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I've tried reading this piece a couple times, but despite the bullet points and numbered lists, I can't make any sense out of it. I presume this is because I l

by nkurz 8y ago

I've tried reading this piece a couple times, but despite the bullet points and numbered lists, I can't make any sense out of it. I presume this is because I lack essential background knowledge. Can someone please help explain the context? When he says "China's debt problems", what exactly is he referring to? When he says "there are also only four ways that Beijing can respond", what are they responding to and what is the goal of their response?

cinquemb 8y ago
I'm assuming the debt problems are the corporate defaults on bond payments [0] for 2018 until July, were close to equal to the entire year of 2016. There's also consumer debt stuff that's blowing up as well (the whole p2p loan companies going bankrupt was linked on HN recently). As for the what are they responding to is the engine for economic growth is stalling out from knock on effects behind whats going on above, and I can only speculate that the "goal" of any kind of response will be to maintain some kind of economic "stability". [0] https://www.bloomberg.com/news/articles/2018-07-02/china-heads-for-record-defaults-and-downgrades-tip-further-pain https://www.bloomberg.com/news/articles/2018-07-02/china-hea...
- nkurz 8y ago
  I appreciate the answer. But I still don't see the connection between the proposed responses (the first four bullet points) and the stalling of economic growth. For example, how is "Reduce savings by letting unemployment rise" a response to slower economic growth, and how does this maintain economic stability?
  - cinquemb 8y ago
    For that particular example I think economists usually see savings as bad because it means that there is unproductive capital (and eventually leads to deflation?) and therefore reduced savings means that capital that would typically be in savings would now be productive (an asset on someones balance sheet that can now be tallied for GDP instead of liability on a banks). Well I put "stability" in quotes because in reality, every economic actor will have their own perspective of what the goal is and how effective any solution will be in achieving such goal. Some people thought zero lower bound and real negative interest rates solved things, and others thought it was just kicking the can down the road… My issue with the first four bullet points is that the government now can point to instances where they say that they have been doing all of those things (because all these bullet points address things at such a high level), and all this is telling them to do is just do more of the same and expect different results.
  - slv77 8y ago
    Letting unemployment rise is the least desired outcome but is what will happen by default in response to a declining trade surplus. Wide spread unemployment doesn’t contribute to economic or societal stability and so China will attempt to avoid that. The second option is wealth transfer through debt default; or government forced wealth transfer (taxes or inflation). China’s debt could be brought down from 300% of GDP to 100% of GDP overnight if creditors simply forgave 2/3rds of debt. That could happen though debt default (debtor bankruptcy) or taxing creditors and giving it to debtors. Having the bulk of your life savings disappear tends to make people angry and so China will attempt to avoid that. The last option is to kick the can down the road and increase domestic debt which is what they have been doing for the last 10 years.
ryandamm 8y ago
Pettis writes extensively about China and its internal debt problem. The best primer, though lengthy, is to slog through his posts dating back to the mid-2000s. Briefly, though: China has had artificially cheap credit in its corporate sector due to explicit government policies restricting the growth of household spending. This cheap credit caused a lot of malinvestment ("bridges to nowhere"), and there hasn't been an accounting reckoning yet. To continue to grow, China needs its household sector to grow, both in consumption and share of the economy. This is a classic shift from middle-income to developed economy. Because right now continued growth from the corporate (generally export-driven) sector has topped out, and getting more growth out of it is costly in terms of debt. I think those are the broad strokes. To summarize: the Beijing is responding to the explosive growth of internal debt in the economy, and the goal is to continue growing. That growth must come from the household sector, but must also include dealing with the massive debt overhang. (I suppose you could also say that Beijing's goal is to stay in power, which requires economic growth to keep the populace happy.)
slv77 8y ago
>When he says "China's debt problems", what exactly is he referring to? China’s response to the financial crisis was to loosen credit and “encourage” banks to lend. The result was that debt started rising faster than GPD and total debt now stands at 300% of GDP. Since GDP is the income needed to pay off debt there is a point where it is no longer sustainable. If there were no limit it would be possible to eliminate poverty by simply giving poor people loans. > When he says "there are also only four ways that Beijing can respond", what are they responding to and what is the goal of their response? With a looming trade war it is unlikely that China will be able to sustain the trade deficits with the US like it has in the past. It is also unlikely that China can find any other viable markets that could absorb exports that are currently destined for the US. China will want to mitigate the domestic impact of the outcome in a way that preserves domestic stability.
bitxbit 8y ago
It's not you, it's just that he's answering the question by using a macro framework. I don't necessarily agree with his approach because China has unprecedented scale in modern economics.

by nkurz 8y ago

cinquemb 8y ago

I'm assuming the debt problems are the corporate defaults on bond payments [0] for 2018 until July, were close to equal to the entire year of 2016. There's also consumer debt stuff that's blowing up as well (the whole p2p loan companies going bankrupt was linked on HN recently). As for the what are they responding to is the engine for economic growth is stalling out from knock on effects behind whats going on above, and I can only speculate that the "goal" of any kind of response will be to maintain some kind of economic "stability". [0] https://www.bloomberg.com/news/articles/2018-07-02/china-heads-for-record-defaults-and-downgrades-tip-further-pain https://www.bloomberg.com/news/articles/2018-07-02/china-hea...

nkurz 8y ago
I appreciate the answer. But I still don't see the connection between the proposed responses (the first four bullet points) and the stalling of economic growth. For example, how is "Reduce savings by letting unemployment rise" a response to slower economic growth, and how does this maintain economic stability?
- cinquemb 8y ago
  For that particular example I think economists usually see savings as bad because it means that there is unproductive capital (and eventually leads to deflation?) and therefore reduced savings means that capital that would typically be in savings would now be productive (an asset on someones balance sheet that can now be tallied for GDP instead of liability on a banks). Well I put "stability" in quotes because in reality, every economic actor will have their own perspective of what the goal is and how effective any solution will be in achieving such goal. Some people thought zero lower bound and real negative interest rates solved things, and others thought it was just kicking the can down the road… My issue with the first four bullet points is that the government now can point to instances where they say that they have been doing all of those things (because all these bullet points address things at such a high level), and all this is telling them to do is just do more of the same and expect different results.
- slv77 8y ago
  Letting unemployment rise is the least desired outcome but is what will happen by default in response to a declining trade surplus. Wide spread unemployment doesn’t contribute to economic or societal stability and so China will attempt to avoid that. The second option is wealth transfer through debt default; or government forced wealth transfer (taxes or inflation). China’s debt could be brought down from 300% of GDP to 100% of GDP overnight if creditors simply forgave 2/3rds of debt. That could happen though debt default (debtor bankruptcy) or taxing creditors and giving it to debtors. Having the bulk of your life savings disappear tends to make people angry and so China will attempt to avoid that. The last option is to kick the can down the road and increase domestic debt which is what they have been doing for the last 10 years.

ryandamm 8y ago

Pettis writes extensively about China and its internal debt problem. The best primer, though lengthy, is to slog through his posts dating back to the mid-2000s. Briefly, though: China has had artificially cheap credit in its corporate sector due to explicit government policies restricting the growth of household spending. This cheap credit caused a lot of malinvestment ("bridges to nowhere"), and there hasn't been an accounting reckoning yet. To continue to grow, China needs its household sector to grow, both in consumption and share of the economy. This is a classic shift from middle-income to developed economy. Because right now continued growth from the corporate (generally export-driven) sector has topped out, and getting more growth out of it is costly in terms of debt. I think those are the broad strokes. To summarize: the Beijing is responding to the explosive growth of internal debt in the economy, and the goal is to continue growing. That growth must come from the household sector, but must also include dealing with the massive debt overhang. (I suppose you could also say that Beijing's goal is to stay in power, which requires economic growth to keep the populace happy.)

slv77 8y ago

>When he says "China's debt problems", what exactly is he referring to? China’s response to the financial crisis was to loosen credit and “encourage” banks to lend. The result was that debt started rising faster than GPD and total debt now stands at 300% of GDP. Since GDP is the income needed to pay off debt there is a point where it is no longer sustainable. If there were no limit it would be possible to eliminate poverty by simply giving poor people loans. > When he says "there are also only four ways that Beijing can respond", what are they responding to and what is the goal of their response? With a looming trade war it is unlikely that China will be able to sustain the trade deficits with the US like it has in the past. It is also unlikely that China can find any other viable markets that could absorb exports that are currently destined for the US. China will want to mitigate the domestic impact of the outcome in a way that preserves domestic stability.

bitxbit 8y ago

It's not you, it's just that he's answering the question by using a macro framework. I don't necessarily agree with his approach because China has unprecedented scale in modern economics.