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"China's best hope is that Trump, Wall Street, and the whole world are willing to play pretend"
Posted by: Ted King
Date: January 08, 2019 05:11PM

This is an intriguing article but I don't know near enough to assess its veracity so I thought since some people who post here seem to have some idea of what is going on with China economically these days, I'd see what y'all think - if you are interested.

Introductory bullet points:


*China's economy is showing signs of extreme stress, and not just because of President Donald Trump's trade war.

*Economic data is showing that China's debt problems are gobbling up cash faster than more Chinese people can become consumers.

*To change this narrative and calm markets, China will have to make a deal with Trump by March 1.

*The deal will likely be a sham.

*But the best outcome for China is that Trump pretends it's good so that he can declare victory, and Wall Street and the rest of the world can pretend China's economy has a catalyst for recovery.

Some factual claims made in the opinion piece:


Let's go back to what China has been saying it was going to do with its economy for years now, which is switch it from one based on investment to one based on consumption. That would make China's economy more like the US — more able to support its own growth on the back of consumer buying power.

It's not there yet. Not by a long shot.
[There is a graph to support the claim.]


"Halfway through 2017 private firms were already dialing back their hiring, borrowing, and investing, but not SOEs [state owned enterprises], they kept their pedal to the metal all the way into 2018," he told Business Insider. "So a 2018 slowdown was inevitable regardless of what was happening around the globe, or with Trump trade."


So in China we have more and more good money chasing a growing pile of bad money. Policymakers have tried to enact measures targeted at private and smaller businesses to free up more good cash. Tax cuts, for example. But they haven't done anything to turn the economy around. Most recently, policymakers announced a cut in Chinese banks' reserve ratio requirement, but Miller says a lack of access to credit has never been the problem, so it won't be the solution.


"A March 1st US-China trade agreement would relieve a great deal of uncertainty from the rest of 2019, but it would only keep things from getting worse, not necessarily help the economy get better."

The author assumes those are true and then goes on to posit that there are three primary options about what to do:


1. Cave to Trump's demands and significantly and transparently change the course of its economy. This would be a massive admission of defeat.

2. Pretend to cave to Trump's demands and risk a return to war in the future if their game is found out.

3. Kick the can down the road and wait for another, kinder administration in the US. This risks freaking out financial markets as investors get doubtful of, or impatient with progress. In the meantime, the Chinese economy will suffer.

And then concludes, "It's not hard to see that pretending, if China can pull it off, is the best solution for the time being."

I know this is a lot to slog through but we are talking about the two largest economies in the world so if the author is right, then this is a really big deal.

Is the author way off base? Kinda right about some things and off on others?
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Re: "China's best hope is that Trump, Wall Street, and the whole world are willing to play pretend"
Posted by: Carnos Jax
Date: January 08, 2019 06:54PM
Well Trump’s been faking it so far (Foxconn & Carrier deals, draining the swamp, Korea, concede defeat on the Wall until Fox News cried out)....he might as well pretend here too.
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Re: "China's best hope is that Trump, Wall Street, and the whole world are willing to play pretend"
Posted by: cbelt3
Date: January 08, 2019 09:36PM
Max, what’s the local take on this story ?
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Re: "China's best hope is that Trump, Wall Street, and the whole world are willing to play pretend"
Posted by: max
Date: January 09, 2019 02:04AM
Max, what’s the local take on this story ?

First, what is correct from the quoted article:....

Wall Street and Washington have been debating whether or not China's economic troubles are mostly being caused by Trump's trade war.
They are not.
That is true. There are many other local, self induced issues involved.
Trump, Trump, Trump is our hangup, not theirs.

The bad debt is an ever present problem, I am not sure it makes any difference today or not.
The switch from export economy to a greater local consumption is quite visible in the manufacturing sector. Some of my suppliers are reaching 50% of their production for the higher end of the local market and some of the stuff is very, very nice. Not available here.
Three years ago that share was less than 5%.
The big drag on the manufacturing sector is threefold; first is the general labor shortage, second is the Chinese EPA new draconian rules issued about three or four years ago and the concurrent anticorruption campaign.
Originally when issued, most smaller and medium firms believed that as in the past, once the original antipollution campaign is done, everything would return to normal after several months. Many did nothing, few actually spend some major money installing high tech treatment plants etc, but because of the anticorruption campaign no bureaucrat is willing to put their neck on the line and issue new licenses. About a third of the existing manufacturing plants in the old manufacturing centers of the east coast have closed down, another third is just running half speed with dirty part done at night.
Third factor is the government policy towards the switch from basic to high tech industrial development is visibly bearing fruit, but at the same time there is some economic disruption during the process.

The big problem not mentioned in the article is the overheated and overbuilt real estate, which could lead to a similar bubble collapse as we had in 2008.

I know that we have the impression that China lives off the exports to the US. It does not. We were a significant market at one point and we were a driving engine of their development as recently as fifteen years ago, but in the last several years most of their exports have gone to the rest of the world. We are a factor and a significant one, but they could survive without us.

In two weeks their entire economy will come to screeching halt as everything closes for a month and everybody heads home for the lunar New Year.
That always mucks up the short term projections of western experts.

Their average GDP growth of 15% was normal for quite a while, but recently it descended to 6.5%. Taking into account that in 2008, while I could see the stagnation, if not a mild recession, the official number published was 5% growth, you can draw your own conclusions.

Cutting taxes is not exactly an effective tool to boost economy in China as there is not much taxes to cut to start with. Their usual mechanism is a fast boost to local infrastructure projects and I have yet to see it...
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Re: "China's best hope is that Trump, Wall Street, and the whole world are willing to play pretend"
Posted by: Ted King
Date: January 09, 2019 09:47AM
Thanks max.

Edit: originally used a capital "M".

Edited 1 time(s). Last edit at 01/09/2019 09:48AM by Ted King.
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