Federal National Mortgage Association Message Board

Thanks Morris!

Wednesday, July 3, 2002
Is China the Next Argentina?

China's sagging economy is threatening to turn China into an Asian version of Argentina, a top financial journal warns.

"Unless it can patch up the situation, China risks becoming Asia's Argentina. ... [T]he People's Republic can go from boom to bust in just a few short years," wrote Gordon Chang in the June 19 Asian Wall Street Journal as quoted by the authoritative American Foreign Policy Council.

According to Chang, both countries crammed their banks full of bonds, created growth by playing money games and attracting foreign direct investment. "Argentina," he wrote, "deferred reforms by living on foreign capital, and China is playing this same game, too. ... When the flow of international capital tightens again, China's deteriorating fiscal and debt conditions will come under international scrutiny."

High expectations for the Chinese economy are "grossly exaggerated," he warned, explaining that China's economic growth is declining and its banking system is in "disarray, posing a threat of destabilization to the international economy."

Chang reported that Beijing authorities describe China's economic outlook with words such as "grim" and "grave," yet some foreign experts are continuing to say that everything is just fine and dandy in the People's Republic of China.

He cited the official figures - which he said tend to exaggerate China's output yet still show growth declined in each quarter of last year: "There is also a more fundamental matter of how could a country record high growth when it is experiencing worsening deflation and massive unemployment."

Signs of China's economic problems described by Chang:

The central government accounts for more than two-thirds of the investment in the country, which he says is alarming by any standard.

China has ever-larger budget deficits, as shown by the record one of $37.5 billion announced for the coming year.

China's annual deficit has already zoomed past 3 percent of the GDP, the internationally recognized safety limit.
"The current pace is unsustainable and out of control," wrote Chang. "Finance Minister Xiang Huaicheng has just one word for China's recent spending, calling it 'reckless.'"
"China as the next Argentina?" he asks, adding that even though it sounds preposterous today, "it is worth remembering that Argentina did not have to go through the shock therapy of joining the World Trade Organization which resulted in China's losing control of the timetable to reform its banking system.

"The largest state banks are insolvent; as a group perhaps the weakest in the world," he reports, adding that Beijing must either rehabilitate them in the next five years to the tune of $500 billion - "or face the failure and the collapse of the economy itself.

"Beijing talks a lot about structural reform but has implemented very little of it these past few years," Chang concludes.

"In this upcoming period of political transition, [with jockeying for the upcoming Communist Party leadership changes at hand] the paralysis will become even more evident. ... The critical issue is time. Peasants and workers are impatient. ... Despite progress, many Chinese today are hungry, angry and, worst of all, desperate. Beijing's leaders know how to use the coercive power of the state to keep a lid on unrest. Yet, force is only a short-term solution. Time is running out."

No, I'm not familiar with it at all. Anywhere that I can read about it?

Yes, China is a deflation exporting machine but they cannot do this in perpetuity. Can't predict when since I'm terrible at timing. But it seems you are not much better since you and I have been shorting FNM since last year.<gggg>

are you familiar with Baumol's report on productivity and convergence? IMO it is a significant large scale replication of Galton's experiments. Additionally IMHO it is reasonable justification for the belief that China will continue to export deflation for as far as the eye can see, and that US industry and productivity will decline and then stagnate in global terms.

trek_ultimo,

Well, let's see. The cost of raw material goes up since they're priced in dollars. Since beginning of this year, CRB index has been going up. If their cost goes up, they can't compete with other nations. Also, as their standard of living improves, their labor cost will increase as well.

I truely think, Chinese will turn into a capitalistic country within 50 years. If you look at the Chinese history, only handful were rich while others were just barely scraping by. IMHO, communism, no matter how bad the system, actually aided many common Chinese from extreme poverty in the short run. But as we all know, that system just cannot compete against free wheeling thinking of capitalism albeit its short-comings like bubble-induced malinvestment.

Again, I have to respectfully disagree with you. My focus is on the extremists and NOT the innocents who may happen to live among them. You can't say that the terrorists are more "rational" in their use of WMD because THEY DO NOT HAVE THEM AS OF YET and that is the scary part and I don't think anyone would be willing to entrust nuclear technology to Bin Ladin.

I'll leave it at that as this board is really not the time and place for such discussions. So much can be said and would be diverting from the main purpose and that is for discussion of FNM and investments in general.

Good Luck with FNM and your other investments.

Yeah, I long for the days of a good old western movie. This cable stuff is so absurd and some of the message boards that I have visited are breeding grounds of bigotry and hate that seems to feed on itself.

I think that terrorists are more 'rational' in their use of WMD than states (USSR. Terrorists have to balance their need to inflict pain with polltical support. Terrorism is probably more about politics than a state sponsered act (i.e. Iraq) who can do what they want because they run the joint.


As bad as 9/11 was it pales in comparison to some of the mass destruction that we have witnessed as a country (Adolph, Idi Amin, Sherman's March to the Sea, Crusades, etc).

I really believe that as ugly as our economic model is we have the ability to creatively destroy that which is no longer needed - see Shumpeter's (sp?) creative destruction theory. We lay off people, shut down businesses, tax the rich, etc but more importantly reward the activity that puts us into the right direction. It is painful but in the end the right approach.

I'm just trying to understand the situation better....So why would they have to stop devaluing with us. What are the ramifications of doing this? Could china go into a deflation spiral?