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Anyone interested in China's real economic condition should have a look at the ongoing analysis by Michael Pettis: http://carnegieendowment.org/experts/444 htt

by rrggrr 10y ago

Anyone interested in China's real economic condition should have a look at the ongoing analysis by Michael Pettis: http://carnegieendowment.org/experts/444 http://carnegieendowment.org/experts/444 And Christopher Balding: http://www.baldingsworld.com/ http://www.baldingsworld.com/ Like other China watchers, they tease economic reality out of ancillary economic data that is difficult to spin (eg. capital outflows, HK-China cross-border trade, energy consumption). The picture is not good. Reforms are needed, to increase low and middle-class domestic consumption; and perhaps a trillion? in non-performing loans must be written off. The rules for foreign trade and investment in China need to be rewritten to allow for unrestricted foreign competition and investment in the broadest of terms. In sum, system inefficiency in China markets must be rooted out quickly to avoid a much worse crisis.

conistonwater 10y ago
One thing I never totally understood is: what happens if those things don't get done? For example, when there is a trillion in non-performing loans, is it an absolute inevitability that they will be written off, or is it "merely" a good idea to write them off (and hence one would think they would write them off)?
- adventured 10y ago
  The Japan zombie scenario is usually cited as the most likely outcome if China refuses to reform its economy and allow bad loans to go bad (allow bankruptcy etc). The zombies are semi-dead entities (whether full corporate, or corporate-state). They tend to perpetually eat capital, frequently need new bailouts, get in the way of progress and growth in the economy, and they tend to survive by politics (by necessity, as they're failed entities) rather than serving customers or providing a good product etc.
- rrggrr 10y ago
  Remember that China must import goods and services to keep any engine running. And, it must defend the RMB internationally. The point being that these debts erode RMB value and confidence and cause continued and massive outflows of foreign reserves l. The engine is running out of fuel.
- walrus1066 10y ago
  It is an inevitability that bad loans get written off. It's just a question when the loss is recognized. You either recognize it up front and write off the loan, or you don't, in which case you keep on losing money into perpetuity, as the person/company misses payments and you have to keep on rolling their debt over or restructuring it, in the hope that you'll be made whole eventually. Over time, the money lost would become equal to the cost of just writing off the loan at the start. But the losses keep carrying on, as you've rolled over their debt, so you'll have to write the loan off eventually, but at greater expense than if you'd have done it earlier.
tw04 10y ago
>The picture is not good. Reforms are needed, to increase low and middle-class domestic consumption; and perhaps a trillion? in non-performing loans must be written off. The rules for foreign trade and investment in China need to be rewritten to allow for unrestricted foreign competition and investment in the broadest of terms. In sum, system inefficiency in China markets must be rooted out quickly to avoid a much worse crisis. All of that is based on the premise that the rest of the worlds financial industry are willing to let them collapse. Is that REALLY an accurate premise to work from? I think the aftermath of the mortgage crisis says otherwise.
- DeonPenny 10y ago
  Most of their debt though is internal. It's chinese government owned banks lending to chinese government owned business. Why would any else care. It won't hurt most other people.
  - shagie 10y ago
    If I recall correctly, its the ongoing aspect. There is debt that a government owned company has in a government owned bank. Writing that debt off (and not continuing to accrue more debt) would mean acknowledging that company _doesn't_ have any profit and would need to close (and fire its workers). As it is, the government owned businesses that have employees who do nothing are a form of welfare - its just they can't call it that - switching the columns from "employment and having revenue of X" to "payments to unemployed workers" could have a significant impact in the morale and productivity of people actually working. Lemon socialism ( https://en.wikipedia.org/wiki/Lemon_socialism https://en.wikipedia.org/wiki/Lemon_socialism ) and zombie company ( https://en.wikipedia.org/wiki/Zombie_company https://en.wikipedia.org/wiki/Zombie_company ). Granted, last year's news: [Massive layoffs coming as China confronts its overbuilt 'zombie economy'](http://www.cbc.ca/news/world/china-zombie-economy-layoffs-petricic-1.3473002 http://www.cbc.ca/news/world/china-zombie-economy-layoffs-pe...) has it at 6,000,000 workers which could cause some significant instability with it that the government is trying to manage (granted, its by ignoring it and continuing to pay the workers despite oversupply). Laying off 6M people will hurt many others and needs to be watched for when it does happen.
baybal2 10y ago
Hohoho, i wrote a paper on the Chinese credit crunch: "the illusion of wealth" during my college years in 2011. I presented it in a class full of kids of rich Chinese expats studying at BCIT back then, and I was laughed off even by an instructor who was a brilliant mind, and had a very anti-red political stance. Two years later, an Econ proff from UBC asked me for a reprint permission. Now, i have randoms buzzing me quite often just to get to know if i had some "behind the scene" knowledge. What surprised me the most was that my former classmate introduced me to her father (a rather rich Chinese businessman), as "the most smart guy in the class" and pretty much tried to drag me into his company. Now I work in China, but not with them.

by rrggrr 10y ago

conistonwater 10y ago

One thing I never totally understood is: what happens if those things don't get done? For example, when there is a trillion in non-performing loans, is it an absolute inevitability that they will be written off, or is it "merely" a good idea to write them off (and hence one would think they would write them off)?

adventured 10y ago
The Japan zombie scenario is usually cited as the most likely outcome if China refuses to reform its economy and allow bad loans to go bad (allow bankruptcy etc). The zombies are semi-dead entities (whether full corporate, or corporate-state). They tend to perpetually eat capital, frequently need new bailouts, get in the way of progress and growth in the economy, and they tend to survive by politics (by necessity, as they're failed entities) rather than serving customers or providing a good product etc.
rrggrr 10y ago
Remember that China must import goods and services to keep any engine running. And, it must defend the RMB internationally. The point being that these debts erode RMB value and confidence and cause continued and massive outflows of foreign reserves l. The engine is running out of fuel.
walrus1066 10y ago
It is an inevitability that bad loans get written off. It's just a question when the loss is recognized. You either recognize it up front and write off the loan, or you don't, in which case you keep on losing money into perpetuity, as the person/company misses payments and you have to keep on rolling their debt over or restructuring it, in the hope that you'll be made whole eventually. Over time, the money lost would become equal to the cost of just writing off the loan at the start. But the losses keep carrying on, as you've rolled over their debt, so you'll have to write the loan off eventually, but at greater expense than if you'd have done it earlier.

tw04 10y ago

>The picture is not good. Reforms are needed, to increase low and middle-class domestic consumption; and perhaps a trillion? in non-performing loans must be written off. The rules for foreign trade and investment in China need to be rewritten to allow for unrestricted foreign competition and investment in the broadest of terms. In sum, system inefficiency in China markets must be rooted out quickly to avoid a much worse crisis. All of that is based on the premise that the rest of the worlds financial industry are willing to let them collapse. Is that REALLY an accurate premise to work from? I think the aftermath of the mortgage crisis says otherwise.

DeonPenny 10y ago
Most of their debt though is internal. It's chinese government owned banks lending to chinese government owned business. Why would any else care. It won't hurt most other people.
- shagie 10y ago
  If I recall correctly, its the ongoing aspect. There is debt that a government owned company has in a government owned bank. Writing that debt off (and not continuing to accrue more debt) would mean acknowledging that company _doesn't_ have any profit and would need to close (and fire its workers). As it is, the government owned businesses that have employees who do nothing are a form of welfare - its just they can't call it that - switching the columns from "employment and having revenue of X" to "payments to unemployed workers" could have a significant impact in the morale and productivity of people actually working. Lemon socialism ( https://en.wikipedia.org/wiki/Lemon_socialism https://en.wikipedia.org/wiki/Lemon_socialism ) and zombie company ( https://en.wikipedia.org/wiki/Zombie_company https://en.wikipedia.org/wiki/Zombie_company ). Granted, last year's news: [Massive layoffs coming as China confronts its overbuilt 'zombie economy'](http://www.cbc.ca/news/world/china-zombie-economy-layoffs-petricic-1.3473002 http://www.cbc.ca/news/world/china-zombie-economy-layoffs-pe...) has it at 6,000,000 workers which could cause some significant instability with it that the government is trying to manage (granted, its by ignoring it and continuing to pay the workers despite oversupply). Laying off 6M people will hurt many others and needs to be watched for when it does happen.

baybal2 10y ago

Hohoho, i wrote a paper on the Chinese credit crunch: "the illusion of wealth" during my college years in 2011. I presented it in a class full of kids of rich Chinese expats studying at BCIT back then, and I was laughed off even by an instructor who was a brilliant mind, and had a very anti-red political stance. Two years later, an Econ proff from UBC asked me for a reprint permission. Now, i have randoms buzzing me quite often just to get to know if i had some "behind the scene" knowledge. What surprised me the most was that my former classmate introduced me to her father (a rather rich Chinese businessman), as "the most smart guy in the class" and pretty much tried to drag me into his company. Now I work in China, but not with them.