On 2013-08-20, at 1:56 PM, raghu wrote: > The debt that Pettis, Krugman et al worry about is internal i.e. some Chinese > entity holding large paper claims on some other Chinese entity. > > It is true that these claims "net out" if you look at China as a monolithic > entity. So these debts can effectively be nullified by the stroke of a pen in > theory. > > But so what? > > Aren't you ignoring the politics and competing interests within China? There > are going to be BIG winners and losers in any such bailout. You think the > losers are just going to sit back and take one for the team?
Assuming there might be a bailout at some point, why should we expect the pattern to be any different than previously? Some senior party officials and executives at the state-run banks and firms will be replaced and, in some cases, jailed or even executed, the last a practice I abhor. But the stage has not yet been reached where the private sector can dictate to the state as it does in the older capitalist countries. The other big losers will be the thousands of microlenders in the shadow economy who are lending to small private firms unable to raise capital through conventional channels. These small firms have been borrowing at exorbitant interest rates of 20% or higher, and would be the first to go under along with their lenders if growth slows more than it has to date. The microloans, however, are said to represent less than an estimated 1% of bank credit in the economy. A more sizeable part of the shadow economy is lending between big firms through the intermediation of trust companies set up by the big banks to evade interest rate and loan-to-value restrictions in China's tightly-regulated financial sector. The trusts have also been mainly responsible for a proliferation of synthetic products sold to growing numbers of wealthy Chinese which some critics have likened to collateralized debt obligations, but which others have likened to safer money market funds. In any case, the scale of this speculation is such that it is not considered threatening to the financial system, though wealthy individuals and smaller joint-stock banks could be hit in a more serious downturn. See: http://www.economist.com/news/finance-and-economics/21578668-growth-wealth-management-products-reflects-deeper-financial-distortions However, even the most long-standing bearish commentators like Michael Pettis don't think a full-blown crisis in the cards, even in the unlikely event growth tumbles precipitously from its current 7.5% level. Pettis recently estimated that GDP need only grow by 3-4%, implying zero investment growth, in order for median Chinese income to continue growing robustly, ensuring social stability while the economy is weaned away from export-led growth: "In recent decades real disposable income has grown at well above 7 per cent a year on average. To ensure social stability, it should continue growing at this rate or close to it. But growth in household income and household consumption of about 6-7 per cent implies that, if China is to rebalance meaningfully, GDP must grow by 'only' 3-4 per cent. This much lower rate is consistent, among other things, with almost zero investment growth. "China’s GDP, in other words, does not need to grow at 7 per cent or even 6 per cent a year in order to maintain social stability. This is a myth that should be discarded. What matters for social stability is that ordinary Chinese continue to improve their lives at the rate to which they are accustomed, and that the Chinese economy is restructured in a way that allows it to tackle its credit bubble." See: http://www.ft.com/intl/cms/s/0/2f018d1c-f475-11e2-a62e-00144feabdc0.html#axzz2biHtW68N _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
