Chinese Economics Thread

[AssassinsMace]

I know it's easy to make generalisations about foreigners being anti-China, feeling threatened by it, and wanting it to fail etc, but you can't tar us all with the same brush. All criticisms I make are intended to be constructive, and I'm pretty sure Blackstone feels the same way. I certainly don't want to believe all news is bad, but I won't blind myself to economic reality either.

It's an economic fact excessive levels of private debt are a major problem, and just because most of the debt isn't consumer debt doesn't stop it from being a concern. It's not an attack on China to point this out. Business ventures fail or don't go as well as expected all the time. Owners and corporations can easily find themselves unable to meet their debt obligations. It's true the government has been using its largess and control of the major banks to keep companies solvent, but so far this appears to be extending and pretending rather than writing debt off completely.

It's also true the Chinese government has the policy means to reduce the debt, but so far these haven't been used to the degree they need to be, or we wouldn't be seeing the debt continue to rise. It's time to act now, before a crisis hits.

Japan sleep walked into its debt crisis, and has never used the policy tools necessary to reduce its debt burden, which is the only thing that can get its economy out of stagnation. I get the impression policy makers in China don't appreciate the problem (and what's necessary to solve it) as much as they need to. Everything I've read from a wide variety of English language sources in the last couple of years gives me the impression they are listening far too much to the advice of orthodox economists, whose policy recommendations are what created the mess in the first place. They need to start reading up a lot more on heterodox economists, the likes of Keynes, Minsky, Keen, and Mosler.

I would love for my concerns to be groundless. I don't think they are though.

Well I'm not arguing their aren't any problems in China. I'm am arguing the West exaggerates to the to the extreme for political purposes. If they're the experts that know, shouldn't China have collapsed already? The reason why they say the US took longer than normal to recover from the 2008 financial collapse, and some say the US still hasn't recovered, is because the world has more options now to invest their money. Before the US/West was the only game in town. When people took their money out, they just reinvested in another sector in the US/West. In 2008 it was different because people could invest outside the US/West. That's why recovery is longer. And China and others were a safer option. So naturally those in the West have to paint China as a horribly place for money to scare people away from China. And with China's financial and therefore political clout on display since 2008, it's not hard to believe there's a consensus in the West to undermine anything that challenges US/Western dominance. Hence the negative campaign on China's economy.

Have you ever seen the show Mr. Robot? There was a scene in the last episode where the CEO of a too-big-too-fail corporation was telling some of the US President's administration how the economy works. And it was all about instilling confidence. It didn't matter if everything was really going to hell. Instilling confidence is the most important thing. I've been arguing this in this forum before that this is how the stock market works more than actual factual numbers. If it works that way then it also works the other way.

 

[taxiya]

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Long essay from Michael Pettis about China's so called "supply side reforms". I won't quote it directly due to length. When I first read this termed being used in the Chinese media, I panicked a little bit. What we recognise as supply side reforms in the West has directly contributed to the growth of income inequality, and unsustainable levels of private debt. Both of which are thing China badly needs to get under control if it wants to prevent the current economic difficulties from getting worse. So I've been spending some times trying to get a hold of what Chinese policy makers actually mean when they use the term. Fortunately, there's not too much common with the Western reforms aside from the name. However, I still share Pettis' skepticism over the likelihood of these reforms working as intended.

Lost in translation again as always. "供给 supply 侧 side 改革 reform" is not "supply side reform".

This happens over and over again among the western thinkers who think they understand Chinese language. I do remember a wise western author (I forget his name) who wrote an article about the real meaning being different about a year ago. I just wish there will be more wise people in the west.

 

[taxiya]

will be good to know also :
* Loan quality
* NPL (Non Performing Loan) rate

It seems the equity of Chinese banking sector is quite healthy 16.1 T Yuan from total asset 208.6 T Yuan or roughly 7.7% .... not sure what is the target, but 12% would be extremely strong

Most of biggest banks in China is SOE .... and 16.1 T Yuan equity is roughly US$2.5T ... huge number!!!

More importantly, the two factors are more important than the pure asset/liability ratio. A good porfoming loan will return profit, the more of it the better. A bad loan will loose, no matter how small the liability is.

Simple analoge, if I know Apple's today, I would have put all my money in Apple's stock some decades ago even when Apple looked going to die. That would have been a 100% liability of my asset, but it will be proven to be a good loan, and I would not be here talking .

 

[taxiya]

Gordon Chang and the rest of the China nay sayers are usually Christian feeling threaten by the rise of Chinese Communism would hinder their Biblical oppressing empire. They don't care about facts or history, they're just throwing anything out there at the wall and hope that it would stick.

That was what me and my friends did when we were below 10. We bet things just as Gordon Chang earns his salary.

 

[taxiya]

That sounds plausible.

There is a diaspora of 60million+ Chinese who either studied or worked or grew up overseas in lots of different countries, both rich and poor.

That means there is a large, diverse and highly skilled talent pool which is familiar with local conditions in each country. I can think of lots of bi-lingual accountants, lawyers, directors and M&A bankers just in London alone.

So Chinese companies have the benefit of employing Chinese-speaking locals from the USA, UK, Singapore, Taiwan etc. In comparison, Japanese companies never had that advantage.

It means investment appraisals are made with the local market rates in mind, and are better managed as well.

Other factors may include the NRDC acting as a gatekeeper vetting takeover proposals. Plus Chinese companies are used to accommodating significant regional differences (language/religion/culture/climate/time zones) even in the internal Chinese market.

Even without local Chinese, it still works. Volvo is a good example, Swedish base remains, Swedish engineers and Swedish or international management. And Volvo is recovering from the bad marriage with Ford. I think Li Shufu understands and respects Swedish more than the Americans although Li has never lived in western countries.

 

[Yvrch]

Even though these ratios and numbers of recent credit boom themselves are not wrong, these numbers in and of themselves alone don't' tell us the whole picture. We will be missing the forest for the trees. It would be better we look at it in Chinese way of looking at things
in their natural context and seeing and understanding interconnection between various aspects to solve the problem as a whole rather than one particular piece, basically a holistic approach.

One thing that no professionals who are worth their salt even the western world would say is Chinese policy makers, statisticians, economists, etc working in various government levels are incompetent and don't know what they are doing. China is unique and enormously complex in its own right. It has a sample size of one. Nobody has even gone down that path. You don't see the other dots that they see. Real world decisions are quite different from standard textbooks or news headlines.

In real world, there are different kinds of economists. You have to understand the context and function. Yellen, Bernanke, Fisher etc can't be grouped together with the ones working in a think tank, same for those in universities, global institutions and financial industry.

You would need to understand a bit of history to understand how we got to where we are now.Zhu Rongji inherited Chengbao, Lou Jiwei in turn inherited Fenshuizhi, that's the nutshell of current problems.In true Chinese tradition, 2 words capture what's happening in China right now under Xi, national governance, with governance at various levels and industries cascading down from the top level national governance. All reforms, fiscal, monetary, social, judiciary, etc and fight against corruptions came under this banner.
Some critical pieces are working like a clock work with their own deadlines and pushing ahead, like May 1 VAT. That's not a small feat considering what's happening in India for the comparable law. By 2020, most, if not all, reforms should be up and running, it's not empty words. Pay attention to what this group is doing next 5 years 中央全面深化改革领导小组.


China's banking system deleveraging is very important to global economy in next 5 years. It does have global systemic spillover effects through trade and financial channels. With Europe and Japan in doldrums and US flattening out with the liftoff pushed out to 2018 horizon, it is the EM, especially China, that's picking up the slack in global growth.
China is being responsible global player here holding off single quick blow, rather choosing a gradual popping out. She has 3% fiscal expansion this year, while Eurozone has 1% average, correctly choosing fiscal support through budget discipline rather than bank balance sheet. That's the reform.

Eurozone national governments, especially the big five, are not planning fiscal expansion, instead they are planning on consolidation, with banks tagging along deleveraging. They do have room to spend but Germans and Dutch said they won't. It's not good everybody deleverages at the same time.

If China does it too soon too fast, asset classes across the board would get a shock and market would go risk off. Europe would be hit, hardest hit would be Japan, as funds would move to safe haven Yen and push up Yen to points BoJ and GoJ would intervene, sending them down deeper into the hole. US treasury yields would go lower, given the CPI-U their effective rates would be in the negatives. Dollar would appreciate sharply given its safe haven status. In that case, RMB would have no other options than a 7 handle.

There are a lot of details that I don't want to go into.
But the powder is dry and China's system can even handle a USD 700 bio writeoff which is pretty much what US did in 2008. But I don't think it will come to that point, as big five is slowly writing off as writeoff is better than keeping them on the book thereby requiring them to set aside 150% buffer which is way higher than global average of 80%. With Basel III coming in 2019, US banks are barely passing Dodd-Frank.
And SOE's portion is about 55% of GDP of which really bad ones are in coal and steel, roughly about 15 -30 %, with a lot of the rest are doing good. Swap, pack and sell with a sort of mezzanine arrangement, M&A, AMC, there goes a whole list. US, Italy, Sweden, even China has all done it. Local government debts should show up in fiscal budget, instead of banks' balance sheet. It is getting fixed moving forward.

So overall it's a phase China has to pass, and she will.

 

[taxiya]

I know it's easy to make generalisations about foreigners being anti-China, feeling threatened by it, and wanting it to fail etc, but you can't tar us all with the same brush. All criticisms I make are intended to be constructive, and I'm pretty sure Blackstone feels the same way. I certainly don't want to believe all news is bad, but I won't blind myself to economic reality either.

You are right about it.

But I don't think A-mace meant to put you in that group if I understand him right, I can't speak for him of course. To me, he was talking general about the mainstream media, in that case, my experience tells me that more than 90% of them are in that group, ideological political driven rather than fact driven.

As in my reply to your post about the meaning of "supply side reforms", I mentioned that there was a western writer who was honest and fact-driven and discovered the difference. Your realisation of that difference of the meaning tells me that you should not be "tarred with the same brush".

 

[AndrewS]

@taxiya

Lost in translation again as always. "供给 supply 侧 side 改革 reform" is not "supply side reform".

This happens over and over again among the western thinkers who think they understand Chinese language. I do remember a wise western author (I forget his name) who wrote an article about the real meaning being different about a year ago. I just wish there will be more wise people in the west.

It depends on the country.

I see a huge deficit in China expertise in the UK and USA. Plus this situation will take a long time to change as it takes a generation to grow such expertise eg. Tsinghua Schwarzman Scholars, Peking University Yenching Scholars etc

In comparison, Australian decision makers are way ahead in this area as they take Chinese studies very seriously - and frequently end up translating/mediating.

 

[plawolf]

I don't take most western economists' predictions and projections about China serious because I'm a trained economist and knows the limitations of this field.

Unlike the true sciences, with their fundamental truths, economics is a predominately theory driven study. The models used are hopelessly crude compared to what they try to model, with unrealistic assumptions and preconditions required to make even the most basic of them make the slightest bit of sense.

Translating this to the subject at hand, when western economists try to make predictions about China, the first mistake they always make is trying to shoehorn China to fit some existing, past developmental model. And they are usually ideologically driven (consciously or subconsciously) to choose failed or flawed examples to compare China to.

Notice how rarely China's growth and development has been directly compared to America's, when objectively speaking, those are the closest fitting comparison. Instead you see China almost always compared to Japan, Germany or some other early-peaking economy that ultimately flounder or turned hostile. The underlying expectation (and probably even hope in a lot of cases) is that China would follow the path of those examples and flounder and fail.

But given the unparalleled success of China, even comparing China to America would be a poor fit.

To truly attempt to understand Chinese economics requires one to try and understand all of China, from history to culture to political system. And here is where the west hits their self-imposed barrier to understanding China - they cannot objectively assess the Chinese social political structure and recognise the strengths and advantages the Chinese system has, because to do so would effectively challenge two of the fundamental core tenants of western ideology that democracy and capitalism are the pinnacle of both the polticial and economic fields.

When they look at the raw facts and figures and starts to come to the inevitable conclusion that the Chinese system has some significant advantages compared to the western system, they either subconsciously recoil and reject from the idea, and/or they conciously back away from pursuing and developing those lines of thought because they know it would be effective career suicide to give voice to such heresies.

This is the great tragedy of economics, because without the backing of undeniable fundamental truths to support them when they reach conclusions power does not like to hear, economists must either adapt their findings to be palatable and acceptable to the establishment or see themselves marginalised at best, or branded as loonies and traitors at worst.

In the post-truth world of modern western poltics, where even being right isn't enough to win the argument at hand, is it any wonder the field has become dominated by intellectual prostitutes willing to come to whatever conclusions those in power wants them to in order to secure fame and fortune?

Even the big private corporations are little better. Their leaders are the arch-cheerleaders of the Devine Superiority of capitalism, and have every incentive to badmouth the kind of role the Chinese state plays in regulating the economy, least some crazy western politican gets the ludicrous idea of emulating the Chinese and actually putting some controls in place to limit how much they could rig the game to line their own pockets at the expense of everyone else.

To get an idea of how much power and influence they have, and how effectively they have used it to impose their view on the people, just think of your instinctive reaction when someone blames the bankers for anything. How easy it is to roll your eyes and dismiss them as a loony.

Yet, when you consider the fact that 1% of Americans have more wealth than the rest combined, well, is it really so absurd to suggest that so few people grabbing so much of the pie for themselves is bad for every on else?

Remember the fundamental principle and strength of both democracy and capitalism is to diffuse decision making, that by having everyone constantly 'voting' to maximise their own best interests, an equilibrium is reached and maintained to maximise the benefit to the most number of people possible, by making the best use of available resources as possible.

In the economic world, when so few people control so much wealth, they could significantly or even decisively influence the market to make the choices they want(and profit massively from doing so).

The real reason the likes of George Soros and Warran Buffett etc can so consistently 'win' in the market isn't just because they are that good or do their research any better than everyone else, it's because they have the muscle and heft to direct the markets themselves.

They were able to force the UK out of the ERM in 1992, proving they had more power than central governments.

So, what you have are individuals with more power than governments, who can and do use and abuse their power to stack the odds in their favour and so extract even more money from the market and economy.

When they do that, not only are they taking money directly from the pockets of everyone else (stock market speculation and manipulation like what they are doing IS a zero sum game, they only win big when someone else looses big), they are also able to influence where and how much the economy direct resources, thereby breaking the efficiency equilibrium capitalism is fundamentally dependent on to optimally allocate resources to grow the economic pie for everyone.

It is my absolutely belief that a huge part of the western economic malaise of recent decades is a direct result of the disruptive and parasitic role these people play. It is in their best interests to create and then burst bubbles, because that creates massive price differentials they could bet against to make astronomical profits.

The reason China has been catching up so rapidly with the west, from a purely economics POV, is the fundamentally different role the achinese state plays in the economy.

Unlike the western government, who are either duped and/or bought and paid for by interests groups to give as much power as possible to these ultra-wealthy individuals who control the markets, the Chinese government both actively influence the market (but with the aim of stimulating growth and efficiency rather than rent seeking) and also proactively target individuals who accumulate too power wealth and power and seek to use that to try and game the system.

If you look at the superwealth of China and compare them to their counterparts in the west, a striking pattern emerges.

Generally speaking, the Chinese superwealthy build things. There are real tangible, if not physical, contributions they have made to the Chinese economy that help it to grow. There are precious few amongst China's economic elite who made their fortune solely from stocks and shares.

China has taken the best bits of a command economy and capitalist economy and fused it together.

The Chinese government decides one the general, strategic direction they want the economy to head it, and then let market forces work out the details of how to allocate resources to achieve that goal.

They vigilantly and ruthlessly police the market and purge it of any rent seekers who damages efficiency (they could and should still do better in this regard, but is still fundamentally better than the western governments, who actively aid and abet such people).

Western economic analysts either cannot, or will not understand this set up.

 

[plawolf]

Take the Chinese debt 'bubble' as a perfect example.

Firstly, the overwhelming majority of that debt was taken out to fund investment rather than consumption. That means there is real solid, physical properties and infrastructure that that debt has financed.

Secondly, almost all of China's debt is internally held. Meaning it's owed to a Chinese bank as opposed to a foreign one.

This is important, because those physical assets could eventually generate a return on the initial investment. The key issue is time and cash flow.

Under a purely capitalist system, cash flow is fundamentally important. Many a profitable business has gone out of business because of temporary cash flow hiccups (why the financial crisis was especially damaging for western economies, when bank credit dried up, many small to medium companies who have perfectly healthy and viable businesses went under because of cash flow problems, which in turn caused cash flow and other problems for other businesses and so on).

This is why western analysts often get their panties in a twist about the much hyped Chinese 'ghost cities'.

In a purely capitalist system, that would indeed cause absolute chaos. The banks would panic and call in loans, causing developers to go out of business, adversely affecting their supplies and customers. The administrators trying to flog all the empty or half developed houses would drive down housing prices, potentially spooking the market causing perspective house buyers to hold off purchases expecting further price falls, other banks getting nervous about developments they are funding and potentially calling in loans and causing more developers to go under.

However, China isn't a purely capitalist economy. The government keeps the banks in line, so no one calls in loans, and even extends credit terms to keep developers from going under.

Eventually, the empty apartments fill up, a new city is created, adding productivity to the Chinese economy and easing China's urban housing shortage, while the developer and banks both walk away with a decent profit.

I am not saying this arrangement is perfect. There are cowboy builders who take the money run rather than seriously try to build something, but these are generally in the minority, are ruthlessly pursued by the authorities and usually can only pull that trick once a lifetime (also why Chinese banks are so reluctant to lend to SMEs, because credit and background checking is still unreliable in China, so the chances of the owners of those small businesses doing a runner is much higher compared to a massive private or state-owned company).

The bigger downside is that Chinese savers loose out, and earn a pitiful interest on their savings.

This is an area the Chinese government needs to seriously address because it's leading to massive capital flight from China.

This is a major problem, but not for the reasons western analysts often assume/insinuate as Chinese people having no faith in the health and prospects of the Chinese economy and are escaping a sinking ship. No, they are just off chasing a better rate of return on their savings.