On crypto currencies and the financial trilemma

(1) Robert Skidelsky has a good piece (ht: Rohit Rajendran) on why the crypto currencies will die a short death. He says that central bankers have done a better job with preserving the ‘store of value’ function of currencies and that past such experiments have failed. The article is inadequately critical of the job that central banks in advanced nations have done that has led to the emergence of crypto currencies.

(2) In the Asian Bureau of Financial and Economic Research (ABFER) conference in Singapore last week, I heard ‘financial trilemma’ mentioned more than once. I think it is flawed. It is a variant of the ‘Impossible Trinity’ that is associated with Fixed Exchange Rates. But, financial trilemma falls well short.

What is the ‘Financial Trilemma’?

The financial trilemma states that financial stability, financial integration and national financial policies are incompatible. Any two of the three objectives can be combined but not all three; one has to give. [Link]

It is flawed. There is no trilemma when there is global financial integration. In the presence of financial integration with the rest of the world, it is not possible to obtain both financial stability and national policies or even one of them. If there is a high degree of international financial integration, there is frequent financial instability and national polices are pegged to the anchor country.

One can have financial stability, national policy autonomy with financial fragmentation. With financial integration, both are impossible.

Much ado about macroprudential

Gillian Tett wrote:

Ireland, for example, has tried to cool a housing boom by introducing rules that make it harder to extend mortgages. Canada and Hong Kong have used similar measures. But these homegrown measures have not been particularly effective at pricking domestic price bubbles when global liquidity was abundant. They are even less likely to work in reverse if the global tsunami of liquidity suddenly dries up. [Link]

What is important and useful about her article is the reminder – not that it is needed for those who are not pre-committed – that macroprudential measures in domestic economies have only limited imapct, if at all, in the face of global liquidity – an outcome of policy spillovers from advanced economies. There is no substitute for allowing interest rates to reflect the true risk-adjusted cost of capital if asset price bubbles are to be avoided or moderated. Finally, macroprudential measures in emerging and small economies work only if interest rates in advanced nations are not working to countremand their effects as has been the case until now.

The Italian drama

The Italian President blocked the appointment of a Eurosceptic finance minister and the new government formation has stopped. The parties are preparing to go back to the voters again! These are my thoughts now on what the Italian President did.

These situations are difficult to analyse in real terms. There are no templates and no precedents. Clearly, the President has to choose, in his opinion, the option with lower risks of blowing up the Eurozone. Of course, I am assuming that that is his objective. The alternative is too difficult to grapple with for many in Europe. Ask Tsipras.

So, the Italian President has chosen to thwart the government formation. He might have calculated that the political parties would go to the people again and that the voters might blink, this time. Incidentally, this is the calculation of those in the ‘Remain’ camp in the UK too and that is why they want a referendum again, on Brexit. But, the contexts are different.

In Italy, the public may conclude that the parties it voted for have been robbed off the opportunity to form the government, even though the President is apparently well within his constitutional rights to reject appointments to the Cabinet.  So, that is the unknown risk.

The alternative would have been to let the government be formed even with the Eurosceptic Finance Minister, betting on two possibilities. One is that the realities and compulsions of office mellow him and the government and two, the ‘Troika’ (or the ‘Duet’ of the European Commission and the ECB) manage to browbeat and defeat the government in Italy, making them fall in line as they did to Greece. Quite what it would do to Italy’s growth and public debt is another matter.  Greece’s fundamentals cannot be said to have improved much in the three years since the Troika managed to eject Yanis Varoufakis and co-opt Tsipras.

In the end, the real issue is about the suitability (or, otherwise) of the single currency, in economic terms, for the current member countries. But, the single currency is a political project more than an economic project and hence, solutions have to be political.

In that sense, does it make sense to keep the political drama domestic or make it a continental affair as happened for five months between Greecea and the European Commission+ECB (and a reluctant IMF playing along)?

Viewed from this angle, the decision of the Italian President becomes somewhat easier to understand although someone else might have decided to trust the European ‘powers-that-be’ to exercise their ‘coercive charm’ on the new Italian government (without solving the underlying issues as in the case of Greece) rather than risk getting the Eurosceptic parties a bigger mandate.

If that outcome materialises, some would conclude that the Eurozone project was proceeding in the right direction, after all?!

Since, in real life, counterfactuals are impossible, debates, analyses and arguments will remain inconclusive and continue into eternity.

From a trade surplus and balance of payments perspective, the Euro might be undervalued (and that too for Germany, for sure) but from the perspective of the pricing of a risk of implosion, the currency is probably not done falling against the US dollar. That said, it might actually rebound this week as financial markets might wager that the Eurosceptics might not come back to office.

[Pl. note that this does not constitute any investment advice. Period]

At this stage, I can only hope that there is someone like Yanis Varoufakis in Italy who would capture the drama for the rest of the world like he did with his excellent book, ‘Adults in the Room’.

The meaning of ‘symmetry’ in FOMC dictionary

In this blog post, all emphasis – bold and underlining – are mine.

This overall assessment incorporated the staff’s judgment that vulnerabilities associated with asset valuation pressures, while having come down a little in recent months, nonetheless continued to be elevated.

The staff judged vulnerabilities from financial-sector leverage and maturity and liquidity transformation to be low, vulnerabilities from household leverage as being in the low-to-moderate range, and vulnerabilities from leverage in the nonfinancial business sector as elevated.

The staff also characterized overall vulnerabilities to foreign financial stability as moderate while highlighting specific issues in some foreign economies, including–depending on the country–elevated asset valuation pressures, high private or sovereign debt burdens, and political uncertainties.

Those were from the Staff assessment of financial conditions presented to the Federal Reserve Open Market Committee for its meeting on May 1-2, 2018.

The Federal Reserve staff had begun to characterise the vulnerabilities associated with asset markets price pressures as elevated from July 2017, having upgraded it from ‘moderate’ as noted in the Minutes of the May 2017 meeting of the FOMC. But, this is the first time that they have called vulnerabilities associated with non-financial sector leverage as elevated.

However, when the FOMC participants discussed ‘financial stability’, they did not discuss the possibility that an accommodative monetary policy could cause both asset prices and leverage in the non-financial sector to become more elevated.

Then, there was the use of the word, ‘symmetric’. It figured eleven times in the Minutes of the FOMC meeting of May 11. That is the highest mention in recent meetings. I went all the way back to FOMC meetings in 2016. The word, ‘symmetric’ began to be mentioned in January 2017.

Here is the mention and the context:

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. [Link]

Then, from the March 2017 FOMC Meeting Minutes:

A few members expressed the view that the Committee should avoid policy actions or communications that might be interpreted as suggesting that the Committee’s 2 percent inflation objective was actually a ceiling. Several members observed that an explicit recognition in the statement that the Committee’s inflation goal was symmetric could help support inflation expectations at a level consistent with that goal, and it was noted that a symmetric inflation objective implied that the Committee would adjust the stance of monetary policy in response to inflation that was either persistently above or persistently below 2 percent. [Link]

The context in which the word, ‘symmetry’ was introduced in the FOMC Minutes is worth recalling. It was introduced in 2017 because the FOMC had decided that it was time to start rising interest rates a little faster than it had done in 2016 and in 2015. In those two years, it had raised them just once each year and that too by 25 bp.

The FOMC had to justify why it was raising them when inflation was not yet at or above 2.0%. So, it came up with the word, ‘symmetric’. That is, it would take action only if was persistently below 2.0% inflation or above it.

Now that inflation is above 2.0%, financial market is expecting that the FOMC might raise rates a bit more rapidly. That expectation is destabilising financial markets or so it is believed. I don’t buy that.

For the record, CPI inflation rate is 2.36%. Core CPI rate is 2.11% and PCE Core Inflation rate is 1.88%.

In order to calm the financial markets, the FOMC is reminding them that it is pursuing a ‘symmetric’ inflation goal. That is, just as it did not refrain from raising rates in 2017 as the inflation rate remained below 2.0% for a few months, it would not necessarily raise the Federal Funds rate more rapidly if inflation stayed above 2.0% for a few months. Only if the overshoot was permanent, would it take action. So, it would go about its task of normalising the monetary policy stance ‘gradually’ rather than ‘rapidly’ or ‘swiftly’.

Personally, I have two problems with this attitude of FOMC:

(1) The Federal Reserve was very very slow to start off the blocks in 2015 and in 2016. After the tapering warning of 2013, it did not raise rates even once in 2014. It raised the rate once in 2015 and in 2016. It was too far behind the curve given the level of the inflation rates then and, more importantly, asset prices.

Corporate profits were contracting y/y for about seven quarters from March 2015 to September 2016. Profit growth was barely above 2% (y/y) in the quarter ending December 2014 and then it turned negative for the next seven quarters. See here.

But, what happened to S&P 500 index? The index barely budged. The S&P 500 index had gone up by more than 20% in 2013, by 10% in 2014 and declined 0.5% in 2015. It was up 19% in 2016 and another 23% in 2017.

The Federal Funds rate, in real terms, remains firmly in the negative territory, even now.

(2) What is the learning from the 2008 crisis, indeed? We all learnt that obsessive focus on inflation without regard to financial stability was the wrong framework for monetary policy.  Indeed, this blogger had written on umpteen occasions that in a well-functioning market economy, the central bank did not have to target prices of goods and services. They will regulate themselves. Instead, they should focus on the quantity of money and credit created, on financial stability and hence, by extension, on asset prices. Where is that awareness in the FOMC discussion that features the word, ‘symmetric’ eleven times? What does the FOMC gain by assuaging the sentiment in financial market when, according to its own staff, asset price pressures and leverage in the non-financial sector are ‘elevated’?

Should the FOMC really stick to a gradual removal of policy accommodation with the unemployment rate at 3.9% and with such elevated vulnerabilities associated with prices in asset markets and leverage in the non-financial sector?

It will end up losing, inevitably, whatever extension of the economic cycle it achieves with such ‘gradual’ removal of policy accommodation because when asset prices become more elevated – thanks to the Federal Reserve’s excessive emphasis on ‘symmetry’ – their eventual crash will be bigger with economic consequences that will be both likely more significant and longer lasting.

The 11-times repeat of ‘symmetry’ in the Minutes is indication of panic and obsession with ensuring that financial markets do not push the Treasury bond yield higher. That is because the Federal Reserve transmission mechanism to the real economy is through the financial markets and asset prices (bond and stock prices) or so, it is believed.

The bond market had obliged and the yield on the 10-year Treasury Note had dropped by 13 basis points – from 3.11% to 2.98%. So much for the independent minds of the financial markets and holding policymakers to account. Financial markets are about greed and not about being a check and balance on the errant ways of governments and central banks. They do that only to developing economies.

The Federal budget deficit is rising; debt is rising and yet, the bond market meekly rallies because the Federal Reserve had told them they would be gentle in rising rates! Contrast that with the bond market sell-off in 1994 as the Federal Reserve was raising rates slowly after holding rates at 3.0% for too long. The bond market began to rally only after the Federal Reserve had raised rates by 2.5% and that included a 75 basis point rate hike in October 1994!

Why is the FOMC anxious about the rise in bond yields?

It is because of the amount of debt that has piled up in the economy.

Why has such debt piled up?

It is precisely because of excessive concern for the amount of debt stock every time the FOMC contemplates a rate hike!

The vicious circle continues….

What to do to avoid a rupee ‘crash’?

A friend to whom I had sent this piece of mine on Rupee risks asked me as to what steps might help avoid a ‘crash’ in the Rupee. Such questions make us think if there is anything at all that governments and central banks can do to avoid such an outcome or it might be that the train had left the station? The truth could be a bit of both. The bulk of the conditions that presage a fairly large depreciation might already be in place but policymakers should, nonetheless, do a few things (if they are still possible) to mitigate the effect; to cushion the effects or to even moderate the depreciation. So, here goes:

(1) Very important to project confidence and calmness and avoid looking panicked. I am starting with this because, in these situations, that is arguably the most important aspect.

(2) Also, panic will force the government to take measures that would aggravate the situation. RBI’s decisions to increase the limits on foreign portfolio investors for government and corporate bonds and the relaxation on eligible external debt borrowers from India are examples of measaures that could be considered ‘panicky’.

(3) Avoid measures that would aggravate the fiscal deficit. For example, these would be reducing excise duties on petrol and diesel and not allowing oil companies to pass on prices. Both are wrong. One, the Government of India (GoI) needs the revenues badly. Two, if GoI has to keep the import bill under check, it has to pass on the higher prices and curtail demand growth.

(4) RBI should neither cut rates nor raise rates unless its inflation mandate is materially threatened. It must see through the oil price related inflation impact. Unless second round effects are important, it should ignore first order effects

(5) The Government should refrain from public advice or instruction to RBI on interest rates. It is lose-lose-lose. Loss for the Government – meddling image; loss for RBI – even its independent decision would be labelled ‘capitulation’ if it coincides with Government’s wishes; Loss for the economy because these two would drive rupee down.

(6) If the GoI can come up with some schemes to consolidate or reform PSU banks’ governance – even if they cannot privatise now – it would be a positive

(7) Any forward movement (or, a successful bidder announcement) on AIR INDIA privatisation will be a positive

(8) I do not know the details of the NSE law suit against SGX (Singapore Stock Exchange) but it is bad optics

(9) Similarly, SEBI diktat banning all Foreign Portfolio Investors (FPI) from participating in Indian capital markets if they were managed by people of Indian origin from buying into Indian market seems rather too drastic and excessive. It will curtail inflows when these are the ones who will have more patience, tolerance given their better understanding of India’s ground reality. If their goal is to avoid round-tripping of Indian money, they can impose more KYC requirements (even though they may be already quite comprehensive and tight) but banning FPI that are even remotely connected to Indians or people of Indian origin (even if they are now foreign nationals) for this reason is too drastic. They aggravate the situation with respect to capital inflows and increases pressure on the Rupee.

(10) I do not know the current situation but if they can completely remove or lift all restrictions on agricultural exports, it will be a good signal. But, may be, very few restrictions remain but they should let farmers cash in on export markets or domestic markets – wherever they get better prices. It is farmer-friendly and also rupee-friendly. If domestic urban consumers have to adjust their consumption, that is the price that has to be paid or a cost incurred.

‘The Gold Standard Site’ on Gold

The following is the comment I had made on John Authers’ column that included a comment on the recent decline in the price of gold.

This is not investment advice. Period.

I read your comments on Gold with a great deal of interest. As an investment advisor, I have been recommending Gold but as an insurance. How much of insurance to hold will depend on one’s risk aversion. But, the question is what does it insure?  It turns out that it is not insuring against the risk of global systemic instability or inflation, unless these risks are also reflected in U.S. dollar weakness. In other words, gold in the end responds negatively to dollar and everything else becomes secondary.

In the Eighties, when dollar soared, gold crashed. Then, gold recovered briefly from USD300 to USD500 as the US dollar crashed. Then, from late Eighties to mid-Nineties, both of them were range-bound. From the mid-Nineties, the dollar strengthened.  From 2002 onwards, until about September 2011, gold rallied, except for the second half of 2008, when the two ‘assets’ that performed well was US dollar and U.S. Treasuries. After that, the US dollar stopped falling.  Almost until end-2015 or early 2016. Then, as the dollar declined again for two years, gold attempted a recovery. Now, since February or March of this year, the US dollar has arrested its two-year decline and in recent weeks, its strength has gathered momentum. Hence, the decline in gold too has accelerated and it broke below USD1300 per ounce.

Of course, we should note here that it is only in the new millennium that the world had glimpsed unconvetional monetary policies. The Federal Reserve sent the Federal Funds rate to 1.0% and the Bank of Japan attempted QE for the first time.

Until the current monetary regime – exemplified by the near-polar status of the US dollar – proves itself unable to cope with the frailties it has thrown up – gold will underperform. Naturally, such a break is so cataclysmic that sovereign governments will be determined to prevent it. Further, America will not be keen to lose the US dollar’s pre-eminence status.

Those who believe that the world is sufficiently and durably repaired will probably see no insurance value in gold. Those who believe that the policy experiments since 2008 have not even remotely addressed the underlying issues, that the world, if anything, has become more fragile since then and that a final donouement still awaits, should hang on to their gold. It is quite likely that such a denouement will also result in or be used as an opportunity to end the hegemony of the US dollar in global trade, capital markets and much else.

‘Deep state’ paranoia

Gideon Rachman of the FT has an article on Team Trump’s Deep State Paranoia. Pl. find below a slightly modified version of the comment I had left on the article. The text below includes a reference to the latest WSJ Edit which is not there in the comment I had left in the FT pages.

In a way, calling it a ‘Deep State’ makes it easy to paint it as paranoia and two, to evade responsibility for specific actions that specific individuals or their departments took or have been taken, specifically with respect to the 2016 Presidential campaign and beyond.

The Wall Street Journal did not endorse Trump, has called some of his policy agendas as mistaken (reducing capital adequacy requirements on banks, for example) and yet, it has been consistently calling attention to instances of egregious interference by government agencies in a democratic political process. Here is its latest ‘no-nonsense’ Edit on the matter.

I do not need to list them here. Anyone with a modicum of curiosity in knowing the truth will have little difficulty in finding them. They cannot be wished away or dismissed as ‘deep state’ paranoia.  That is an exercise in evasion of journalistic responsibility and also a masterclass in self-destruction of credibility on the part of the writer of this article.

Casual cynicism

Alan Blinder has a book out called, ‘Advice and Dissent’.  The title is the same as the book by Dr. Y.V. Reddy, former Governor of the Reserve Bank of India. Wonder why no one told Blinder about it. Dr. Reddy’s book came out in 2017 itself.

The FT had a review of his book and under the ‘comments’ section, I found two very interesting links.

The casual cynicism that underlies the ventures that Blinder was part of (or, co-promoted) boggles the mind.

Two vs. 1157

Reproducing the article that I co-wrote with Dr. Srinivas Thiruvadanthai for MINT. He blogs here.

Economists write letter to the wrong address

Economists have deservedly earned a reputation for being out of touch with reality. They are cementing it with their latest letter to Donald Trump

As of last count, 1,157 economists had sent a letter to US President Donald Trump warning him not to repeat the mistake of the Smoot-Hawley Tariff Act of the 1930s. The one-page letter was a copy-and-paste job from the letter that economists sent to the then president in 1930 because the fundamental principle, according to them, has remained unchanged since then.

No honest economist would generalize theory across space and over time, without considering the context. In the 1930s, the Great Depression had many parents. When it suits them, economists point to the gold standard as the culprit. With considerable justification, some of us would like to point to the asset bubbles, excessive bank lending and the “Great Gatsby” decade of the 1920s as more important causative factors for the Great Depression. At best, the Smoot-Hawley tariff might have been a complementary factor. The tariffs were enacted in June 1930. By that time, the US and the global economies were already in a vicious downward spiral. Industrial production was down almost 20% by June and the Dow Jones Index down close to 40%. More importantly, as Barry Eichengreen and Kevin O’Rourke have shown, world trade fell more in 2008-09 than in the Great Depression, though there was no trade war in 2008-09!

Although economists are virtually unanimous in their support of free trade, the theoretical justifications are much less sound than they make it appear. Comparative advantage, the cornerstone of the benefits of trade, assumes full employment and frictionless movement of factors of production across sectors. These conditions are generally not true in practice. It is not easy for a middle-aged, laid-off steel worker to be retrained as a lab technician, much less a software engineer. Indeed, recent work by David Autor shows that the entry of China into the World Trade Organization (WTO) had a strong, negative impact on the long-term prospects of US workers displaced by Chinese competition. Economists will be quick to point out that these negative effects reflect the failure to implement adequate compensatory policies, but how many times have you seen 1,000 top economists write to the president urging more aggressive policies to help workers displaced by free trade?

The signatories to the letter cite the 1930s precedence. However, there is no precedence for dealing with a nation of 1.3 billion people that makes commitments with the conscious intent of not honouring them—whether it is on trade or technology matters. William A. Galston, who served during president Bill Clinton’s first term in office, wrote for The Wall Street Journallast August (“Second Thoughts On Trade With China”) that when China joined the WTO in 2001, it had promised to sign the Government Procurement Agreement, which requires government purchases to be made on a non-discriminatory and transparent basis. Sixteen years later, at the time of his writing the article, China had not yet done so. China pledged not to militarize the islands it had created in the South China Sea. But, it proceeded to do exactly that. “They tell us what we want to hear and then do the opposite,” says an unnamed German government official, in a Reuters news report. German government officials note too, wryly, that trade with China is win-win. That is, China wins twice. More than half the members of the German chamber of commerce in China are not planning new investments in the country.

Bryan Riley, director of the National Taxpayers Union’s free trade initiative, which coordinated the letter, had said that the anti-free trade message was not being driven by public opinion and that it was top-down. This is inconsistent with facts. The monthly Harvard-Harris poll tells a different story. From the March 2018 edition:

—55% said America’s trade agreements cost jobs and only 45% said that they created jobs

—61% approved of the president leveraging the threat of tariffs to win more favourable terms for America from trade agreements

—More than two-thirds (67%) said that the US should punish China for forcing American companies to give up technology secrets

—72% were either concerned or very concerned about the US losing technological supremacy to China

—75% said that the US should take steps (including tariffs) to correct the $375 billion trade deficit with China

—58% supported the imposition of tariffs on Chinese goods

—68% said that the American government should buy America-made goods and hire Americans

Economists have deservedly earned a reputation for being out of touch with reality for their failure to anticipate the 2008 crisis and read the mood of the people correctly on either side of the Atlantic in the last three years. They are cementing their reputation with this letter to the US president. They should reflect on why even 1% of the number of signatories do not emerge from China to tell their president to honour international commitments, and on their own reluctance to address a similar letter to China, despite its documented breaches of trust.

In short, the inability and unwillingness of 1,000 learned men and women to call out a nation that plays either by its own rules or none at all, with no recourse to others against such unilateralism, do not provide good soil for the growth of world peace.

V. Anantha Nageswaran and Srinivas Thiruvadanthai are, respectively, a Mint columnist, and director of research at the Levy Forecasting Institute.

Comments are welcome at theirview@livemint.com

Debt, deleveraging and defaults in China

If not shadow banking, it is shadow lending, anyhow:

Insurers are allowed to allocate up to 55 percent of total invested assets in alternative investments. Those investments accounted for 40 percent of invested assets in 2017, but the number has risen sharply in recent years. In 2012, the proportion was 9 percent.

Of the 40 percent recorded in 2017, the largest proportion was in debt investments, where the funds mostly end up as loans to infrastructure and real estate projects, Reuters analysis of insurance asset management product data shows.

In the three years to the end of 2017, insurers’ investment in loans for infrastructure nearly tripled and nearly doubled for real estate. [Link]

Private sectore defaults:

Earlier this month a private Chinese manufacturer, DunAn Group, sent a letter begging the Chinese government to help it out with its $7 billion of debt.

“If a credit default happens, it will deliver a serious blow to many financial institutions in Zhejiang and may even cause systemic risks,” said DunAn’s letter, according to the Financial Times. The letter also blamed the company’s troubles on China’s tepid effort to tighten credit conditions and rein in corporate debt. [Link]

Private corporate defaults in general, up more than 30% in the first four months of 2018:

China’s private sector firms are facing a debt crisis amid falling profits and rising financing costs, with the value of bond defaults in the sector rising by more than a third in the first four months of the year, according to industry watchers.

More than 10 companies, several of them listed, from a variety of industries have defaulted on 15 bonds worth more than 12.8 billion yuan (US$2 billion), according to figures from China Central Depository and Clearing Company, which manages and promotes the sector.

The spike in defaults has unsettled regulators that have been keen to prevent systemic risks as they seek to reduce national debt levels. [Link]

Debt addiction has not really been kicked but bank lending somewhat rationalised:

Here’s a widely told yarn: Last year China successfully curtailed skyrocketing debt issuance without hurting growth…. For investors watching the Chinese economy and rates, the message is clear: China hasn’t somehow magically cracked the code on debt-free growth. If industrial profits and inflation keep heading sharply lower, expect another round of substantial stimulus before too long. [Link]

Therefore, this should not come as a surprise at all:

In a speech made in the Chinese capital, Xia Bin, who has been advising the State Council – China’s cabinet – on financial policy since 2009, painted a far less rosy picture of the country’s financial industry than the one presented by Beijing.

“Systemic risks are elusive and spread fast” in China, said the 67-year-old, who was a key figure in a clean-up campaign of non-banking financial institutions two decades ago, when he was a senior official at the People’s Bank of China.

Beijing must remain alert to the threat of a financial crisis, he said, adding that government indicators did not reflect the true dangers.

China’s official non-performing loan ratio, for instance, bore little resemblance to the true figure, he said.

“From a dynamic perspective, it should be beyond [the official figure of] 2 per cent.”

Similarly, banks’ exposure to the property market was far higher than official figures suggested, he said. Official numbers say that about a quarter of all outstanding bank loans are linked to real estate, but Xia said the real figure could be as high as 80 per cent if all loans that used property as collateral were taken into account.

The whole Chinese economy had been “hijacked” by property, and that had created an enormous threat to the country’s financial stability, he said. [Link]