Viswanathan K's Thoughts

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 constructio...

Look at the history of the first European “global” powers, Spain and Portugal, and you’ll see it is based on military/naval might. But the next power, Holland, had another ace up its sleeve, writes William Bernstein in A Splendid Exchange : “Their most potent weapon was Dutch finance.”   Bernstein elaborates. In 1602, investors poured 6.5 million guilders (that’s $100 million in today’s money) into the Dutch East India Company: “The capital was permanent, that is, if things went well, it would yield profits that would go mostly to pay for the expansion of business.” Contrast that with the standard practice of the day: money put in a company had to be paid back after a fixed period… with interest. See how close the Dutch model is to modern day stock investing? This was a sign of an “extraordinary degree of confidence in Dutch financial institutions”.   But why was there so much confidence to begin with? Being a lowland country, the Netherlands had to laboriously ...