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This post does not pass the smell test. Yes, there is a lot of corruption in China and the political elite is enriching itself at the expense of the public and

This post does not pass the smell test. Yes, there is a lot of corruption in China and the political elite is enriching itself at the expense of the public and private sector. One mechanism for this certainly involves the government suppressing interest rates on bank deposits, and then directing banks to provide loans to preferred enterprises, which often engage in real estate. This is not actually a horrible approach to development since it keeps the government from having to finance everything up-front and a lot of the time the projects actually end up working. But sometimes it leads to non-performing loans and everyone knows there is much more of this than is claimed. But even so the alarmism doesn't make any sense. If we multiply the amount of state-acknowledged NPLs at the largest five Chinese banks (~300 billion RMB) by an order of magnitude and we still only have 500 billion USD in bad assets. Sure this is a lot of money, but the Chinese government has previously dealt with the NPL issue by dumping cash into the banking sector and will doubtless continue to do so if necessary to maintain the status quo. 500 billion dollars still pales in comparison to China's more than 3 trillion in foreign currency reserves, so who cares? In reality, this system is actually sort of preferable since no-one can effectively loot state currency reserves yet, so bailing out the banks gets the money back into play. To the extent there are stresses in the system, its that real estate development has been on the rocks since 2008 and prices are getting past the point where people can throw themselves into practical servitude in order to buy property. If you follow the Chinese media, right now it looks like the bubble will play out with local governments buying properties from cash-strapped developers at inflated prices (bonus question: guess who will issue the loans to finance this?) in order to turn them into social housing projects (bonus question two: guess who you need to be related to in order to get apportioned these assets?). Since it seems likely the poor are going to get screwed regardless, the real losers in the coming years are Chinese citizens locked into 30 or 40 year mortgages on underwhelming properties who will soon find themselves doubly-screwed as cash-strapped localities who can no longer charge real estate developers such inflated prices for real estate switch to issuing property taxes instead.

jasonwatkinspdx 14y ago
Interesting that you feel the need to start your refutation with nothing more than "smells bad." To me that reads like you don't even believe your own envelope arithmetic enough to not throw in some superfluous rhetorical support.
- trevelyan 14y ago
  Huh? The post claims non-performing loans are some sort of poison pill for Chinese economic and political stability. The point of the back-of-the-envelope calculation is to show this isn't the case using some simple math. The blogger could easily have run those numbers himself. And the reason I said "smells bad" instead of "wrong" is that China is complex and some things that seem wrong on first pass might actually be right. As far as I know, for instance, the blogger is also wrong when he implies that the big four are holding significant amounts of Treasuries on their balance sheets. The reason I believe this is because the People's Bank of China sterilizes currency inflows and monopolizes currency exchange. So the banks which are the most exposed to non-performing SOE debt should not have the USD to invest in US Treasuries and it should mostly be the PBOC which handles Treasury purchases. Googling for terms like "ICBC" and "US Treasury Bonds" suggests this is in fact the case since it doesn't pull up any documents suggesting ICBC is buying Treasuries. But maybe the bank is awash in them and the blogger knows something other people don't? China is strange. It could happen.
  - jsn 14y ago
    > he implies that the big four are holding significant amounts of Treasuries on their balance sheets What? Where? The only mention of "big four" in his text is about big audit firms being silent about evidence of fraud perpetrated by big Chinese companies.
    - earl 14y ago
      I think gp meant the big 4 state owned commerical banks: people's bank of china (pboc), construction, industrial + commerce, and agricultural [1] http://en.wikipedia.org/wiki/Banking_in_the_Peoples_Republic_of_China http://en.wikipedia.org/wiki/Banking_in_the_Peoples_Republic...
jseliger 14y ago
The linked post also uses a cultural explanation for the high Chinese savings rate, when James Fallows demonstrates in this Atlantic article: http://www.theatlantic.com/magazine/archive/2008/01/the-14-trillion-question/6582/?single_page=true http://www.theatlantic.com/magazine/archive/2008/01/the-14-t... that the state engineers an artificially high savings rate in order to keep its currency relatively weak. The mechanism is too strong to describe here, but China in essence forces manufacturers and other exporters to save instead of spend. A mistake of this magnitude doesn't automatically discount the rest of the original post, but it does make me suspicious.

jasonwatkinspdx 14y ago

Interesting that you feel the need to start your refutation with nothing more than "smells bad." To me that reads like you don't even believe your own envelope arithmetic enough to not throw in some superfluous rhetorical support.

trevelyan 14y ago
Huh? The post claims non-performing loans are some sort of poison pill for Chinese economic and political stability. The point of the back-of-the-envelope calculation is to show this isn't the case using some simple math. The blogger could easily have run those numbers himself. And the reason I said "smells bad" instead of "wrong" is that China is complex and some things that seem wrong on first pass might actually be right. As far as I know, for instance, the blogger is also wrong when he implies that the big four are holding significant amounts of Treasuries on their balance sheets. The reason I believe this is because the People's Bank of China sterilizes currency inflows and monopolizes currency exchange. So the banks which are the most exposed to non-performing SOE debt should not have the USD to invest in US Treasuries and it should mostly be the PBOC which handles Treasury purchases. Googling for terms like "ICBC" and "US Treasury Bonds" suggests this is in fact the case since it doesn't pull up any documents suggesting ICBC is buying Treasuries. But maybe the bank is awash in them and the blogger knows something other people don't? China is strange. It could happen.
- jsn 14y ago
  > he implies that the big four are holding significant amounts of Treasuries on their balance sheets What? Where? The only mention of "big four" in his text is about big audit firms being silent about evidence of fraud perpetrated by big Chinese companies.
  - earl 14y ago
    I think gp meant the big 4 state owned commerical banks: people's bank of china (pboc), construction, industrial + commerce, and agricultural [1] http://en.wikipedia.org/wiki/Banking_in_the_Peoples_Republic_of_China http://en.wikipedia.org/wiki/Banking_in_the_Peoples_Republic...

jseliger 14y ago

The linked post also uses a cultural explanation for the high Chinese savings rate, when James Fallows demonstrates in this Atlantic article: http://www.theatlantic.com/magazine/archive/2008/01/the-14-trillion-question/6582/?single_page=true http://www.theatlantic.com/magazine/archive/2008/01/the-14-t... that the state engineers an artificially high savings rate in order to keep its currency relatively weak. The mechanism is too strong to describe here, but China in essence forces manufacturers and other exporters to save instead of spend. A mistake of this magnitude doesn't automatically discount the rest of the original post, but it does make me suspicious.