US Financial Crisis/Bailout, China's Role

crobato said:

Which they do, and is what they're working on right now.

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I would be more encouraged if they had done more to promote consumption rather than relying on the same tactics such as tax rebates to the export sector in order to sustain over-capacity. I hope they do well, we'll see.

Nothing wrong about providing housing for the low and middle class which is where the F Mae and Mac specializes on. Its on the upper end that produced the bubble and soaked up the credit supply.

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It was the sub-prime loans, or those made to mostly the poor and the middle class that couldn't make payments.. It was these risky loans that had to be financially engineered into securities that relied on actuarial risk but wasn't adequately stressed tested. Don't turn this into a rich vs. poor thing. If the main street wasn't such a power electoral block, I would love to see a politicians making every single one of these greedy [censored] who bought houses with no down payment foreclose.

So regulators as you said "Now the Fed isn't stupid; you are talking about Harvard economists who probably tell their kids bedtime stories about massive hyper-inflation of Weimer Germany", but can't see a Ponzi scheme in effect? Brilliant.

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Let's distinguish the regulators and monetary authorities. Regulators deal with industry and company level issues, while monetary authorities, who are mainly academics and economists, deal with macro issues. There is a compelling case that neither one has done a great job, but on the whole Harvard economists have done a better job with macro issues than your government bureaucrat has done with much smaller and obvious issues like Ponzi schemes.

Can't blame them. That banking model did work over successive crisis.

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By work you mean massive bailouts of state banks for NPLs, then I agree.

That's where you don't know much about the industry in the PRC. All those centrally planned enterprises, with the exception of the defense and aviation industries, have either been sold away, privatized, made over or died in the vine. They don't have much baggage.

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Yeah ok sure. Chongqing's SOE alone need probably a 20 billion dollar bailout. A lot of these SOEs are state owned developers that engaged in real estate, and as real estate tumbled, they need bailouts. Each one of these cities need bailouts. It just happens so that Chongqing is under the jurisdiction of a
powerful princeling, so they'll get the money. But when cities and provinces come knocking on the door for loans to fund "projects", you'll find that a lot of these projects are bailout money that will be essential to maintain social stability.

Sorry but Asia devaluate? Not a chance. The Koreans and the Japanese had greater reason to devaluate as well as Taiwan, but they didn't and never will. Why? Because maintaining the value of their currency is essential for the purchasing power to obtain imports and raw materials.

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I agree that the chances of devaluation are small due to political pressures, but if we are to use your logic in reverse for a second, why does China and Japan drag their feet so much in the face of pressure to appreciate? That would've made imports cheaper, that's for sure. The answer is that a stronger currency not only makes raw materials cheaper, it also makes import of finished goods cheaper, thus making it more difficult for domestic industry to dump over-capacity.

I guess my whole point is that everybody's [censored] stinks. But these issues aren't as simplistic as some try to make them out to be. The reason why SOE reforms were successfully implemented was that people were hired as fast by the export manufacturing sector as they were laid off in 1999-2001 by SOEs during the Zhu RongJi era. Now that the manufacturing sector is rapidly cooling down as American households are bankrupt, it imposes tremendous pressure on both countries. Going to Beijing in a couple of months. Very excited.

FugitiveVisions said:

I would be more encouraged if they had done more to promote consumption rather than relying on the same tactics such as tax rebates to the export sector in order to sustain over-capacity. I hope they do well, we'll see.

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That's another thing. I don't believe in either promoting but neither do I believe in constraining consumption either. Neither do not provide for wise and efficient consumption of goods, and both are distortive. Promoting consumption can lead to inefficient use and allocation of goods, but so will constraint (example of such a mechanism, sales tax).

No, consumption for the sake of consumption is all wrong. You have to let the consumer be the judge of what is good for them without the need to lure them using artificial demand mechanisms into useless shopping sprees.

It was the sub-prime loans, or those made to mostly the poor and the middle class that couldn't make payments.. It was these risky loans that had to be financially engineered into securities that relied on actuarial risk but wasn't adequately stressed tested. Don't turn this into a rich vs. poor thing. If the main street wasn't such a power electoral block, I would love to see a politicians making every single one of these greedy [censored] who bought houses with no down payment foreclose.

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A lot of risky loans are spent in upper class houses, and this is where the owners get to fail to pay them. It has everything to do with strata as well, much of the speculative real estate deals are done here, and they're the first to go when the companies and the stock values of these buyers go down.

Let's distinguish the regulators and monetary authorities. Regulators deal with industry and company level issues, while monetary authorities, who are mainly academics and economists, deal with macro issues. There is a compelling case that neither one has done a great job, but on the whole Harvard economists have done a better job with macro issues than your government bureaucrat has done with much smaller and obvious issues like Ponzi schemes.

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The Ponzi scheme happening in the US Treasury now is every bit a macro issue. So is the Ponzi schemes that disguise themselves as Credit Default Swaps and other crazy financial instruments Wall Street thinks up every morning. I don't see any difference between regulators and monetary authorities.

Yeah ok sure. Chongqing's SOE alone need probably a 20 billion dollar bailout. A lot of these SOEs are state owned developers that engaged in real estate, and as real estate tumbled, they need bailouts. Each one of these cities need bailouts. It just happens so that Chongqing is under the jurisdiction of a
powerful princeling, so they'll get the money. But when cities and provinces come knocking on the door for loans to fund "projects", you'll find that a lot of these projects are bailout money that will be essential to maintain social stability.

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State owned? Connected and state owned are two different things. And besides, a lot of these developers are not coming from the state but from Taiwan, Hong Kong, Singapore and all sorts of overseas Chinese, not to mention Korean and Japanese developers in cahoots with all sorts of local partners. Local level cronyism is a better way to describe things happening, but then that's been the way in any Asian real estate.

I agree that the chances of devaluation are small due to political pressures, but if we are to use your logic in reverse for a second, why does China and Japan drag their feet so much in the face of pressure to appreciate? That would've made imports cheaper, that's for sure. The answer is that a stronger currency not only makes raw materials cheaper, it also makes import of finished goods cheaper, thus making it more difficult for domestic industry to dump over-capacity.

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Look, its easy to curb imported finished goods through other means. Such as import tax. Such as government regulations. There is a whole list of protectionist measures and devices you can choose from.

I guess my whole point is that everybody's [censored] stinks. But these issues aren't as simplistic as some try to make them out to be. The reason why SOE reforms were successfully implemented was that people were hired as fast by the export manufacturing sector as they were laid off in 1999-2001 by SOEs during the Zhu RongJi era. Now that the manufacturing sector is rapidly cooling down as American households are bankrupt, it imposes tremendous pressure on both countries. Going to Beijing in a couple of months. Very excited.

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Service sectors will also go down as well since they are dependent both on households and the manufacturing sector.

The solution to that is to shift to recession resistant goods. People might still buy a Toyota Yaris but not a Ford Expedition. They may buy a cheap $30 DVD player but not a $300 Blue Ray player. They will continue to need to eat, drink and the need for entertainment but they won't buy LV bags.

For example, Nintendo's Wii had record sales of over 2 million last month, 800,000 alone in Black Friday and they're kicking up production even more. That's good news for IBM and its East NY Fishkill plant, where the Broadway CPUs are made. That's good news to the Chinese and Taiwan subcontractors doing all the other parts.

That's the real application of capitalism, a flexible production economy and letting an economy decide naturally what it consumes without promotion or constraint. The ability to deal with the situation with flexibility, and change production to the shifting demand. Adapt and see opportunities even in a recession.

I envy you, you got a nice vacation planned. I hope you enjoy your trip. Don't forget to checkout the Bird's Nest.

FugitiveVisions said:

Several very serious contradictions that makes this commentary sound more like a political piece to direct public anger at US policies and take heat off the CCP:

The paper concludes with the need for diversification, and yet it was China that adopted an industrial policy that contributed to over-capacity in the exporting sector. Talk to me about diversification when they actually have a strategy to decouple from the US and European markets.

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This is wrong. It talks about global growth being not dependent on one country. It does not address diversification of industries.

In any case, China has over-relied on export industries -- but this would not have been a problem if the US had started letting Chinese investments flow into its markets back in 2005.

Unocal? 3Com?

It also would not have been a problem if the US had not been putting up protectionist measures to prevent China from buying industrial technology!

FugitiveVisions said:

Scolding the US about over-investment in housing when it was in fact the PBoC that purchased Fannie Mae debt by the hundreds of billions.

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These are two separate issues. The US over-investment is a gross misallocation of capital, that's mostly a US domestic problem. China had to park its money in something considered relatively safe (like Fannie Mae bonds) because the US wouldn't open its markets and prevents China from buying things it actually wants and needs.

Now that the administration is changing, this policy might change too. If things go well, China might be able to buy companies or technologies, and meanwhile save the US economy.

FugitiveVisions said:

Blaming the problem on deregulation is a non-sequitor because regulation has not and never will keep up with the market. It's not that they haven't implemented enough rules; no matter how many government bureaucrats you stuff into nice taxpayer paid offices in NYC, they don't even have the ability to see a Ponzi scheme directed right under their eyes.

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How much experience do you have with regulatory agencies? With the SEC? FTC?

Do you have any proof that regulators are totally ineffective other than repeated rehashing dogmatic statements like the above?

FugitiveVisions said:

It sounds like the Chinese are trying to say how much superior the central planning banking model is. Well, we'll find out how great it is as all the centrally planned enterprises all over the country come knocking for emergency bailout loans. If you think GM is bad, you aint seen nothing yet.

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Not denying that the Chinese government has had to inject money into SOE in the past. Not denying that there are bad loans. But do you have any proof, aside from dogmatic claims, that the scale of bad loans / misallocated capital is much worse than the US?

If you are knowledgeable about China, you would realize that the vast majority of SOEs have been reformed. The vast majority of industries sectors are not participated in by the government.

Now what's more worrying are the private companies that get loans from the government through connections. In better times, they might be solvent. In bad times they should be insolvent. But these companies tend to be small and medium sized, so individually their capital misallocation should not be a huge drain on the state. And today small / medium sized (and badly run) companies are collapsing all over China, so it doesn't look like capital misallocation is a hidden problem anymore -- the scale of losses should be fathomable now.

FugitiveVisions said:

There is a compelling case that neither one has done a great job, but on the whole Harvard economists have done a better job with macro issues than your government bureaucrat has done with much smaller and obvious issues like Ponzi schemes.

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I think this is the first time I've heard somebody praise Greenspan and Bernanke in a long time!

He used to be the "Maestro" but now he's "that guy who created the mess and ran away just in time."

FugitiveVisions said:

By work you mean massive bailouts of state banks for NPLs, then I agree.

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This is wrong. Please explain where you came up with "massive". Even if the government gets involved, it won't give more than 10% as bailout money. But the US bailouts are something along the lines of 80%. There's almost no value in these corporations.

FugitiveVisions said:

Yeah ok sure. Chongqing's SOE alone need probably a 20 billion dollar bailout. A lot of these SOEs are state owned developers that engaged in real estate, and as real estate tumbled, they need bailouts. Each one of these cities need bailouts. It just happens so that Chongqing is under the jurisdiction of a powerful princeling, so they'll get the money. But when cities and provinces come knocking on the door for loans to fund "projects", you'll find that a lot of these projects are bailout money that will be essential to maintain social stability.

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LOL. 20 billion dollar bailout. This is obviously wrong. Please provide a source.

And a lot of state-owned real estate developers have been failing, they haven't been bailed out. I'm not sure where you're getting all this information from.

Roger604 said:

This is wrong. It talks about global growth being not dependent on one country. It does not address diversification of industries.

In any case, China has over-relied on export industries -- but this would not have been a problem if the US had started letting Chinese investments flow into its markets back in 2005.

Unocal? 3Com?

It also would not have been a problem if the US had not been putting up protectionist measures to prevent China from buying industrial technology!

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Well they have done a pretty good job diversifying exports to Europe as well. When something like this happens, where households in the West take this big of a huge hit in equity, it's awfully tough to find other places on the map to pick up the slack in demand.

With regards to industrial diversification, I agree that economic protectionism has impeded development.

These are two separate issues. The US over-investment is a gross misallocation of capital, that's mostly a US domestic problem. China had to park its money in something considered relatively safe (like Fannie Mae bonds) because the US wouldn't open its markets and prevents China from buying things it actually wants and needs.

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I don't know what exactly is the point of this post. I agree that the US should open up more, but the underlying issue is not as simple as that. We are talking about governments acting potentially as investors, so ownership of private enterprises becomes a foreign policy issue as well.

The influx of capital into the US that dwarfs its actual productive functions is the problem. If you want to talk about the problem, that's the problem.

Now that the administration is changing, this policy might change too. If things go well, China might be able to buy companies or technologies, and meanwhile save the US economy.

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Obama welcoming Chinese ownership of US industries? I must admit, that's the first I've heard of that. In any case, at the current rate, US industries would not have to rely on Chinese equity because the Chinese have poured all its capital into the Treasury, and the Treasury is going just fine financing corporate debt.

Do you have any proof that regulators are totally ineffective other than repeated rehashing dogmatic statements like the above?

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I don't want to say they are totally ineffective. They have cracked some cases and prevent some stuff from happening. However, the original contention wasn't whether regulators are totally ineffective. So let me ask you: what evidence do you have that more regulators, you know, the same ones that had no clue about the liquidity risks that credit default swaps posed to AIG, could have prevented this crisis? On what basis are you to say that the same regulators who have engineered a titanic collapse of the books of major banks by forcing them to market down the value of their illiquid assets based on market price would have saved the banks? Totally ridiculous.

To say that deregulation is the problem also shows a lack of understanding of the politics of the US, where you had legislators on both sides of the isle pushing for looser lending standards. It wasn't just the deregulators who were drinking the kool-aid.

If you are knowledgeable about China, you would realize that the vast majority of SOEs have been reformed. The vast majority of industries sectors are not participated in by the government.

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Before I allow to continue to question my knowledge about China, let me what kind of experience have you had in China. I'm just curious since you obviously know a lot.

Roger604 said:

I think this is the first time I've heard somebody praise Greenspan and Bernanke in a long time!

He used to be the "Maestro" but now he's "that guy who created the mess and ran away just in time."

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I'm not praising them. I just happen to think that they are not complete idiots who are going to ramp up hyperinflation in this country. You are talking about the same Greenspan who invented the policy of soft-landing here, remember?

And a lot of state-owned real estate developers have been failing, they haven't been bailed out. I'm not sure where you're getting all this information from.

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Who do you suppose is going to deliver the paychecks to laid off workers when the owners of their factories flee and disappear? Social insurance by the way of government bailouts is going to be a big problem, especially when there is massive over-capacity and when demand has retreated as fast as it has. Remember, this is not just a problem with external demand. The weakness in domestic demand and the cascading effect that slowdown in manufacturing is going to have on the service industry can not be understated. If you happened to have lived in Beijing, you would have seen these teams of countryside migrant girls hired by newly constructed apartment buildings on the outskirts that were only there to push elevator buttons and do some light sweeping. Imagine the impact that the slowdown in real estate had on those people.

crobato said:

I envy you, you got a nice vacation planned. I hope you enjoy your trip. Don't forget to checkout the Bird's Nest.

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Oh man I can't wait. The lamb kabobs and beer is a potent combination on the streets of Beijing. I don't think they'll have that in winter time, but it were sure a fun way to spend nights during the summer. I'll keep this thread updated on conditions there.

China to support 9 crisis-stricken industries
2008-12-19 20:18:55 Print

Special Report: Global Financial Crisis

BEIJING, Dec. 19 (Xinhua) -- China must take more powerful and effective policies to support industrial development, the country's vice premier Zhang Dejiang said at a work meeting concerning national industry and information technology on Friday.

"A stable and rapid industrial development is essential to the country's overall economic advance," Zhang said.

China plans to initiate a policy package in the coming new year to revive nine industries heavily hurt by the unfolding global financial crisis, the Ministry of Industry and Information Technology (MIIT) vowed at the meeting.

The nine industries to receive national support include light industry, textile, steel, non-ferrous metal, automobile, petrochemical, ship-making, electronics and telecommunications.

"China will resort to tariff and trade policies to facilitate export of labor-intensive and core technology-supported industries, and encourage domestic companies to conduct overseas merger and acquisition," MIIT minister Li Yizhong said.

Li stressed the importance of adhering to the country's opening up policy amid international market contraction and emerging trade protectionism.

While supporting domestic companies to tap the international market, Vice Premier Zhang also urged to improve the country's investment environment.

Other major favorable policies to prop up the nine industries include carrying out sound value-added tax reform, setting up special funds to support technological innovation, expanding bank loans especially to small and medium-sized enterprises and increasing government procurement and reserves of major raw materials.

Policies to boost auto development and consumption are also being mapped out, according to Li.

Li urged local industry and information technology officials to work out specific regulations and ensure the effectiveness of these policies.

Chinese Premier promises support to Hong Kong, Macao amid global financial crisis
2008-12-19 13:06:51 Print

Special Report: Global Financial Crisis

Chinese Premier Wen Jiabao (R) meets with Donald Tsang, Chief Executive of Hong Kong Special Administrative Region (HKSAR), in Beijing Dec. 19, 2008. Donald Tsang was in Beijing for a briefing on regional work to the central government. (Xinhua/Liu Weibing)
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BEIJING, Dec. 19 (Xinhua) -- Chinese Premier Wen Jiabao announced Friday the mainland's plan to help Hong Kong and Macao tackle economic challenges amid the global financial crisis.

"The motherland will always provide a reliable backing for HongKong", Wen said during a meeting with Donald Tsang, Chief Executive of the Hong Kong Special Administrative Region(HKSAR).

The move is reminiscent of China's pledge to back Hong Kong, a leading world financial center, during the Asian Financial Crisis in 1997.

According to Wen, the central government would help Hong Kong overcome challenges brought by the world financial crisis by promoting financial cooperation between the mainland and HKSAR.

The central government would help Hong Kong upgrade infrastructure construction and grant favorable policies for small and medium-sized HK enterprises, he said.

"The mainland would also ensure stable food, water, electricity and natural gas supply for the region and further open of its service industry market to HKSAR."

Measures will also be taken to encourage more mainland tourists to visit Hong Kong, said the Premier.

Wen said "the central government would firmly support the work of HKSAR and with joint efforts, Hong Kong people could turn present difficulties into opportunities... and achieve sustainable development."

China publishes details of real-estate stimulus package
2008-12-22 00:38:26 Print

Special Report: Global Financial Crisis　
·The State Council Sunday unveiled more details of a real-estate stimulus package.
·The document emphasized low-income housing and home ownership.
·It repeated all other major points adopted by last Wednesday's executive meeting.

BEIJING, Dec. 21 (Xinhua) -- The General Office of the State Council, or Cabinet, on Sunday unveiled more details of a real-estate stimulus package adopted at an executive meeting of the Council last Wednesday.

The document, called A Number of Opinions Concerning Boosting Healthy Development of the Property Market, was posted on the central government's official website. It emphasized low-income housing and home ownership.

The five-point opinions included building more houses for low-income urban families, encouraging home buying, supporting property developers to deal with changing market, enhancing role of local governments in stabilizing the real estate market, and improving surveillance on the property market.

The document repeated last Wednesday's decision that the government will solve the housing problem for 7.47 million low-income urban families and 2.4 million households in shantytowns in the next three years. Rural homes in dangerous condition will also be renovated.

It detailed the goal for 2009, during which the government will help overcome housing difficulties for 2.6 million low-income urban families and 800,000 households in shantytowns.

It also repeated all other major points adopted by last Wednesday's executive meeting of the Council.

According to the package, someone who has owned his home for two or more years can now sell it without having to pay business taxes. Previously, owners had to wait at least five years before selling houses tax-free.

If they sell their houses within two years, owners only have to pay taxes levied on the profit, not the sales price.

To boost home buying, the government also allows people with "smaller-than-average" apartments to buy a second apartment under favorable loan terms. Size limits are different in every city.

This is the latest in government efforts to prop up the real estate sector. Previous measures include pledges to build more low-income housing and cuts of mortgage rates and down payments for first home buyers.

Property prices in 70 major Chinese cities rose 0.2 percent in November from a year earlier. The growth rate was the lowest since the government started to publish the figure in July, 2005.

A total of 2.7 trillion yuan (387.5 billion U.S. dollars) was pumped into real estate development nationwide in the first 11 months of the year, up 22.7 percent year-on-year. However, the growth rate was 1.9 percentage points lower than the January-October level.

Between January and November, total sales were 490 million sq m, down 18.3 percent year-on-year. Residential sales fell 18.8 percent.

The rest of the article seems boring but the title itself is important for the sake of its own to heed.



Chinese leader: Use crisis as driving force for economic restructuring