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China Has a $1.2 Trillion Ponzi Finance Problem

98 points by lelf 11y ago

deleted 11y ago
[deleted]
- fennecfoxen 11y ago
  The nature of capitalism is to invest a sum up front (the capital) in something capable of producing more output later (usually when combined with another resource you spend money on, including Labor). Then, because you bought the capital and you bought the inputs, you're entitled to the outputs, or the money you get from selling the outputs. Capitalism is quite compatible with a zero-credit economy (though that deprives it of a force which both accelerates and democratizes capital formation).
- fredkbloggs 11y ago
  No, it's the nature of an economic system in which the extension and maintenance of credit are considered both tools of social policy and an end in themselves. Most modern economies have this flaw, some to a greater degree than others. The stronger the linkage between the banking system and the government, the worse it is. Japan had it real bad, and China does too. The US and UK are very bad but not quite as bad as those two. You can go figure out for yourself how big a problem this is in your part of the world.
samclearman 11y ago
This article is utterly useless without comparisons to the equivalent numbers in other major economies.
- siscia 11y ago
  The point is that China is a major force in the global economies and, as the video explains, an healthy economy should not have such issues.
- jack9 11y ago
  Wrong. It's a spiral (after more than 3 consecutive years!) US, Mexico, Brazil, Greece have all gone through this and melted down. The US called it "the roaring 20's" which proceeded a great depression. Now, companies in the US rarely get to borrow to pay interest as they are generally liquidated by creditors or the profit generation is subsected from the death spiral. In this case, we see Chinese state sponsored industries affected. Comparative numbers are irrelevant.
- Gibbon1 11y ago
  First thing I did was divide 1.2 trillion by 1.357 billion (population of china). And then I lost interest in what the author had to say. The reality is the financial press has been predicting that China's financial policies will come a cropper _any day now_ for the last half dozen years.
Mikeb85 11y ago
So borrowing is up since rates are at a 5-year low. Colour me shocked...
- seivan 11y ago
  I might be wrong here but I figure the rates are controlled by their Central Bank. Meaning the rates are low, so borrowing can be high. Like Sweden. On a side note aren't all software engineering startup-jobs basically in Ponzi Finance problem? We should be worried by this. I always got the feeling engineering jobs are primarily driven by a bunch of startups running on credit, thus very very very volatile and unstable.
  - greglindahl 11y ago
    It's true that there are a lot of apps making money by showing ads for other apps. The actual money coming in is from VCs and "whales" making in-app purchases in games... both of which could dry up.
  - icebraining 11y ago
    Not all startup jobs; there are plenty of (mostly) boostrapped tech startups outside of SV. We just don't make the news :)
    - seivan 11y ago
      If a tech startup does not make a sound.... ;-)
dibbsonline 11y ago
In the video he says "look at the facts" then proceeds to add context to the first half of the data, "these are rough numbers I didn't have the exact numbers", but the graphs are attributed to Huachuang Securites and he is from Bloomberg.
danmaz74 11y ago
TLDR: return on investment in China has gone down a lot lately, and (according to the article) many Chinese companies which borrowed heavily to invest aren't now able to repay the interests with their cash flow, and thus need to borrow even more to do that. This kind of situation was defined "Ponzi borrowing" by economist Hyman Minski [1], hence the sensationalist title. [1] https://en.wikipedia.org/wiki/Hyman_Minsky https://en.wikipedia.org/wiki/Hyman_Minsky
- mahranch 11y ago
  Yes, but how is the title sensationalist? I think it's quite accurate. They're borrowing money just to pay off the interest on previously borrowed money. 8 trillion Yuan just in 2015 alone. If anything, the title of the article may be understating the problem. Common sense should dictate that it's not a sustainable practice at any level.
  - lawpoop 11y ago
    I think the problem may be that many people see the word 'Ponzi' and jump to the conclusion that it's a Ponzi _scheme_, rather than a Ponzi borrowing situation. Not that I'm the most financially savvy person, but I've never heard the phrase Ponzi borrowing before. Until I read the comments, I glossed it as 'Ponzi scheme'. It completely makes sense, once I read the comments.
    - deleted 11y ago
      [deleted]
  - xenadu02 11y ago
    Eh, if inflation is high and the business is a real going concern (not completely useless and corrupt malinvestment) then you can get away with this. It's a dangerous game though.
contingencies 11y ago
Serious question: has Bloomberg ever published a positive China article?
- seanmcdirmid 11y ago
  Bloomberg is much more bullish on China than say the New York Times. But even the WSJ, which is really unashamedly pro China to a fault, got blocked eventually. China (edit: the Chinese government) just doesn't like real news.
  - lemevi 11y ago
    The New York Times was hacked by chinese agents and has been repeatedly threatened to not report on the finances of Chinese leaders. So yeah they're not hesitant to write articles that put China in a bad light.
  - rsync 11y ago
    I was just in China and walked into the Shanghai central library ... stairway up to the top floor ... big reading room, nice chairs, newspapers. Read that days[1][2] New York Times in its entirety. No problem. WSJ was there too. South China Seas news, etc. [1] Well, the day before, technically ... [2] Yes, the real NYT, not the herald tribune or whatever...
    - seanmcdirmid 11y ago
      Ah well, in that case maybe my Internet is just having "technical problems" as China Telecom keeps telling me (we don't block facebook! It must be facebook's fault, stop bothering us!)
- ysilver 11y ago
  I highly recommend the Economist for China reporting. As much as I love the New York Times, their China articles are typically negative, alarmist and selective. For a recent example of the Economist's superior China reporting, check out their articles on the summer crash. They called the heat up well in advance, and strongly advocated against over-reacting as things unwound. They really got it right while most other media focused on the gory day-to-day details. Furthermore, the Economist never dropped the thread on how China's long-term economic liberalization is really all that matters at this point given the relatively small size of their stock market.
narrator 11y ago
Except all the borrowing is in Yuan and People's Bank Of China prints all the money they want to, hands it to the banks, tells them what industries to lend to and on what terms and shoots corrupt bankers. The government, and eventually the taxpayer is not on the hook for the bailout like they are in the west. In China, banking is basically partially privatized central planning. This difference in how Chinese banking works vs western banking is a source of endless cognitive dissonance in the western financial press. They can't understand how a capitalist financial system could be set up differently where the government's finances aren't subject to the whim of the private financial industry. As James Carville once quipped : "I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 basball hitter," he said. "But now I would like to come back as the bond market. You can intimidate everybody. [1] http://www.nytimes.com/1994/06/12/weekinreview/ideas-trends-the-bondholders-are-winning-why-america-won-t-boom.html?pagewanted=all http://www.nytimes.com/1994/06/12/weekinreview/ideas-trends-...
- markdown 11y ago
  > In China, banking is basically partially privatized central planning. Isn't the US Federal Reserve an organisation made up of and governed by the private sector (banks).
  - Gibbon1 11y ago
    Difference is in China the central bank is wholly under the thumb of the communist party. Also: When you read the word 'Ponzi' in the context of macro-economics, as opposed to criminal prosecution, you should stop reading right then an there because the author is spouting drivel.
    - markdown 11y ago
      > Difference is in China the central bank is wholly under the thumb of the communist party. Is that supposed to be worse? Is it better if it were under the thumb of a handful of powerful private banking corporations whose primary goal is the pursuit of profit? At least within the communist party you might find an idealist or two who cares about the role of the banking system in raising the standard of living of the poor.
geggam 11y ago
... but the US doesnt ?
damian2000 11y ago
The household savings rate in China is one of the highest in the world however ... http://www.bloomberg.com/news/articles/2015-05-01/chinese-consumers-cling-to-saving-suppressing-spending http://www.bloomberg.com/news/articles/2015-05-01/chinese-co...

98 points by lelf 11y ago

deleted 11y ago

[deleted]

fennecfoxen 11y ago
The nature of capitalism is to invest a sum up front (the capital) in something capable of producing more output later (usually when combined with another resource you spend money on, including Labor). Then, because you bought the capital and you bought the inputs, you're entitled to the outputs, or the money you get from selling the outputs. Capitalism is quite compatible with a zero-credit economy (though that deprives it of a force which both accelerates and democratizes capital formation).
fredkbloggs 11y ago
No, it's the nature of an economic system in which the extension and maintenance of credit are considered both tools of social policy and an end in themselves. Most modern economies have this flaw, some to a greater degree than others. The stronger the linkage between the banking system and the government, the worse it is. Japan had it real bad, and China does too. The US and UK are very bad but not quite as bad as those two. You can go figure out for yourself how big a problem this is in your part of the world.

samclearman 11y ago

This article is utterly useless without comparisons to the equivalent numbers in other major economies.

siscia 11y ago
The point is that China is a major force in the global economies and, as the video explains, an healthy economy should not have such issues.
jack9 11y ago
Wrong. It's a spiral (after more than 3 consecutive years!) US, Mexico, Brazil, Greece have all gone through this and melted down. The US called it "the roaring 20's" which proceeded a great depression. Now, companies in the US rarely get to borrow to pay interest as they are generally liquidated by creditors or the profit generation is subsected from the death spiral. In this case, we see Chinese state sponsored industries affected. Comparative numbers are irrelevant.
Gibbon1 11y ago
First thing I did was divide 1.2 trillion by 1.357 billion (population of china). And then I lost interest in what the author had to say. The reality is the financial press has been predicting that China's financial policies will come a cropper _any day now_ for the last half dozen years.

Mikeb85 11y ago

So borrowing is up since rates are at a 5-year low. Colour me shocked...

seivan 11y ago
I might be wrong here but I figure the rates are controlled by their Central Bank. Meaning the rates are low, so borrowing can be high. Like Sweden. On a side note aren't all software engineering startup-jobs basically in Ponzi Finance problem? We should be worried by this. I always got the feeling engineering jobs are primarily driven by a bunch of startups running on credit, thus very very very volatile and unstable.
- greglindahl 11y ago
  It's true that there are a lot of apps making money by showing ads for other apps. The actual money coming in is from VCs and "whales" making in-app purchases in games... both of which could dry up.
- icebraining 11y ago
  Not all startup jobs; there are plenty of (mostly) boostrapped tech startups outside of SV. We just don't make the news :)
  - seivan 11y ago
    If a tech startup does not make a sound.... ;-)

dibbsonline 11y ago

In the video he says "look at the facts" then proceeds to add context to the first half of the data, "these are rough numbers I didn't have the exact numbers", but the graphs are attributed to Huachuang Securites and he is from Bloomberg.

danmaz74 11y ago

TLDR: return on investment in China has gone down a lot lately, and (according to the article) many Chinese companies which borrowed heavily to invest aren't now able to repay the interests with their cash flow, and thus need to borrow even more to do that. This kind of situation was defined "Ponzi borrowing" by economist Hyman Minski [1], hence the sensationalist title. [1] https://en.wikipedia.org/wiki/Hyman_Minsky https://en.wikipedia.org/wiki/Hyman_Minsky

mahranch 11y ago
Yes, but how is the title sensationalist? I think it's quite accurate. They're borrowing money just to pay off the interest on previously borrowed money. 8 trillion Yuan just in 2015 alone. If anything, the title of the article may be understating the problem. Common sense should dictate that it's not a sustainable practice at any level.
- lawpoop 11y ago
  I think the problem may be that many people see the word 'Ponzi' and jump to the conclusion that it's a Ponzi _scheme_, rather than a Ponzi borrowing situation. Not that I'm the most financially savvy person, but I've never heard the phrase Ponzi borrowing before. Until I read the comments, I glossed it as 'Ponzi scheme'. It completely makes sense, once I read the comments.
  - deleted 11y ago
    [deleted]
- xenadu02 11y ago
  Eh, if inflation is high and the business is a real going concern (not completely useless and corrupt malinvestment) then you can get away with this. It's a dangerous game though.

contingencies 11y ago

Serious question: has Bloomberg ever published a positive China article?

seanmcdirmid 11y ago
Bloomberg is much more bullish on China than say the New York Times. But even the WSJ, which is really unashamedly pro China to a fault, got blocked eventually. China (edit: the Chinese government) just doesn't like real news.
- lemevi 11y ago
  The New York Times was hacked by chinese agents and has been repeatedly threatened to not report on the finances of Chinese leaders. So yeah they're not hesitant to write articles that put China in a bad light.
- rsync 11y ago
  I was just in China and walked into the Shanghai central library ... stairway up to the top floor ... big reading room, nice chairs, newspapers. Read that days[1][2] New York Times in its entirety. No problem. WSJ was there too. South China Seas news, etc. [1] Well, the day before, technically ... [2] Yes, the real NYT, not the herald tribune or whatever...
  - seanmcdirmid 11y ago
    Ah well, in that case maybe my Internet is just having "technical problems" as China Telecom keeps telling me (we don't block facebook! It must be facebook's fault, stop bothering us!)
ysilver 11y ago
I highly recommend the Economist for China reporting. As much as I love the New York Times, their China articles are typically negative, alarmist and selective. For a recent example of the Economist's superior China reporting, check out their articles on the summer crash. They called the heat up well in advance, and strongly advocated against over-reacting as things unwound. They really got it right while most other media focused on the gory day-to-day details. Furthermore, the Economist never dropped the thread on how China's long-term economic liberalization is really all that matters at this point given the relatively small size of their stock market.

narrator 11y ago

Except all the borrowing is in Yuan and People's Bank Of China prints all the money they want to, hands it to the banks, tells them what industries to lend to and on what terms and shoots corrupt bankers. The government, and eventually the taxpayer is not on the hook for the bailout like they are in the west. In China, banking is basically partially privatized central planning. This difference in how Chinese banking works vs western banking is a source of endless cognitive dissonance in the western financial press. They can't understand how a capitalist financial system could be set up differently where the government's finances aren't subject to the whim of the private financial industry. As James Carville once quipped : "I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 basball hitter," he said. "But now I would like to come back as the bond market. You can intimidate everybody. [1] http://www.nytimes.com/1994/06/12/weekinreview/ideas-trends-the-bondholders-are-winning-why-america-won-t-boom.html?pagewanted=all http://www.nytimes.com/1994/06/12/weekinreview/ideas-trends-...

markdown 11y ago
> In China, banking is basically partially privatized central planning. Isn't the US Federal Reserve an organisation made up of and governed by the private sector (banks).
- Gibbon1 11y ago
  Difference is in China the central bank is wholly under the thumb of the communist party. Also: When you read the word 'Ponzi' in the context of macro-economics, as opposed to criminal prosecution, you should stop reading right then an there because the author is spouting drivel.
  - markdown 11y ago
    > Difference is in China the central bank is wholly under the thumb of the communist party. Is that supposed to be worse? Is it better if it were under the thumb of a handful of powerful private banking corporations whose primary goal is the pursuit of profit? At least within the communist party you might find an idealist or two who cares about the role of the banking system in raising the standard of living of the poor.

geggam 11y ago

... but the US doesnt ?

damian2000 11y ago

The household savings rate in China is one of the highest in the world however ... http://www.bloomberg.com/news/articles/2015-05-01/chinese-consumers-cling-to-saving-suppressing-spending http://www.bloomberg.com/news/articles/2015-05-01/chinese-co...