BOOM sees many analysts predicting the decline of the Chinese economy. They invariably involve some argument that China has a precarious banking system that will collapse some day in the future. However, they invariably involve little analysis of the real Chinese economy. The urge to predict collapse and doom overrides all else. This is possibly a false assumption and we all know that false assumptions will almost always lead to false conclusions.
So, leaving the Chinese banking system to one side because it is effectively State run and micro managed to look like a western banking system, let’s look at the structure of the real Chinese economy.
CEIC data proudly claims the mantle of “the most trusted data in the world”. They have been collecting data since 1992, have offices in 18 nations and cover over 200 economies. So, presumably, their data has some reliability.
BOOM recently saw a graph from CEIC that showed the changes in the structure of the Chinese economy since 1954 to present day. It was revealing. It showed that in 1954, the Primary industry sector was 45 % of the economy. That has shrunk to less than 10 % and, yet, it is still the producer of 20 % of the planet’s food and is worth about $ 2 Trillion per year. The Primary sector principally involves farming, fishing, forestry and oil production.
The Secondary industry sector comprises the manufacture of goods, electricity and construction. This is seen as the great strength of China. However, it has shrunk from its peak of almost 50% of the economy in 2004 to its present day contribution of around 35%.
The Tertiary sector is where the real story is happening. It reached its low point in 1984 just above 20 % or thereabouts and is now about 50 % and on the graph it appears to be heading upwards rapidly towards 60% of the economy.
The Tertiary sector includes real estate, finance, wholesale and retail, transportation and all other service industries. It now employs the most people, over 40 % of the workforce.
So China is rapidly beginning to resemble an advanced economy such as the USA, the European Union or Australia where services contribute up to 70 – 80 % of annual GDP. And this is beneficial because this lessens China’s previous over-reliance upon Production and Productivity which can easily become the Achilles heel of any centrally planned economy. In fact, this observation is critical to understand. Why? Because, in history, we have never seen any centrally planned economy achieve Tertiary sector dominance. And this should theoretically create a natural resilience and stability to their domestic economy.
The Belt and Road Initiative will assist in this process as China offers more services to other nations, especially in the area of finance.
GREECE AND CHINA
The President of China, Xi Jinping, visited Greece this week and signed off on a number of very important agreements. In fact, China and Greece signed 16 bilateral agreements outlining cooperation in a broad range of sectors. Investment and banking was a key element.
“China and Greece are natural partners for building the Belt and Road,” Xi said after meeting with Prime Minister Kyriakos Mitsotakis. “We would like to mesh the Belt and Road initiative more closely with the development strategy of this country.”
The Greek Prime Minister said that the aim is to make the Greek port of Piraeus the largest port in Europe. He also commented that China had helped Greece with its huge economic hardship during the Global Financial Crisis of 2009.
China’s state owned shipping company, Costco, already owns a majority stake in the Port of Piraeus which is a major investment in shipping infrastructure.
But the key agreement reached was to allow the Bank of China to open its doors in Greece plus a branch of the Industrial and Commercial Bank of China and an office of the China Development Bank. The advance of Chinese finance around the globe is the next big step for China to make in its quest to become a more resilient economy with a more readily accepted currency for international trade settlement.
THE BALKANS MAY BE RESCUED
Greece’s geographic location is an important consideration because it is the entry point to the Balkan Peninsula, a region that has been an economic backwater for many decades and where unemployment rates are extremely high.
Nations in the region include Bulgaria, Albania, Bosnia & Herzegovina, Kosovo, Montenegro and North Macedonia. Nearby nations include Croatia, Romania, Serbia, Slovenia and even Turkey. All of these nations will welcome heavy foreign investment and the employment opportunities that come with that.
The population (including Greece) includes 60 Million people who are tired of economies that do not grow and the subsequent, terrible unemployment levels. If you include Turkey into this sphere of influence, the total population is approximately 140 Million — almost half the population of the US.
Greece’s unemployment rate is 18 %, Albania’s is 11.5 %, North Macedonia’s is 18%, Bosnia & Herzegovina’s is 20 %, Serbia’s is 12 % and (shock, horror) Kosovo’s is 28 %. The largest economy in the region is Turkey which has an unemployment rate of 14 %.
Here is China’s potential future Eastern European workforce. And it is needed badly because China has just hit a major internal labor shortage brought about by its One Child per Family Policy that was in place for 36 years from 1979 to 2015. They lost half (or perhaps more) of a generation who could have entered their workforce from 2000 through to 2035. That is a very big demographic hole in terms of both labor and consumers.
So, when you hear the mainstream Western media discussing “the threat of Chinese expansion”, consider the fact that this is a complex issue that cannot be simply reduced to a slogan. After all, in this instance, the major trading partner by far of all the Balkan nations is still the European Union which to date has paid little attention to the poor health of the Balkan economies. International trade and (hopefully) prosperity for all should be welcomed by the Balkan nations. And that is exactly what seems to be happening.
GERMANY NOT IN RECESSION
Germany released its GDP growth numbers last week and it just avoided recession. It revised its second quarter GDP growth from – 0.2 % to – 0.1 % and the figure for the third quarter came in at a barely positive 0.1 %.
At present the entire German Sovereign Bond Yield curve is negative right out to 20 years. Then it becomes positive with the 25 year bond yielding a positive 0.077 % and the 30 year bond yielding 0.155 %. That is a staggering fact. Sovereign Bonds are bonds issued by a Federal Government.
If you buy a German government 30 year bond right now, you will receive an annual yield of 0.155 %. And if the German nation and its currency, the Euro, still exists at maturity of the bond, then you will receive your capital back. Of course, the spending power of that capital will be reduced by any interim CPI inflation or asset price inflation that has occurred over the period that you have held the bond.
So why would any rational investor acting without constraints take such an extended investment risk? It seems to BOOM that the risk of CPI and asset price inflation plus the currency risk adds up to a very significant risk. So, again to BOOM, it makes little sense to acquire such risks in a German sovereign bond unless you think the spending power of the capital will increase due to future and persistent CPI and asset price deflation.
Theoretically, a rational investor should be looking to sell such a bond holding immediately if any persistent CPI or asset price inflation occurs. So holding these bonds to maturity should (eventually) make little sense. Alternative investments would seem to be more attractive. Maybe this is why the German stock market is rising strongly since August despite the weak economy? The possibility certainly seems to exist for more and more capital to leave the German sovereign bond market and head towards the German stock market. Time will tell.
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
EMAIL: gerry [@] boomfinanceandeconomics.com
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HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR (but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
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