6 ms·

It's China's turn to wrestle with a pile of bad debt

27 points by chailatte 15y ago

iqster 15y ago
I don't get it. This article was confusing and badly written. The Chinese govt gave the money to local authorities to spend. Next, the article talks about bad debts showing up in audits. Was the money a straight out transfer? If so, this doesn't affect their debt position. Was the money supposed to be used for construction projects and not just used to pay down old debts? If so, this doesn't affect their debt position either. The article also talked about corruption and a "rigged system to guarantee bank profits". No details given about either issues.
- RickHull 15y ago
  > The Chinese govt gave the money to local authorities to spend. I believe that is a overly-simplistic, "net" explanation. I think it goes more like: 1. China's central bank grants credit (i.e. cheap loans) to big "national" banks 2. Big national banks grant credit to regional/provincial/municipal governments 3. Local governments spend on infrastructure (build it and they will come) 4. No one comes 5. ... 6. Profit? So the big banks have bad loans on their books, but the national government / central bank will surely bail them out.
  - aquark 15y ago
    So is the question how do these loans appear on China's central bank's balance sheet? I am confused by reading this article: if part of the issue in the US is that China holds vast amounts of US debt, and now China is also highly leveraged, then who is left holding their debt?! What would be to problem with the Chinese central bank just writing off all the debt? I can see that the spending pattern may be unsustainable, but if you have been lending the money to yourself there is no-one left to be upset when you default.
    - junkbit 15y ago
      I think most of the world's debt is privately held. For instance the UK is the third largest owner of US debt after China and Japan, but we ourselves have a massive public debt.
ChuckMcM 15y ago
I expect effects on China's economy will be the biggest story of the 10's or 20's. So many things were lined up to make the system they had work, educated but under employed labor, a voracious appetite in the world for their cheaply manufactured goods, and a relatively docile population. Every single one of these 'advantages' seem to be deteriorating. So the new learning we'll get this time around is if the Chinese version of Communism can keep the economy from driving off a cliff or not. If not, will it kill communism in China?, or the world's economy? or both? And how will the folks in power respond? Very interesting times indeed.
- aneth 15y ago
  On the contrary, I would say their economy is maturing with domestic consumption becoming a dominant portion, their production methods are becoming more efficient as labor costs increase, their production scale is second to none, their educated and motivated population is poised to bring a new era of innovation and entrepreneurship to China. And for the record, "communism in China" is already dead. In response to the article, China's balance sheet was worse in 2004 before the triumphant expansion of the last 7 years. I had doubts they could outgrow their debts then. I have doubts today, but fewer. China is controlled by the smartest, most effective technocrats in the world. Don't underestimate them.
  - dimmuborgir 15y ago
    "I would say their economy is maturing with domestic consumption becoming a dominant portion." You've got it completely wrong. Consumption in China has been rapidly decreasing with respect to GDP. Their consumption was some 55% of GDP in the 90's. Then it came down to 46% around 2000 and now it stands at 34%. [[1]] All the efforts that China made to increase consumption didn't materialise. The fast growing Chinese GDP is only giving an illusion that Chinese people are massively consuming. But that's not true. On the other hand, the percentage of fixed-investment (roads, bridges etc.) to GDP has been steadily increasing in China. If Jim Chanos is to be believed, the fixed-investment now stands at a whopping 70% of GDP. [[2]] This seems to be the actual lifeline of Chinese economy. So in order to maintain the GDP growth, China has been recklessly building roads, bridges etc. fuelled by local government debts. [[3]] This has been creating massive bad-loans, over-investments and bubbles. China is building not 'because of' its economy. It is building 'for the sake of' its economy. This won't see a happy ending. [[1]] http://www.bloomberg.com/news/2011-06-16/consumers-fade-in-china-economy-racked-by-inflation-with-peak-days-gone.html http://www.bloomberg.com/news/2011-06-16/consumers-fade-in-c... [[2]] http://www.moneynews.com/StreetTalk/jim-Chanos-Soft-Landing/2011/02/02/id/384774 http://www.moneynews.com/StreetTalk/jim-Chanos-Soft-Landing/... [[3]] http://www.moneycontrol.com/news/features/why-china39s-local-government-debt-is-so-scary_563013.html http://www.moneycontrol.com/news/features/why-china39s-local...
wisty 15y ago
Despite the amount of hot funding going around, most Chinese are capital constrained. Small business can't get credit because they don't have the "connections", their books are cooked (no revenue = no tax, but sadly no credit; and businesses that pay tax are uncompetitive), and banks would rather loan to the government or state-owned-entities. Thus, anyone who has the seed money to start a business can do very well, so the "businessmen" (even small ones) make a lot more than the workers.
daemin 15y ago
This article reminds me of a Cringley article that was written not too long ago, where he speculated that this was going to be India's century rather than China's, and China would have a decade instead. - http://www.cringely.com/2010/10/the-chinese-decade/ http://www.cringely.com/2010/10/the-chinese-decade/ It also reminds me of seeing a report on infrastructure projects in Japan, with bridges going to nowhere and other crazy construction projects, all designed to pump up the economy as well as the pockets of construction companies owned by cronies. It will be interesting to see how and where it goes, and I hope that Australia can diversify its economy - from mining and sending ore to China - to something else before China experiences any hiccups (or worse).

27 points by chailatte 15y ago

I don't get it. This article was confusing and badly written. The Chinese govt gave the money to local authorities to spend. Next, the article talks about bad debts showing up in audits. Was the money a straight out transfer? If so, this doesn't affect their debt position. Was the money supposed to be used for construction projects and not just used to pay down old debts? If so, this doesn't affect their debt position either. The article also talked about corruption and a "rigged system to guarantee bank profits". No details given about either issues.

RickHull 15y ago
> The Chinese govt gave the money to local authorities to spend. I believe that is a overly-simplistic, "net" explanation. I think it goes more like: 1. China's central bank grants credit (i.e. cheap loans) to big "national" banks 2. Big national banks grant credit to regional/provincial/municipal governments 3. Local governments spend on infrastructure (build it and they will come) 4. No one comes 5. ... 6. Profit? So the big banks have bad loans on their books, but the national government / central bank will surely bail them out.
- aquark 15y ago
  So is the question how do these loans appear on China's central bank's balance sheet? I am confused by reading this article: if part of the issue in the US is that China holds vast amounts of US debt, and now China is also highly leveraged, then who is left holding their debt?! What would be to problem with the Chinese central bank just writing off all the debt? I can see that the spending pattern may be unsustainable, but if you have been lending the money to yourself there is no-one left to be upset when you default.
  - junkbit 15y ago
    I think most of the world's debt is privately held. For instance the UK is the third largest owner of US debt after China and Japan, but we ourselves have a massive public debt.

ChuckMcM 15y ago

I expect effects on China's economy will be the biggest story of the 10's or 20's. So many things were lined up to make the system they had work, educated but under employed labor, a voracious appetite in the world for their cheaply manufactured goods, and a relatively docile population. Every single one of these 'advantages' seem to be deteriorating. So the new learning we'll get this time around is if the Chinese version of Communism can keep the economy from driving off a cliff or not. If not, will it kill communism in China?, or the world's economy? or both? And how will the folks in power respond? Very interesting times indeed.

aneth 15y ago
On the contrary, I would say their economy is maturing with domestic consumption becoming a dominant portion, their production methods are becoming more efficient as labor costs increase, their production scale is second to none, their educated and motivated population is poised to bring a new era of innovation and entrepreneurship to China. And for the record, "communism in China" is already dead. In response to the article, China's balance sheet was worse in 2004 before the triumphant expansion of the last 7 years. I had doubts they could outgrow their debts then. I have doubts today, but fewer. China is controlled by the smartest, most effective technocrats in the world. Don't underestimate them.
- dimmuborgir 15y ago
  "I would say their economy is maturing with domestic consumption becoming a dominant portion." You've got it completely wrong. Consumption in China has been rapidly decreasing with respect to GDP. Their consumption was some 55% of GDP in the 90's. Then it came down to 46% around 2000 and now it stands at 34%. [[1]] All the efforts that China made to increase consumption didn't materialise. The fast growing Chinese GDP is only giving an illusion that Chinese people are massively consuming. But that's not true. On the other hand, the percentage of fixed-investment (roads, bridges etc.) to GDP has been steadily increasing in China. If Jim Chanos is to be believed, the fixed-investment now stands at a whopping 70% of GDP. [[2]] This seems to be the actual lifeline of Chinese economy. So in order to maintain the GDP growth, China has been recklessly building roads, bridges etc. fuelled by local government debts. [[3]] This has been creating massive bad-loans, over-investments and bubbles. China is building not 'because of' its economy. It is building 'for the sake of' its economy. This won't see a happy ending. [[1]] http://www.bloomberg.com/news/2011-06-16/consumers-fade-in-china-economy-racked-by-inflation-with-peak-days-gone.html http://www.bloomberg.com/news/2011-06-16/consumers-fade-in-c... [[2]] http://www.moneynews.com/StreetTalk/jim-Chanos-Soft-Landing/2011/02/02/id/384774 http://www.moneynews.com/StreetTalk/jim-Chanos-Soft-Landing/... [[3]] http://www.moneycontrol.com/news/features/why-china39s-local-government-debt-is-so-scary_563013.html http://www.moneycontrol.com/news/features/why-china39s-local...

wisty 15y ago

Despite the amount of hot funding going around, most Chinese are capital constrained. Small business can't get credit because they don't have the "connections", their books are cooked (no revenue = no tax, but sadly no credit; and businesses that pay tax are uncompetitive), and banks would rather loan to the government or state-owned-entities. Thus, anyone who has the seed money to start a business can do very well, so the "businessmen" (even small ones) make a lot more than the workers.

daemin 15y ago

This article reminds me of a Cringley article that was written not too long ago, where he speculated that this was going to be India's century rather than China's, and China would have a decade instead. - http://www.cringely.com/2010/10/the-chinese-decade/ http://www.cringely.com/2010/10/the-chinese-decade/ It also reminds me of seeing a report on infrastructure projects in Japan, with bridges going to nowhere and other crazy construction projects, all designed to pump up the economy as well as the pockets of construction companies owned by cronies. It will be interesting to see how and where it goes, and I hope that Australia can diversify its economy - from mining and sending ore to China - to something else before China experiences any hiccups (or worse).