Hidden dragon

Part of the Shanghai skyline.

By Emil Pulsifer, Guest Rogue

Those who fail to learn from history are doomed to repeat it.

Before China became the leading developing nation, there were the Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan. In the late 1990s a financial crisis gripped Southeast Asia that threatened to spread into a global financial meltdown.

In many significant respects, the parallels with China are eerily disturbing. While it is true that there are important, fundamental differences which preclude an exact replay, there have been other developments since that time, such as growth in the derivatives market and the securitization of debt which have the potential to spread financial contagion. Leverage is a fearsome thing, and risk predictions are notoriously unreliable and often consider only the initial stages: we have only to look at the recent example of the Great Recession, in which a small but very sick portion of the U.S. housing market spread to the national housing market and thence, via securitized and bundled loans, to the global financial system.

A few bullet points will suffice to give the reader a background on the Asian Tigers crisis. The summary is taken closely from International Business: Competing in the Global Marketplace by Charles W.L. Hill (6th Edition, 2008).

• Exports had been the engine of economic growth in these countries. The nature of exports had also shifted significantly from basic materials and products such as textiles, to complex and increasingly high-technology products such as semiconductors and microcircuits.

• The wealth created by export-led growth helped fuel an investment boom in domestic commercial and residential property, industrial assets, and infrastructure. The value of commercial and residential real estate soared, particularly in major cities. This fed a building boom financed with heavy borrowing from banks.

• In many cases, governments embarked on huge infrastructure projects. Throughout the region governments also encouraged private business to invest in certain sectors of the economy in accord with "national goals" and "industrialization strategy." Many of these businesses built up massive debts that were multiples of their equity. Many of these businesses were also granted lucrative monopolies or elite, oligopolist advantages by governments.

• By the mid-1990s Southeast Asia was in the grips of an unprecedented investment boom, much of it financed with borrowed money.

• As the volume of investments ballooned, often at the bequest of national governments, the quality of many of these investments declined significantly. The investments were also made on the basis of unrealistic projections of future demand conditions. The result was excess capacity and overbuilding.

• Excess capacity and overbuilding resulted in price and valuation drops which made it difficult for companies to make the scheduled debt payments on the debt they had taken on to build the extra capacity.

• A complicating factor was that by the mid-1990s, although exports were still expanding across the region, imports were too. The investments in infrastructure, industrial capacity, and real estate development were sucking in foreign goods at an unprecedented rate, as Asian countries purchased capital equipment and materials from America, Europe and Japan to build with.

• A number of major financial institutions had been borrowing at low interest rates and lending to local property developers at much higher interest rates. However, due to speculative overbuilding these developers could not sell their commercial and residential property, forcing them to default on obligations. This left the banks holding the bag.

• Sensing the beginnings of the crisis, investors fled local stock markets, selling their positions and converting them to U.S. dollars. This drove down local currencies. Foreign exchange dealers and hedge funds started speculating against the local currencies, selling them short. The governments, who had pegged their currencies to the U.S. dollar, tried to shore them up, but only succeeded in depleting their foreign exchange reserves. The slide in the value of local currencies increased the amount necessary to service outstanding loans taken on by local financial institutions and businesses. This increased the likelihood of bankruptcies and further pulled down the local stock markets.

Now, there are some very important differences between the Asian Tigers crisis and the China situation which need to be pointed out before we go any further.

The first is that much of the borrowing by the Asian Tigers had been in U.S. currency from international banks. The second is that, unlike many of the Southest Asia states who saw their balance of payments go into the red during the mid-1990s, China has the largest accumulation of foreign exchange reserves in the world.

This is not to say that mainland China is without foreign exposure. Large portions of the China bubble have been inflated with the assistance of Hong Kong banks, which in turn have close connections with western international banks globally. In just the last three years, Hong Kong banks have increased their lending to mainland China from 25 percent of Hong Kong GDP to 110 percent

Furthermore, as much as 25 percent of foreign direct investment in mainland China is "round-trip" money sent by Chinese businessmen offshore, then returned to China using disguised accounts. This was done to obtain the favorable treatment afforded to foreign firms (though in the last few years China has restricted or begun to phase out many incentives to foreign firms). Though this does not represent foreign debt per se, it suggests the possibility of unrecognized arbitrage by Chinese investors: In recent years, U.S. interest rates have been extremely low and it would not be impossible to obtain loans through intermediaries and shell corporations and then re-loan the money to local developers at much higher rates of interest.

Note also that there are many partnerships between the Chinese government and private foreign investors (e.g., jointly owned factories and assembly plants) and though these foreign investors have their own financing, the success of their ventures depends in many cases on the ability of Chinese businessmen, investors, and banks to remain solvent; thus foreign financing is indirectly vulnerable.

Though important to a balanced analysis, these nuances may ultimately be less important to the global economy than interlinked international commodities and derivatives markets. Before examining that aspect,let's briefly examine where China stands today in comparison with the Asian Tigers.

First, those exports. The true nature of China's economy may come as a surprise to those who regard it as an export-driven engine. As recently as 2005 net exports accounted for slightly more than 20 percent of annual growth there. But as this simple graph (courtesy of The Economist) shows, since 2008 net exports have either contributed only negligibly to growth or else have actually subtracted from growth (as China imported more than it exported):

You can see the graph in context here. As it shows, consumption (which includes government consumption) and fixed investment (infrastructure) accounted for all or nearly all economic growth in China recently. Foreign demand has decreased, first as a result of the Great Recession and second as a result of persistent slow growth in the U.S. and elsewhere. The European Union is in recession and even the notoriously optimistic World Bank forecasters expect it to remain in "negative growth" through 2013. Even Germany, Europe's powerhouse, has cut its own growth forecast for 2013 to just 0.4 percent; France is even weaker, and Great Britain is expected by many to enter recession during 2013.

In order to keep the Chinese economy growing, then, both the government and local investors have relied on an orgy of easy money and property development. In the words of Foreign Affairs, underwriting the impressive facade of the Chinese economy is an incredibly risky strategy:

(Local Chinese) Governments borrow money using land as collateral and repay the interest on their loans using funds they earn from selling or leasing the same land. All this means that the Chinese economy depends on a buoyant real estate market to keep grinding. If housing and land prices fall dramatically, a fiscal or banking crisis would likely soon follow. Meanwhile, local officials' hunger for land has displaced millions of farmers, leading to 120,000 land-related protests each year... Private analysts put the (size of local government debt) between 50 and 100 percent of GDP, depending on whether local governments' contingent liabilities or indirect debts (debts owed by government-owned and government-related entities) are included... The banks' accounting tricks treat only a symptom of the problem. Eventually, banks will become unable to roll over loans because they will run out of fresh money. And officials' ability to pay off loan interest depends on the continued rise of real estate prices and a buoyant economy, neither of which can be taken for granted.

Indeed they can't, a point Patrick Chovanic makes in the same journal:

As 2011 progressed, developers scrambled for new lines of financing to keep their overstocked inventories. They first relied on bank loans (until they were cut off), then high-yield bonds in Hong Kong (until the market soured), then private investment vehicles (sponsored by banks as an end run around lending constraints), and finally, in some cases, loan sharks. By the end of last summer, many Chinese developers had run out of options and were forced to begin liquidating inventory. Hence, the price slashing: 30, 40, and even 50 percent discounts...Residential real estate construction now accounts for nearly ten percent of the country's total GDP -- four percentage points higher than it did at the peak of the U.S. housing bubble in 2005."

...new urban residents are not the immediate drivers of China's recent run-up in real estate. Chinese investors, large and small, are the ones creating the market. For more than a decade, they have bet on longer-term demand trends by buying up multiple units -- often dozens at a time -- which they then leave empty with the belief that prices will rise. Estimates of such idle holdings range anywhere from 10 million to 65 million homes; no one really knows the exact number, but the visual impression created by vast "ghost" districts, filled with row upon row of uninhabited villas and apartment complexes, leaves one with a sense of investments with, literally, nothing inside.

...more than 100 local government land auctions failed last month, and land sale revenues in Beijing are down 15 percent this year. Without them, local governments have no way to repay the heavy loans they have taken out to fund ambitious infrastructure projects, or the additional loans they will need to keep driving GDP growth next year...the collapse in property prices has sparked a full-blown credit crisis, with reports of ruined businessmen leaping off building rooftops; some are fleeing the country."

...Ironically, as Chinese investors start pulling their money out of property, many are putting it into bank- and trust-sponsored "private wealth management" vehicles that promise high fixed rates of return but channel the proceeds into investments -- like real estate developers and local government bonds -- whose returns are themselves predicated on ever rising property prices. Many fear this repackaging of real estate risk is laying the foundation for a follow-on crisis that some are labeling the Chinese equivalent of Wall Street's collateralized-debt-obligation mess."

KPMG reports that wealth-management trust companies will soon overtake insurance to become the second largest sector in the Chinese financial industry. Xiao Gang, the chairman of the Bank of China, went on record as saying that the way trust companies were run was "fundamentally a Ponzi scheme".

If anything, the amount of real estate driven borrowing in China is seriously underestimated by Chinese authorities (or at least, their public spokesmen).  Unofficially, however, they have seen it coming.

Li Zuojun, a Chinese researcher with the National Development and Research Center of the State Council, delivered a speech on Sept. 17, 2011 titled, "Economic Crisis Will Befall China in 2013." The speech, predicting an economic meltdown, was presented at an internal meeting of the Changsha Alumni Organization of Huazhong University of Science and Technology, according to Deutsche Welle. As the New York Times reported, "Foreign analysts have warned that borrowers in many industrial sectors have used bank loans to speculate in real estate, so that the banking sector may have an unintentionally large exposure to the country’s real estate market."

Note also that domestic credit as a percentage of GDP has risen from 125 percent to 200 percent over the last four years.

China's excess capacity in its manufacturing sector was reported by the International Monetary Fund to be 40 percent in 2011. China's corporate sector is highly leveraged, saddled with debt equaling 120 percent of GDP at the end of 2011 and increasing into 2012.

If the real estate sell-off continues and broadens, according to one analyst's report, China can expect: "...a sharp growth slowdown. This would cut corporate margins sharply, making profits plunge, and triggering a downward spiral in domestic demand. Bankruptcies and unemployment would occur on a large scale, endangering financial and social stability...The rapid development of the non-bank credit market (in China) in the last few years, especially shadow banking activities, has created a new vector through which a systemic liquidity crunch could take place. Capital outflow would likely ensue, stretching domestic liquidity conditions further."

Of course, the Chinese government may step in with a bail-out. Indeed, it is hard to see how it could avoid doing so if the crisis progresses to this point. That, however, would not only risk reinflating the bubble but could also risk hyperinflation; and the specter of this is precisely what prompted Chinese authorities to put the brakes on the economy, which is what pricked the real estate bubble to begin with, as it reduced developers' access to credit:

"...Real estate investment has continued growing at nearly 30 percent annually. But inflation began to rise from 1.5 percent in January 2010 to a peak of 6.5 percent in July 2011, and authorities began to sweat. They broadened their cooling efforts. The central bank tightened credit expansion, and China's economy began to slow."  (from the second Foreign Affairs link above)

Now to the broader consequences. How badly would this affect the global economy? One estimate says that a "hard landing" in China could cut global GDP by 60 percent; produce a 50 percent drop in base metals prices and a 30 precent drop in Brent crude oil prices (China represents a huge chunk of the commodities market); slash European equities by 20 percent; and cause "interest rate swap levels" to fall to historical lows across the region.

But could that be just the beginning? Reuters reported that China plans to renege on "loss-making commodities derivatives trades."

One should also not forget the power of leverage to turn comparatively small financial disruptions into much larger ones; the international banking community is linked as never before and one thing leads to another. Because I'm scarcely an authority on derivatives I'm determined to resist the urge to be alarmist, but I would be remiss if I didn't examine the possible ripple effects of a Chinese economic meltdown.

The Bank of International Settlements keeps statistics on over-the-counter (OTC) derivatives in the G10 countries and Switzerland. Obviously, this is only a fraction of total global derivatives, albeit a large and important one. As of June 2012 the notional value outstanding of these was $639 trillion dollars. However, a better measure of risk for OTC derivatives is gross market value: this represents the actual cost to financial markets if all of the derivatives contracts defaulted. In June 2012 the gross market value of these was $25.3 trillion.  By contrast, the World Bank put total global economic output (GDP) at $70 trillion (U.S. dollars) in 2011.

Obviously, we wouldn't expect all of these to default. The good news is that the gross market value of commodities derivatives is only $390 billion in 2012, and only a portion of these could be expected to default. The bad news: OTC derivatives are only part of the derivatives market. The other part consists of exchange-traded derivatives. According to the BIS: "There are no available statistics in the exchange traded derivatives markets that are comparable to gross market values as calculated in the OTC markets. That is because exchange traded derivatives are commonly marked-to-market on a daily basis. As such, traders pay any losses and collect any profits on a daily basis."

The outstanding value of these already marked-to-market derivatives is quite high. Exchange traded derivatives come in two flavors: futures, and options. The value of these as of September 2012 was respectively $25 trillion and $31 trillion.

Again, obviously only a fraction of these might cause trouble in the event of a Chinese meltdown. But even a small fraction of a very large number can still be a very large number — an amount, say, that would cause severe hardship to financial institutions still reeling from the global financial near-collapse of the Great Recession; and the effects of a Chinese meltdown are not necessarily limited to the initial effects, as other markets may bedragged down in turn.

According to economic analyst Jesse Colombo, who was described by the Times of London as one of the "ten people who predicted the financial meltdown" in 2008, China is actually a bubble within a much wider bubble.

"China has clearly veered off of its successful original path of reform and modernization, while large parts of their economy have devolved into a classic bubble," he writes. "China will soon face the terrible consequences that inevitably come when bubbles of this magnitude pop. The popping of China’s bubble will also pop bubbles that are derivatives of it, primarily the bubbles in commodities, emerging markets, Canada and Australia. While China’s economy may very well have a bright long-term future, the same could be said about the U.S. economy in 1929 before it plunged into the Great Depression." (Colombo also has a broader commodities-bubble web-page).

According to Zhang Ziyi,"Crouching Tiger, Hidden Dragon is a common expression which refers to the mysteries that lie below the surface of society and our everyday lives. The expression is a reminder never to underestimate our own dragons and tigers - they can spring out at any time."

In Chinese mythology, dragons are a symbol of good luck. In the Greek mythology of the West from which the word dragon stems, "Draco" was a dangerous and greedy creature that caused great evil. The creation of a new consumer society by China's totalitarian government has brought great wealth to a new elite class within China while driving up the price of basic foodstuffs and living space for the toiling majority of its workers and seizing ancestral farming land from many others, forcing them into a life of wage-slavery in smog-filled, overcrowded metropolises; while for the rest of the world, vastly accelerating global climate change and driving up the price of basic commodities. Only time will tell how the current crisis will play out.

Let history judge the implications.

Comments

[AzRebel]

Very interesting presentation, Emil.

Just curious, in Chinese mythology, Russian mythology and American mythology what is the symbol for corruption?

After witnessing events over the past couple of decades, any analysis of the world's banking activities being conducted "out in the sunlight", need to have a factor of maybe $2 out of every $3 being lost to corruption.

[AzRebel]

Emil,

This is not meant to be personal, but only meant to make a point.

The corrupt head of Countrywide Home Mortgage made $500,000,000 during the past decade.

I was a tad shy of that amount. How about you?

[Rogue Columnist]

Excellent work, Emil. Add in social unrest, the corruption of the communist party, growing nationalism in the standoff with Japan, Vietnam, etc., pollution and popular anger about it...and we live in interesting times.

[Suzanne]

Here is a ten minute video that reinforces the concern of a housing bubble in China.

[Suzanne]

I think I may give up on html code.

Here:http://youtu.be/pngdQo205fM is a ten minute video that reinforces the concern . . .

[AzRebel]

The deserted streets in the video reminded me of downtown Phoenix on evenings and weekends.

So China accomplished in 10 years what it took Phoenix 100 years to do.

That's progress, right???

[Emil Pulsifer]

My profound thanks once again to Mr. Talton for the fine opportunity afforded me. His generosity and guidance are surely appreciated.

One of the links was duplicated (my fault): here is the blow-up showing Chinese components of GDP courtesy of The Economist:

http://media.economist.com/sites/default/files/images/2012/10/blogs/free-exchange/contributions.png

Here is the link documenting Hong Kong banks' exposure to mainland China:

http://twitpic.com/71krv9

And finally, here is the omitted first Foreign Affairs link:

http://www.foreignaffairs.com/articles/138449/lynette-h-ong/indebted-dragon?page=show

[Emil Pulsifer]

Mr. Talton wrote:

"...growing nationalism in the standoff with Japan..."

IMHO it's all about oil:

http://www.eia.gov/countries/regions-topics.cfm?fips=ECS

[AzRebel]

Isn't the historical pecking order in the far east:

Japan
China
Korea
Vietnam
Laos, Cambodia, Thailand
and the rest.

The only reason Japan holds it's spot is because of it's Uncle named Sam.

Didn't Japan attack us and all the British interests in the far east, because we and Britain were going to cut off their oil, rubber and other war supplies?

I hope they'll hold off for about ten years while we wrap up our new wars in Africa.

So many continents and not enough time to kill/destroy/birth new democracies.

What's a super power to do????????????

[cal Lash]

PUNT

[cal Lash]

From the Dragons flaming mouth (and in China I am a dragon)
Countries come and go but the 5000 (now 5002) people that run the world stay in control.
“The good news is that the species at greatest risk is industrial man.”

[phxSUNSfan]

AzRebel, that was part of the reason for Japan's attack of the Pacific Fleet. They wanted to neutralize the American threat while they advanced on Malaya and the Dutch East Indies. They wanted natural resources, which did include oil and rubber, since the U.S. declared an embargo on Japan. The U.S. had been a major supplier of oil to the empire.

Very interesting piece Emil. No doubt the heavy investments made by Hong Kong financiers will have ramifications in London (the global financial center). To what extent is my question and will this impact American interests due to the complex globalization of financial institutions?

Aside from that, I now know the etymology of "draconian" and "dragon". However, was Draco not a real ruler in Greece? Thus, not a character of mythology? Or did I read that part incorrectly?

[jmav]

The economic locomotive engine that the financial community currently looks to to pull the global economy out of its doldrums is largely a house of cards?

[cal Lash]

jmav, The industrial/technological/military/free market financial baron driven plan will keep enriching the 5002 while povertizing the rest until the planet becomes a red ball of fire.

Interesting gathered up and organized article of mostly known previously available quoted data. I would have liked a little more rabble rousing verbal emotion tossed into the blog bowl.

[cal Lash]

Oil, It occurs to me that one can look back to Sinclair for more about how we got here.

[cal Lash]

AZREB, left you note 13 at the MLK blog

[Suzanne]

I recently heard China's government referred to as a kleptocracy. I thought that was amusing.

cal, I was not familiar with Sinclair’s book ‘Oil’. I did see the 2007 movie based on the book ‘There Will Be Blood’. Here is a trailer link: http://youtu.be/f3THVbr4hlY

I understand that the movie was nominated by several leading publications, Rolling Stone, Chicago Tribune etc. to be the best film of the first decade in the 21st century.

[AzRebel]

Kleptocracy. I like it.

That is exactly what we have been doing. Setting up new kleptocracies in the world modeled after our own.

[cal Lash]

Sinclair had a great voice but was ignored by the critics.

[cal Lash]

"There will be blood" that's what I thought after I saw Benson's political cartoon with Obama the fifth president on the Mountain.

[Emil Pulsifer]

AzRebel, Japan's place in the "historical pecking order" has been displaced by China, which now has a larger GDP than Japan and promises to grow larger than that of the U.S. in years to come, once it graduates into a fully developed consumer market. After all, there are more than a billion inhabitants.

http://www.forbes.com/sites/kenrapoza/2011/10/15/chinas-cash-position-swells-to-record-high/

[Emil Pulsifer]

Cal Lash, most information is "previously known", though I dare say not to you personally. That applies to most journalism (which this isn't) and particularly, to news analysis and commentary (which this is).

An original interview with Chinese officials was not forthcoming (though it still would have been a "quote" had it in fact been available), nor do I have a network of agents in place, or access to restricted state archives.

But it's nice of you to call it "interesting".

I like to think of this column as a combination of news analysis, open-source intelligence, warning, and conversation starter. That may be overweaning, but not unrealistic as a goal to shoot for.

If you're simply looking for blood and thunder, there is plenty of that to be found on the Internet. You won't get empty bombast from me, however much you call for it.

[Emil Pulsifer]

phxSUNSfan, there are two schools of thought as to the possible ramifications of a Chinese economic meltdown.

The first, I dub the "tsunami" theory: this views the phenomenon as an earthquake generated in China, causing large and destructive waves to hit major Asian (regional) economies; but by the time those waves reach the United States, far away, they have lost most of their energy.

The second theory, which I am more inclined to consider (though I stress that I am by no means decided on the matter), is that financial and commodities markets act more like repeater stations in an interlinked communications web; the strength of the original waves may be amplified or attenuated in the course of transmission, in somewhat unpredictable (at least to me) ways; and the wave is likely to travel around the world more than once rather than travel unidirectionally and with increasing weakness.

I'm simply not sure how loads of hot money sent to the United States, along with an appreciating (?) dollar and kneecapped commodities prices will affect the U.S. economy.

Could this actually be good for the U.S. economy, providing additional capital while decreasing production costs?

Could decreased commodities prices instead result in deflationary price drops, wage decreases and layoffs, and a vicious circle of these?

Could inflationary pressures be triggered by all that hot money flowing in?

Would China feel inclined to cash in any substantial portion of its Treasury securities?

Then, as I suggest, there are the financial aftershocks, which may or may not be the most serious.

My point is not to offer the last word, but to suggest that the problem is potentially more serious than many would like to think.

[cal Lash]

?

[Emil Pulsifer]

phxSUNSfan, the Latin for dragon (or serpent) is draco, and the Greek (rendered in the Latin alphabet) is drakon. The Greek word comes from a root which means "to gaze keenly".

Exactly how the Athenian legislator came to be called Draco is an excellent question, but one which I cannot answer at the moment.

[Suzanne]

cal, I believe that my comment above is misleading, not worded very well. The movie, ‘There Will Be Blood’ is based on the book, ‘Oil’ by Upton Sinclair.

In Buddhist tradition the dragon’s symbolism represents the quality of power, dominance of the sea; therefore it is hidden. Dragons hold power of complete communication. Tigers represent unconditional confidence, disciplined awareness. The tiger is dominant on land.
The story of Crouching Tiger, Hidden Dragon is Taoist in origin; it relates a virtue in concealing ones strengths or combative talents as to take others off-guard.

[Emil Pulsifer]

Cal Lash wrote: "Sinclair had a great voice but was ignored by the critics."

The Jungle received critical and popular acclaim, and has also been described by the FDA as "the final precipitating force behind both a meat inspection law and a comprehensive food and drug law."

Also well received critically and popularly was the Lanny Budd series of novels (the third, Dragon's Teeth, won a Pulitzer Prize in 1943), which "attempted to trace the history of the United States from 1913 into the Cold War through the eyes of the fictional Budd, an anticommunist with socialist sympathies".

http://books.google.com/books?id=rvP8qEFuwdUC&pg=PA769&lpg=PA769

[Emil Pulsifer]

Just an addendum to my comment to AzRebel above:

Note that China has a population of roughly 1.3 billion, or four times that of the United States. If per capita consumption in China reaches a level only half as high as that in the United States, then its GDP would still be twice as large.

No wonder, then, that international corporations fawn over it and -- being the power behind the throne of American politics -- put an end to the annual debate over Most Favored Nation trading status (a debate in which China's police state brutality was regularly brought before the public and congressional eye):

"Clinton had been the subject of heavy lobbying by American business interests and his economic advisers to continue China's trade privileges. With China now the world's fastest growing economy the United States exports $8 billion a year there, which sustains up to 150,000 American jobs. Many major American businesses see even greater potential in Chinese markets, expecting China to become a massive purchaser over the next decade of the phones, electronic gadgets and thousands of other products made in America."

"I think we have to see our relations with China within a broader context" than simply human rights, Clinton said, adding that the link between rights and trade was no longer tenable. We have reached the end of the usefulness of that policy," he said.

http://tech.mit.edu/V114/N27/china.27w.html

This was in 1994. Far sighted, aren't they? All of that crap about benefiting the American consumer with lower prices, was just an excuse to build a new consumer society there which would provide an unprecedentedly larger end market for their products.

[AZREBEL]

I will always consider Clinton and his administration as the traitors who handed over vital ballistic missile technology to China under the guise of helping Motorola access cheap Chinese missiles to launch the Iridium satellites.

Another example of American leaders selling out their country for personal gain.

China gets brought up to speed on the latest US missile technology and we get a worthless satellite phone system.

What a great trade.

[Suzanne]

Emil, All of that crap about benefiting the American consumer with lower prices, was just an excuse to build a new consumer society there which would provide an unprecedentedly larger end market for their products. Yup, I think you have hit the nail.

I think China’s economy is more like a paper tiger with gold teeth.

[Emil Pulsifer]

There was a timely story in the Business section of today's New York Times headlined "Suit Hints At Behavior By Bankers In Bubble". Excerpt:

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members’ suggestions: “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust” and “Mike Tyson’s Punchout,” as well a simple yet direct reference to a bag of excrement.

Ha ha. Those hilarious investment bankers.

Then they gave it its real name and sold it to a Chinese bank.

...the documents suggest a pattern of behavior larger than this one deal: people across the bank understood that the American housing market was in trouble. They took advantage of that knowledge to create and then bet against securities and then also to unload garbage investments on unsuspecting buyers.

http://dealbook.nytimes.com/2013/01/23/financial-crisis-lawsuit-suggests-bad-behavior-at-morgan-stanley/

Of course, this doesn't directly address the China issue today. But it does suggest a pattern of behavior by bankers that might still be relevant to the current bubble...

[Emil Pulsifer]

U.S. exports to China were $100 billion in 2011. U.S. GDP in 2011 was $15.1 trillion. That means U.S. exports to China represented just 7/1000th of one percent (0.007) of U.S. GDP in 2011.

http://export.gov/china/doingbizinchina/index.asp

Yet, "By 2020, China‘s middle class is expected to account for around 45 percent of the population, or approximately 700 million people."

[phxSUNSfan]

North Korea threatening the U.S. with nuclear weapons. Just what someone like McCain needs to start talk about a new war and preemptive strike. I don't think the North Koreans realize they are dealing with Republicans just as crazy as they are...only difference is that our weapons can actually reach their military installations.

http://www.npr.org/blogs/thetwo-way/2013/01/23/170122496/north-korea-threatens-nuclear-test-targeting-u-s

[cal Lash]

Sinclair, Not enough in my opinion and some other really old folks I know.

[Rogue Columnist]

Sinclair was highly influential in a time of progressive reform. Sadly, many now question why we need gub'ment, clueless about life before, say, federal meat inspections.

[cal Lash]

Now theres some dangerous words "progressive reform "

[Emil Pulsifer]

A quick correction: $100 billion is roughly 7/1000 of $15.1 trillion, but in converting to percentazges one needs to multiply by 100. So, U.S. exports to China are actually 7/10 of one percent of U.S. GDP.

[AZREBEL]

From a sheer size of economy point of view, China is the head honcho in the region.

From an ass-kicking point of view, the Japanese still hold sway over the Chinese. (Due to what the Japanese did to China in WWII and due to the big lap dog Japan still has at it's beck and call - U.S. Pacific Fleet.)

$100 billion in exports to China.
$400 billion in imports from China.

How much you want to bet that when China's middle class reaches 700 billion, the above numbers will read:

$100 billion in exports to China
$400 billion in imports from China.

The minor difference between the US and China is that in their system of government, they could snap their fingers and make their middle class disappear over night.

At least in our Kleptocracy it will take a few more decades for them to make our middle class go extinct.

[cal Lash]

There is still a middle class. I think not.
just rich, poor and poorer!

[Emil Pulsifer]

UPDATE 1:

I still expect major problems in the near term in China because of an economic crisis stemming from the collapse of its housing bubble.

However, this may not happen as soon as I thought. From a current Bloomberg news story updating that (note the reference to "housing slaves"):

"The volume of residential property sales in China will rise this year, driven by improved funding to developers, Fitch Ratings said in a Jan. 29 research report. . . . Loose monetary policy will drive housing prices and sales up in the near term, Hong Kong-based Jinsong Du, Credit Suisse Group AG’s head of property research, wrote in a report Feb. 18."

http://www.bloomberg.com/news/2013-02-19/china-housing-slaves-helping-property-rebound-mortgages.html