Chinese Economics Thread

Y

Yvrch

Junior Member
Registered Member
B.I.B. said:
Where did you get this info from?

I think the Swiss must be talking about a different aspect of measurement as their expanded comments are in reference to this... I Think

"An early warning of financial overheating – the gap between credit and GDP – hit 30.1 in China in the first quarter of this year, a report from the Bank for International Settlements (BIS) said on Sunday.

Any level above 10 suggests that a crisis will occur “in any of the three years ahead”, the BIS said. China’s indicator is way above the second highest level of 12.1 for Canada and the highest of the countries assessed by the BIS."
Click to expand...

From the very same report they are rattling off to you in the article you quoted.
The gap is nothing but another layer of arcane academic exercise under basel III provisions which tries to capture the short term acceleration in credit growth, which could be for any number of given underlying reasons and could as well be just a blip, or a fore-runner of a business cycle.
Anyone suggesting a systemic meltdown in China financial system would only find a ready audience in folks who are more or less basing their call of judgement on news and media only. Much more are involved, far more than a single or a few data points, in real life.
 
Hendrik_2000

Hendrik_2000

Lieutenant General
Via Emperor from CDF. This is the best article to refute the doom and gloom prophet.

I don't even agree with his conclusion that the misallocation of resource would lead to Japan like stagnation.
Because Chinese private sector are more robust with entrepreneur spirit and they are funded by family, friend and now increasingly venture capitalist
They alone are responsible for the increase share of GDP and expansion of service economy.

Think of Internet economy of Alibaba, Baidu, Tencent, didi Chuxing, etc.

The problem with Japan is they are depending solely at large conglomerate like Toshiba, Hitachi, Sony,Sharp, etc for their economic growth.
And those large company are not nimble enough.

Relax, China’s banks aren’t about to have a meltdown
PUBLISHED : Monday, 26 September, 2016, 9:02am
UPDATED : Monday, 26 September, 2016, 1:59pm
Tom Holland

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The international community of China-watchers is suffering one of its periodic flaps. China’s debt levels, we are told, are spiralling out of control, and the country is speeding towards its very own version of the Lehman crisis of 2008, except on an even bigger scale.

Several things have come together to feed this latest flap. Last week, the Bank for International Settlements, often called “the central bankers’ central bank”, flashed a red light over something called China’s credit-to-GDP gap, which it said had widened to more than three times the level normally considered dangerous.

Coming on top of China’s annual health check from the International Monetary Fund, which last month emphasised the “the urgency of addressing the corporate debt problem”, the BIS warning revived fears about an impending financial crisis in the world’s second largest economy. A research report from brokerage house CLSA fed those fears further, estimating that bad debts in China’s shadow banking system now exceed 4 trillion yuan.

Then, on Wednesday, news broke that state-owned Guangxi Nonferrous Metals had become the first ever issuer in China’s interbank bond market to be forced into liquidation, after repeatedly defaulting on its debt. To confirmed China bears, this last piece of news was the most significant: proof, they argued, that China’s state-controlled banks are now so fragile that they can no longer protect their own. To them, the bankruptcy was just the tip of an iceberg, and a full-scale financial meltdown can’t be far behind.

Happily, the grizzliest of these bears are wrong. Yes, there are reasons to be worried about China’s debt build-up, but the risk of a 2008-style crisis is not one of them. It is true that at close to 250 per cent of GDP, China’s non-financial sector debt is approaching the levels at which crises struck in Japan at the end of the 1980s and in other economies since. Even more troubling is the speed at which the debt pile has accumulated, with outstanding debt currently growing at around twice the pace of nominal GDP. Such rapid growth, fret the bears, means credit standards must have been lax and much of the capital must have been allocated poorly. With economic growth now slowing, more and more borrowers will inevitably default, they argue.

To a certain extent they are right. Although the bad loan ratio in China’s banking system is low, at less than 2 per cent, factor in the number of “zombie” companies kept from default because banks would rather roll over their loans than acknowledge losses, and the true ratio is many times higher and getting worse.

But that does not mean a crisis is imminent, because in China there is no obvious trigger point. Usually a crisis strikes not because of insolvency – when liabilities exceed assets – but because of illiquidity – when an institution can no longer obtain ready funding. It was illiquidity that led to the collapse of Lehman Brothers in 2008, when other Wall Street banks declined to lend to it any more, afraid they would never be repaid. And it was illiquidity that triggered the Asian crisis of 1997, when foreign investors decided they were no longer prepared to finance Thailand’s current account deficit. But there is almost zero chance the Chinese banking system will suffer a liquidity crisis in the foreseeable future.
State-owned Sinosteel to swap 27 billion yuan worth of debt for convertible bonds

Unlike banks elsewhere in the world which are often dependent on volatile wholesale market funding, China’s banks finance themselves largely from a captive pool of customer deposits. The big state-owned banks typically rely on the interbank market for just 10 to 15 per cent of funding. The proportion of wholesale funding at smaller city banks is often higher at 20 to 30 per cent. But as a whole the ratio of private sector credit to deposits across the whole banking system is no higher than 100 per cent. In contrast, the ratio in the US banking system on the eve of the 2008 crisis was around 370 per cent.

In other words, China’s banks are not going to run out of cash as Lehman Brothers did. And even if one or two small local institutions run into trouble, the banking system remains state-controlled. In the event of any localised financial turbulence, either Beijing will strong-arm big banks into smoothing things over, or it will truck in as much cash as it takes to hose the problem down. In short, there will be no financial system meltdown.

Instead the danger for China is that the financial system will continue to misallocate capital to heavy industrial state sector zombies rather than productive private sector businesses. By doing so it may achieve stability – but at the expense of future economic growth.

Tom Holland is a former SCMP staffer, who has been writing about Asian affairs for more than 20 years
 
Y

Yvrch

Junior Member
Registered Member
Hendrik_2000 said:
Via Emperor from CDF. This is the best article to refute the doom and gloom prophet.

I don't even agree with his conclusion that the misallocation of resource would lead to Japan like stagnation.
Because Chinese private sector are more robust with entrepreneur spirit and they are funded by family, friend and now increasingly venture capitalist
They alone are responsible for the increase share of GDP and expansion of service economy.

Think of Internet economy of Alibaba, Baidu, Tencent, didi Chuxing, etc.

The problem with Japan is they are depending solely at large conglomerate like Toshiba, Hitachi, Sony,Sharp, etc for their economic growth.
And those large company are not nimble enough.

Relax, China’s banks aren’t about to have a meltdown
PUBLISHED : Monday, 26 September, 2016, 9:02am
UPDATED : Monday, 26 September, 2016, 1:59pm
Tom Holland

Please, Log in or Register to view URLs content!


The international community of China-watchers is suffering one of its periodic flaps. China’s debt levels, we are told, are spiralling out of control, and the country is speeding towards its very own version of the Lehman crisis of 2008, except on an even bigger scale.

Several things have come together to feed this latest flap. Last week, the Bank for International Settlements, often called “the central bankers’ central bank”, flashed a red light over something called China’s credit-to-GDP gap, which it said had widened to more than three times the level normally considered dangerous.

Coming on top of China’s annual health check from the International Monetary Fund, which last month emphasised the “the urgency of addressing the corporate debt problem”, the BIS warning revived fears about an impending financial crisis in the world’s second largest economy. A research report from brokerage house CLSA fed those fears further, estimating that bad debts in China’s shadow banking system now exceed 4 trillion yuan.

Then, on Wednesday, news broke that state-owned Guangxi Nonferrous Metals had become the first ever issuer in China’s interbank bond market to be forced into liquidation, after repeatedly defaulting on its debt. To confirmed China bears, this last piece of news was the most significant: proof, they argued, that China’s state-controlled banks are now so fragile that they can no longer protect their own. To them, the bankruptcy was just the tip of an iceberg, and a full-scale financial meltdown can’t be far behind.

Happily, the grizzliest of these bears are wrong. Yes, there are reasons to be worried about China’s debt build-up, but the risk of a 2008-style crisis is not one of them. It is true that at close to 250 per cent of GDP, China’s non-financial sector debt is approaching the levels at which crises struck in Japan at the end of the 1980s and in other economies since. Even more troubling is the speed at which the debt pile has accumulated, with outstanding debt currently growing at around twice the pace of nominal GDP. Such rapid growth, fret the bears, means credit standards must have been lax and much of the capital must have been allocated poorly. With economic growth now slowing, more and more borrowers will inevitably default, they argue.

To a certain extent they are right. Although the bad loan ratio in China’s banking system is low, at less than 2 per cent, factor in the number of “zombie” companies kept from default because banks would rather roll over their loans than acknowledge losses, and the true ratio is many times higher and getting worse.

But that does not mean a crisis is imminent, because in China there is no obvious trigger point. Usually a crisis strikes not because of insolvency – when liabilities exceed assets – but because of illiquidity – when an institution can no longer obtain ready funding. It was illiquidity that led to the collapse of Lehman Brothers in 2008, when other Wall Street banks declined to lend to it any more, afraid they would never be repaid. And it was illiquidity that triggered the Asian crisis of 1997, when foreign investors decided they were no longer prepared to finance Thailand’s current account deficit. But there is almost zero chance the Chinese banking system will suffer a liquidity crisis in the foreseeable future.
State-owned Sinosteel to swap 27 billion yuan worth of debt for convertible bonds

Unlike banks elsewhere in the world which are often dependent on volatile wholesale market funding, China’s banks finance themselves largely from a captive pool of customer deposits. The big state-owned banks typically rely on the interbank market for just 10 to 15 per cent of funding. The proportion of wholesale funding at smaller city banks is often higher at 20 to 30 per cent. But as a whole the ratio of private sector credit to deposits across the whole banking system is no higher than 100 per cent. In contrast, the ratio in the US banking system on the eve of the 2008 crisis was around 370 per cent.

In other words, China’s banks are not going to run out of cash as Lehman Brothers did. And even if one or two small local institutions run into trouble, the banking system remains state-controlled. In the event of any localised financial turbulence, either Beijing will strong-arm big banks into smoothing things over, or it will truck in as much cash as it takes to hose the problem down. In short, there will be no financial system meltdown.

Instead the danger for China is that the financial system will continue to misallocate capital to heavy industrial state sector zombies rather than productive private sector businesses. By doing so it may achieve stability – but at the expense of future economic growth.

Tom Holland is a former SCMP staffer, who has been writing about Asian affairs for more than 20 years
Click to expand...

Just like Plawolf mentioned a few posts before, one fundamental difference between run of the mill traditional western system and that of contemporary China that western media left out is that in China's case it is the finance with Chinese characteristics, full of local adaptations and flavors to fit the local circumstances, a quite different beast. It's a walled garden to say the least with no visible trigger point.
A few things about the local government and SOE debts. China is still stuck in cash basis when it comes to government spending, when US has moved on to highly modified cash basis. So normal ROI, cash flow, MFP, etc don't quite fit in as the primary consideration is not market but social and public goods. And most of LGFV and SOE's investment horizon are way longer than a normal private entity would entertain. China did try PPP approach to infrastructure and public projects in early 90's but it didn't turn out as she expected as foreign investors demanded too much risk premiums and additional favorable terms and fixed cash flows, finally local governments losing out on value for their money. Hence the rise of LGFV's and big SOE's borrowings in 2000's as they often are the two main partners to do the heavy lifting in social and public undertakings. Private couldn't survive in this environment till 2015 as the local government would just act as it saw fit and ignored the arbitration or court disputes with private partners should they arise. Not so for SOE's. SOE's bosses would in fact rank higher than local government in the pecking order and they are not pushovers. They have a lot of experience and influence. Hence the two go hand in hand scratching each other's back. It was also the confusion between NDRC and MOF that somewhat led to explosive credit grwoth as one approved it and other paid for it.
That gap indicator from bis is a bit funny. It is in no way a definitive number that everybody agrees on, far from it. Each national statistics authority would have their own number using different time series and assumptions and slightly different methodology, resulting in numbers as widely apart as where each would have started off. So their 30 number would end up maybe 15 in China, or 20 in US. And they are advising China to have a cash buffer to handle the downside so what would PBOC say? "For sure mate"? LoL
Government debt wise, Japan actually loves the negative rates, as they hope it would stimulate targeted inflation rate, at the same time paying down the government debt as the payor and payee of the debt are reversed. With recent policy announcement of yield curve targeting, we'll have to wait and see where it takes us.
 
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Hendrik_2000

Hendrik_2000

Lieutenant General
I though this is an excellent essay full of wisdom. Describing exactly the reason for so much negativity in the media when it come to China
Surprisingly from Huffington the left,neo liberal standard bearer

China on Washington mind
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China is an ever-present element in strategic discourse, yet is rarely treated with the sobriety that it deserves and requires. It is as if China’s monumental importance for the shape of global affairs in the 21st century, with obviously profound implications for the United States, has frozen foreign policy minds rather than stimulated them.

While there are a handful of scholarly works that make a serious attempt to think through the unprecedented ways in which China will impact our interdependent but still competitive world, public discourse is characterized by simplifications that either reproduce an irrelevant past and/or harp on strictly American responses to this perceived threat to our supremacy. The sheer complexity of an intellectual and diplomatic challenge is overwhelming the very modest capabilities of our leaders who already struggle with limited success to cope with far more prosaic problems.

Without presuming to any expertise on China, or presuming to know what strategic master strokes are in order, one still can offer a few touchstones for appraising approaches that are potentially fruitful and those to be avoided. In the latter category, the cardinal sin is disparagement of China and the implications of its rise. This is a common avoidance device that has taken hold in many political, media and think tank circles. It is understandable in psychological terms. Avoidance is utterly irresponsible in policy terms, however.

The recent slowdown in China’s astronomical rate of economic growth has encouraged this response pattern. Oddly, it co-exists with exclamations of anxiety about Beijing’s growing assertiveness in the South China Sea and that new found practice of engaging in verbal duels with Washington about the management of global affairs. A strained and stilted reconciliation takes the form of condescending instruction to the effect that China should recognize two paramount realities: it is not as strong as it believes it is; it will suffer deleterious consequences unless it alters course to align with the prevailing perspectives of the United States and its like-minded partners.

The most egregious manifestations of this attitude are found in the so-called “serious” press and journals — as well as many publications of prestigious foundations and institutes. The New York Times exemplifies this conduct to the point of caricature. Readers are treated to a steady diet of stories that dwell on China’s problems, however trivial the subject. Hence, we are offered easily digestible morsels that are the news equivalent of junk food.

From 3-5 times a week, we learn of the dire fate of noodle vendors in the old alleys of Beijing or how the demand for luxury goods appears to have expanded less robustly than it did a few years back. Or how China’s impressive network of high-speed rail lines is straining public finances — this from a country whose capital city cannot keep its creaky subway running and abandons its decades-old struggle to extend it to Dulles airport in a Virginia shopping mall. Probing analysis of the country’s growing technological prowess or its gobbling up of natural resources on five continents or its contesting American financial dominance are relegated to the occasional technical piece in the Business Section.

Analysis of political institutions is similarly skewed toward the pessimistic and the superficial. This is silly. Such juvenile behavior evokes images of a concerned parent sitting down a wayward middle school child in the dinette for a heart-to-heart talk on how young adults are expected to act maturely in seeing the world as it is rather than as a self-indulgent fantasy.

Another common attitude to be avoided is the characterization of China as an implacable rival whose threat to American dominance must be repulsed on every front. This is a classic 18th - 19th century mentality tinged with lingering Cold War imagery. Putin’s Russia, of course, has been cast in this very mold — to an absurd degree that borders on the cartoonish. There is a considerable danger that similar gross transference could occur in regard to China.
As to what might be a more constructive approach, some things are obvious. They are implied in the paragraphs above.

First, simple-minded analogies to past great power conflicts are a lure to be rejected. In today’s unique circumstances, we must think anew — about China, about ourselves, about managing a world wherein cooperation and competition intersect. Frankly, we currently show no aptitude for doing that.

Second, we should recognize that the era of American unilateralism is over. The moment of unchallenged American supremacy, the hyper-power era that followed the end of the Cold War, is past. Others no longer will accept Washington’s dictation. Certainly, that is true of China. President XI shoved that unwelcome reality under Uncle Sam’s nose at the Hangzhou G-20 Summit earlier this month. We have yet to see signs that the Obama people took notice, much less drew lessons from that display. We should bear in mind that this is the same foreign policy Establishment that to its discredit has the historic accomplishment of unmitigated and humiliating failures in the Middle East over the past 15 years — and a learning curve that is perfectly flat.

The imperative is talk — real, sustained exchanges. Dialogue would be the appropriate term if the word hadn’t been debased by promiscuous misuse. Traditional diplomacy entails the communication patterns associated with bargaining. At times, there also is signaling via non-verbal means, e.g. the movement of military assets, unilateral measures of one kind of another. By contrast, present and future circumstances call for strategic discussions. The collective challenge is to foster shared conceptions of the evolving world system. Those conceptions will be like nothing that has existed previously. This is an undertaking that will strain the minds of leaders and the resilience of their domestic political systems. That is, if the inescapable need to launch the process is recognized. That has yet to occur.

The United States’ foreign policy Establishment clearly is unprepared for such an enterprise — psychologically, intellectually and politically. Recent administrations have shown themselves averse even to talking with other governments unless they make prior accession to American terms of reference. The act of engaging in serious discourse is felt to be somehow alien. Making an appointment with the President is akin to arranging a Papal audience. The White House views it as privilege to be accorded or denied in accordance with presidential predilection. Of course, Secretary of State John Kerry never stops talking. However, all of his encounters with counterparts are part of a bargaining process that almost never touches on strategic issues — much less broad visions of how world affairs should be conducted.
 
Hendrik_2000

Hendrik_2000

Lieutenant General
With little fanfare Yuan just join SDR. It is a milestone and the beginning of the end of dollar as the domineering reserve currency with their privilege of borrowing at lowest rate skewing the world economy and discouraging fiscal discipline

Much To The Dismay Of China Haters, The Yuan Goes Global On Oct. 1

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China’s yuan becomes part of the IMFs currency basket on Saturday, making it officially a reserve currency for the world’s biggest central banks. (Photo by FRED DUFOUR/AFP/Getty Images)

China goes even more global this weekend. Love ‘em or hate ‘em, on Saturday Oct. 1, the Chinese yuan joins the International Monetary Fund’s currency basket. Once the yuan is a full fledged member of the IMF’s Special Drawing Rights, it becomes a currency worth holding at every single emerging market central bank holding foreign currency reserves. That’s a few billion yuan, on the low end, of demand for the Chinese currency…automatically.

Even though the yuan is not an immediate threat to the U.S. dollar’s dominance in world trade, nor as a global reserve currency, the yuan’s official entrance makes it the newest, liquid safe haven. Moreover, unlike the yen and the euro safe havens, this one actually has yield.

Last year, U.S. Treasury secretary
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that the yuan was not ready for inclusion in the basket. His statement reflected similar sentiment in Washington, which has sought to roadblock China’s moves within the multi-lateral institutions for years. The U.S. was against China’s proposed Asian Infrastructure Investment Bank, and is one of the few Western powers that is not a member. China is also not a part of the Trans-Pacific Partnership, a proposed trade agreement between the U.S. and every other nation that shares a Pacific coastline except the one nation that buys and sells most with the United States.

With the yuan as a reserve currency, China suddenly becomes an integral part of the debate on where the global monetary system is heading. More importantly, Saturday marks China’s receipt of a seal of approval that tells China’s global trading partners (Brazil, all of Europe), including some that have riffs with the United States (Russia), that Beijing is serious about making the yuan a market currency used in trade settlement. The yuan is expected to replace the Great Britain pound and Japanese yen in trade settlement within the next few years, according to SWIFT.

It won’t replace the dollar, but Asian nations that trade in commodities with the Chinese will increasingly price their goods in yuan.

Worth noting, emerging market fixed income funds love China’s expansion in the currency markets because that expansion requires China to play by certain market rules. It is enticing China to open up, if not create from scratch a brand new bond market. Emerging market bond fund managers are only just starting to get their feet wet in Chinese bonds. At least three new exchange traded funds have been created to give retail investors a chance to hold yuans without opening up a Chinese bank account.

Impact & Implications

The IMF agreed, with Washington’s blessing, to include the Chinese currency in the SDR basket on Nov. 30, 2015. The yuan joins the dollar, euro, yen and pound as part of the IMFs currency and has an initial weighting of 10.9%.

Central banks in the emerging markets — those that hold nearly all of the world’s foreign currency reserves — are unlikely to rush to buy yuans. But there could be an indirect impact in yuan demand from central banks that are positioning in SDRs. Reserves at emerging market central banks are used to manage currency risk and as a back stop to foreign debt service, helping those markets achieve better credit ratings and ease foreign lender risk. Most of these banks hold dollars first, euros second. SDRs are weighted a little more than gold. Yuan, as an individual currency, is not usually weighted. But the IMFs endorsement here “supports long-term demand” for the yuan, say HSBC analysts led by Paul Mackel in Hong Kong in a report published Sept. 13.

“SDR inclusion should encourage further reforms on China’s part to integrate its financial markets globally and push ahead with yuan internationalization,” Mackel says.

As a reserve currency, China’s aim is to be a source of diversification for Asian central banks who do not want to hold negative yielding euro debt, or a very weak Japanese yen. The yen has lost 24.3% of its value versus the dollar over the last five years. The yuan, which everyone insists is too weak, has lost just 4.2%.

The current uni-polar dollar system is not without its challenges. The advent of the euro took some of that away, but global trade is still heavily titled towards the greenback. When Brazil sells soybeans to the Chinese, its priced in dollars. The same holds for the Saudis selling oil to anyone, anywhere. China thinks that the yuan provides markets with another option. Why not buy Saudi oil in yuan? That’s like IMF money for Saudi’s central bank.

Lastly, the SDR inclusion has emerging market investment banks devising new products for investors to diversify into yuan denominated holdings. That will continue.

According to the People’s Bank of China, foreign investors have increased their holdings of yuan-denominated debt by around 100 billion ($14.9 billion) between March and June alone. More timely data from the Chinese Central Depository and Clearing Co. suggests that foreigners were back to buying Chinese debt in August, which has kept the currency strong and irked short sellers waiting for the yuan to hit seven.

With the yuan totally global within the next 24 hours, look for Chinese local currency debt to be included in corporate and emerging market bond indices like the JP Morgan EMBI and the CEMBI indices. When that happens, the yuan will have even more support, if the base case scenario holds up rather than a hard landing.

“The challenges confronting the current U.S. dollar-centric system and its short comings are well known,” says Mackel. “There is a structural shortage of risk free assets, namely Treasuries. The U.S. cannot provide a credible fiscal backstop to a stock of liabilities that is growing faster than its economy while maintaining confidence in the dollar,” he says. “Financial market stress arises when the Fed tries to run a diverging monetary policy from the rest of the world…a very real prospect today.”

Yuan: welcome to the world.
 
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