Chinese Economics Thread


weig2000

Junior Member
...Continued.

Let’s start with the banks. Much ink has been spilled on the risks in China’s financial sector. Since November 2008, when then-Premier Wen Jiabao pressed the “go” button on the four-trillion-yuan stimulus, bank assets have more than quadrupled in size. Reviewing the history of credit bubbles, the IMF found none that had expanded so quickly, but plenty of more modest size that still imploded into crisis.

Worse, the problem of moral hazard—the assumption that a deep-pocketed government would backstop bad loans—was endemic. In 2019, cracks started to appear. Baoshang Bank Co., a city lender in Inner Mongolia, became the
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. Defaults, including by state-owned companies and local governments, rose. Even ahead of the Covid-19 crisis, it seemed like sky-high debt, recklessly allocated, might result in a day of reckoning.

Maybe tomorrow, but not today. Missing from the crisis thesis was a crucial point: Financial meltdowns don’t start because bad loans are too high; they happen because banks run out of funding. In the Asian Financial Crisis in 1997, Korea’s banks didn’t melt down because they had made too many loans to crony-capitalist chaebol. They melted down because the foreign funds they relied on to finance their operations dried up. In 2008, Lehman Brothers didn’t collapse because it had too many investments in dodgy mortgage- backed securities. It collapsed because the money markets that financed its activity decided to cut it off.

In China, the combination of a high savings rate and tight controls on moving capital out of the country means that a lack of funding is unlikely to be a problem. Its banks can count on a steady inflow of domestic savings to provide a stable, long-term basis to fund operations. While helter-skelter expansion in lending is a problem—as are a state-dominated banking system and zombie borrowers—as long as bank funding remains adequate, there’s no trigger for crisis.

Then there is the nature of business. Nowhere is the contrast between the U.S. free-market system and China’s state-centric approach as sharply drawn as in the relationship between government and corporations. In the U.S., a hands-off approach is a critical driver of economic dynamism. In China, the biggest banks, telecoms, airlines, and industrial companies are owned by the state. Even in private companies, the Communist Party exercises an influence that would be unthinkable in the U.S.

There are major costs to this approach. “We’re state-owned, so we don’t have to worry about profits,” says the manager of one massive power project on the outskirts of Beijing. Writ large, that cavalier attitude to the niceties of actually making money means a big chunk of the corporate sector is mired in low productivity. Return on assets for state companies is a fraction of the level in the private sector.

But there are also benefits. China’s direct control of state companies—and sway with the private sector—gives policymakers a powerful instrument to manage the ups and downs of the economic cycle. Rarely has that been more evident than in the response to the Covid-19 shock. State companies holding on to their employees prevented spiraling unemployment. Tech giants supported the public health response and the credit stimulus. In a crisis, government and business moving together can be a powerful force for resolution.

Behind it all are the benefits of China’s enormous size. As far back as 1776, Adam Smith—the grandfather of modern economics—recognized that the “vast multitude” of China’s population gave it a built-in advantage in the global economic race. If, Smith wrote, China could “learn for themselves the art of constructing all the different machines made use of in other countries,” they would be able to leapfrog ahead of smaller rivals. After Deng kicked open the door to the world in 1978, and even more after entry to the World Trade Organization in 2001, China had ample opportunity to “learn for themselves.” By directing the resources of the state to acquire new technologies, and then scaling them to China’s massive domestic market, industrial planners were able to give Chinese companies a competitive edge first in textiles, then metals, and now high-speed trains, solar panels, and nuclear power.

That story isn’t over. China’s GDP per capita is just a third of the level in the U.S. That means ample room for continued catch-up growth. As China focuses its attention on the technologies of the future—from electric vehicles to industrial robots and artificial intelligence—the annual pace of growth could stay close to 5% through 2025 and end the decade not much lower. With global businesses deeply invested in their China relationship, Trump’s trade war is unlikely to change the trajectory.

“There are lots of Baoshangs,” says one senior banker in Henan province, hinting that other banks could go the same way as the failed lender. Maybe. But as long as the market believes the government will underwrite their operations, they will stay in business. And as long as China continues to grow, the government’s ability to provide that backstop won’t come into question.

One day, a crisis will come along that’s too big even for Beijing to handle. When that happens, the price of allowing problems to fester in the dark will be a meltdown of monumental proportions. One day. But if a once-in-a-hundred-year pandemic doesn’t pop the bubble, the question is: What will? —With David Qu and Yinan Zhao

Adapted from
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by Bloomberg chief economist Tom Orlik. Published by Oxford University Press.
 

Petrolicious88

Junior Member
Registered Member
...Continued.

The massive zombie loans, the hugely inefficient SOEs, etc. etc...are exactly the structural problems im talking about. The CCP will never give these up because doing so means decreasing state power itself. At the same time, delaying these structural reforms means they become harder to solve in the future.
 

ansy1968

Junior Member
Registered Member
The massive zombie loans, the hugely inefficient SOEs, etc. etc...are exactly the structural problems im talking about. The CCP will never give these up because doing so means decreasing state power itself. At the same time, delaying these structural reforms means they become harder to solve in the future.
hi Petrolicious88

good day.

Which is more effective ,QE or funding SOE, from what I heard both are bad but at least funding SOE ,ordinary people are able to work and had income rather than only the top 1%. Dont get me wrong I agree that China need a structural reform, but it may not be the best time to implement it due to current pandemic and incoming international economic recession.
 

AndrewS

Major
Registered Member
China is the world’s factory, more than ever

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Its export share has expanded during the pandemic. But is this the high-water mark?

NORMALLY 200,000 buyers, hailing from just about every country, would have flocked to the Canton Fair, the world’s biggest trade show. This year, because of the pandemic, it has been conducted entirely online, running for ten days and ending on June 24th. Although no substitute for meetings in the flesh, the virtual fair was a spectacle in its own right, testament to China’s manufacturing muscle. Some 25,000 exhibitors have hosted live-streams simultaneously, often from their factories, chatting to anyone interested in their products.

Among them, Wen Li, a young product manager, demonstrated Z-Green’s self-propelled lawnmowers, to the background clang of the shop floor. Sherry, a manager with My Dinosaurs, gingerly stepped around fake bones as she introduced her company’s giant animatronic beasts, pausing to insert a tongue into the gaping mouth of a brachiosaurus. Joy, a saleswoman with PK Cell, sat behind an array of rechargeable lithium batteries, explaining the workings of the firm’s 23 automated production lines and reeling off its partners’ names, from Walmart to the Chinese government.

On it went. There were companies making motorbikes and electric cars, coffee machines and milk-frothers, dog toys and hummingbird-feeders. Even if the individual live-streams were mostly amateurish, in halting English with poor lighting, the overall effect was powerful. Here, the Canton Fair proclaimed, is China: home to 28% of the world’s manufacturing—nearly as much as America, Japan and Germany combined (see chart)—and, despite all the dislocations from the coronavirus crisis, still going strong.

China has two big advantages as a manufacturing power, amply displayed in recent months. First, its industrial base is unparallelled in breadth and depth, churning out everything from low-end footwear to high-end biotech. Even as wages have steadily increased, China’s combination of manufacturing clusters, first-class infrastructure and upgraded factories have made it more competitive. In 2005, 26.3% of the value of China’s exports was added abroad; by 2016 that was down to 16.6%, with the share of foreign content falling most sharply in electronics, according to the OECD. In other words, more of the bits and bobs that end up in Chinese gadgets are themselves made in China.



Face masks, a must-have during the pandemic, offer a vivid illustration of China’s strengths. At the start of February, it made about half the world’s supply, 10m a day. Within a month, output had increased to nearly 120m. That was not simply through exertion. It was thanks to having “the world’s most complete supply chain”, as Xinhua, the state-run news agency, put it. A simple surgical mask consists of a woven layer fused to a non-woven layer, elastic loops that go around your ears and a thin metal band to fasten it to your nose. More sophisticated masks add a thin plastic filter and an activated carbon filter. Any country hoping to make masks on its own needs companies with expertise in textiles, chemicals, metallurgy and machining, along with sufficient supplies of raw materials, factory space, trained workers, engineers and capital. It cannot just be done from scratch, and a similar story plays out across thousands of products.

The second advantage for China is its own vast market. This is why many American companies want the Trump administration to go only so far in its tussles with China, applying enough pressure to free up more space for them to operate in China, but not so much as to blow up their opportunities. By one measure global firms look even more wedded to China, despite the trade war: during the past 18 months the value of foreign mergers and acquisitions in China reached its highest in a decade, according to Rhodium Group, a research firm. There have also been several high-profile investment projects. BASF, a German chemicals company, is investing $10bn in a production complex in southern China, to serve local customers. Tesla opened its first foreign factory in Shanghai last year to cater to the Chinese market, its biggest after America.

As is to be expected, the global downturn is weighing heavily on Chinese manufacturers. China’s exports fell by 8% in the first five months of 2020 compared with the same period a year earlier. Yet Chinese firms are in better shape than most elsewhere, thanks to the country’s success in slowing the spread of the coronavirus. Not only is China’s economy one of the few likely to grow this year; its earlier resumption of industrial activity has allowed exporters to gain market share while most other countries are still in varying states of lockdown. In Japan, goods from China accounted for a record 30% of total imports in May. In Europe, they made up 24% of imports in April, also a record.

Unmade in China

Yet this may be the high-water mark for China’s exporters. Other countries are only too well aware of China’s manufacturing prowess—and that it leaves them vulnerable to shortages of critical products. That point hit home earlier this year, as they scrambled to buy ventilators and masks from China. Concern that too much manufacturing had been offshored to China motivated some members of the Trump administration—notably Peter Navarro, a brash White House adviser—to impose tariffs on Chinese products. A few years ago Mr Navarro’s obsessive focus on luring manufacturing back to America made him seem eccentric. Now plenty of others sing the same tune, if in gentler tones. In April Japan earmarked $2.2bn to help defray the costs of manufacturers leaving China. European officials have warned of excessive dependence on China, especially for medical products. From India to Taiwan, governments are offering loans, cheap land and other incentives to lure companies from China.

Such inducements have rarely worked in the past, but they stand a better chance now. Three factors are pushing firms to shift some manufacturing operations, even as they continue to target the Chinese market for sales. First, China’s climb up the value chain and rising labour costs have squeezed out low-end firms. Many garment-makers and basic electronic-assembly plants have already left, typically for South-East Asia. Second, tensions between China and America have made companies wary of being caught on one side or the other. Apple still makes most of its iPhones in China but to hedge its political risks has encouraged its suppliers to expand elsewhere, such as India. Third, the rolling shutdowns of factories during the pandemic, with China’s production almost entirely knocked out in February, has underscored the danger of being over-exposed to any one country.

Evidence of the shifting tide can be found in surveys of senior executives of big companies from America, China and north Asia (eg, Japan and South Korea), conducted by UBS, a Swiss bank. Among its 1,000-plus respondents, 76% of American companies, 85% of north Asian ones and even 60% of Chinese firms said that they had already moved or were planning to move some production away from China. Keith Parker of UBS estimates that companies might shift between 20-30% of their Chinese manufacturing capacity. The relocations will not happen overnight but they will slowly chip away at China’s dominance in manufacturing.

In the meantime, Chinese businesses are resilient and retain a well-honed ability to adapt. Take Sowind, a maker of household-cleaning tools—one of the companies showing off its wares at the virtual Canton Fair. Along with mainstays such as brooms and lint rollers, it was flogging a new product: motion-activated, battery-powered soap-dispensers for home use. In a live-stream, Ivy, a young saleswoman in a Sowind red polo shirt, tailored her pitch to the grim viral reality: “You don’t need to touch the soap dispenser, so you can avoid cross-infections.” Contacted after her broadcast, Ivy said that customers in Europe and America were buying thousands at a time. “Our clients really need this,” she said. As for the online migration of the world’s biggest trade show, she was also upbeat. “It takes time to get used to a new technique, but it’s gone better than I had expected.”
 

ZeEa5KPul

Junior Member
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China should conspire with countries to get more money from the US by artificially bidding low because the reality is there will be a point of no return for these countries where the US can stop subsidizing them and they will have to pay the rest.
Now see, this is actually interesting; this is them putting their money where their mouth is. Let's see what sort of result it gets them.
 

Skywatcher

Senior Member
The massive zombie loans, the hugely inefficient SOEs, etc. etc...are exactly the structural problems im talking about. The CCP will never give these up because doing so means decreasing state power itself. At the same time, delaying these structural reforms means they become harder to solve in the future.
There's a onetime fix to the zombie loans: partially privatize the SOEs (which have decent real assets). There will be foreign and domestic investor demand for SOE shares (since they're often real estate heavy, have huge, modern industrial empires or have fixed markets (i.e. utilities).

Of course, it's only a one time trick (trying again would likely weaken CCP's economic hold).
 

plawolf

Brigadier
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China should conspire with countries to get more money from the US by artificially bidding low because the reality is there will be a point of no return for these countries where the US can stop subsidizing them and they will have to pay the rest.
Unlikely to be viable. All bids to national providers, can be subject to freedom of information requests, if they are not published as standard. Even if such information is not normally made public, the US will know if China is trolling them by purposefully making lowball bids to US ally nations that are likely to get the US grants, so can easily get those nations to publically disclose the lowball price China was offering.

It will be hard to charge actual market prices when everyone can point to specific lowball bids you have made, and so it’s quite possible that by trolling in this way, China ends up being the one being forced to make unsustainable subsidies.
 

ZeEa5KPul

Junior Member
Registered Member
There's a onetime fix to the zombie loans
There's a much better "fix" for that: forgive the loans. China's government is lending China's government Chinese currency - the amount of outstanding "loans" is pretty much a fictitious number: it's whatever China wants it to be.
If you borrow money in your own currency, you don't have a debt problem. You can't have a debt problem. There might be other problems like inflation and moral hazard, but not a debt problem.
 

Quickie

Major
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China should conspire with countries to get more money from the US by artificially bidding low because the reality is there will be a point of no return for these countries where the US can stop subsidizing them and they will have to pay the rest.

The offer is not very viable when you take into account that, that's just one-time funding for buying the equipment, which doesn't lead to the overall cost saving when you take into account the cost of maintenance during the lifetime of the equipment, not to mention the cost of possible expansion and upgrade of equipment down the road. Does the U.S. intend to fund all these extra costs as well 5 to 10 years in the future possibly under a very different U.S. administration?
 

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