Sinophrenia #2: Financial System Woes

This blog is a take on the problems in China’s financial system, as described in Thomas Orlik’s China: the Bubble that Never Pops.

 

Those risks/problems today can be traced back to the (Western) financial crisis of 2008. As the West fell into a recession, demand for Chinese imports fell. China responded with a massive stimulus package (4 trillion yuan, approx. $400 billion) to keep its economy running. The central government only came up a quarter of that amount, though. The provinces (states) were told to come up with the rest. How could the provinces come up with such a huge amount?

 

For historical reasons, most land in China is owned by the government. Ergo, the provinces decided to sell some of their land to raise the money. Other perks were thrown to industrialists so that they’d buy the land. In turn, real estate companies started buying land close to these planned sites of industrial expansion. So far it looks good, right? Those new industries and construction activities would add to economic growth. But then…

 

The governments wanted economic growth to pick up, so there was pressure on the banks to lend, er, easily. That led to indiscriminate lending with barely any care about the feasibility of repayment. The central government saw the risk and framed regulations to limit the risk banks could take on. But…

 

Banks, Chinese or Western, break laws and regulations. China’s banks created new dummy entities (“shadow banks”) – the bank would give a loan to the borrower, then transfer that loan as a bond to this shadow bank. Bingo! The bank no longer had the loan in its books, and was meeting the regulations. But of course, the loan was just hidden in the shadow banks. And then…

 

China’s growing middle class was always looking for opportunities to invest their wealth. The shadow banks started offering those high-risk bonds to them as an investment option! Suddenly, the risk of all these loans was spreading from the banks to the middle class as well. The government woke up. While they knew the banks were lying, how could they find out all the shadow banks, which by definition, were illegal and thus hidden? Center-province politics made any such discovery process very complicated. But without that knowledge, how could the government know the true state of the financial system? Or steps to take?

 

Even more problematically, the blissfully unaware middle class found those risky bonds attractive – after all, they offered higher interest than bank deposits. In turn, as more and more savings moved to buy these bonds, the banks found their deposits slowing and/or reducing. Which put pressure on the banks to slow down lending (which would then slow down economic growth) or to raise deposit rates (which would increase the risks to the banks themselves).

 

China’s government, therefore, is in a fix. Squeeze too hard, and lending might freeze, and financial panic would hurt economic growth. But do nothing, and the problems may grow so big that when they finally come out, it would be too late to fix them.

 

This then is the first problem China faces today:

“The economy has too much debt, taken on too quickly, and allocated by a deeply flawed financial system. Bad loans, unrecognized in the official data, are already high enough to pose a threat to stability.”

In China’s case, “stability” here doesn’t just refer to financial stability. After all, financial problems can quickly turn into social unrest, which could become a danger to the political system itself…

Comments

Post a Comment

Popular posts from this blog

Student of the Year

Image
As a toddler, my daughter loved Alia Bhatt’s songs, esp. the ones from Student of the Year . (That movie did have many good songs and well-choreographed dances). Fast forward to present day, when she is 12 yo. She rarely watches Hindi movies now, but one of the few ones she likes of late, Raja aur Rani ki Prem Kahani has, yes, Alia Bhatt.   If I had any hopes that there was anything to be read in the name of her toddler-time favorite ( Student of the Year ), they have been dashed. Our conversations come exam time are perfectly captured by this photo and its caption: In fact, the pic below captures how she and I look at her answer sheets – me intently, she with an expression of “It’s over, so why are you even looking at it?”   Of late, we pull her leg and tell her that she isn’t showing any signs of academic prowess, she’d better find a rich guy to marry. Some time later, she showed us this meme on the Internet: “Me No Study, Me No Care Me Go Marry Millionaire If He Die
Read more

Animal Senses #7: Touch and Remote Touch

Instinctively, we think touch is based on contact. Not entirely true, explains Ed Yong in Immense World – there’s a more important aspect than contact: “These incredible feats are possible through movement. If you rest a fingertip upon a surface, you can get only a limited idea of its features. But as soon you’re allowed to move, everything changes. Hardness becomes apparent with a press. Textures resolve at a stroke.” As you run your fingers over a surface, they hit the tiny peaks and troughs and set off vibrations in the mechanoreceptors at their tips.   At the tip of its snout, the star-nosed mole has many pairs of hairless appendages. It uses them to touch things around itself. Alive or dead? Food or ignore? It does these movements at an insane speed. In the time it takes to blink our eyes, the star-nosed mole can probe, identify and swallow its food. “Light may be the fastest thing in the universe, but light sensors have their limits, and the star-nosed mole’s sense of
Read more

The Retort of the "Luxury Person"

Image
Coming up with biting and witty retorts. It’s something we dream of, but rarely manage to pull off. Worse, the more we stew over the offending remark, the more likely we are to come up with that dream retort, as Calvin ruefully points out: During our last holiday at the Taj Resort, seeing my wife carrying towels to our poolside chairs, one of the kids there mistook her for a member of the staff and asked for a towel. When my wife narrated this to us, I did not imagine that my 8 yo daughter would come up with her own retort. But a day later, my daughter recapped the incident, an incident that didn’t even involve her in the first place , and said, “You know what I’d have told that kid who asked for the towel?”. And without waiting for an answer, she told us anyway: “I don’t work here. I too am a luxury person who is living at this resort. Go get your own towel.” We were highly amused by the phrase she had coined: “luxury person”. It certainly captures the kind of holid
Read more