There’s a lot going on – from FT Alphaphille, via AR, UBS economist Paul Donovan, a challenge to the notion that it will be possible for the U.S. to inflate its way out of expansive debt burdens:

The fundamental obstacle to governments eroding their debt through inflation is the duration of the government debt portfolio. If all outstanding debt had ten years before it matured, then governments could inflate their way out of the debt burden. Inflation would ravage bond holders, and governments (with no need to roll over existing debt for a decade) could create inflation with impunity, secure in the knowledge that existing bond holders could do nothing to punish them. In the real world, of course, governments roll over their debt on a very frequent basis. As a result, governments are vulnerable to higher debt service costs if market interest rates change. If markets move to price in the consequence of higher inflation by raising nominal interest rates, then the debt service cost will rise and increase the debt. Thus a period of high inflation will tend to raise both the numerator and the denominator of the debt: GDP ratio.

That makes sense. Meanwhile, Andy Xie, former former Morgan Stanley analyst (via Ritholtz) says China is “one giant ponzi scheme,” that will come crashing down as soon as U.S. interest rates go up:

While China is experiencing weak exports now, the weak dollar allows China to release the liquidity saved up during the boom in the past five year without worrying about currency depreciation. How far would the bubble go and for how long?

It is not too hard to understand when the bubble would burst. When the dollar becomes strong again, liquidity could leave China sufficiently to pop the bubble. What’s occurring in China now is no different from what happened in other emerging markets before. Weak dollar always led to bubbles in emerging economies that were hot at the time. When the dollar turns around, the bubbles inevitably burst.

There’s also the notion that a weak dollar is driving commodity prices (again, from Ritholtz). There’s been a lot of fanfare about China’s stockpiles, since metals are more tangible than IOUs. Roubini warns:

“My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of its economy,” …

The contrarian position now seems to be pro-China. Recently, there have been lots of concerns about China’s 8% growth. Financial Times. AEI, via Tyler who also links to Vitaly Katsenelson, who writes that Chinese non-export economic activity grew by 23% in June (“3 times the rate of their GDP growth”). This can be accomplished because policy makers can control the money supply and what most of it is spent on (transfers from State Banks to State Owned Enterprises for extensive infrastructure projects). Katsenelson notes in an updated article for Foreign Policy:,

… [China] suffers from real overcapacity. And now growth comes from borrowing — and hundreds of billion-dollar decisions made on the fly don’t inspire a lot of confidence. For example, a nearly completed, 13-story building in Shanghai collapsed in June due to the poor quality of its construction.

There’s also that pesky issue about declining electricity consumption, which doesn’t quite square with growth in what should be an energy intensive economy. Most construction here is also very labor intensive – infrastructure projects might involve more bamboo and sweat than electricity, at least during the initial phases. Simultaneously, consumers here are cutting back on recently obtained luxuries like air conditioning and lighting, since they are used to living that way. Dubious, but plausible?

Even the locals are restless. This week’s Southern Weekly has a whole section devoted to 中国式复苏能否继续 (‘Can Chinese Style Recovery Continue’), with the following graph showing ‘number of new investment projects’ (black line) and ‘planned investment projects’ (gray line). Unfortunately the available data doesn’t go past January ‘09 – presumably both data points continue climbing:

This notion that every investment project is deadweight needs to be explored further. China is big, underdeveloped, and has such an excess supply of skilled and semi-skilled labor that it might not matter that centralized planning doesn’t work – any infrastructure project will have some positive return… Maybe.

There is some validity to the claim (made by locals) that basic infrastructure needs to come online in order for people to consume more; the classic story is that a washing machine is useless in the numerous smaller cities without reliable power / water supplies. Too often Westerners suffer from a bias of visiting Shanghai or Beijing and extrapolating those conditions for the rest of the country.

That being said, there are huge barriers to overcome. Throwing money at random infrastructure projects in a useless way is just a symptom of the more endemic problems of corruption and regime uncertainty at local levels. Chinese leadership is aware of these, whether they can be remedied in any meaningful way is another matter entirely.

From Saturday’s Chutian Metropolis, “The Government Shouldn’t Ignore Graduates’ False Signatures,” an article about the rising number of falsely employed graduates. Summary: several students have reported being coerced into signing false contracts to boost universities “employed graduates” rate, after having pressure put on them by higher level officials trying to rectify employment problems among college graduates. The article indicates that there is a large gap (1 million) between The Ministry of Human Resources and Social Security’s statistics, and officially reported rates by universities.

Original article below, highlights translated:

Yin Chengji, spokesperson for the Ministry of Human Resources and Social Security, responded with comments about the situation of university students being hired by fake contracts. The Ministry cannot ignore this problem.

Several university graduates have posted comments on the internet indicating that universities, in order to increase the ‘Recent Graduate Job Rate,’ have spared no effort in giving as of yet unemployed students false contracts, the so-called “forced hiring” problem…

As of July 1st, [according to 'Graduate Employment Rate' measures reported by universities] the nation has 4.5 million 2008 graduates with secure employment contracts, representing approximately 68% of 2008’s graduating class. This is almost identical to the similar period last year.

The Ministry’s research statistics indicate that this year there are 6.1 million graduates, plus 1 million [unemployed from last year] totaling 7.1 million recent graduates in the job market; throughout the entire country at least 3 million have still not secured actual job contracts. The Ministry of Human Resources and Social Security will strive to achieve an 88% employment rate among this years’ recent graduates by year-end.

政府不会放任毕业生虚假签约

针对近日引起社会广泛关注的大学生“被就业”问题，人力资源和社会保障部新闻发言人尹成基24日回应，对于个别高校毕业生虚假签约的情况，政府部门不会放任。

有大学毕业生在网上发贴称，学校为了提高就业率，让没有就业的大学生千方百计获取一纸就业签约，这就是所谓的“被就业”。尹成基在此间举行的人力资源和社会保障部上半年新闻发布会上表示，对于个别弄虚作假的情况，该部将会同教育部等有关部门认真对待和解决，“政府部门不会放任”。

截至7月1日，全国已有415万高校毕业生落实去向，就业签约率为68％，与去年同期基本持平。

数据显示，全国今年有610万名应届大学毕业生，再加上去年毕业未就业生100万人，总计710万人，全国仍有近300万毕业生未实现就业。人为资源和保障部门表示，力争今年年底，实现应届高校毕业生就业率88％以上。

Update: Michael Pettis writes:

I have been writing for three years that unemployment among college graduates in China was soaring, and that authorities were understandably nervous.  So nervous, it seems, that they have been putting pressure on university to do more to get jobs for their graduates by limiting their next-year enrollment to the number of graduates this year with jobs.

From WSJ Real Time Economics, ‘What Can China Get For Its $2 Trillion?’:

There’s an increasingly strong sentiment in China that these funds should be used to benefit the nation, rather than being lent to the U.S. and other rich countries. Premier Wen Jiabao said earlier this week that China should “combine the use of foreign exchange reserves with the ‘going out’ strategy of enterprises” (in Chinese here). That echoed earlier government statements — a deputy administrator at the State Administration of Foreign Exchange, for example, also raised the idea in February of using the reserves to support Chinese companies’ growing outward investments.

There’s a strong notion here that reserve accumulation has only benefitted the U.S. – completely ignoring the fact that much of it was necessitated to support exports with an artificially cheap currency. In the U.S., the sentiment seems ‘the Chinese own us,’effectively  blaming the pusher for whatever cheap debt binges we have engaged in during the last 10 years. This view (Asian savings glut as a major cause of the recession) is overplayed, but it’s certainly an element. People also tend to gloss over the positive effects that cheaper imports had. Sure, consumption is generally less preferable to saving, but certainly some people benefitted as a result of cheaper products / inputs into other manufacturing processes. Whether it was worth the systematic imbalances, and readjustment is an open question.

Niall Furgeson has often said that the ending of this relationship could be caustic, comparing China to Weimar Germany. That more U.S. legislators are not calling for punitive tariffs against China for currency manipulation is surprising; a year ago it only seemed like a matter of time. At this point would it even be possible to encourage Yuan appreciation without being antagonistic? The longer the current system persists, the more useless policy levers will become to U.S. politicians. Whether such levers are appropriate is a different question entirely, especially since tariffs and boycotts would not be well received. Perhaps a social movement to buy less, and live within means? Absurd. Better use tariffs.

From the Atlantic, ‘the Chinese Are Just Like Us’ (greedy unsophisticated speculators):

… it sounds to me like Chinese investors have the same irrational exuberance that once gripped U.S. markets. No one likes to stand in the way of a runaway train.

On some level, China’s situation could end up being worse than ours: generally our investors bet on bubbles with their own money. In China, that money is coming from government stimulus and loans.

On the optimistic side, the author fails to note that a lot of Chinese are also very similar to us with regards to buying useless, expensive crap. Anyone who rails against conspicuous consumption in the West should take a stroll down one of the more affluent boulevards of a Chinese city. There is also no glory in saving money on something nice – a premium price is worth it’s weight in bragging rights. Credit cards are also becoming a problem. My generation in the U.S. takes materialism as a given, and just as often glorifies potemkin poverty (some of us, anyway). Where is this crassitude-with-Chinese-characteristics coming from? The fact that it’s all very new, for starters – there’s also something about hierarchy in transitional economies… Not quite sure what though. Regardless, there’s still a lot of slack left, at least in terms of what some people are willing to put, and many want to take out.

Considering underutilized ‘consumption capacity’ and the vast amount of underemployment (both skilled and unskilled) the case for ‘dumb investments’ becomes somewhat more complicated. Certain periods of the Industrial Revolution had all the characteristics of a bubble, and the same fundamental factors were at work (large amounts of labor underutilization, and rapid returns to simple investments in infrastructure and mechanization). The context of authoritarian cronyismharmonious socialist society matters, but were we really so different?. Forcing the narrative into a ‘bubble-no-bubble’ lens is going to lead to analytical errors and oversimplification of an extremely complex and interesting process.

China has been consistently been held up as one of the bright spots in the global economy – this doesn’t quite seem to square with my pessimism in general. Either I’m wrong; or only half-right (“things are bad here – but they are much worse elsewhere.”)

Take, for example, the litany of positive indicators:

… Record Loan Addition, Record Money Supply, Record Auto Sales, Record Imports of Copper, Iron Ore, and Coal, Strong Property Sales.”

The above list comes from Vitaliy Katsenelson (The Next Great Bubble: China). His point is largely the same one that Professor Michael Pettis has been making – without a market ready to replace the U.S. and soak up large amounts of exports, China (certain parts of it, anyway) are in for a much rougher time than everyone’s been used to.

On the other side, the only hard evidence available seems to be just that: collapsing exports throughout Asia (and the suggestion that even this trend could be reversing?)

There are of course, other concerns: anecdotal reports of large amounts of unused infrastructure; unclear numbers of non-performing loans (if I understand the situation correctly, all of the State Banks are able to carry commercial loans at book value, even when nothing actually happens with the building. Might this develop / pop analogous to the U.S. bubble? Can they be held long enough to become performing loans?)

Talk to most people here and you’ll get the same response. A street vendor, when asked of his opinion of the global crisis, put it thus: “there are over a billion people here. We don’t need to rely on the U.S. If every one of us buys only a toothbrush from you, you’d be rich.”

Sure – assuming everyone brushes their teeth [or values it enough to buy a new one and maybe forego a meal.] Extreme, crass example – the more nuanced counterpoint, one that Pettis has been making for a long time now, goes something like:

… if the explosion in new lending (loans are up 15% in the first quarter of this year) leads, as it almost certainly will, to a subsequent explosion in non-performing loans, in the next few years just as China is expanding its production and struggling with US reluctance to absorb its rising excess capacity, the resolution of the NPLs will itself constrain Chinese consumption. Resolving future NPLs, in other words, will reduce future domestic consumption growth in China, just as the current resolution in the US of bad loans and shattered household balance sheets must come with reduced US consumption growth.

Why are they pursuing this strategy, instead of trying to wean themselves from the debt-fattened teat of Uncle Sam? It has a lot to do, unfortunately, with the people I spend my mornings talking with, and what they might do if they can’t find work for a long period of time.

The policy reaction to all sorts of problems – from simple things like traffic accidents and internet censorship – to these grand, impossible to grasp concepts, always seems founded on a tacit assumption of palpable fear that the country is sitting on a tinderbox. It’s a sense you don’t get just by watching the news about China, or even living here – though my position is rather privileged at present.

Chinese policy makers must realize the risks they are taking by sacrificing longer term growth for immediate gain. Perhaps there’s no other feasible way. Like my street vendor, they seem to have bought the line (hook + sinker) that 1 billion+ couldn’t possibly go wrong. History, unfortunately, is littered with examples to the contrary.

In Hong Kong, New Territories. Thanks to KWW for the guide. And for protecting me from massive guard dogs.