[obblekk]

One by one:

1. Freer movement of capital. This is a false herring in my opinion. Virtually no countries outside the US/EU offer completely free movement of money. The thing that matters is whether this prevents foreign capital investment (because people are scared of not being able to get their money back). In China, I don't think it does based on the last few decades of foreign investment.

2. External investment. As above, I don't think people are discouraged by the rules. Yes, you have to make a 50% joint venture, bribe government officials, share technology, have no copyright/IP protection, and risk your partner entering the market as a competitor once they learn your business (see Asus). But, you can still make so much money that it's probably worth it (or so American corporations seem to believe).

3. Ghost cities. I don't know much about this one honestly. I've been hearing about this since 2009, but consider that China is increasing their urbanization rate by 1 percentage point per year (~10M people/yr). If I were asked to manage that as a central planner, having excess inventory of housing would be critical to prevent slowdowns and allowing for some burstiness. Yeah, there's probably ghost cities, but how long do they remain before becoming occupied. Are the same cities hanging around forever (and people complaining about them forever), or is it new stock every year?

4. Illiquid foreign debt. Most of China's debt is in two categories: 1) Popular debt (US/EU) or 2) strategically important countries. For (1), there's likely some market. You're right that they can't sell too much, but they've already notified the world that they will begin selling their holdings over the next decade and since central banks in the western world are trying to increase the reserve interest rate there should be people willing to buy this stuff (or the government can buy it and reissue at a higher interest rate to make people want it). For (2), don't think of it as debt, but operating expense, never to be recovered.

[tyre]

A few counterpoints.

From your original comment

> In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing.

That is the overall percentage of bad debt increasing linearly, meaning accumulation of bad debt is accelerating faster than growth of "good" debt. This was also the case in the US mortgage crisis.

From this comment

1) It would be less of a concern if China had less liquidity while Chinese companies were also getting less access to liquidity. Shadow lending from wealth management product (WMPs) is a massive structural issue for the Chinese economy. When the underlying assets fail, you have a recession. It also means a centralized economy with lots of the downsides (bribes, joint ventures, etc.) but without the control.

2) American corporations believe there is tons of money to be made, but not many have been successful. In the event of a Chinese recession, those experiments will be vastly drawn back when Chinese consumers become pessimistic. In the event of an American correction, they'll pull back to invest in proven markets.

3) I haven't seen evidence that these ghost cities are the result of central planners building slack for expected growth.

4) Internal private debt (see 1) is a much larger problem. Most of that is owned by the central government, which means either a bailout when companies fail, continued lending until a bailout, or letting their economy correct.

[obblekk]

Linearly increasing: True. I misread the axis. It still doesn't seem to have the form of something in a bubble or clearly unsustainable.

1. That's a fair point. But I suspect this has more to do with less developed capital markets in China than systematic weakness. I wonder if local supply of capital will be able to step up in the next American recession.

2. I think many have been successful in lowering their manufacturing costs. Not sure how an American correction would affect the Chinese economy.

3. Fair.

4. I'm generally skeptical of this argument. US corporations and households have maintained a high level of debt for more than 50 years without significant effect. I guess the Federal gov hasn't been the holder of that debt, but it actually seems better that way because they have the ability to print cash and add a stabilizing effect.

I guess my point is that none of these individually seem extreme enough to cause a problem. Maybe in aggregate there could be a storm.

[tyre]

Interesting point on (1). I wonder if that could trigger relaxed repatriation taxes for corporations in the US. Bringing a few hundred billion home would be great in a liquidity crisis.

I wasn't thinking of (2) that way, but in that case you're right that southeast asian competition is a bigger factor. If cheap manufacturing leaves, China would need to shift to consumer growth, which American companies thus far haven't really cracked (except Apple to an underwhelming degree.)

An interesting aside on (2) would be if a trade-protectionist president is elected in the US. This would re-prioritize from cheap manufacturing overseas to better jobs at home—triggering or accelerating what you were talking about. The New Yorker had a great piece today on how both Sanders and Trump are of that mindset.[1]

(4) might be a case of six in one hand, half dozen in the other. Turned out that the US government did (indirectly) hold all that mortgage debt when it bailed out the banks. That said, it looks better externally to institute QE to bailout companies who backed bad debt than to print money to pay off your own debt.

Either way, I'm not sure we are or aren't at a crisis yet, but they also haven't fixed some basic structural problems.

[1] http://www.newyorker.com/magazine/2016/02/22/trump-sanders-a...

[forgetsusername]

>I haven't seen evidence that these ghost cities are the result of central planners building slack for expected growth.

I think this reveals some bias. The evidence is the cities themselves. Or do you think that it's central planners merely trying to improve GDP numbers, but completely oblivious to the fact that Chinese citizens are urbanizing at a scale not seen before in human history?

[seanmcdirmid]

If you are talking about Ordos New Town, it is local governments and tycoons trying to do something with their coal money. This isn't really central planning, more like investment options suck, and we can't just park our money in the bank, so let's build a city in the middle of nowhere! Ordos is filling up slowly, but it's clear at this point that many of the buildings will be torn down before they are ever occupied (Chinese constructed buildings only last around 20-30 year before they are completely derelict).

China is urbanizing, but it is not clear those poor farmers can afford the $200k+ apartments being built...even if they come down by half or more. Not only that, but these farmers can't even get hukou, making them second class citizens in the cities they might move to, ineligible for schooling for their kids or even subsidized healthcare. China needs to do a lot of reforming before this massive urbanization can happen, and they haven't really prepared for it (e.g. By focusing on luxury apartments vs. mass social housing with schools and hospitals enough to give those farmers proper urban hukou).

Finally, farmers can't even sell their land to buy an urban apartment. Instead, they have to wait for it to be appropriated by the local government (if near a growing urban area) or otherwise, they are just SOL. It really is quite a mess.

[dh997]

Exactly. Wealth transfer and mobility for some, but not growing a middle class sufficiently to realize these artificial investments. China could invest more in better equiping people to make and earn more value, so they can afford cleaner/nicer cars, homes, factories, etc.

[tallanvor]

>Yes, you have to make a 50% joint venture, bribe government officials, share technology, have no copyright/IP protection, and risk your partner entering the market as a competitor once they learn your business (see Asus). But, you can still make so much money that it's probably worth it (or so American corporations seem to believe).

All legitimate companies have strong rules against bribing officials, and it's illegal, so don't expect the company to have your back if you get caught.

[audunw]

The ghost cities are indeed filling up, at least last time I read about it. You'll probably still have problems with misplaced building sprees when you build at that scale, no matter what. But it doesn't seem like a real crisis

[dh997]

Isnt there an entire replica of Paris with barely 1k people?

How can value be justified with whole half-finished cities with no customers?

Sounds like deferring a real-estate crash is only making a future event even more painful when that paper value evaporates and takes real comparables along with them.

[tmptmp]

>>Are the same cities hanging around forever (and people complaining about them forever), or is it new stock every year?

I guess, googling "ghost cities in China" may bring out many interesting statistics about this. From the top links you get there one can fairly say that the "ghost cities" are in reality a biggish problem. Of course, we cannot get more complete picture just from these sites, but that is true for any communist regime: they will never allow any independent market study to happen in the first place.