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Generational Dynamics Web Log for 5-Feb-2010
5-Feb-10 News - China's nationalism and real estate bubble grow

Web Log - February, 2010

5-Feb-10 News - China's nationalism and real estate bubble grow

Problems in Greece and Portugal slam stocks around the globe

Lot's of news today.

Contents:
"China hits back at Obama's statements on trade"
"James Chanos: China's real estate bubble is 'staggering'"
""The whole world is laughing at China being stupid""
"Greek virus spreads to Portugal and other European countries"
"The euro falls, the dollar rises, and stocks are slammed"
"Brother can you spare a dime?"
"Additional Links"

China hits back at Obama's statements on trade

It seems that US-China relations get worse every day.

At a meeting with Congressional Democrats on Thursday, President Obama took a hard line on China's trade policies:

"I would not be in favor of revoking the trade relationships that we’ve established with China.

I have shown myself during the course of this year more than willing to enforce our trade agreements in a much more serious way. And at times I’ve been criticized for it. There was a case involving foreign tires that were being sent in here [[by China -- JX]] and I said this was an example of where we have got to put our foot down and show that we’re serious about enforcement. And it caused the usual fuss at the international level, but it was the right thing to do.

Having said that, I also believe that our future is going to be tied up with our ability to sell products all around the world, and China is going to be one of our biggest markets, and Asia is going to be one of our biggest markets. For us to close ourselves off from that market would be a mistake.

Now the point you’re making, Arlen, which is the right one, is it’s got to be reciprocal. So, if we have established agreements in which both sides are supposed to open up their markets, we do so and then the other side is imposing a whole set of non-tariff barriers in place, that’s a problem and it has to be squarely confronted. So the approach that we’re taking is trying to get much tougher about enforcement of existing rules, putting constant pressure on China and other countries to open up their markets in reciprocal ways.

One of the challenges that we’ve got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price. That puts us at a huge competitive disadvantage."

The last phrase about Chinese goods "artificially inflated in price" particularly angered the Chinese. This remark is related to an open US accusation that China is artificially weakening its renminbi currency, in order to make US goods more expensive.

According to the NY Times, Ma Zhaoxu, a Foreign Ministry spokesman, said:

"Trade cooperation between US and China is mutually beneficial. it is a genuine benefit to the people of both countries. We hope the american side sees the problem with in the trade cooperation objectively and reasonably and continues to negotiate on an equal basis and deal with the situation properly. Accusations and pressure do not help so.ve the problem. ... Judging from the international balance of payments and the currency market’s supply and demand, the value of the renminbi is getting to a reasonable and balanced level."

The BBC provides a very convenient list of the issues that are raising US-China tensions:

Google - China denies being behind an alleged cyber attack on the US search engine
Taiwan - a US sale of $6.4bn (Ł4bn) of defensive arms to Taiwan has angered Beijing
Tibet - China says a US meeting with the Dalai Lama would "undermine relations"
Trade - rows over imports and exports of meat, media, car tyres and raw materials
Iran - the US fears China will not back tougher sanctions against Tehran over its nuclear programme
Climate - the US is disappointed at China's tough position at the Copenhagen Summit

James Chanos: China's real estate bubble is 'staggering'

I've written before about the enormous real estate bubble in China. (See "Skyrocketing real estate prices in China alarm officials.")

Appearing on CNBC on Thursday morning, James Chanos, president of Kynikos Associates, added some more information. Here's what he said:

"The fun fact I'll give you is there is almost 70 billion sq. feet under construction right now in high rises, commercial, residential and light manufacturing. We estimate about 30 billion sq. feet is commercial, what we would consider is office space. And to put it in perspective, that's a 5x5 cubicle for every man woman and child in China. These are really staggering, staggering numbers. So we can argue a lot about takeup and absorption, but they're are building high rises in cities with already 15-20% vacancy rates, and those are the government's numbers. I think the real vacancy rates are higher...

They have hard currency at the government level, but the Chinese banking system is the problem. The banking system is loaded with bad debts. Remeber the government controls the banking system there, and the assets of the banking system are suspect.

Our geostrategic position is a lot better than China. Keep in mind China imports almost all its essential materials. ... They send us stuff, we send them pieces of paper. Who would you rather be?"

He made several points that are of interest.

First, there's enough commercial real estate under construction in China to give every man, woman and child a 5x5 cubicle. That's really mind-blowing, in a country of 1.4 billion people.

Second, contrary to popular belief, China is in a great deal of debt. Many people have suggested to me that China will do OK in the coming crisis because they're a creditor nation. My answer to that has always been to point to America in the 1930s, when America was a creditor nation. Being a creditor nation didn't do any good at all.

China is owed some $2 trillion by the US government, but that debt is never going to be repaid, so those are "toxic assets." Chanos makes the point that, even so, China owns the banks, and the banks are hugely in trouble. He doesn't say so explicitly, but I assume he's referring to the debt on 70 billion square feet of real estate under construction -- debt that will never be repaid.

So China may be owed a lot of money, but those debts are "toxic assets." China is just as bad off as America is, and probably a lot worse.

"The whole world is laughing at China being stupid"

Girls singing 'The whole world is laughing at China being stupid' <font face=Arial size=-2>(Source: chinahush.com)</font>

Girls singing 'The whole world is laughing at China being stupid' (Source: chinahush.com)

Correction:The following story contains several errors, according to "Sensei Michael" in the Generational Dynamics forum: "Uh...the video is a parody of another song by the 3 girls (S.H.E. - they're one of the hottest singing acts in the Chinese-speaking world). The parody uses their MTV, and changes the lyrics in the video. The singer is also untrained - her voice was already very strained when she sang the chorus. It has nothing to do with the 3 girls." I apologize for the confusion. (Correction posted 5-Feb-2010)

A year ago, I wrote about a a new best-selling book, called "Unhappy China - The Great Time, Grand Vision and Our Challenges." The book is highly nationalistic, and highly anti-American and anti-West.

A new music video named "The whole world is laughing at China being stupid" was circulating around the Chinese internet, according to China Hush. Here are some of the lyrics:

    How many years our state-owned enterprises have struggled and were ruined
    These years in exchange for their machinery, electronics,
             chemical industry and logistics to dominate the world
    Welcome foreign businesses
    Such hard working Chinese people and such cheap Chinese goods

    The whole world is laughing at China being stupid
    We act foolishly and let the world praising us being so obedient

    Various colored skins and hair
    Come here to trick and swindle
    For years the shoes, shirts and underwear we made
    These years in exchange for their dumping investigation and
             technology embargo to blackmail us
    To build the harmonious Chimerica
    Such charitable Chinese people and such cheap Chinese goods

According to the article, the Chinese government initially endorsed the video, but later reversed their endorsement because the lyrics are so bitterly nationalistic.

From the point of view of Generational Dynamics, it's not surprising that the singers are three young girls. Young people in China know as little about America as young people in America know about China.

As I've said many times before, generational theory tells us that US-China relations are going to continue to trend worse, thanks to younger generations replacing the survivors of the last crisis war (WW II and Mao's Communist Revolution, respectively). At some point, a misunderstanding or miscalculation will lead to war.

Greek virus spreads to Portugal and other European countries

The trigger was apparently a failed bond auction in Portugal on Wednesday.

The Portuguese government had attempted to borrow 500 million euros by selling Treasury bills at an auction on Wednesday, but they were unable to borrow more than 300 million euros. According to the Wall Street Journal, quoting Gavan Nolan of Markit, there was there was "panic buying" in the sovereign CDS (credit default swap) market. This means that investors were betting that Portugal was going to default on its debt.

A CDS is a kind of insurance policy that an investor can purchase for protection against debt default.

CNBC reported the following CDS rates as of Thursday afternoon:

    Country        CDS Rate     Change since yesterday
    ----------     --------     ----------------------
    Greece         422.00        +30.00
    Portugal       230.00        +34.00
    Spain          171.25        +18.75
    Italy          152.50        +21.25
    Ireland        172.50        +10.50

A CDS rate of 422.00 means that you have to pay $422,000 to insure $10 million of debt against default for 5 years. For comparison purposes, typical CDS rates prior to the financial crisis were in the range 10 to 30. (Paragraph corrected - 8-Feb)

I've mentioned these five countries before -- the Europeans call them the "P.I.I.G.S." All of these countries appear in the same kind of debt spiral as Greece.

If you listen to the pundits, then you frequently hear something like, "Greece cannot solve its fiscal problems by itself. The European Union HAS TO to bail out Greece, because if Greece defaults, then the other four countries will also default."

But then you hear the other set of pundits. They say, "Greece has to solve its fiscal problems by itself. The European Union CAN'T bail out Greece, because if it does, then it will have to bail out the other four countries as well."

Either prospect is very daunting. Greece and Portugal have small enough economies, but Spain has a very large economy, and either a bailout or default would bring down the euro currency.

The euro falls, the dollar rises, and stocks are slammed

The panic buying of CDSs caused investors to panic over the euro currency as well. Reuters reports that the euro plunged to a seven-month low against the dollar on Thursday on concerns over the debt levels of the eurozone countries.

Now, as we've explained several times in the past, last year's stock market bubble was caused by the "carry trade" -- traders borrowing dollars at zero percent interest rates, and investing them in stocks, commodities, and other assets. Now, with the dollar strengthening, traders are scrambling to sell their assets in order to pay back the borrowed dollars.

The result was that Asian, European and North American stock markets all fell around 2%.

From the point of view of Generational Dynamics, this trend toward financial crisis is unstoppable. The survivors of the 1930s Great Depression were so traumatized by the starvation and homelessness that surrounded them that they mostly avoided debt for the rest of their lives. As they disappeared, and were replaced by Boomers and Generation-Xers, all the abusive practices that led to the Great Depression were repeated, and are still going on today. This behavior will not change until the new generations are traumatized by starvation and homelessness.

Brother can you spare a dime?

To give you a better idea of where we're headed, spend a couple of minutes with this video of one of the iconic songs of the Great Depression, Bing Crosby singing the 1931 song, "Brother, Can You Spare A Dime?":

Additional Links

According to Reuters, Moody's rating service is saying that it might have to lower the AAA rating on America's debt.

(Comments: For reader comments, questions and discussion, see the 5-Feb-10 News - China's nationalism and real estate bubble grow thread of the Generational Dynamics forum. Comments may be posted anonymously.) (5-Feb-2010) Permanent Link
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