I left for the UK on 29th July and returned on 6th August to Singapore. Spent two days in London and the rest in Manchester. It was English summer. Temperature in the mid-teens, cool and breezy. I returned with a nagging cough. Watched South Africa struggle both at the ‘Kia Oval’ in London and then at ‘Emirates Old Trafford’ in Manchester. Spent many an hour chatting with my co-author Gulzar Natarajan on India and Row.
Met with James Kynge at FT. I had known him for the last several years. It is a matter of personal satisfaction that I introduced him to Julius Baer in 2010, when I was working for them. He reminded me of an article that he had written in December 2016 that China has always had problems printing too much of money. I had blogged on it then.
Ye Shi, a Song dynasty adviser, warned that issuing “kongqian” — or “empty money” that is not backed by assets — would stoke inflation and reduce people’s incomes. His emperor did not listen, triggering economic chaos that enfeebled China before the Mongol invasion. [Link]
But, what the article did not say but which he said during the conversation was that it took seventy years before Song dynasty’s money printing turned inflationary. So, how much time does China have?
Ambrose Evans-Pritchard appears to think that the revelations in People’s Bank of China financial stability report make the case for a disorderly collapse of the Chinese financial system:
The Chinese version of the PBOC’s Financial Stability Report – not yet available in English – shows that the shadow banking nexus is bigger than all other regular activities of the lenders put together.
Regulators had thought it was equivalent to 42pc of on-balance sheet business at the end of 2015. They have revised this drastically, admitting that it reached 110pc by the end of last year. [Link]
Research by Mizuho confirms that Pritchard got it right:
On 4 July, the PBoC noted in the 2017 Financial Stability Report that the size of banks’ off-balance sheet activities reached CNY253.5t by the end of 2016. This suggests that off-balance sheet activities have already exceeded total assets in the banking sector in China.
That was from their China Economics Weekly No. 126.
On the topic of China’s debt problem, Charlene Chu, formerly of Fitchratings, has something to say, again:
Total outstanding credit is expected to grow to 223 trillion yuan ($33 trillion) by December from 196.8 trillion yuan at the end of 2016, analysis by Chu shows. The estimated increase will be lower than last year’s 19 percent gain as the government’s campaign against leverage starts to bite, she said.
Her estimates are far higher than the latest official figure of 167 trillion yuan in June, which she says doesn’t accurately represent the true state of financing as it doesn’t include items like local government bond issuance and some forms of off-balance sheet lending. [Link]
If my students write this, I would deduct marks:
Since the debt is financed by domestic savings—not foreign lenders—Beijing has ample wiggle room for reform. [Link]
The problems with that statement are as below:
1) Regardless of whether debt is financed by domestic savings or foreign savings, in the event of rising NPA or debt crisis, ‘capital outflows’ would occur. Yes, the residents would flee. If the government blocks that ruthlessly, then all bets are off on social stability and internal mutiny.
2) To ease the pressure on NPA and banks, the government can open the liquidity tap generously and thus lower interest rates, in order to bail out borrowers and lenders too. The government would have to keep interest rates rather low. Consequently, there won’t be any incentive for residents is no incentive to hold the currency. That feeds back into (1) above.
3) In order to stop capital outflows and to prevent the emergence of bad loans, if the government squeezed the credit market and shut it down almost, all asset markets would fall, including real estate. Further, the resulting higher interest rates would worsen the NPA problem.
That is why my reaction to all this ‘new found resolution’ on deleveraging, etc., is a big yawn. CPC is very unlikely to have a stomach for it.
So, whenever a journalist writes that, I realise that they have nothing more than superficial knowledge of economics.
Plus, they are ignoring empirical evidence. It is more than ten years since Wen Jiabao said that the Chinese economy was “unbalanced, unstable, uncoordinated and ultimately unsustainable”. What is the record after that?