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The Economist has been predicting a Japan style financial crisis in China regularly since the early 90s. They have always been wrong. You'd think they'd updat

The Economist has been predicting a Japan style financial crisis in China regularly since the early 90s. They have always been wrong. You'd think they'd update their model of how China works, but they are so bought into the western system of finance that they can never do that. China doesn't have boom bust cycles because: 1. It has little foreign debt. 2. It has a trade surplus. 3. It prints money to bailout any internal bad loans. It does this politically by picking and choosing winners and who gets bailed out, usually with foreigners getting stiffed. 4. Its bank bailouts do not require issuance of new debt or taxpayer austerity. 5. Banks do not all collapse at the same time because they get fresh new printed money to lend. 6. Anyone at the bank who takes advantage of that moral hazard to lend outside of guidelines gets executed. 7. The banks have very detailed guidelines for how they are to lend such that they are more or less partially privatized central planning. 8. The government regularly issues guidelines to preemptively crush bubbles on purpose by restricting lending to overheated sectors instead of across the entire economy via raised interest rates. I am not a big fan of the CCP, but their financial system is impressive. That system, by design, has conquered the boom/bust cycle, but western observers refuse to believe this because they are so throughly bought into the architecture of the western financial system and the many billions of words written on the topic of the operation of that system which is based on very different rules that they cannot imagine it could work any other way.

dasudasu 5y ago
Noticeably absent from this analysis is the humongous shadow banking sector.
lamontcg 5y ago
And China doesn't care about the IMF (which is sort of implicit in half of your points, but thought I'd call it out)
- justicezyx 5y ago
  Have this actually been done since the opening up?
danjac 5y ago
> That system, by design, has conquered the boom/bust cycle Gordon Brown made this claim about the UK back in 1997. 10 years later he became Prime Minister just in time to see this claim put to the test.
dragontamer 5y ago
But the effects of the strategy you detail, have caused China's debt to GDP to skyrocket to 270% (In contrast: we've got politicians getting nervous about USA's 100% debt-to-GDP ratio). Its easy to stave off the bust if you just swipe your credit card to solve the problem and kick the can down the road. But the general assumption is that eventually, your country's debt becomes untrustworthy because of all the shenanigans you pull. -------- I think the world markets have shown a need for "safe" bonds, aka government-secured bonds. So I'm sure foreign markets are still willing to buy Chinese debt up. There's also the issue of looking at your competitors (USA, Japan, Germany, etc. etc.), and other market conditions (if everything is overvalued in the stock market, then people buy bonds because they see it as a "less bad deal"). Eventually, the pool of debt and money will stop. It is a finite resource.
- conception 5y ago
  That is not the government debt to GDP ratio - it's about 45%. China AS A NATION is about 270%. The USA's is about 335% if my quick googling serves me.
  - johncearls 5y ago
    Thanks for pointing this out. FWIW, it appears China's number is actually 66.8%, vs the US's 108%. Your point still stands. 1 https://tradingeconomics.com/country-list/government-debt-to-gdp https://tradingeconomics.com/country-list/government-debt-to...
tootie 5y ago
They can also just set policy by fiat on the fly. When Lehman collapsed, Treasury and Congress had to scramble and scrap to utilize their limited authority to contain and cushion the crash. Then years later passed a law to give them more tools and watch it get chipped away by courts and future Congress's and whatever is left will be enough for the next crisis. China can just do whatever, whenever. If they need to break up Evergrande, nationalize it, take its assets, censor the media, send their execs to gulags forever. They just do it.
- AwaAwa 5y ago
  Always [not] keen to see more of the world adopt a system that ends with "gulags forever". Sadly, I fear this is the inevitable direction, especially since it looks to be a last govt standing kind of situation.
zepto 5y ago
> That system, by design, has conquered the boom/bust cycle Either that, or it has simply deferred it. Remember that was once said about the US too. Complexity is hard to tame and prone to punctuated equilibrium. If you eliminate the complexity, you end up with brittleness, which is prone to catastrophic failure. One difference between your analysis and the Economists is that nobody will remember a hacker news comment that was proven wrong.
- justicezyx 5y ago
  Rather, turning into a different kind of boom bust cycle. If history is to be rythmed, the answer might need another hundred years to manifest. The usual cycle of Chinese history is about 200-500 years in the unified state. Given the acceleration because of economics and technology, the lower end might be more likely this time.
bingohbangoh 5y ago
> It has little foreign debt. This is only true at the national level. Cities, provinces, and large companies (if large enough, act as tentacles of the government) are incredibly indebted and much of it is foreign. More than that, China has a lot of foreign debt denominated in US dollars so any spike in inflation will massively hurt.
jkhdigital 5y ago
Centralization of power can do impressive things. Like conquering the boom/bust cycle, or mass imprisonment and ideological reprogramming of entire ethnic populations. I don't find it "impressive", just a consequence of different first principles.
- chmod600 5y ago
  If boom/bust is conquered, does that mean that there is no more boom either? What economic function does a boom or bust perform, and why doesn't China need those functions? I guess you can smooth them out a lot and limit the human impact. To a large extent, that's been done many places. People in the US don't normally starve because of a recession.
  - jbay808 5y ago
    Growth happens through people's hard work building useful things; there's no reason that has to have a periodic boom/bust nature to it; it could just be a slow, steady upward trend. The fact that it does have oscillations in practice is mostly an artifact of collective psychology (and perhaps underpricing of debt). To a controls engineer, oscillations are indicative of bad feedback tuning.
    - chmod600 5y ago
      Let's say it's 2000 years ago and building boats is the next big thing, and you are a boat builder. It's exciting, and you and everyone else are building a lot of boats. It seems very productive, until one day there are just too many boats and nobody needs them. Someone will eventually tell you "You're a good boat builder, but stop building boats, go learn to make fishing nets instead". That's a bust, even though growth is still happening. If you are using western accounting methods, it might look like things stopped growing and reversed (negative gdp growth), because you thought last year that the boats were more valuable than they actually are, but there are still more boats, it's not like the accountant destroyed them. So a bust doesn't mean destruction, it's just a realignment of resources and a realization that what you had wasn't as great as you hoped. The oscillations are related to feedback delays and how conservative you are about overbuilding. Basically, debt is what feeds a boom/bust. If you wait for your previous boat to be sold before you build a new one, and if buyers wait for the last boat to pay for itself before they buy a new one, then there is no boom/bust. You can tune the feedback, and that's badically what lenders are supposed to try to do. In practice, policymakers need to be involved as well, because lenders won't do that great a job because they aren't lending their money. Maybe China has a different way of tuning. But basically, debt is the mechanism of boom/bust, and China has a lot of it, so it's hard for me to believe that it is somehow conquered. Good for them if they are better at tuning it, but it's not clear that they are better, and certainly not so good that they've eliminated all the oscillations.
LorenPechtel 5y ago
The fundamental problem is they are determined to maintain a growth rate that can no longer be maintained (developing economies can grow 7% while catching up, developed economies can't.) While they could bail this out with the printing presses it's really a symptom of the underlying problem and that can't be handwaved away.
- imtringued 5y ago
  In my opinion China won't face economic problems. At worst they will just chug along like Japan. What will happen is that they increasingly run into political problems. You can get away with a lot of sketchy things if you can promise your people that tomorrow will be a better day. Once the easy growth is gone China will have to figure out how to keep their people happy.
  - LorenPechtel 5y ago
    That's the problem--the easy growth *is* gone.
valas 5y ago
I can confirm that I keep seeing Economist's predictions re China debt not pan out, though I started paying attention only ~10 years ago. Do you have any books to recommend on China's financial system to help give perspective alternative to western default take?
aazaa 5y ago
> That system, by design, has conquered the boom/bust cycle, but western observers refuse to believe this because they are so throughly bought into the architecture of the western financial system and the many billions of words written on the topic of the operation of that system which is based on very different rules that they cannot imagine it could work any other way. One thing all markets at their very peak have in common is the widespread belief that the business cycle has finally been conquered. Whether that's the "permanently high plateau" of the 1920s or the "new economy" of the late 1990s. Remember "The Maestro?" Alan Greenspan was the guy who knew what was what and kept the economy humming. How is he viewed now? Same story, different actors. I doubt that any of these notions are true: 1. All of the information about Evergrande is out. 2. Half of the information that is out is accurate. 3. The CCP rescue actions will not re-inflate the bubble.
- narrator 5y ago
  You're using a narrative to analyze the economy though. That obscures the underlying dynamics of money creation in booms and busts, namely fractional reserve banking and the money multiplier that causes the money supply to rapidly decrease and increase in the western banking system as a result of loans and defaults. I'm not even sure if the money multiplier effect even happens in China, or if it's 100% reserved. It's a bit hard to get information about Chinese banking regulations in English.
analog31 5y ago
China doesn't need a wealth tax because they can just erase the wealth of entire sectors and then print new money.
cs702 5y ago
Very insightful. There are three other variables that are important here, but which unfortunately are very opaque to me: * Is Evergrande an isolated case of "Ponzi finance" (taking money from new customers to pay interest to old customers), or just the tip of an iceberg? How many other Evergrandes are there in China? To what degree has uneconomic lending and investing underpinned the Chinese economy over the past three decades? * If the mass of Chinese consumers who lent to the Evergrandes of China get stiffed, how will their behavior change? And how will that impact the Chinese economy? * If foreigner lenders get stiffed, how does that affect credit markets -- in China, in Asia, and everywhere else?
wetjen 5y ago
And 9. The government frequently fudges key financial metrics regarding growth, GDP and key economic health indicators.
fn_bb_sqr_pnts 5y ago
A few things to note: 1. points 1-2 are often cited as to why China has been immune from prior global financial issues. IMO, we need to contextualize this. China was able to finance itself through an export-oriented economy and receive huge foreign inflows of cash from it as it became the factory to the world. This has been true for other developing economies. at some point, history shows that most large economies need to reach a better balance between exports and internal consumption (china is the 2nd largest country by GDP with 30% of world MFRU output; law of large numbers apply?) It does seem now, that China's export economy has reached a stasis/equilibrium given a variety of factors (China labor inflation, regulations/trade wars, other economies like India, Vietnam becoming increasingly competitive vs China, and more vendors adopting China +1 sourcing strategy). You can also see this in China's more aggressive stance towards investing in Africa and LatAm. It's not to say that China's export economy crumbles, but it's likely not the same tailwind to economic growth. Typically when this happens, economies need to switch to a more consumption oriented economy (hence the Economists constant comparison to Japan) Points 5-8 seem to ignore what actually happened with Evergrande. The new property development restrictions enacted last year point to worries that China's financial sector is exposed to something akin to a "shadow" banking system (Evergrande is both a property developer and offered financial instruments to consumers). The question is how much damage does this do to consumer balance sheets (and hence future consumption) - hard question to answer given everything we don't know about China's actual financial system (we didn't even know the ins/outs of our own system in 2008) While i dont disagree that the Economist has been a Cassandra on China for a while, this situation seems like a potentially more difficult situation for the CCP to handle

dasudasu 5y ago

Noticeably absent from this analysis is the humongous shadow banking sector.

lamontcg 5y ago

And China doesn't care about the IMF (which is sort of implicit in half of your points, but thought I'd call it out)

justicezyx 5y ago
Have this actually been done since the opening up?

danjac 5y ago

> That system, by design, has conquered the boom/bust cycle Gordon Brown made this claim about the UK back in 1997. 10 years later he became Prime Minister just in time to see this claim put to the test.

dragontamer 5y ago

But the effects of the strategy you detail, have caused China's debt to GDP to skyrocket to 270% (In contrast: we've got politicians getting nervous about USA's 100% debt-to-GDP ratio). Its easy to stave off the bust if you just swipe your credit card to solve the problem and kick the can down the road. But the general assumption is that eventually, your country's debt becomes untrustworthy because of all the shenanigans you pull. -------- I think the world markets have shown a need for "safe" bonds, aka government-secured bonds. So I'm sure foreign markets are still willing to buy Chinese debt up. There's also the issue of looking at your competitors (USA, Japan, Germany, etc. etc.), and other market conditions (if everything is overvalued in the stock market, then people buy bonds because they see it as a "less bad deal"). Eventually, the pool of debt and money will stop. It is a finite resource.

conception 5y ago
That is not the government debt to GDP ratio - it's about 45%. China AS A NATION is about 270%. The USA's is about 335% if my quick googling serves me.
- johncearls 5y ago
  Thanks for pointing this out. FWIW, it appears China's number is actually 66.8%, vs the US's 108%. Your point still stands. 1 https://tradingeconomics.com/country-list/government-debt-to-gdp https://tradingeconomics.com/country-list/government-debt-to...

tootie 5y ago

They can also just set policy by fiat on the fly. When Lehman collapsed, Treasury and Congress had to scramble and scrap to utilize their limited authority to contain and cushion the crash. Then years later passed a law to give them more tools and watch it get chipped away by courts and future Congress's and whatever is left will be enough for the next crisis. China can just do whatever, whenever. If they need to break up Evergrande, nationalize it, take its assets, censor the media, send their execs to gulags forever. They just do it.

AwaAwa 5y ago
Always [not] keen to see more of the world adopt a system that ends with "gulags forever". Sadly, I fear this is the inevitable direction, especially since it looks to be a last govt standing kind of situation.

zepto 5y ago

> That system, by design, has conquered the boom/bust cycle Either that, or it has simply deferred it. Remember that was once said about the US too. Complexity is hard to tame and prone to punctuated equilibrium. If you eliminate the complexity, you end up with brittleness, which is prone to catastrophic failure. One difference between your analysis and the Economists is that nobody will remember a hacker news comment that was proven wrong.

justicezyx 5y ago
Rather, turning into a different kind of boom bust cycle. If history is to be rythmed, the answer might need another hundred years to manifest. The usual cycle of Chinese history is about 200-500 years in the unified state. Given the acceleration because of economics and technology, the lower end might be more likely this time.

bingohbangoh 5y ago

> It has little foreign debt. This is only true at the national level. Cities, provinces, and large companies (if large enough, act as tentacles of the government) are incredibly indebted and much of it is foreign. More than that, China has a lot of foreign debt denominated in US dollars so any spike in inflation will massively hurt.

jkhdigital 5y ago

Centralization of power can do impressive things. Like conquering the boom/bust cycle, or mass imprisonment and ideological reprogramming of entire ethnic populations. I don't find it "impressive", just a consequence of different first principles.

chmod600 5y ago
If boom/bust is conquered, does that mean that there is no more boom either? What economic function does a boom or bust perform, and why doesn't China need those functions? I guess you can smooth them out a lot and limit the human impact. To a large extent, that's been done many places. People in the US don't normally starve because of a recession.
- jbay808 5y ago
  Growth happens through people's hard work building useful things; there's no reason that has to have a periodic boom/bust nature to it; it could just be a slow, steady upward trend. The fact that it does have oscillations in practice is mostly an artifact of collective psychology (and perhaps underpricing of debt). To a controls engineer, oscillations are indicative of bad feedback tuning.
  - chmod600 5y ago
    Let's say it's 2000 years ago and building boats is the next big thing, and you are a boat builder. It's exciting, and you and everyone else are building a lot of boats. It seems very productive, until one day there are just too many boats and nobody needs them. Someone will eventually tell you "You're a good boat builder, but stop building boats, go learn to make fishing nets instead". That's a bust, even though growth is still happening. If you are using western accounting methods, it might look like things stopped growing and reversed (negative gdp growth), because you thought last year that the boats were more valuable than they actually are, but there are still more boats, it's not like the accountant destroyed them. So a bust doesn't mean destruction, it's just a realignment of resources and a realization that what you had wasn't as great as you hoped. The oscillations are related to feedback delays and how conservative you are about overbuilding. Basically, debt is what feeds a boom/bust. If you wait for your previous boat to be sold before you build a new one, and if buyers wait for the last boat to pay for itself before they buy a new one, then there is no boom/bust. You can tune the feedback, and that's badically what lenders are supposed to try to do. In practice, policymakers need to be involved as well, because lenders won't do that great a job because they aren't lending their money. Maybe China has a different way of tuning. But basically, debt is the mechanism of boom/bust, and China has a lot of it, so it's hard for me to believe that it is somehow conquered. Good for them if they are better at tuning it, but it's not clear that they are better, and certainly not so good that they've eliminated all the oscillations.

LorenPechtel 5y ago

The fundamental problem is they are determined to maintain a growth rate that can no longer be maintained (developing economies can grow 7% while catching up, developed economies can't.) While they could bail this out with the printing presses it's really a symptom of the underlying problem and that can't be handwaved away.

imtringued 5y ago
In my opinion China won't face economic problems. At worst they will just chug along like Japan. What will happen is that they increasingly run into political problems. You can get away with a lot of sketchy things if you can promise your people that tomorrow will be a better day. Once the easy growth is gone China will have to figure out how to keep their people happy.
- LorenPechtel 5y ago
  That's the problem--the easy growth *is* gone.

valas 5y ago

I can confirm that I keep seeing Economist's predictions re China debt not pan out, though I started paying attention only ~10 years ago. Do you have any books to recommend on China's financial system to help give perspective alternative to western default take?

aazaa 5y ago

> That system, by design, has conquered the boom/bust cycle, but western observers refuse to believe this because they are so throughly bought into the architecture of the western financial system and the many billions of words written on the topic of the operation of that system which is based on very different rules that they cannot imagine it could work any other way. One thing all markets at their very peak have in common is the widespread belief that the business cycle has finally been conquered. Whether that's the "permanently high plateau" of the 1920s or the "new economy" of the late 1990s. Remember "The Maestro?" Alan Greenspan was the guy who knew what was what and kept the economy humming. How is he viewed now? Same story, different actors. I doubt that any of these notions are true: 1. All of the information about Evergrande is out. 2. Half of the information that is out is accurate. 3. The CCP rescue actions will not re-inflate the bubble.

narrator 5y ago
You're using a narrative to analyze the economy though. That obscures the underlying dynamics of money creation in booms and busts, namely fractional reserve banking and the money multiplier that causes the money supply to rapidly decrease and increase in the western banking system as a result of loans and defaults. I'm not even sure if the money multiplier effect even happens in China, or if it's 100% reserved. It's a bit hard to get information about Chinese banking regulations in English.

analog31 5y ago

China doesn't need a wealth tax because they can just erase the wealth of entire sectors and then print new money.

cs702 5y ago

Very insightful. There are three other variables that are important here, but which unfortunately are very opaque to me: * Is Evergrande an isolated case of "Ponzi finance" (taking money from new customers to pay interest to old customers), or just the tip of an iceberg? How many other Evergrandes are there in China? To what degree has uneconomic lending and investing underpinned the Chinese economy over the past three decades? * If the mass of Chinese consumers who lent to the Evergrandes of China get stiffed, how will their behavior change? And how will that impact the Chinese economy? * If foreigner lenders get stiffed, how does that affect credit markets -- in China, in Asia, and everywhere else?

wetjen 5y ago

And 9. The government frequently fudges key financial metrics regarding growth, GDP and key economic health indicators.

fn_bb_sqr_pnts 5y ago

A few things to note: 1. points 1-2 are often cited as to why China has been immune from prior global financial issues. IMO, we need to contextualize this. China was able to finance itself through an export-oriented economy and receive huge foreign inflows of cash from it as it became the factory to the world. This has been true for other developing economies. at some point, history shows that most large economies need to reach a better balance between exports and internal consumption (china is the 2nd largest country by GDP with 30% of world MFRU output; law of large numbers apply?) It does seem now, that China's export economy has reached a stasis/equilibrium given a variety of factors (China labor inflation, regulations/trade wars, other economies like India, Vietnam becoming increasingly competitive vs China, and more vendors adopting China +1 sourcing strategy). You can also see this in China's more aggressive stance towards investing in Africa and LatAm. It's not to say that China's export economy crumbles, but it's likely not the same tailwind to economic growth. Typically when this happens, economies need to switch to a more consumption oriented economy (hence the Economists constant comparison to Japan) Points 5-8 seem to ignore what actually happened with Evergrande. The new property development restrictions enacted last year point to worries that China's financial sector is exposed to something akin to a "shadow" banking system (Evergrande is both a property developer and offered financial instruments to consumers). The question is how much damage does this do to consumer balance sheets (and hence future consumption) - hard question to answer given everything we don't know about China's actual financial system (we didn't even know the ins/outs of our own system in 2008) While i dont disagree that the Economist has been a Cassandra on China for a while, this situation seems like a potentially more difficult situation for the CCP to handle