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The Coming Debt Bust

To all those who are upset by the Economist article.

First of all the Economist routinely criticizes everyone not just the Chinese. Please read some of the things they say about Russia, Iran, India, the possible future Trump presidency (which BTW They have classified as a major economic risk) . They do not write self congratulatory articles.

For the minority of you who may have actually read the article before reaching for their revolvers, it also says that the Chinese leadership "have the skill to solve their problems once they have been identified".

Is the western media biased towards there own? Yes , they are. But this is a technical piece about shadow banking ,insufficient deposits, bad loans etc. All of these are measurable facts. The way to disagree is to prove either the economics or the data is wrong not just curse the Economist or Europeans or Jhungary or Indians in general!

I don't know enough about China's banking industry to critique it, which is why I leave it to others who do have the knowledge but to say that the Economist is just out to "get China" is pathetic.
 
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China's actions internationally, are Chinese interests, they will remain Chinese interests whether it be the communist party or the martian party. If Modi drops dead tomorrow, would India and Pakistan be best friends? Hell no. In terms of international relations, expect further push against India, CCP or not. As Pakistan is infinitely more important to us than India. Just like Japan is to the US.

I do agree with your assertion that interests exist independent of individuals. But I think I tend to conflate issues by comparing China's position vis-a-vis its neighbors with India/Pakistan. Yes, China's territorial disputes may remain, but when was the last time a democratic regime went to war over territory? Also, surely its not your claim that China's stand with its neighbors is the same as Pakistan's with India? The reason you are right about Modi being immaterial to our relations have nothing to do with interests - they have everything to do with the fact that one of these two nations was founded as an ideological antithesis of the other. If the so-called Communist party was not in power, there would be no fundamental schism between China and its neighbors.

Even after Japan's crash, it still was a huge investor, and the same will be more true for China.

True. But the point is - when investing is more due to your own need than that of those receiving the investment, what leverage do you have? I am yet to see a Chinese member on PDF concede that Japan carries tremendous clout because of its overseas investment. Primarily because they apparently have different rules and are too busy crowing about the success of China on the same metrics. What is sauce for the goose....

Or to put it more bluntly, if you can name a country since 2007's sea row that we did even 1/1000th of the damage to their country than their own government and people, I like to hear it.

The damage is in terms of destabilizing the security paradigm. China obviously believes that it is too big for any tensions in South China Sea etc. to cause an economic impact. But same is not so for Philippines, Vietnam and Indonesia. Investment will not come if threat perception remains. How is this damage to be quantified? The bully instigating tensions will obviously deny the damage. Does that mean it doesn't exist?

The government of Xi, of Hu, of Jiang, of Deng, of Mao are all different,

Agreed. But lack of popular will is a constant feature. And also, Xi's cult of personality is as close as one can get to Mao's. So instead of progress, one could say there has been a regression.

GDP numbers by itself is just a number, it doesn't mean any more than tree numbers, or cat numbers. What it represent is prestige and since every international organization recognizes, I say goal achieved.

The rest of the world tends to treat GDP in a slightly less cavalier manner than you state. But that is to be assumed - seldom does a student who gets caught cheating in an exam show much faith in examination invigilation.

Much of China's GDP includes production for the sake of it. The Chinese government promised that it would slash steel production by 150 million tonnes. It did even let a couple/few mills shut down. Now a fresh round of funding has been infused, some public sector mills are being taken over by private players such as Jianlong, and instead of cutting down, production will only increase this year. Meanwhile the three month bubble in steel prices has passed, and these will be no buyers for much of this steel. Same is the case with housing - new purchases are being made because banks are lending money to sub-prime borrowers who will not be able to repay.

Yet, all of this counts as China's GDP. It is a criminal waste of resources, and some day in the near future it will have to answer for all this wastage.

Besides regarding IMF/world bank, you are getting screwed at the same time we are. Unless your position is as long as we get screwed, you're happy, then there really isn't much you want to say about IMF.

No IMF is not screwing us. India has not subscribed to Bretton Woods dictated "structural adjustment" plans in a major way. On the other hand, Chinese lending for infrastructure projects is already running into rough weather because they seem to believe that it is a profitable venture. Don't think that no one notices that China only gives loans at exhorbitant interest rates for projects to be executed by Chinese companies. That is taking the sort of "tied loans" that the West was accused of disbursing to a whole new level.

Lastly, you can point to articles we can point to infrastructure. At the end of the day, words are just words, we can always write more, but let see someone build what we have built, and don't even pretend like our infrastructure is not needed, even Americans are wanting infrastructure, it's just they are not doing much at the moment.

Infrastructure is needed to service economic activity. Creation of infrastructure is not an end in itself. If Chinese steel is not needed, then the ports and the expressways leading up to them are wasted. If people don't live in ghost cities then what do you do with the infrastructure? Stimulating the economy by replacing legacy infrastructure is one thing, which is what American requirement is. Yes, maybe they too could do with a repeat of the New Deal.

But what China has done is that it has created infrastructure based upon a false premise - that of an ever-increasing demand for the same. This infrastructure is leveraged with so much debt - unless all this infrastructure can be monetized, who will repay all the debt? And how exactly will it be monetized? Given that the only way the current levels of demand are maintained is through debt? By adding on more debt?
 
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I do agree with your assertion that interests exist independent of individuals. But I think I tend to conflate issues by comparing China's position vis-a-vis its neighbors with India/Pakistan. Yes, China's territorial disputes may remain, but when was the last time a democratic regime went to war over territory? Also, surely its not your claim that China's stand with its neighbors is the same as Pakistan's with India? The reason you are right about Modi being immaterial to our relations have nothing to do with interests - they have everything to do with the fact that one of these two nations was founded as an ideological antithesis of the other. If the so-called Communist party was not in power, there would be no fundamental schism between China and its neighbors.

Pakistan is root of all evil, here we go again. Even ISIS isn't one dimensional, but Pakistan is. Come on.

As to democratic government over territory, Britain, America, France, South Korea, South Vietnam, and more. BTW, do you consider India democratic? Goa?

India and China's problem is fundamentally, none of the others can challenge China, even in theory, India in theory, could, hence it is what it is. SCS is really about the US. These differences will continue to exist, well after CCP is gone.

The Cold War was not the Soviets shadow boxing itself.


True. But the point is - when investing is more due to your own need than that of those receiving the investment, what leverage do you have? I am yet to see a Chinese member on PDF concede that Japan carries tremendous clout because of its overseas investment. Primarily because they apparently have different rules and are too busy crowing about the success of China on the same metrics. What is sauce for the goose....

The point isn't influence, it's your assertion that Western investors are done with China. They may or may not be. They aren't, but even if they are China is a major source of financing now.

The point is, China is no longer at a stage were foreign funding has to be the driver of economic growth.

Your comment is Chinese members is contradictory, unless they are your spirit animal, what do you care what they say.

The damage is in terms of destabilizing the security paradigm. China obviously believes that it is too big for any tensions in South China Sea etc. to cause an economic impact. But same is not so for Philippines, Vietnam and Indonesia. Investment will not come if threat perception remains. How is this damage to be quantified? The bully instigating tensions will obviously deny the damage. Does that mean it doesn't exist?

I mean actual damage to Philippines, Vietnam, wetting the bed isn't damage. China is still top three in investments, and number one in out going investments. While trade is still expanding, so what damage did it do to China.

Any damage you think may have occurred be it by China or to China is non existent because that is not how the world works. Did you know China became America's number one trade partner this year, surpassing Canada.

Don't be one of those on a board that goes boycott this, sanction that. That's not a discussion, that's the GOP primaries.

Agreed. But lack of popular will is a constant feature. And also, Xi's cult of personality is as close as one can get to Mao's. So instead of progress, one could say there has been a regression.

This is like me grabbing your yogurt and you call me a colonizer. The fact you can even think it's in the same sport, much less ballpark, means you have no idea what kind of power Mao had. Even Putin and Modi has bigger cults around them.

Also popular will is almost never a problem, see a non elective change is still a change. Hence the same hope is placed in the leaders as any new democratic leaders.

Things can go forward, or backwards, one of the features of any action. Things hardly stay the same, after action. However, forward doesn't mean good and backwards doesn't mean bad in the long term. Your entire argument is based on that.

The rest of the world tends to treat GDP in a slightly less cavalier manner than you state. But that is to be assumed - seldom does a student who gets caught cheating in an exam show much faith in examination invigilation.

Much of China's GDP includes production for the sake of it. The Chinese government promised that it would slash steel production by 150 million tonnes. It did even let a couple/few mills shut down. Now a fresh round of funding has been infused, some public sector mills are being taken over by private players such as Jianlong, and instead of cutting down, production will only increase this year. Meanwhile the three month bubble in steel prices has passed, and these will be no buyers for much of this steel. Same is the case with housing - new purchases are being made because banks are lending money to sub-prime borrowers who will not be able to repay.

Yet, all of this counts as China's GDP. It is a criminal waste of resources, and some day in the near future it will have to answer for all this wastage.

Yea, as if this is a Chinese problem, I'm sure 40 nuclear submarines and 11 carriers for the US is because IEDs have evolved so much. All nations continue stupid stuff long after they served their purpose, due to other reasons.

Even India, it knows it's weapon development agencies are largely inefficient, why not reform? Can't, too much interest there.

China has its problems, anybody can see that, what you have suggested as a long decline is not on the cards is my point.

No IMF is not screwing us. India has not subscribed to Bretton Woods dictated "structural adjustment" plans in a major way. On the other hand, Chinese lending for infrastructure projects is already running into rough weather because they seem to believe that it is a profitable venture. Don't think that no one notices that China only gives loans at exhorbitant interest rates for projects to be executed by Chinese companies. That is taking the sort of "tied loans" that the West was accused of disbursing to a whole new level.

I'm talking Chinese involvement in IMF, India also wants a bigger say. Those investments are Chinese banks, not IMF. IMF doesn't give two craps about what China thinks, while taking China's money. We have less voting power than Belgium and you say we are not getting screwed?



Infrastructure is needed to service economic activity. Creation of infrastructure is not an end in itself. If Chinese steel is not needed, then the ports and the expressways leading up to them are wasted. If people don't live in ghost cities then what do you do with the infrastructure? Stimulating the economy by replacing legacy infrastructure is one thing, which is what American requirement is. Yes, maybe they too could do with a repeat of the New Deal.

But what China has done is that it has created infrastructure based upon a false premise - that of an ever-increasing demand for the same. This infrastructure is leveraged with so much debt - unless all this infrastructure can be monetized, who will repay all the debt? And how exactly will it be monetized? Given that the only way the current levels of demand are maintained is through debt? By adding on more debt?

Ghost cities are filling up, and even the ones that are slow to do so would eventually. China wants 70% urban population and create bigger farms for the individual, where do you want China to stash them if not for the infrastructure.

Napoleon was so successful why? He inherited France, as did Hitler Germany. My point, is that infrastructure last. Even if CCP were to fall, any succeeding power would still have all this to play around with.

I can hardly see how more words has made Modi's term any easier.

You are focusing too much on what's on paper, paper can be burnt, I like to see someone destroy our roads, rails, and bridges.

What's good for some, isn't necessarily good for others. After the great depression, Americans came out of it, richer, though, a different band of rich people. That really only matters to the ones that are not rich anymore, not so much to the wider population.
 
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what we need to do it or not, when to do it, how to do it, we Chinese make all the decisions by ourselves!


take your poison somewhere else !



we can set up another IMF if we want, same as AIIB to WB!!!


:china::china::china:
 
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Periodically and precisely, the Chinese debt problem appears here. It is really good that such strategic fraud works so well for so long: The western countries think they do not do anything to compete with China and just wait for the time the Chinese economy collapse. Hope they keep this dream as long as enough.


What is debt? For instance, a company borrowed money to invest to make profits, before it bankrupted, the company only pay attention on its business rather than debt itself. Debt is two-edged sword depends on how you put use of it. So when we discuss the Chinese debt we must discuss the status of Chinese economy, but who really understand Chinese economy, the westerns or Chinese government?


If the debt problem was true as ecumenist said, what Chinese government will deal with it, could the economist predict? If the western countries have so many elites in economy why they have such a bad performance in economy management in the last decade? Easy to be a paperbaby.


I do not want to guess what is the psychological reasons the Indian put the Chinese debt here again and again, but have to admit the they really brainwashed by the western theories that the Indians lost their ancient glorious philosophy.


Like the Christian, democrazy, and so called west economics, the western think they are the only correct thing on this earth. In their eyes, even the communist country, such as China, is also a monster which fortunately they cannot beat now. So does the western economics really suit for Chinese economy? What is the base of political economics or plutonomy in west economics?


Today, even in the inner of west economics are debating the corrections of itself when they saw so many faults in financial management in 2008 crisis, see detail: http://www.isipe.net/ ;https://en.wikipedia.org/wiki/Heterodox_economics .


Appendix:


http://blog.sina.com.cn/s/blog_4b712d230102w81l.html

…………..

自2000年在西方发达国家爆发“经济学改革国际运动”以来,经济学教育改革的思潮和运动就风起云涌,至今方兴未艾。2000年7月,法国经济学学生的请愿书揭开了这种改革运动的序幕,学生们使用精神病学的一个术语痛斥新古典主流经济学的“自闭症”,指责其已经没有能力解决真实世界中的许多重要经济问题。国际金融危机爆发后,这种经济学又遭到了广泛的质疑。例如,在世界20多个国家(甚至更多国家)里出现了“重新思考经济学联盟”、“新经济学思维研究所”、“后危机经济学社团”等组织。2014年5月5日,来自30个国家的65个学生团体发起成立了“国际学生经济学多元化倡议行动”(International Student Initiative for Pluralism in Economics,ISIPE)。一年后,这一组织已发展到了31个国家的82个学生社团。杨虎涛教授曾指出,耐人寻味的是,国际学生经济学多元化运动所涉及的31个国家和85个社团中唯独没有中国。…………..

信奉所谓自由市场经济的新古典经济学家们借助麦卡锡主义打压他们无法容忍的马克思主义和其他异端经济学流派,他们通过动用国家力量、商业团体力量和高等教育机构中的精英阶层等,使得非主流经济学家得不到雇佣,即使被雇佣也会被任意开除。直到1970年之后,西方新古典主流经济学动用国家力量打击西方非主流经济学才扮演了较为间接的角色,而通过期刊评级等职业力量在这时作为排挤异端的手段开始占据主导地位。 …………………..

2014年,为了对法国经济学教育体系进行实质性的改革,法国政治经济学会向法国教育部提出,以试验的方式开放一个为期四年的研究与教学新空间,在“经济学”之外另外成立“经济学与社会”这一新的学科,以便使“扎根于社会科学”的经济学得以延续,四年之后,再根据结果来决定,是继续还是终止试验。显而易见,法国政治经济学会的目的是为了使一度因受西方主流经济学严重打压而面临灭绝、但在近20年来却蓬勃发展的法国非主流经济学各流派(马克思主义政治经济学只是其中的一个流派),在体制上脱离由新古典经济学统治和支配的经济学体制,自主地从事经济学的教学与科研活动。

2014年12月,法国政治经济学会的这一建议得到法国教育部的批准,但却遭到了法国新古典经济学家的强烈反对,法国很多经济学系主任和法国“经济学”学科现任主席本人在2015年1月4日的《费加罗报》上宣称,新学科仅仅是为大学经济学教研系统中“那些无法在顶级期刊发表文章的人”,提供一个“失败和沮丧的聚居地”,“教育部长已经被左翼人士欺骗了”。由于西方新古典主流经济学在法国的统治地位,法国政治经济学会的这种改革动议至今仍前途未卜。法国经济学教育改革给中国行政当局提供了哪些教训呢?显而易见,如果再放任西方主流经济学垄断中国的经济学教育,在中国早已被边缘化的马克思主义政治经济学将面临着法国非主流经济学艰难生存的悲惨命运
 
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Well I wouldn't say it's reasonable or not.

But government corruption has always been the number 1 complaint in China. (And for good reason, if you've seen any news coming out of China).

And people do get angry about it:

Chinese Citizens Stormed Government Offices Near Shanghai And Forced The Mayor To Strip - Business Insider

Anyway, it's human nature to criticize one's own leaders, you can't change that without changing species.

(And the OP's comments were very obviously designed to inflame anger. :P)

That's a little too excessive dont you think. I think the police need to do a better job protecting officials.

Periodically and precisely, the Chinese debt problem appears here. It is really good that such strategic fraud works so well for so long: The western countries think they do not do anything to compete with China and just wait for the time the Chinese economy collapse. Hope they keep this dream as long as enough.


What is debt? For instance, a company borrowed money to invest to make profits, before it bankrupted, the company only pay attention on its business rather than debt itself. Debt is two-edged sword depends on how you put use of it. So when we discuss the Chinese debt we must discuss the status of Chinese economy, but who really understand Chinese economy, the westerns or Chinese government?


If the debt problem was true as ecumenist said, what Chinese government will deal with it, could the economist predict? If the western countries have so many elites in economy why they have such a bad performance in economy management in the last decade? Easy to be a paperbaby.


I do not want to guess what is the psychological reasons the Indian put the Chinese debt here again and again, but have to admit the they really brainwashed by the western theories that the Indians lost their ancient glorious philosophy.


Like the Christian, democrazy, and so called west economics, the western think they are the only correct thing on this earth. In their eyes, even the communist country, such as China, is also a monster which fortunately they cannot beat now. So does the western economics really suit for Chinese economy? What is the base of political economics or plutonomy in west economics?


Today, even in the inner of west economics are debating the corrections of itself when they saw so many faults in financial management in 2008 crisis, see detail: http://www.isipe.net/ ;https://en.wikipedia.org/wiki/Heterodox_economics .


Appendix:


http://blog.sina.com.cn/s/blog_4b712d230102w81l.html

…………..

自2000年在西方发达国家爆发“经济学改革国际运动”以来,经济学教育改革的思潮和运动就风起云涌,至今方兴未艾。2000年7月,法国经济学学生的请愿书揭开了这种改革运动的序幕,学生们使用精神病学的一个术语痛斥新古典主流经济学的“自闭症”,指责其已经没有能力解决真实世界中的许多重要经济问题。国际金融危机爆发后,这种经济学又遭到了广泛的质疑。例如,在世界20多个国家(甚至更多国家)里出现了“重新思考经济学联盟”、“新经济学思维研究所”、“后危机经济学社团”等组织。2014年5月5日,来自30个国家的65个学生团体发起成立了“国际学生经济学多元化倡议行动”(International Student Initiative for Pluralism in Economics,ISIPE)。一年后,这一组织已发展到了31个国家的82个学生社团。杨虎涛教授曾指出,耐人寻味的是,国际学生经济学多元化运动所涉及的31个国家和85个社团中唯独没有中国。…………..

信奉所谓自由市场经济的新古典经济学家们借助麦卡锡主义打压他们无法容忍的马克思主义和其他异端经济学流派,他们通过动用国家力量、商业团体力量和高等教育机构中的精英阶层等,使得非主流经济学家得不到雇佣,即使被雇佣也会被任意开除。直到1970年之后,西方新古典主流经济学动用国家力量打击西方非主流经济学才扮演了较为间接的角色,而通过期刊评级等职业力量在这时作为排挤异端的手段开始占据主导地位。 …………………..

2014年,为了对法国经济学教育体系进行实质性的改革,法国政治经济学会向法国教育部提出,以试验的方式开放一个为期四年的研究与教学新空间,在“经济学”之外另外成立“经济学与社会”这一新的学科,以便使“扎根于社会科学”的经济学得以延续,四年之后,再根据结果来决定,是继续还是终止试验。显而易见,法国政治经济学会的目的是为了使一度因受西方主流经济学严重打压而面临灭绝、但在近20年来却蓬勃发展的法国非主流经济学各流派(马克思主义政治经济学只是其中的一个流派),在体制上脱离由新古典经济学统治和支配的经济学体制,自主地从事经济学的教学与科研活动。

2014年12月,法国政治经济学会的这一建议得到法国教育部的批准,但却遭到了法国新古典经济学家的强烈反对,法国很多经济学系主任和法国“经济学”学科现任主席本人在2015年1月4日的《费加罗报》上宣称,新学科仅仅是为大学经济学教研系统中“那些无法在顶级期刊发表文章的人”,提供一个“失败和沮丧的聚居地”,“教育部长已经被左翼人士欺骗了”。由于西方新古典主流经济学在法国的统治地位,法国政治经济学会的这种改革动议至今仍前途未卜。法国经济学教育改革给中国行政当局提供了哪些教训呢?显而易见,如果再放任西方主流经济学垄断中国的经济学教育,在中国早已被边缘化的马克思主义政治经济学将面临着法国非主流经济学艰难生存的悲惨命运

The reasons for these articles are:
1. jealousy. Look at China's growth in 30 years vs India growth
2. that person hoping for others to fail is a failure in life and cannot succeed
3. China debt news sell newspapers
4. Lacking understanding of China's real economy
5. Lack of brains--not thinking about the consequences facing their own country IF China collapse

Yet as you read this, every company want to go into China and China's FDI is steady.
 
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But this is a technical piece about shadow banking ,insufficient deposits, bad loans etc. All of these are measurable facts.


Not exactly measurable facts.

As foreigners like to say, China's system is a "closed book" (lack of transparency). So in lieu of solid numbers... they present "estimations" and make arguments based on those estimations.

In the end only the Chinese government itself knows what these numbers really are. Except for things like shadow banking which even they have to make estimates for.

The only thing we know for sure, is that there is a significant problem which needs to be solved by economic reforms. A process which has been ongoing for a few years now.
 
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It depends on who you are listening to....

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China Doesn't Need Western Economics
By MIKE NORMAN

I've long been a defender of the Chinese economy and a critic of those who say China is facing a credit or debt crisis. I have explained many times, correctly, that China is a sovereign currency-issuing nation that spends in its own currency, and the state banks in China are functionally nothing more than fiscal agents of the government.

Therefore, their ability to lend in yuan is without limit and loan losses are the equivalent of deficit spending here in the United States: It's a fiscal transfer to the economy. China is completely capable of doing that to infinity if it wanted to, and while there might be other consequences like inflation, China is not hindered by any need to "obtain funds" to merely credit bank accounts with yuan or keep the loans flowing.

It's the same as saying the U.S. has no risk of insolvency because it spends in its own currency and all our debts are denominated in our own currency -- the dollar -- which we have the monopoly power to issue. The only "promise" or liability that the government makes is that it promises to accept its own currency for the payment of taxes, and that is a liability or promise that it can always keep.

While that fact alone should make it clear that the United States, or China for that matter, can never be forced into an involuntary bankruptcy, both nations can, however, decide to default voluntarily. Indeed, in the United States we come close to this every few years when it comes time to raise the debt ceiling. The debt ceiling is an anachronism that should have been done away with a long time ago; however, we still stupidly have it and it's used, politically, to extract concessions from one side or the other, usually spending cuts or tax cuts for the wealthy or corporations.

The point being, we can default on our own accord and so can China if it is motivated by seemingly expedient politics or something like the belief in some dangerous or misguided ideology.

That's why when I read anarticlethe other day about a recent speech given by Chinese President Xi Jinping and how he plans to crack down on China's lending-fueled economic growth, it got me a little concerned.

Xi could easily fall prey to many of the false beliefs of the prevailing Western economic mainstream, for example. They've been beating the drum about excessive Chinese debt and credit bubbles for a long time and now Xi might be falling for all their fearmongering. That could lead him to embark on an aggressive campaign of debt reduction that would be the equivalent of hard-core fiscal austerity. If so, it would send China into an economic tailspin, collapse commodity prices worldwide and plunge the global economy into a deep recession.

I am a little concerned. However, I have been reading and rereading the article to try to understand the gist of what he is saying, and while I am no expert in Chinese communication (the Chinese famously are not direct in their messages), it seems to me that the inner meaning of the speech was meant more as a mission to further Xi's battle against internal corruption, which has been one of his main thrusts and is rife in China.

If Xi is looking to target corruption and shut down overproducing and failed industries, then that is a different story. That has bullish implications for commodity prices as well as for the Chinese economy in the long run. However, if it is truly about "reducing debt," then Xi has indeed drunk the Kool-Aid of the out-of-paradigm debt doomsday crowd and the "austerians," and that's not good.

Luckily, we can see the numbers. No, there is no Daily Treasury Statement equivalent that China releases each afternoon like we have here in the U.S., but there are monthly published figures that report China loan data that are put out by thePeople's Bank of China. At least we can follow those. That will tell us the story.

I would add that there is another reason why I am not overly worried about China enacting austerity via a dramatic slowdown in lending. That's because the Chinese leadership knows it must keep growth elevated or risk massive popular discontent. It doesn't want that. On the other hand, it's still disappointing to see another regime fall prey to the misguided views of the Western economic mainstream. It's only wrought disaster everywhere it's been applied.
 
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It depends on who you are listening to....

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China Doesn't Need Western Economics
By MIKE NORMAN

I've long been a defender of the Chinese economy and a critic of those who say China is facing a credit or debt crisis. I have explained many times, correctly, that China is a sovereign currency-issuing nation that spends in its own currency, and the state banks in China are functionally nothing more than fiscal agents of the government.

Therefore, their ability to lend in yuan is without limit and loan losses are the equivalent of deficit spending here in the United States: It's a fiscal transfer to the economy. China is completely capable of doing that to infinity if it wanted to, and while there might be other consequences like inflation, China is not hindered by any need to "obtain funds" to merely credit bank accounts with yuan or keep the loans flowing.

It's the same as saying the U.S. has no risk of insolvency because it spends in its own currency and all our debts are denominated in our own currency -- the dollar -- which we have the monopoly power to issue. The only "promise" or liability that the government makes is that it promises to accept its own currency for the payment of taxes, and that is a liability or promise that it can always keep.

While that fact alone should make it clear that the United States, or China for that matter, can never be forced into an involuntary bankruptcy, both nations can, however, decide to default voluntarily. Indeed, in the United States we come close to this every few years when it comes time to raise the debt ceiling. The debt ceiling is an anachronism that should have been done away with a long time ago; however, we still stupidly have it and it's used, politically, to extract concessions from one side or the other, usually spending cuts or tax cuts for the wealthy or corporations.

The point being, we can default on our own accord and so can China if it is motivated by seemingly expedient politics or something like the belief in some dangerous or misguided ideology.

That's why when I read anarticlethe other day about a recent speech given by Chinese President Xi Jinping and how he plans to crack down on China's lending-fueled economic growth, it got me a little concerned.

Xi could easily fall prey to many of the false beliefs of the prevailing Western economic mainstream, for example. They've been beating the drum about excessive Chinese debt and credit bubbles for a long time and now Xi might be falling for all their fearmongering. That could lead him to embark on an aggressive campaign of debt reduction that would be the equivalent of hard-core fiscal austerity. If so, it would send China into an economic tailspin, collapse commodity prices worldwide and plunge the global economy into a deep recession.

I am a little concerned. However, I have been reading and rereading the article to try to understand the gist of what he is saying, and while I am no expert in Chinese communication (the Chinese famously are not direct in their messages), it seems to me that the inner meaning of the speech was meant more as a mission to further Xi's battle against internal corruption, which has been one of his main thrusts and is rife in China.

If Xi is looking to target corruption and shut down overproducing and failed industries, then that is a different story. That has bullish implications for commodity prices as well as for the Chinese economy in the long run. However, if it is truly about "reducing debt," then Xi has indeed drunk the Kool-Aid of the out-of-paradigm debt doomsday crowd and the "austerians," and that's not good.

Luckily, we can see the numbers. No, there is no Daily Treasury Statement equivalent that China releases each afternoon like we have here in the U.S., but there are monthly published figures that report China loan data that are put out by thePeople's Bank of China. At least we can follow those. That will tell us the story.

I would add that there is another reason why I am not overly worried about China enacting austerity via a dramatic slowdown in lending. That's because the Chinese leadership knows it must keep growth elevated or risk massive popular discontent. It doesn't want that. On the other hand, it's still disappointing to see another regime fall prey to the misguided views of the Western economic mainstream. It's only wrought disaster everywhere it's been applied.

I stopped after reading this

Therefore, their ability to lend in yuan is without limit and loan losses are the equivalent of deficit spending

Anyone that said this have no idea how basic economy works, western or otherwise.......
 
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I stopped after reading this



Anyone that said this have no idea how basic economy works, western or otherwise.......
Japan is an example of that sentence

I stopped after reading this



Anyone that said this have no idea how basic economy works, western or otherwise.......
There are one hidden premise for the situation in that sentence: the country should have large trade surplus and tremendous foreign currency reserves. Lets take Japan as an example of that. Japan's total debt including government, financial sector, non-financial enterprise, and household debt has been around 600% of its GDP. But still Japan can QE, QQE, QQQE, and buy more than 50% of its entire nation's stock market.
 
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I stopped after reading this



Anyone that said this have no idea how basic economy works, western or otherwise.......
Japan is far from collapse although its economics is like dead water now. Why?

A country's currency is just a piece of paper that has the government's credit on it. The government's credit on currency was only recognized by its own citizen unless its made of precious metals like silver and gold, which is accepted by worldwide. However, under globalization, a county's credit on currency (paper) is not only for its own citizen but also international society.

Japan and China's credits on currencies for international society are ensured by their large trade surplus and foreign currency reserves. Japan has been QEed several times and even put negative rate, however its currency increased. China QEed around 4 trillion RMB(yuan) from end of 2008 to end of 2010, which caused significant inflation domestically, however RMB (yuan) increased from 6.8 to 1 USD at 2010 to 6.06 to USD at mid of 2013.
 
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Japan is an example of that sentence


There are one hidden premise for the situation in that sentence: the country should have large trade surplus and tremendous foreign currency reserves. Lets take Japan as an example of that. Japan's total debt including government, financial sector, non-financial enterprise, and household debt has been around 600% of its GDP. But still Japan can QE, QQE, QQQE, and buy more than 50% of its entire nation's stock market.

Japan is far from collapse although its economics is like dead water now. Why?

A country's currency is just a piece of paper that has the government's credit on it. The government's credit on currency was only recognized by its own citizen unless its made of precious metals like silver and gold, which is accepted by worldwide. However, under globalization, a county's credit on currency (paper) is not only for its own citizen but also international society.

Japan and China's credits on currencies for international society are ensured by their large trade surplus and foreign currency reserves. Japan has been QEed several times and even put negative rate, however its currency increased. China QEed around 4 trillion RMB(yuan) from end of 2008 to end of 2010, which caused significant inflation domestically, however RMB (yuan) increased from 6.8 to 1 USD at 2010 to 6.06 to USD at mid of 2013.

I am actually struggling should I reply to this..........

First of all, the author is talking about UNLIMITED loan condition. QE is actually more limited and stringent than any monetary policy, the amount QE printed have to be specifically engineered to deal with a particular problem and also they had to have financial planning in place to deal with the extra flow of currency.

QE is simply printing money to pay debt is a very common misnomer.

Second of all, China is not Japan, unless you think the Yuan today is actually as strong as Yen back then (Which is almost the same class as USD), Japan can stand up to the influx, but could China? China would not have international currency backing to pull off anything QE like, you cannot use Japan to compare with China in this sense.

Anyway, as I said, QE and unlimited borrowing is two different thing, and a point you seems to not recognize
 
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I am actually struggling should I reply to this..........

First of all, the author is talking about UNLIMITED loan condition. QE is actually more limited and stringent than any monetary policy, the amount QE printed have to be specifically engineered to deal with a particular problem and also they had to have financial planning in place to deal with the extra flow of currency.

QE is simply printing money to pay debt is a very common misnomer.

Second of all, China is not Japan, unless you think the Yuan today is actually as strong as Yen back then (Which is almost the same class as USD), Japan can stand up to the influx, but could China? China would not have international currency backing to pull off anything QE like, you cannot use Japan to compare with China in this sense.

Anyway, as I said, QE and unlimited borrowing is two different thing, and a point you seems to not recognize

First, QE of course is not just printing money to pay debt, but it‘s a possible approach to pay debt. And the debt is also a particular problem, which could be solved by printing money or QE.

Secondly, influx has been happened to China since its economic reform, and just stopped a little nowadays. But unlike Japan, the influx was guided and limited to the real economy sector not fictitious economy by China government. China has international currency reserves to support QE. And further, because of the strong role of government in the outflow and influx of currency, China have more space in monetary policy compared with Japan.
 

I am actually struggling should I reply to this..........

First of all, the author is talking about UNLIMITED loan condition. QE is actually more limited and stringent than any monetary policy, the amount QE printed have to be specifically engineered to deal with a particular problem and also they had to have financial planning in place to deal with the extra flow of currency.

QE is simply printing money to pay debt is a very common misnomer.

Second of all, China is not Japan, unless you think the Yuan today is actually as strong as Yen back then (Which is almost the same class as USD), Japan can stand up to the influx, but could China? China would not have international currency backing to pull off anything QE like, you cannot use Japan to compare with China in this sense.

Anyway, as I said, QE and unlimited borrowing is two different thing, and a point you seems to not recognize

BTW, based on the percentage of Yuan in SDR, I don't think Yuan is as bad as you think.

I know QE and unlimited borrowing are two different things. And neither China nor Japan is doing the unlimited borrowing. However, in China a large portion of debt is chain debt, which is owed by the state-owned enterprises. To those state-owned enterprises and those debts, China government is not afraid of printing money and lending.
 
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First, QE of course is not just printing money to pay debt, but it‘s a possible approach to pay debt. And the debt is also a particular problem, which could be solved by printing money or QE.

But you still don't understand how QE and the what the author said about "Unlimited Borrowing" are two different things.


Secondly, influx has been happened to China since its economic reform, and just stopped a little nowadays. But unlike Japan, the influx was guided and limited to the real economy sector not fictitious economy by China government. China has international currency reserves to support QE. And further, because of the strong role of government in the outflow and influx of currency, China have more space in monetary policy compared with Japan.
 

Again, you are addressing the wrong point, China did have quite a lot of breather on Monetary policy, China have and still has the world greatest Foreign Reserve, and that give China a lot of leeway to get in with its reform.

However, did China want a reform is another problem altogether, the question is, would China want to abandon the SOE system and get into real gear in market economy. That's another story, you are betting on Chinese government doing thing right ALL THE TIME and we all know this has not yet happen in this world. But in all, this is not related to what the author said. Which nobody have any economic background will go ahead and say any economy can afford to have unlimited borrowing of its currency. Take a look at Venezuela, this is the closest to what the Author said, where Venezuela tried to borrow as much as their oil reserve allow. Which fell apart dramatically.

BTW, based on the percentage of Yuan in SDR, I don't think Yuan is as bad as you think.

I know QE and unlimited borrowing are two different things. And neither China nor Japan is doing the unlimited borrowing. However, in China a large portion of debt is chain debt, which is owed by the state-owned enterprises. To those state-owned enterprises and those debts, China government is not afraid of printing money and lending.

The problem is again, Chinese currency is not exactly that strong, many country trade RMB have actually make USD as a guarantor as RMB in order for them to not to lose value over trade. You are talking about 4% use internationally, still, the damage would cause influx to at least Asian economy.

The world already have little confidence to Yuan to begin with, and if China start irresponsible lending and start printing money, the RMB confidence will be completely lost. Imagine what happened to US in 2008 happens in China, it will take quite a long while to recover.
 
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But you still don't understand how QE and the what the author said about "Unlimited Borrowing" are two different things.




Again, you are addressing the wrong point, China did have quite a lot of breather on Monetary policy, China have and still has the world greatest Foreign Reserve, and that give China a lot of leeway to get in with its reform.

However, did China want a reform is another problem altogether, the question is, would China want to abandon the SOE system and get into real gear in market economy. That's another story, you are betting on Chinese government doing thing right ALL THE TIME and we all know this has not yet happen in this world. But in all, this is not related to what the author said. Which nobody have any economic background will go ahead and say any economy can afford to have unlimited borrowing of its currency. Take a look at Venezuela, this is the closest to what the Author said, where Venezuela tried to borrow as much as their oil reserve allow. Which fell apart dramatically.

Venezuela? Zimbabwe? Or even we can go back to 1940s of KMT. You cannot compare China to compare with those in this sense because they don't have large trade surplus and foreign currency reserves

But you still don't understand how QE and the what the author said about "Unlimited Borrowing" are two different things.




Again, you are addressing the wrong point, China did have quite a lot of breather on Monetary policy, China have and still has the world greatest Foreign Reserve, and that give China a lot of leeway to get in with its reform.

However, did China want a reform is another problem altogether, the question is, would China want to abandon the SOE system and get into real gear in market economy. That's another story, you are betting on Chinese government doing thing right ALL THE TIME and we all know this has not yet happen in this world. But in all, this is not related to what the author said. Which nobody have any economic background will go ahead and say any economy can afford to have unlimited borrowing of its currency. Take a look at Venezuela, this is the closest to what the Author said, where Venezuela tried to borrow as much as their oil reserve allow. Which fell apart dramatically.



The problem is again, Chinese currency is not exactly that strong, many country trade RMB have actually make USD as a guarantor as RMB in order for them to not to lose value over trade. You are talking about 4% use internationally, still, the damage would cause influx to at least Asian economy.

The world already have little confidence to Yuan to begin with, and if China start irresponsible lending and start printing money, the RMB confidence will be completely lost. Imagine what happened to US in 2008 happens in China, it will take quite a long while to recover.
Chinese currency is not exactly that strong? Japan yen is not that strong either. Many country using Yen in trade also have make USD as a guarantor.

But you still don't understand how QE and the what the author said about "Unlimited Borrowing" are two different things.




Again, you are addressing the wrong point, China did have quite a lot of breather on Monetary policy, China have and still has the world greatest Foreign Reserve, and that give China a lot of leeway to get in with its reform.

However, did China want a reform is another problem altogether, the question is, would China want to abandon the SOE system and get into real gear in market economy. That's another story, you are betting on Chinese government doing thing right ALL THE TIME and we all know this has not yet happen in this world. But in all, this is not related to what the author said. Which nobody have any economic background will go ahead and say any economy can afford to have unlimited borrowing of its currency. Take a look at Venezuela, this is the closest to what the Author said, where Venezuela tried to borrow as much as their oil reserve allow. Which fell apart dramatically.



The problem is again, Chinese currency is not exactly that strong, many country trade RMB have actually make USD as a guarantor as RMB in order for them to not to lose value over trade. You are talking about 4% use internationally, still, the damage would cause influx to at least Asian economy.

The world already have little confidence to Yuan to begin with, and if China start irresponsible lending and start printing money, the RMB confidence will be completely lost. Imagine what happened to US in 2008 happens in China, it will take quite a long while to recover.

Again the credit of Japanese yen or Chinese yuan to international society is based on their tremendous manufacturing capability, large trade surplus, and huge foreign currency reserves. BTW when US started printing money (QE) after crisis in 2008, the dollar index actually started to increase.
 
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