Friday, January 25, 2013

Did China or India "Win" the Development Race?

Who has “won” the development race, China or India?

Steven Rattner, a Wall Streeter with a Washington revolving door background, declared in an opinion piece in the New York Times last Sunday (20 January) that it was China. 

Tyler Roylance of the Heritage Foundation weighed in with an opposing viewpoint three days later on the HF website.

“When a New York Times columnist feels the need to tell his readers, ‘Don’t get me wrong—I am hardly advocating totalitarian government,’ something has probably gone badly awry in his analysis,” he noted in a rebuttal that cited all the by now familiar points in favor of democratic India.

What was missing from both articles was the smoke and mirrors quality of Chinese success. (“Smoke and Mirrors,” by the way, is a must-read book about China by Pallavi Aiyar.)

I have noted in earlier posts the real estate and banking mess in China, both hidden by  statistical fraud but evident in the continuing rise of housing prices even as unsold and unoccupied buildings accumulate into brand new ghost cities.

There is also the officially reported fact that 50 percent of Chinese GDP is investment, foreign and domestic. That is an entirely unsustainable phenomenon, without precedent in economic history: like Lance Armstrong’s seven Tour de France victories, China’s spectacular growth rates are the result of artificially pumped-up muscle.

When that rate of investment slows – as it must – it will bring down the whole house of cards. That is because the mandarins of the Communist Party have chosen the appearance of growth over healthy development. They have hidden weaknesses and problems to support the pretense of success.

Corporate debt, for instance, is 180 percent of GDP. (India’s is 49 percent.) Despite that huge debt overhang, there has not been a single default on a Chinese corporate bond issue. That is because even one might start an unstoppable run on the house. So, when a corporation cannot pay back its loans and is in danger of default, local governments step in with public money.

Tyler Durden of summed up the situation yesterday: “China is proceeding with bail out after bail out of any company that threatens to expose the reality that Chinese corporations are massively undercapitalized and that absent Chinese state support this particular 180 percent debt/GDP bubble would pop immediately and have dire consequences around the world.”

The corporate bubble will not burst in isolation. It will take the banks with it, and the real estate market. Bank loans, much of it unrealizable and “hidden” in blatantly dishonest ways, are estimated to be 300 percent of GDP. 

The expectation that the Chinese economy has made a “soft landing” because its manufacturing index has shown a slight rise in the last few weeks is whistling in the dark. What has been happening is that the government has been paying ruined merchants to stay open. A few weeks ago The New Yorker reported on a new mall filled with shops carrying the identical range of products, all on the dole; there was not a shopper in sight.

Warehouses at ports and even decommissioned office buildings are reportedly storing imported commodities for which domestic demand has dropped radically.The regime has elected to hid the slowdown in demand.

How long can Beijing continue this charade? No one knows; but it cannot be for very long. A timeline might be suggested by China's huge increase in food imports -- reportedly four times its annual amount.

That is in line with the certainty that a crash in China will bring down the entire world economy. The financial system the IMF presides over with such aplomb is as insolvent as China’s. The trillions of notional dollars Western Central Banks pumped into national economies to prop up demand after the 2008 fall of Lehman Brothers must meet up with reality at some level, and when that happens, the results could be dire indeed.

To answer the question at the beginning of this piece: India has won; but that might not mean much if we do not survive China’s failure.

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