he just wanted to fire workers, or pay down debt, or move abroad (his daughter is). Many businesses exist just to make jobs, it seems. Not all of these businesses are efficient, or profitable. Some exist to violate US patents or steal technology, particularly military technology. I suspect that China’s hot new car company, BYD, is a money-losing, job factory, behind Tesla in every open market. Some 91 public firms have delisted over the last two years, effectively vanishing from oversight. Are they gone, or still operating as employment zombies. Will BYD join them? If China manages to avoid war, I have to expect stagnation, a “lost decade” or two, as in Japan saw from 1990 to 2010, as they unwound their unprofitable businesses.

A sign suggesting that a Chinese lost decade has begun is that China’s is seeing deflation, a negative inflation rate of -0.2%/year according to the world bank. It seems people want to hold money, and don’t want Chinese products, services, or investment. Japan saw this and tried a mix of regulation and negative interest rates to revive the interest, basically paying people to borrow in hopes they spend.

In Japan, the main cause of their deflation seems to have been an excess of borrowing against overvalued and unoccupied real estate. The borrowed money was used to support unprofitable businesses to buy more real estate. This seems to be happening in China too. As in Japan, China originally needed new lots of new apartments when they opened up and people started moving to the cities. The first apartments increased in value greatly so people built more. But now they have about 100% oversupply: one unoccupied or half-built apartment for every one occupied, with many mortgaged to the hilt against other overvalued apartments and flailing businesses.

Chinese Dept, personal and corporate match Japan’s at the start of the lost decade(s). Personal debt is at 150% of GDP, corporate debt is at65% of GDP, all propped up by real estate.

As in Japan 30 years ago, China’s corporate + personal debt is now about two times their GDP. Japan tried to stop the deflation and collapse by increased lending, and wasteful infrastructure projects. People in the know sent the borrowed money abroad confident that they would repay less when they repaid. We are already seeing this; low interest loans, money flowing abroad and a profusion of fast trains, unused roads, and unused bridges. I suspect most fast trains don’t pay off, as planes are faster and cheaper. These investments are just postponing the collapse. China is also seeing a birth dearth, 1.1 children per woman. This means that within a generation there will be half as many new workers and families to use the trains, or occupy the apartments. As the country ages, retirees will need more services with fewer people to provide them. China’s culture promotes abortion. China’s working population will decline for the next 30 years at least.

Japan came through all this without war, somewhat poorer, but unified and modern. It helped that Japan was a democracy, unified in culture, with an open press and good leaders (Abe). There was no collapse, as such, but 20 years of stagnation. China is a dictatorship, with a disunited culture, and a closed press. I think it will get through this, but it will have a much rougher time.

Robert Buxbaum January 9, 2024. China isn’t alone in facing collapse and/or lost decades. Germany is in a similar state, especially since the start of the Ukraine war. It’s a democracy like Japan, and pacifist for now.

Trump, tariffs, and the national debt

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My previous post was about US foreign policy, Obama’s and Trumps. This one is about Trump’s domestic policy as I see it. The main thing I see, the pattern is that I think he’s trying to do is pay down the national debt while increasing employment. So far unemployment is down, but borrowing is not. I suspect that a major reason for the low unemployment is that Americans (particularly black Americans) are taking jobs that used to be held by Mexicans. As for US borrowing, it’s still bad. For his first budget, Trump, like all other recent politicians caved to the forces that favor borrow and spend than to pay back. In this century, only Wm. McKinley, Theodore Roosevelt, Taft, Harding, and Coolidge managed to pay down the national debt. But only one man, Andrew Jackson, managed to pay it off completely. Jackson’s picture hangs in the pride of place in the Trump white house, something that I find significant. I suspect that Trump’s tariffs and spats are intended to pay down the debt without raising unemployment, or weakening the military. Andrew Jackson is his idea of “Make America Great Again.”

All recent presidents have raised the national debt. Trump claims he will shrink it.

All recent presidents have raised the national debt. Trump data to April 20, 2018.

As the graph above shows, if Trump plan is to pay down the debt, he is not succeeding. Trump is overspending — at a somewhat slower rate than other recent presidents, but in 1 1/4 year he’s increased the debt by 6.3%, about $1220 B. He’s saved a few billion by reduced payments to the UN, and to the EU for climate studies, and he’s asking NATO to pay more for Europe’s defense, but he’ll have to do a lot more, and the rest of the world is already unhappy with him.

Many US economists — Keynesians – are not happy with him for another reason. They claim that debt is good, and that borrowing increases employment. As proof they note that FDR borrowed and spent heavily though the 1930s,and we got out of the depression. Other economists point out that it took longer in the US to get out of the depression than in many other countries. More recently, under Jimmy Carter, deficit spending created a combination of high inflation and high unemployment, “stagflation,” suggesting that Keynes should be modified to “Neo Keynesians” who claim you can overspend if you don’t outspend the GDP growth rate. Sorry to say, even in these terms, Obama and GW Bush overspent badly, as did Reagan before them (see graph below). Obama raised the debt from 65% of the GDP to its current 105%, and GW Bush raised it from 50% of GDP to 65%. This borrowing did not increase employment, or raise the standard of living for most Americans, though several at the top became fabulously wealthy. As Alan Greenspan noted, “If national borrowing was a path to wealth, Zimbabwe would be the richest country on earth.” I’m more of a hard money man, as Greenspan was, inclined to think that a balanced budget is good, and that tariffs are good too.

Ratio of US government debt to GDP

Ratio of US government debt to GDP

As of June 1, 2018, Trump has imposed ~20% tariffs on five items: wood, steel, aluminum, washing machines, and solar panels. Combined, these items constitute 4.1% of our imports, $130 B/ year. Taxed at 20%, the US will collect $25 B/year. it’s a step, but I suspect that Trump knows that, if tariffs are to wipe out all of our deficit, he’ll have to impose a lot more, about 40% on all of our imports ($3,100 B/year). Trump may yet do this, and may yet cut spending, and put a lot more America to work. My sense is that this is his aim.

The next step in the Trump MAGA plan involves adding another $35B to the list of items being taxed; that’s about 1.1% of US imports (5.2% total). In response, our trade-partners have complained to the press and to the world court, and have imposed their own tariffs — so far on about $100 B of US products, mostly food items, like bourbon and cheese, chosen to hit Republicans in politically – sensitive states: Tennessee and Wisconsin. Canada now taxes US cheese at over 100%. It’s an effort to embarrass Trump and get Democrats elected in 2018. If these tactics don’t work, Trump will impose another round, e.g. on foreign-made cars and motorcycles. I’d also expect him to cut NATO funding unilaterally, too, as a counter-slap to the EU.

US unemployment by race

US unemployment by race, data to May 2018.

Speaking of Keynesian economists, Nobel Laureate economist, Paul Krugman of the New York Times has been predicting severe job losses, and a permanent stock collapse since 2016, and especially following Trump’s election. Virtually every week he announces that the end is near, and every month the economy looks better. But he’s not deterred, and neither are most economists. In a survey of nearly 100 economists by Reuters, 80% said that Trump’s policies will hurt the U.S. economy, and the rest said there would be little or no effect.[1] . So far it looks like they are all wrong. Unemployment is at record lows, particularly for African-Americans (see chart above); we’re adding new jobs at the rate of 200,000 new jobs per month, nearly 0.8% of the population per year. Inflation is a modest 2.3%, GDP growth is excellent, at 3.2% (or an incredible 4.5%). All we need now is a sensible immigration policy plus some healthcare reform, a modified social security tax, and for the economy to stay this way for another 5-10 years. It’s unlikely, but that’s the plan.

Robert Buxbaum, July 5, 2018. I’d hoped to see the employment and deficit numbers for June by now, but it’s not out. I’ve also argued that free trade is half right, as there is a benefit to workers, And there is a certain greatness that comes from paying your bills. Today, the EU offered to lower some auto tariffs if Trump does not move forward.