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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 ab

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.

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.