Chinese Economics Thread

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China has cut its benchmark interest rate from 6% to 5,6%. This is the first time in more than 2 years. This is in response to the slowing economy and growing bad loans in the system. Personally I think this policy move is more about preventing systemic risk than about spurring growth. It makes it easier for companies and local governments to service their debts. Its in my view a quiet bailout of the state owned enterprises and the local governments. Which I think is a bad idea. They should let the chips fall where they may and allow the bad loans to go sour. In the short run it will be bad for GDP growth but in the long run it will lead to a more balanced economy. This only perpetuates the bubble's in the economy.

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If it's true it's better than using tax payers money to bail out the failed bankers and loan companies back in 2008.

 

[solarz]

The word "salary" derives from paying soldiers (was it in the Roman army ) in salt.

Amazing! I never knew that! So the practice was pretty widespread then.

 

[broadsword]

If it's true it's better than using tax payers money to bail out the failed bankers and loan companies back in 2008.

I also don't think a 0.4% reduction will bail out the big companies that are heavily in debt as opposed to what the US govt did in 2008. It is just too little if that was the purpose.

 

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I also don't think a 0.4% reduction will bail out the big companies that are heavily in debt as opposed to what the US govt did in 2008. It is just too little if that was the purpose.

Well lets look at it this way.

1. That debt is nothing compare to what Fannie Mae, Leighmen Brothers, Freddie Mack, Myrril Lynch and others had.

$29 Trillion is around twice the size of America's GDP.
The Federal Reserve claims they only lent $1.7 Trillion to the big banks. Why the huge difference in totals? Because the Fed only counts the most outstanding at any one time.
Here's a quick list of the Fed borrowers:

Citigroup - $2.513 trillion
Morgan Stanley - $2.041 trillion
Merrill Lynch - $1.949 trillion
Bank of America - $1.344 trillion
Barclays PLC - $868 billion
Bear Sterns - $853 billion
Goldman Sachs - $814 billion
Royal Bank of Scotland - $541 billion
JP Morgan Chase - $391 billion
Deutsche Bank - $354 billion
UBS - $287 billion
Credit Suisse - $262 billion
Lehman Brothers - $183 billion
Bank of Scotland - $181 billion
BNP Paribas - $175 billion
Wells Fargo - $159 billion
Dexia - $159 billion
Wachovia - $142 billion
Dresdner Bank - $135 billion
Societe Generale - $124 billion
"All Other Borrowers" - $2.639 trillion

Behind the enormous sum, we find certain items of interest. Such as:

The Fed paid $659.4 million in "fees" to these very same institutions during the period in question. This is not part of the bailout.

You might have noticed that about $3 Trillion went overseas.

The banks made $13 Billion from Fed below-market rates. This is not part of the bailout.

The bailout of Fannie and Freddie (which directly assists the banking industry) is still negative $187 billion. They have returned none of the money yet. However, Fannie and Freddie have paid $50.4B in dividends to the Treasury.

OK. So now we have the full picture, right? TARP bailout was a small loser on something around $600 Billion, while the Fed bailout was around $29 Trillion and pretty much a wash, right?

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2. NO Chinese tax dollars were use to bail out these big Chinese company debts.

 

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I hope this will help Pakistan to develop its country.

ISLAMABAD (Reuters) - The Chinese government and banks will finance Chinese companies to build $45.6 billion worth of energy and infrastructure projects in Pakistan over the next six years, according to new details of the deal seen by Reuters on Friday. The Chinese companies will be able to operate the projects as profit-making entities, according to the deal signed by Prime Minister Nawaz Sharif during a visit to China earlier this month.

At the time, officials provided few details of the projects or the financing for the deal, dubbed the China-Pak Economic Corridor (CPEC).

The deal further cements ties between Pakistan and China at a time when Pakistan is nervous about waning U.S. support as troops pull out of Afghanistan.

Pakistan and China, both nuclear-armed nations, consider each other close friends. Their ties are underpinned by common wariness of India and a desire to hedge against U.S. influence in South Asia.

Documents seen by Reuters show that China has promised to invest around $33.8 billion in various energy projects and $11.8 billion in infrastructure projects.

Two members of Pakistan's planning commission, the focal ministry for the CPEC, and a senior official at the ministry of water and power shared the details of the projects.

The deal says the Chinese government and banks, including China Development Bank[CHDB.UL], and the Industrial and Commercial Bank of China Ltd (ICBC)<601398.SS>, one of China's 'Big Four' state-owned commercial banks, will loan funds to Chinese companies, who will invest in the projects as commercial ventures.

"Pakistan will not be taking on any more debt through these projects," said Pakistan's minister for water and power Khawaja Asif.

Major Chinese companies investing in Pakistan's energy sector will include China's Three Gorges Corp[CYTGP.UL], which built the world's biggest hydro power scheme, and China Power International Development Ltd<2380.HK>.

Sharif signed more than 20 agreements during his trip to China earlier this month, including $622 million for projects related to the deepwater, strategically important Gwadar port, which China is developing.

The port is close to the Strait of Hormuz, a key oil shipping lane. It could open up an energy and trade corridor from the Gulf across Pakistan to western China that could be used by the Chinese Navy - potentially upsetting rival India.

Pakistan sees the latest round of Chinese investments as key to its efforts to solve power shortages that have crippled its economy.

Blackouts lasting more than half a day in some areas have sparked violent protests and undermined an economy already beset by high unemployment, widespread poverty, crime and sectarian and insurgent violence.

Under the CPEC agreement, $15.5 billion worth of coal, wind, solar and hydro energy projects will come online by 2017 and add 10,400 megawatts of energy to the national grid, officials said.

An additional 6,120 megawatts will be added to the national grid at a cost of $18.2 billion by 2021.

"In total we will add 16,000 MW of electricity through coal, wind, solar and hydel plants in the next seven years and reduce power shortage by 4,000 to 7,000 megawatts," said Asif.

"This will take care of a growing demand for power by a growing economy."

The CPEC deal also includes $5.9 billion for road projects and $3.7 billion for railway projects, all to be developed by 2017. A $44 million optical fiber cable between China and Pakistan is due to be built.

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[xiabonan]

I think what Pakistan really needs is better, stronger, wiser leaders and institutions.

There's an old Chinese saying, "to teach someone fishing is better than giving him the fish"

 

[wtlh]

Fascinating! Sounds like salt was almost a second currency next to silver!

It is actually more clever than just a currency. They use it as a means to influence the market forces to act in the benefit of logistic redistribution and needs of the empire. The salt bonds are issued as emergency tokens, and are issued to troops, or even farmers where there is a shortage of normal supply.

If the place is very remote, hard to travel or dangerous, there is actually very limited natural incentives for traders to bring goods there, because they could easily make money elsewhere in more wealthy regions. If the solders or disaster struck farmers were only be given silver or the common currency, then due to local shortage of supplies, local inflation could quickly go up, then either there will remain a shortage of supplies for an average soldier---because he could afford less---or the government will be landed with all the extra bills paying for the more expensive goods.

With the salt bonds, however, market forces automatic adjust to any given situation. If there are initially little incentive for the traders to go to the difficult to reach regions, then as a result, less salt will be released to the market---as all the salt bonds for this time of the year are issued to the disaster struck area. This pushes up the prices of salt, an essential everyday commodity, and the price will keep on rising, until it leads to high enough incentive for traders to risk the trip. The risk of local inflation in the disaster area will be much reduced, given that rising prices of salt means the salt bonds worth more.

The end result is that, no matter where the supply shortage and disaster happened in the empire, all the government has to pay is the cost for producing the same amount of salt. The rest is absorbed by the market. It can be seen as an extra tax on wealthier citizens to fund supply shortages elsewhere, but it is much more efficient than raising taxes, and avoids all the bureaucracy and man power that is associated to government sponsored aid operations.

 

[solarz]

It is actually more clever than just a currency. They use it as a means to influence the market forces to act in the benefit of logistic redistribution and needs of the empire. The salt bonds are issued as emergency tokens, and are issued to troops, or even farmers where there is a shortage of normal supply.

If the place is very remote, hard to travel or dangerous, there is actually very limited natural incentives for traders to bring goods there, because they could easily make money elsewhere in more wealthy regions. If the solders or disaster struck farmers were only be given silver or the common currency, then due to local shortage of supplies, local inflation could quickly go up, then either there will remain a shortage of supplies for an average soldier---because he could afford less---or the government will be landed with all the extra bills paying for the more expensive goods.

With the salt bonds, however, market forces automatic adjust to any given situation. If there are initially little incentive for the traders to go to the difficult to reach regions, then as a result, less salt will be released to the market---as all the salt bonds for this time of the year are issued to the disaster struck area. This pushes up the prices of salt, an essential everyday commodity, and the price will keep on rising, until it leads to high enough incentive for traders to risk the trip. The risk of local inflation in the disaster area will be much reduced, given that rising prices of salt means the salt bonds worth more.

The end result is that, no matter where the supply shortage and disaster happened in the empire, all the government has to pay is the cost for producing the same amount of salt. The rest is absorbed by the market. It can be seen as an extra tax on wealthier citizens to fund supply shortages elsewhere, but it is much more efficient than raising taxes, and avoids all the bureaucracy and man power that is associated to government sponsored aid operations.

Amazing! This gives me new respect toward the ancient Chinese and their understanding of the economy. It is unfortunate that the economy and the intricacies of trade is something that is not emphasized in classical Chinese history.

 

[wtlh]

Amazing! This gives me new respect toward the ancient Chinese and their understanding of the economy. It is unfortunate that the economy and the intricacies of trade is something that is not emphasized in classical Chinese history.

Nevertheless, these type of things are now being taught in Chinese high school history lessons.

The history curriculum seems to be getting better and better. They now emphasis on looking at why and how the various political systems in the Chinese history work, the chief social issues they faced and tried to address, and the underlining reasons and the imperfections in the system that had led to the decline and fall of a dynasty, the mechanisms to ensure balances of power that are gradually improved and built into the Imperial bureaucratic system, and on how the economy was managed.

In other words, a lot more useful, enlightening and important than the learning of what happened at when by whom. I have never thought history classes could be this interesting and stimulating when I was a school boy in China.

There are a lot of accumulated experiences passed over from the Imperial bureaucratic system that are still being applied in today's Chinese political and governing systems. Understanding how these practices have been evolving over the centuries and millennia to the form it is today, with countless number of very clever people contributing to them, is crucial to understanding of how China works today, and how to improve it.

 

[no_name]

Nevertheless, these type of things are now being taught in Chinese high school history lessons.

Better the kids learn more about these kind of lessons than going out and 'democracy yeah! automatically solves every problems!'