China's journey started from 1978 when the Deng Xiaoping began the reforms such as allowing private enterprises to run businesses,general public were allowed to own the land etc.These reforms were the beginning of China's unparalleled path of growth.From 1990 to 2008,it grew at an unprecedented rate.Especially in the miracle years of 2003 to 2007, it touched the growth figure of 12% per annum averaging the growth rate to 8%.In fact the '8' actually became the lucky number for China.It is the only country in the world which has been able to remove the maximum number of people out of poverty in the shortest span of time and second in the world to become 10 trillion dollar economy.
For any economy to drive four factors play an important role.They are Consumption, Investment, Government spending and Exports.Till 2008, China's model worked which was similar to Japan,South Korea and Taiwan.Exports was driving the economy for the fact that Chinese goods were relatively cheaper than rest of the world.But it got badly hit by Global Financial Crisis 2008.This is so because China depended on the developed nations for its exports but developed nations reduced their imports due to GFC (Global Financial Crisis).Therefore,China after 2008 had to adopt a different route to continue its path.Also,it was hubris that found its place among the Chinese leaders due to fact that it was growing at an astounding rate since last two decades.So it focused on internal growth that is consumption, Investment and Government spending.But, Investment from private enterprises cannot begin until government kick-start the spending.In order to increase spending government needed funds.
The administrative structure in China is that state government collect taxes from the citizens and from that it runs the administration.There were also restrictions on the state government with respect to borrowings.So,LGFVs (Local Government Finance Vehicles) were created.Now, these LGFVs will borrow from the citizens of the nations.This money will be invested into the infrastructure of the nation to keep growing at pre-crisis level.
As and when the projects backed by LGFVs started developing slowly and gradually,the prices of the projects started increasing.This is so because when the project starts developing, wages are provided to the workers.With more money in workers hand,they will have more bargaining power.Also, because of government's interest in the infra, many private players also join.So, actually there arises competition among the government and private enterprises to employ the workers.As mentioned by Ruchir Sharma in his book,"There was a time in China in 1990s when employers were shouting at workers.Now post 2008, workers are shouting at the employers."The wages levels have increased in China although comparatively it is cheaper than rest of the world.This leads to increase in inflation in the economy.
There can be foul play in LGFVs.This is so because the LGFVs are Government Sponsored Entities.There is a possibility that they might invest in risky projects and the project might not bear enough returns in order to make payments to the citizens.So ultimately,people lose their investments. These investments of Chinese people came from the fact that Chinese people have predominantly been the savers.This will led to people losing their entire savings.With no money left, they wont be able to spend in the economy and therefore economy will come to a halt.This situation can be compared with Public Sector banks in India where patronage is given to business houses even though they don't possess capability to repay money.Ultimately, it leads to erosion of capital of Public Sector Banks.
LGFVs are GSE that is Governement Sponsored Entities.Parallel play is also taking place in the private enterprises where instead of LGFVs , TWMP (Trust Wealth Management Products)come into picture.At present there are more than 10,000 LGFVs active in China.With one LGFVs going bankrupt for the reason mentioned above, people will panic and start withdrawing money from remaining LGFVs.There is always a possibility that people might not be able to recover entire prinicipal. This will lead to butterfly effect on the other LGFVs.The money in circulation due to LGFVs is around 1.8 trillion yuan and in entire credit system it is approximately 20-22 trillion yuan. LGFVs,if defaulted can mar the entire Chinese economy.
As quoted by Howard Marks,"History does not repeat itself, it rhymes" and in the words of Santayana,"Those who do not remember the past are condemned to repeat the same".China is going swiftly on the path of US.China in 2009 banned the sales of ABS after learning from GFC 2008 but again started its sales in 2012.Till 2014,its sales touched the whopping figure of 282 billion yuan.China's debt to GDP ratio touched 250%,an alarming level double than US in 2014.The margin lending also increased in the Chinese stock markets and at present taking place at dangerous levels.
Since last year,two Chinese companies have defaulted on their debt obligations and among them one company's debt was in US dollars.Shanghai Index lost around 6.5% of its value on 28th May,2015.6.5% number should be taken seriously because Howard Marks when describing about 1987 fall of the stock market said,"People panic when they lose 2% of capital on the markets."These should be taken as warning signs by the Chinese leaders.
It would be better if China is able to fix its problem in due time before the things get worst.As quoted by Ruchir Sharma ," There is a 50% probability that China will be a breakout nation in the next decade (2011-2020)".According to me,above mentioned are the reasons for the bearish face of China.
For any economy to drive four factors play an important role.They are Consumption, Investment, Government spending and Exports.Till 2008, China's model worked which was similar to Japan,South Korea and Taiwan.Exports was driving the economy for the fact that Chinese goods were relatively cheaper than rest of the world.But it got badly hit by Global Financial Crisis 2008.This is so because China depended on the developed nations for its exports but developed nations reduced their imports due to GFC (Global Financial Crisis).Therefore,China after 2008 had to adopt a different route to continue its path.Also,it was hubris that found its place among the Chinese leaders due to fact that it was growing at an astounding rate since last two decades.So it focused on internal growth that is consumption, Investment and Government spending.But, Investment from private enterprises cannot begin until government kick-start the spending.In order to increase spending government needed funds.
The administrative structure in China is that state government collect taxes from the citizens and from that it runs the administration.There were also restrictions on the state government with respect to borrowings.So,LGFVs (Local Government Finance Vehicles) were created.Now, these LGFVs will borrow from the citizens of the nations.This money will be invested into the infrastructure of the nation to keep growing at pre-crisis level.
As and when the projects backed by LGFVs started developing slowly and gradually,the prices of the projects started increasing.This is so because when the project starts developing, wages are provided to the workers.With more money in workers hand,they will have more bargaining power.Also, because of government's interest in the infra, many private players also join.So, actually there arises competition among the government and private enterprises to employ the workers.As mentioned by Ruchir Sharma in his book,"There was a time in China in 1990s when employers were shouting at workers.Now post 2008, workers are shouting at the employers."The wages levels have increased in China although comparatively it is cheaper than rest of the world.This leads to increase in inflation in the economy.
There can be foul play in LGFVs.This is so because the LGFVs are Government Sponsored Entities.There is a possibility that they might invest in risky projects and the project might not bear enough returns in order to make payments to the citizens.So ultimately,people lose their investments. These investments of Chinese people came from the fact that Chinese people have predominantly been the savers.This will led to people losing their entire savings.With no money left, they wont be able to spend in the economy and therefore economy will come to a halt.This situation can be compared with Public Sector banks in India where patronage is given to business houses even though they don't possess capability to repay money.Ultimately, it leads to erosion of capital of Public Sector Banks.
LGFVs are GSE that is Governement Sponsored Entities.Parallel play is also taking place in the private enterprises where instead of LGFVs , TWMP (Trust Wealth Management Products)come into picture.At present there are more than 10,000 LGFVs active in China.With one LGFVs going bankrupt for the reason mentioned above, people will panic and start withdrawing money from remaining LGFVs.There is always a possibility that people might not be able to recover entire prinicipal. This will lead to butterfly effect on the other LGFVs.The money in circulation due to LGFVs is around 1.8 trillion yuan and in entire credit system it is approximately 20-22 trillion yuan. LGFVs,if defaulted can mar the entire Chinese economy.
As quoted by Howard Marks,"History does not repeat itself, it rhymes" and in the words of Santayana,"Those who do not remember the past are condemned to repeat the same".China is going swiftly on the path of US.China in 2009 banned the sales of ABS after learning from GFC 2008 but again started its sales in 2012.Till 2014,its sales touched the whopping figure of 282 billion yuan.China's debt to GDP ratio touched 250%,an alarming level double than US in 2014.The margin lending also increased in the Chinese stock markets and at present taking place at dangerous levels.
Since last year,two Chinese companies have defaulted on their debt obligations and among them one company's debt was in US dollars.Shanghai Index lost around 6.5% of its value on 28th May,2015.6.5% number should be taken seriously because Howard Marks when describing about 1987 fall of the stock market said,"People panic when they lose 2% of capital on the markets."These should be taken as warning signs by the Chinese leaders.
It would be better if China is able to fix its problem in due time before the things get worst.As quoted by Ruchir Sharma ," There is a 50% probability that China will be a breakout nation in the next decade (2011-2020)".According to me,above mentioned are the reasons for the bearish face of China.
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