CHINA VERSUS RUSSIA

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FOCUS ON CHINA OVER 10 YEARS

The Chinese economy is a mystery to many observers. Many experts continually predict the fall of the Chinese economy. They say it is fragile, that it will collapse due to a heavy burden of debt, that it is too heavily controlled, that it is not open enough, that it “manipulates” its currency.

In 2015, a China “expert” wrote “having been the locomotive for global growth following the financial crisis in 2008, Chinese growth has now slowed and its economy is looking increasingly fragile.” BOOM has lost count of the number of times such sentences have been written by so-called economic experts on the subject of China. Lack of democracy is often referred to as a cause of imminent demise. Other explanations include lack of property rights (especially in intellectual property) and loss of talent to the US. On and on they go, forever predicting the end of the China economic miracle.

And yet, China continues to grow and to provide improved living conditions for its people. Its currency is exactly where it was 10 years ago in relation to the US Dollar. In that same time frame of 10 years, its annual GDP growth has averaged around 7 % p.a. and its GDP per Capita on a Purchasing Power Parity basis (PPP) has doubled — again showing a growth rate of about 7 % p.a. Its annual CPI inflation rate has averaged around 2 %. Its Core inflation rate has averaged 1.5 %. The Minimum Wage has doubled, as has the Average Wage while its unemployment rate has been steady and averaged around 4.5 %.

Exports have doubled in US Dollar terms. Imports have grown but have not doubled, increasing by about 65 %. Tourism revenues have tripled. The Government’s Budget Deficit has averaged around 2 % of GDP. Military expenditures have grown also by 7 % p.a. but are still relatively modest compared to the US. US military spending is estimated to be currently around US $ 750 Billion annually. China’s is estimated to be around US $ 250 Billion.

Business confidence measures are very stable as is capacity utilization. Car production and car registrations are stable. Cement production is stable. Electricity production has doubled. Steel production has doubled.

Consumer Credit has surged fivefold, reflecting a stong growth in consumer confidence. Disposable personal income has doubled. Household debt to GDP has doubled. Gasoline prices have almost halved.

Government Debt to GDP has doubled, again revealing a 7 % p.a. growth rate but is still low by international standards at around 68 % of GDP. Gold Reserves have doubled. Its 10 year government bond yield has averaged around 3.5 % (currently 2.848 % with a positive yield curve right out to the 30 year yield at 3.42 %).

So — it all looks very stable and well managed. Next time you see an article predicting the “imminent collapse of the Chinese economy”, take a deep breath and wonder about the author, not the Chinese economy.

CHINA BOND MARKET

How does China finance its economy? Interestingly, it does so overwhelmingly via new bank loan creation. The annual bank loan growth rate is around 12 % p.a.

The total bond issuance in China is estimated to be around US $ 15 Trillion. The US market is estimated to be US$ 50 Trillion. BOOM regards the Chinese market as not a large domestic bond market in comparison with the US and especially in regard to its population which is around 5 times larger than the US.

Some people point out that China’s bond market is the second largest national bond market on the planet. However, being the world’s second largest market does not make it “large” relative to the US market or its huge population.

China has cleverly avoided bond issuance as a major financing methodology compared to the US, relying instead on the issuance of new bank loans. And that has been a good policy because they seem to appreciate the subtle fact that bond issuance ensures the flow of finance but without any correspondent increase in the supply of new money.

This has become America’s Achilles Heel in regard to financing its economy. The US must wake up to this point. The US economy is being relatively starved of fresh new money via bank loan creation. The size of the US bond market relative to its GDP is the problem. As a result, economic growth is stagnant.

The US bond market is more than twice the size of its GDP. The Chinese bond market is approximately equal to its GDP. Therein lies the problem for the US. They need more fresh new money via well regulated bank loan creation and, especially, via new cash issuance.

They must stop their obsession with bond issuance.

By the way, Japan’s Bond Market is around US$ 13 Trillion (with a population of less than one tenth that of China). The Emerging Markets nations combined actually have a total bond issuance of more than $ 15 Trillion. That is more than Chinese bond issuance.

THE RUSSIAN ECONOMY OVER 10 YEARS

Let’s take a look at the Russian economy. Over the last 10 years, its currency has depreciated steadily in relation to the US Dollar (halved). In that same time frame of 10 years, its annual GDP growth has averaged around 2 – 3 % p.a. over the last 10 years but its GDP per Capita on a Purchasing Power Parity basis (PPP) has barely increased, which means its people have not seen any large improvement in living conditions. Its annual CPI inflation rate has averaged around 6 – 7 %. Its Core inflation rate has also averaged 6 – 7 %. The Minimum Wage has tripled while the Average Wage has doubled. Its unemployment rate has been steady and averaged around 5.5 %.

Exports have halved in US Dollar terms (bear in mind the currency has depeciated by a similar amount). Imports have been relatively stable in US Dollar terms. The Government’s Budget Deficit has averaged around 1.5 % of GDP. Military expenditures have grown marginally from around US$ 50 Billion p.a. to about US$ 65 Billion but are still modest compared to the US and China. As previously noted, US military spending is estimated to be currently around US $ 750 Billion annually while China’s is estimated to be around US $ 250 Billion.

Business confidence measures are moribund as is capacity utilization. Car production has fallen marginally. Total vehicle sales have fallen by about 20 % in total. Cement production is stable. Steel production has increased by about 20 % in total annual production, revealing poor growth in industrialization and construction.

Consumer Credit has surged fourfold but consumer confidence has fallen significantly. Household debt to GDP has doubled. Gasoline prices have fallen by 40 %.

Government Debt to GDP has doubled, revealing a 7 % p.a. growth rate but it is still very low by international standards at around only 18 % of GDP. Its 10 year government bond yield has averaged around 8.5 % and is currently 7.03 % — reflecting the weakness of the currency over time.

COMPARISON

If you compare the Chinese economy and the Russian economy over the last decade, it is clear that the management of the Chinese economy is far superior to that of the Russians. Russian living conditions are not rising anywhere near as fast as those of the Chinese people. China has the advantage of a large manufacturing sector while Russia has abundant energy and commodities. Both nations should work together more closely to take advantage of their respective economic strengths. But that is easier said than done. Perhaps the Belt and Road strategy being adopted by China as it moves its industrial focus more towards the west geographically will benefit Russia over the next decade. However, Russia must grasp this opportunity or else it may find increased prosperity for its people to be an illusive goal.

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.

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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
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY

Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how the banking system and financial sector really work. 

https://www.youtube.com/watch?v=EC0G7pY4wRE
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.

“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.

Youtube Video —  https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction

and

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

Paper:  Money in the Modern Economy  PDF —  CLICK HERE

Quarterly Bulletins Index

http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx

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).”

Reference: https://www.bundesbank.de/Redaktion/EN/Topics/2017/2017_04_25_how_money_is_created.html
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans
“In the first instance, the process of money creation requires a willing borrower.” 
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
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MOLS Denmark

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