Is This The Great Crash Of China?

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China’s sec­ond stock mar­ket crash will be its first fully fledged eco­nomic cri­sis

China has achieved a remark­able trans­for­ma­tion in the last 30 years—something that you can only fully appre­ci­ate if, like me, you vis­ited China before that trans­for­ma­tion began. In 1981/82, I took a group of Aus­tralian jour­nal­ists on a tour of China on behalf of the Aus­tralia-China Coun­cil. The key pur­pose was to take part in a sem­i­nar with Chi­nese jour­nal­ists under the aus­pices of the “All-China Jour­nal­ists Asso­ci­a­tion”. Given the unfor­tu­nate acronym by our Chi­nese hosts of SAPS—for the “Sino-Aus­tralian Press Seminar”—it was the first sem­i­nar between Chi­nese jour­nal­ists and those of any other nation.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • TruthIs­ThereIs­NoTruth

    Here is a pre­dic­tion.

    If you call every mar­ket wob­ble the begin­ning of a great crash sooner or later you have to be right, at which point you will pro­claim your fore­cast­ing supe­ri­or­ity and run media sto­ries to lever­age of your hit to vin­di­cate your the­ory. The the­ory is good, inter­est­ing and cap­tures a cer­tain aspect of real­ity, but the implied link to fore­cast­ing abil­ity is not only a fal­lacy it is also inter­nally incon­sis­tent to the the­ory itself which pre­dicts chaos more than any­thing. While it makes a good story and media out­lets are always keen to look for sooth­sayer econ­o­mists, for me it will be a man­i­fes­ta­tion of con­fir­ma­tion bias.

  • Tim Ward

    Well, I think prof. Keen prob­a­bly has a lot of other infor­ma­tion and data to sup­port the idea of a ‘Great Crash of China’. 

    To a casual observer such as myself, an obvi­ous point and one that has strong res­o­nance with the Aus­tralian export econ­omy, is the rather pro­nounced crash in com­modi­ties. Iron ore, met coal and cop­per to name a few, have crashed. So Chi­nese demand has fal­tered. And that means lay­offs.

    Another thing I just stum­bled across, is that Chi­nese pri­vate sec­tor loans in for­eign cur­rency, USD, have recently surged, and reached a level some­thing like 9%,and now that they have deval­ued, ser­vic­ing costs have surged. This is also occur­ring across the com­mod­ity export/EM world, with com­mod­ity export cur­ren­cies crash­ing (includ­ing the AUD), and debt ser­vic­ing for their for­eign cur­rency loans (USD) surg­ing. This is painfully deflat­ing.

    So a fall off in Chi­nese com­mod­ity demand, leads to fall of demand for Chi­nese prod­ucts from commodity/EM coun­tries, just as they get a defla­tion­ary surge from USD debt ser­vic­ing. Yikes.

    And now China is also see­ing a fall off in demand for autos. Over­ca­pac­ity and fierce com­pe­ti­tion rag­ing. US auto giant GM was gen­er­at­ing a lot of rev­enue in China. And so a slow down in China, by glob­al­ism, leads to a profit decline in the US. Com­bine this with the repa­tri­a­tion penalty to US cor­po­ra­tions of the recently deval­ued ren­minby, exac­er­bates the prob­lem.

    We’re see­ing export and import vol­umes shrink­ing sig­nif­i­cantly.

    I was just read­ing some­where else that China laid down more con­crete in three years than the US in the twen­ti­eth cen­tury! They can’t keep that pace up for long, because they will have com­pleted so much infra­struc­ture and build­ing, and so it means inevitable lay­offs. And since the com­mod­ity flow tells us that the slow down is already here, well you get the pic­ture.

    The debt func­tions that Prof. Keen has been observ­ing, are all con­nected to other eco­nomic func­tions, of employ­ment , incomes, and demand. The debt changes show what’s going in those other areas. Com­modi­ties have already tanked. This doesn’t look like just a lit­tle wob­ble, or tremor, to me.

    Oil has also crashed, pulling down var­i­ous other coun­tries, and pres­sur­ing the the US junk bond mar­ket, and so global crash seems to be play­ing out quite strongly. We should see a US junk bond crash. And another finan­cial cri­sis.

    Looks like a crash to me.

  • Tim Ward

    …if you look at the Chi­nese con­sump­tion of indus­trial com­modi­ties, in 1970 China con­sumed 2% of all indus­trial com­modi­ties, by 1990 it was 5% of global com­mod­ity con­sump­tion for indus­trial com­modi­ties and by the year 2000 it was 12% and then it went in 2011–2012 to 47%,half of all indus­trial com­modi­ties in the world were con­sumed by China.” Just read this some­where else.

    So when China eases off on com­modi­ties, a crash is likely, glob­ally. And it already has.

  • TruthIs­ThereIs­NoTruth

    Tim — I am nei­ther say­ing the model is wrong or mak­ing a pre­dic­tion that there won’t be a ‘crash’ or even a ‘great crash’. Basi­cally I am say­ing that I have seen Steve Keen seed the media with so many crash pre­dic­tions, each incre­men­tal pre­dic­tion has very lit­tle value. And when a crash even­tu­ally hap­pens it would be rather cyn­i­cal to go back to the par­tic­u­lar arti­cle pre­dict­ing that par­tic­u­lar crash. It’s like bet­ting on a num­ber on a roulette and then shout­ing I told you so when the num­ber comes up. 

    But I am not actu­ally detract­ing from the the­ory, I take the view that the con­tin­u­ous pre­dic­tions are detract­ing from the the­ory, in a way I see myself defend­ing the the­ory.

  • Bhaskara II

    Pro­fes­sor Keen or any one with the answer,

    Are there any Aus­tralian gov­ern­ment spon­sored enter­prises like Fan­nie Mae or Fred­die Mac of the United States?

    Fan­nie and Fred­die would buy mort­gages from banks. This was a flow of mort­gages off the banks bal­ance sheets. Allow­ing them to make more loans or improve their reserve ratios. But, they are each in the pri­vate sec­tor and traded on the stock exchange.

    Loans re-sold by them were often gov­ern­ment backed.

    The Company’s activ­i­ties include pro­vid­ing mar­ket liq­uid­ity by secu­ri­tiz­ing mort­gage loans orig­i­nated by lenders in the pri­mary mort­gage mar­ket into Fan­nie Mae mort­gage backed secu­ri­ties (Fan­nie Mae MBS) and pur­chas­ing mort­gage loans and mort­gage related secu­ri­ties in the sec­ondary mar­ket for its mort­gage port­fo­lio. ”

    Short Fan­nie Mae descrip­tion under head­ing, Descrip­tion:

  • Tim Ward

    Hello, Bhaskara II,

    I don’t know the answer to that one, but some­one at Pros­per Aus­tralia would know.

    Have a look at this arti­cle about land spec­u­la­tion and crises:

    Mason Gaffney pre­dicted a reces­sion for 2015 …“Cur­rent con­di­tions in China in 2014 are exam­ined and shown to indi­cate a likely reces­sion in that coun­try in 2015 because their banks are over-lever­aged with large-scale, under-per­form­ing real estate loans.”

  • Bhaskara II

    Farage says the whole thing is a giant Ponzi scheme. But, before that he says some thing that is not said much in the press I read. It went on in Cyprus. Think about what it means when he said who is buy­ing a coun­tries bonds in the EU.

    1:30 1:45 1:49 to 2;15, “The whole thing is a giant Ponzi scheme. Isn’t it?”

  • John­Smith

    @Prof. Keen:
    Con­cern­ing Fig­ure 3: On the y-axis:
    Is it the change rate of change (!) of debt or the change rate of total debt plot­ted there?

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  • JJLe­hto

    So is pri­vate debt yet again an expla­na­tion to some­thing most peo­ple couldn’t grasp?
    Why China had no crash? No pri­vate debt house of cards col­laps­ing?

    Also explains some­thing I won­dered, how the export dri­ven China has con­tin­ued strong growth despite a global reces­sion of damp­ened demand…Inflated their own pri­vate debt bub­ble.