Meanwhile in China....

cells

michaels wrote: »

IN China they have the same problem that caused the financial crisis, high income inequality lending to too little consumption from income and excess saving, the savings glut leading to a misallocation of resources/mispricing of risk.

In the west it was then unsustainability of borrowing to consume that burst the bubble (see Greece).

In China it looks like excessive investment in infrastructure/production with negative real returns will be what brings the cards tumbling down.

Both problems mirror the 30s although China even more so.

are we to call all recessions bubbles from now on?

china is investing a lot on fixed infrastructure because that is what you do when you have nothing.

or should the Chinese be expected to have a consumer economy before they build themselves decent homes?

start to worry when they have more than europe or the USA on a per capita basis.


also it seems odd that one nation can spend a trillion dollars on military expeditions and that's fine economic management but if another spends a trillion dollars in building bridges roads hospitals and homes thats an over investment that wont have a reasonable payback and will ruin them for all eternity.....

Generali

cells wrote: »

also it seems odd that one nation can spend a trillion dollars on military expeditions and that's fine economic management but if another spends a trillion dollars in building bridges roads hospitals and homes thats an over investment that wont have a reasonable payback and will ruin them for all eternity.....

It's about return on investment.

If you can borrow a pound and make a guinea then you're doing fine. If you borrow a pound and make 90p then that's not sustainable.

A problem China has is that she is pouring huge sums of money into investment that really doesn't seem to be productive.

cells

Generali wrote: »

It's about return on investment.

If you can borrow a pound and make a guinea then you're doing fine. If you borrow a pound and make 90p then that's not sustainable.

what if you borrow a few pounds to buy a house to live in?

America borrows a trillion dollars a year and spend it on its military with nothing but a few fireworks to show for it....
China borrows a trillion dollars a year and build homes for its homeless people which will stand for a hundred years....

Generali wrote: »

A problem China has is that she is pouring huge sums of money into investment that really doesn't seem to be productive.

says who*

the biggest fixed asset they are doing, which is probably true for most nations, is building homes. Well they have a good deal fewer homes per capita than we do so whos to say its an unproductive asset

China will slow down its investment boom into infrastructure when it gets towards western levels on a per capita basis which probably means by about the year 2020-2030 depending on industry/sector.

ging84

is this a real thing? or a storm in a teacup ?
I looked up some of these Chinese markets, and yes they have taken a real hammering this month, may of them down 20-30%+, but they are all still massively up from 12 months ago

TickersPlaysPop

Sapphire wrote: »

So as a result of all this, do you think there will be a mass sell-off of so-called 'luxury apartments' bought by the Chinese in London as investments? (I seem to remember they are/were buying them almost like sweets at one stage.) Would help the housing shortage in London if this happened, and perhaps contribute to a lowering of prices…

At last somebody comes up with the same idea I've been repeating for over a year!

Thank you, but shame nobody reacted.... it's like you are all in denial of what is likely to happen to our housing market in London and our economy if China pops.

Generali

ging84 wrote: »

is this a real thing? or a storm in a teacup ?
I looked up some of these Chinese markets, and yes they have taken a real hammering this month, may of them down 20-30%+, but they are all still massively up from 12 months ago

That's the several trillion Yuan question.

I'm sure you know all this but for those that don't, the Chinese have a tendency to trade on 'margin'. That means they put up perhaps 25% of the value of the share they want to buy and borrow the rest of the money at an interest rate of about 20% from what I've read.

If a share costs 100 Yuan and an investor wants to buy 1,000 shares, he needs to put up CNY25,000 (25% of 100k if we ignore dealing costs). He borrows the CNY75,000 at an interest rate of 20% pa.

If the share falls in value by 1% to CNY99, the value of his investment has fallen by CNY1,000. That comes out of his margin which has fallen from CNY25,000 -> CNY24,000, a drop of 4%. If he has more money in his margin account then the broker will simply top up the margin. However, if he doesn't, he faces a 'margin call'.

A margin call is when he doesn't have the money in his account to cover his losses. His broker will then give him a certain amount of time, normally a day, to put more money into his margin account before the broker will start to sell assets to make his margin good again.

That's why big stock market falls in situations like this, and in the USA in 1929, can become self-reinforcing. Stock prices fall so margin calls are triggered which can't be met. That means more forced sellers, more falls in price, more margin calls and so on.

That continues until the market becomes so crazily cheap that someone has to step in to buy as the dividends on offer are too juicy to worry about any capital losses. Once enough people are of that opinion the market stops falling.

The Government has stepped in to try to stop the market falling further with the following steps:

- State pension funds are banned from selling shares
- Companies have 'voluntarily' suspended IPOs
- Organized a 'voluntary' fund paid for by stock brokers totaling CNY120,000,000,000 (£12.5bn) to buy shares to try to slow falls in the market
- The Chinese Government is also supposedly buying shares directly but it has not said how much it is prepared to spend

The impact of all this? Share prices were down 8% at the open in Shanghai today and are down 8.16% so far today as I write. As each individual share can only change in value by 10% in a day that means that many shares are now suspended. 40% of the market according to the FT right now.

Maybe this will turn out fine. As cells implies, not every rise in price is a bubble, not every bubble leads to a recession and not every recession is presaged by a asset price bubble. To misuse the old economics joke, asset price bubbles have predicted 10 of the last 3 recessions. Things are looking a bit iffy over there right now in paper assets. Whether that spills over into the real economy is another matter of course.

Time will tell.

mwpt

ging84 wrote: »

is this a real thing? or a storm in a teacup ?
I looked up some of these Chinese markets, and yes they have taken a real hammering this month, may of them down 20-30%+, but they are all still massively up from 12 months ago

And yet, central bank / government sees fit to intervene now, rather than when prices were going up. Everywhere we look, intervention. Free markets should allow failure.

Generali

cells wrote: »

what if you borrow a few pounds to buy a house to live in?

Then you get a return the form of imputed rent.

America borrows a trillion dollars a year and spend it on its military with nothing but a few fireworks to show for it....
China borrows a trillion dollars a year and build homes for its homeless people which will stand for a hundred years....

cells wrote: »

says who*

the biggest fixed asset they are doing, which is probably true for most nations, is building homes. Well they have a good deal fewer homes per capita than we do so whos to say its an unproductive asset

China will slow down its investment boom into infrastructure when it gets towards western levels on a per capita basis which probably means by about the year 2020-2030 depending on industry/sector.

Watch what happens to Chinese steel production over the next few years. Huge amounts of Government money have been pushed towards steel production over the last few years as an attempt to keep the credit crunch and GFC from China's door. As a result, IMHO, China has over invested in steel production.

Let's see what happens in that sector over the next couple of years. The decline will be quite precipitous without further Government intervention I think.

This is another example of misdirection of investment, this time caused by Government intervention in the market rather than by a bubble. A similar example closer to home would be the old wine lakes caused by the old version of the CAP which cost billions to resolve:

http://www.theguardian.com/business/2006/jun/23/europeanunion.france

http://wineeconomist.com/2007/12/24/draining-europes-wine-lake/

This is the EU's take on the lessons learned from the Government subsidising production:

http://www.ecpa.eu/information-page/agriculture-today/common-agricultural-policy-cap

The CAP was one of the original pillars of the European Community, comprising France, Germany, Italy, Netherlands, Belgium and Luxembourg. The treaty of Rome set out its basic principle and objectives:

1. To increase productivity, by promoting technical progress and ensuring the optimum use of the factors of production, in particular labour.
2. To ensure a fair standard of living for the agricultural Community.
3. To stabilise markets.
4. To secure availability of supplies.
5. To provide consumers with food at reasonable prices.

Those objectives were written in 1958 and have never been amended. The Lisbon Treaty who will amend existing European Union and European Community treaties does not revise the objectives.
An increasingly complex system of quotas and support prices was set up, with further crops included as the European Community expanded. This basic system led to the infamous "butter mountains" and "wine lakes" of the 1980s, with farmers being paid to produce goods for which there was no market and which were then bought up for intervention storage and later sale at (lower) global market prices.
Additional instruments such as quotas for milk and other produce were introduced to limit production. "Set aside" was another innovation, with farmers being paid to keep a certain percentage of their land out of production.
The CAP has always been the most expensive of the EC's (later EU's) policies, accounting for about half of total central funds for many years. With successive waves of enlargement, it has become a less dominant part of the overall budget and a decreasing proportion of GDP.

ging84

mwpt wrote: »

And yet, central bank / government sees fit to intervene now, rather than when prices were going up. Everywhere we look, intervention. Free markets should allow failure.

I'm not sure that is really true
they automatically suspend stocks if there is a 10% change, up or down, we saw some stocks literally going up 10% instantly then stopping, every day for weeks

Generali

ging84 wrote: »

I'm not sure that is really true
they automatically suspend stocks if there is a 10% change, up or down, we saw some stocks literally going up 10% instantly then stopping, every day for weeks

Some interesting thoughts on the Chinese market:

http://www.baldingsworld.com/2015/07/08/grab-bag-thoughts-for-the-day-on-china/

I don't agree with it all but there are some interesting thoughts in there especially if deleveraging hasn't even started in the market yet.