China's got problems of its own

MUCH of the discussion of China in the business and financial section of the American media these days consists of teeth-gnashing laments over their trade deficits with and indebtedness to the emerging global power. People have recently been made aware that the Chinese hold so much American government debt that interest payments on the debt will be large enough to completely fund the People’s Liberation Army by as early as 2015.

The view from Asia, however, offers a different perspective. Japanese journalist Miyazaki Masahiro provided a brief description of that view recently, and here it is in English.

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The dramatic change in Chinese trade patterns: The drastic decline in the trade surplus

The Chinese trade surplus is growing with the United States and the EU, but that country has a large deficit with resource-exporting countries. Their deficit with Australia is roughly equivalent to their recent surplus with the U.S.

China imports coal, natural gas, minerals, rare earth metals, and other natural resources from Australia. The unfavorable trade balance for China is about to reach $US 40 billion. They also have deficits with Canada, Brazil, and other resource-producing countries.

The Chinese import core parts, components, and high-tech products from Japan, Taiwan, and South Korea, and their deficit with those countries remains unchanged. It is close to $US 30 billion with South Korea alone. The trade deficit with Japan is said to be a constant, but it has somewhat improved to roughly $US 22 billion. Japan continues to import vegetables, grains, seafood, as well as processed food products from China.

Chinese foreign exchange reserves are several times greater than their trade surplus, and direct investment in the country amounts to more than $US 100 billion. The influx of speculative investment is also thought to be several times greater than the trade surplus.

Meanwhile, the trade surplus remains unchanged with the countries of the EU, particularly Great Britain, France, and Italy. The surplus with the U.S. is greater than $US 30 billion, and about $18 billion with India.

Overall, however, the pattern of rising national wealth fueled by trade surpluses is undergoing a dramatic change. Attention will be focused in the future on the contours of the curve in the distortion that occurs during the structural transition from an export-oriented nation to an import-dependent nation.

Regardless, the age in which China was the world’s factory with cheap labor is assuredly coming to an end.
(end translation)

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Meanwhile, Gordon Chang asks in Forbes: How can China save Europe when it’s defaulting on its own debt?

He explains:

About 85% of Liaoning province’s 184 financing companies defaulted on debt service payments in 2010 according to a report from the province’s Audit Office. The report also noted that 120 of these borrowers, de facto government agencies, operated at a loss last year.

Since 1994, provinces and lower-tier governments have not been permitted to issue bonds or borrow from banks. Despite the strict prohibition, their debt has skyrocketed as local officials incurred obligations through LGFVs, local government finance vehicles. The central government’s National Audit Office said these companies, at the end of last year, had taken on 10.7 trillion yuan of debt. No one, however, knows the true amount of LGFV indebtedness, and some have calculated the real amount to be more than double the official figure.

Due to a combination of circumstances:

China’s debt-fueled growth is slowing fast, probably faster than official GDP figures indicate…Xu Lin, a senior official at the National Development and Reform Commission, says there is no need to “panic,” but there are plenty of reasons to think that China’s economy is already landing hard. And a hard landing will soon cause LGFV defaults around the country, which will roil banks. Fitch early this month put China’s local-currency debt on downgrade watch due to concerns about bank asset quality and general concerns about financial stability.

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Then there’s the Chinese real estate bubble. Said the Wall Street Journal earlier this summer:

AFTER years of housing prices gone wild, China’s property bubble is starting to deflate.

That’s a relative term, of course:

Beijing has one of the most expensive real-estate markets in the world relative to the income of its citizens.

Calculations based on Soufun data show that in the opening months of 2006 an average-price new apartment in China’s capital would cost around $US100,000 — the equivalent of 32 years’ disposable income for the average resident.

By 2011, the average price had more than doubled to $US250,000, but relatively modest increases in income mean it would now take 57 years of saving for the average resident to cover the cost.

Why are falling prices a problem?

Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.

Some countries have market risk, some have currency exchange risk, and some have inflation risk. As always with China, however, there is honesty risk:

A number of analysts think official data, which has continued to show a slight rise in prices, understate the slowdown as the government can affect the numbers by pressing developers to withhold or add high-value properties to the market depending on what it wants the data to show.

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Everyone in the United States and Europe sees and hears the Big Train coming round the bend, but those governments seem intent on finding ways to stay lashed to the tracks instead of fleeing or derailing the locomotive. Now, some people are taking notice that the Chinese might be tied to the same tracks themselves.

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