中國的潛在金融風暴 - W. Lam
Beijing caught in debt dilemma
Willy Lam, 10/21/11
Given that China is expected to contribute 24% of world growth this year, the fast-rising quasi-superpower is generally deemed a bastion of stability in the financial maelstrom that is hitting Europe and the United States.
While Beijing, which is the largest holder of US debt, has yet to make substantial purchases of the European bonds, it has expressed a theoretical willingness to help embattled European Union countries. One of the goals of the latest session of the Chinese Communist Party's (CCP) Central Committee (which concluded on October 18) was to project Chinese soft power by playing up the viability of the "China model".
Confidence in Beijing's ability to manage China's finances however has been shaken by a series of bad news about the nation's private enterprises and its labyrinthine underground banking system.
Since early summer, thousands of once vibrant small and medium-sized enterprises (SMEs) - which account for more than half of China's gross domestic product (GDP) and which create 80% of its jobs - have gone under. In Wenzhou, Zhejiang province, the world-famous quasi-capitalist showcase, dozens of "red bosses" simply vanished last month without paying either their creditors or their employees.
Wenzhou officials have increased visits to factories that appear to be in trouble with a view to forestalling mass layoffs should these firms fail. In the first seven months of the year, Wenzhou enterprises recorded losses of 640 million yuan (US$100 million), or 220 million yuan more than 2010.
While China's private bosses are known for being savvy and resilient, many have turned from manufacturing - where labor and material costs are rising dramatically - to the much more lucrative business of speculating in the real estate market. The downturn in property and related sectors however means some of the most successful SMEs have gone bust.
The so-called Wenzhou phenomenon is being duplicated elsewhere, including several cities in prosperous Guangdong province.
The financial disruptions hitting private firms is linked closely with the country's gargantuan "underground banks". These unlicensed lenders range from local-based businessmen's cooperatives and brokers to credit and trust companies that are offshoots of official banks, insurance companies and other financial institutions.
While illegal on paper, underground banks have been tolerated by the authorities for more than a decade. Even though China has given so-called "national treatment" to quite a number of foreign enterprises and joint-ventures, non-state firms routinely face discrimination from creditors.
Most government-controlled banks, including the "Big Four" - Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agriculture Bank of China - prefer to do business with large state-owned enterprises (SOEs). Non-state companies, particularly SMEs, have for the past decade or so been forced to borrow from underground financial institutions. This is despite the fact that interest rates have been between 30% to 100% during the past year.
Since Beijing tightened the official banks' credit to the real-estate sector early this year, underground banks have also become the prime financier to property developers. The shadow bankers have lent 208 billion yuan to real-estate companies so far this year, or nearly as much as the 211 billion yuan worth of loans that official banks have extended to the sector.
Estimates of the total size of China's underground lending range from 4 trillion yuan to 8 trillion yuan, or respectively around 8% to 16% of the official credit market. It is obvious that a sudden downturn in the economy - such as a bursting of the housing bubble and domino-style defaults by borrowers - could wreak havoc on this shady banking industry.
Complicating the problem is the fact that many of the shadow financial institutions are so-called trust companies that are either directly or indirectly connected with either official banks or government-controlled business conglomerates. They have lured depositors by promising interest rates at least a few times higher than the meager 3.5% or so offered by official banks.
Depositors have included SOEs as well as ordinary citizens, who have been transferring money from their saving accounts in official banks to underground ones. This partly explained the fact that deposits in the Big Four banks suddenly shrank by 420 billion yuan in the first half of September.
The extent of ordinary folks' participation in the shadow banking sector is evidenced by the fact that 90% of Wenzhou residents have parked their money into these institutions. These underground lenders also are proving popular with depositors in neighboring Guangdong province.
Apart from giving loans to parties that have problem securing credit from government banks, trust companies and other underground financial institutions have repackaged and "securitized" their loans into asset-based securities and other wealth management products (WMP) that are similar to those dubious bonds and financial products that flooded the United States in the run-up to the sub-prime mortgage crisis in late 2008.
The Chinese media have reported that commercial lenders issued 8.51 trillion yuan worth of WMPs in the first six months of this year, compared to about 7.05 trillion yuan for the whole of 2010. The value of WMPs could shrink drastically at a time of economic fluctuations, leaving their investors with little compensation.
Meanwhile, the problem of bad loans being piled up by the nation's close to 10,000 local-government financial vehicles (LGFV) remains unresolved. These semi-governmental institutions were set up by municipal- and grassroots-level administrations in 2008 and 2009 mainly to raise money for property and infrastructure development.
The National Auditing Office estimated the LGFVs had amassed 10.7 trillion yuan of debt by the end of 2010. Yet independent estimates put the figure around 14 trillion yuan. While the government anticipates that 2.5 trillion yuan to 3 trillion yuan of these debts will turn sour, while at least one Western analysis reckons that as much as 8 trillion yuan to 9 trillion yuan will not be repaid.
A recent edition of the official Liaoning Daily said close to 85% of LGFV-related loans in northeast Liaoning province missed debt service payments in 2010.
Economist Cheng Siwei, who is a former vice chairman of the National People's Congress, recently expressed worries about a mammoth debt crisis. "Our version of the US sub-prime crisis is the lending to local governments, which is causing defaults," Cheng said at the World Economic Forum in Dalian last summer.
Owing to the unmitigated spate of bad news on the finance front, it is not surprising that the stock prices of even the "Big Four" banks have tumbled by more than 30% since the summer. It is however premature to conclude the country is about to be plunged into a recession. While independent analysts estimate China's total public debt is about 80% of GDP, central authorities still have a huge war chest. Central revenue was 8.3 trillion yuan last year. The country also holds more than $3.2 trillion in foreign-exchange reserves.
The central government's apparent failure to take timely and efficacious action to combat the series of abuses however is a grave cause for concern. For example, despite repeated pledges by Premier Wen and Executive Vice Premier Li Keqiang about "rectifying dislocations" in the economy, very little has been done to curb the excesses of the underground banks or the LGFVs.
Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC) - which is the top watchdog of the banking industry - recently told the People's Daily that banks must "step up their prevention of risks associated with shadow banking".
"The CBRC will strictly examine all financing products promoted by commercial banks to ensure that risk from these products will not extend into the banking system," Liu said. He also expressed confidence that debts incurred by LGFVs would not get out of hand.
At a CBRC meeting earlier this year, Liu told bankers to "boost their investigation and research of the question of shadow banks, and to do well the task of following up [cases] and analysis". No decisive action however has yet been taken by either the CBRC or other government department to close down underground banks, trust companies or LGFVs.
After news of the massive defaults of Wenzhou enterprises hit the newsstands earlier this month, Premier Wen rushed to the city to give at least rhetorical support to the country's struggling private sector.
"Small enterprises should be a priority of bank credit support, and they should enjoy more tax preferences from the government," said Wen. "Banks should increase their tolerance of the non-performing loan ratio of small enterprises, set targets for the expansion of loans to small companies, and reduce the small businesses' cost of securing credit."
Given that it is a stated central-government policy to restrict lending - and to allow major commercial banks to give preference to SOEs in their credit policy - it is, however, unlikely Wen's promises will materialize.
The central government is facing a tough dilemma. On the one hand, Beijing is unlikely to change its year-long policy of reining in credit so as to curb inflation - as well as excessive exuberance in the housing and other sectors. Last August, the consumer price index was 6.2%, slightly down from the three-year high rate of 6.5% recorded for July.
Both officials and economists however have warned upward price spirals will continue for a relatively long period. On the other hand, the massive closure of SMEs means unemployment - and social unrest.
Equally importantly, Beijing must do more to curtail reckless lending as well as the sale of WMPs in the shadow banking market. A massive failing of underground banks could lead to potentially violent protests by its tens of millions of depositors. China already suffers from more than 100,000 mass disturbances each year.
Given that the 18th CCP Congress, which will witness a wholesale changing of the leadership, is just a year away, the current administration faces mounting pressure to clean up the country's financial mess sooner rather than later.
Dr Willy Wo-Lap Lam is a Senior Fellow at The Jamestown Foundation. He has worked in senior editorial positions in international media including Asiaweek newsmagazine, South China Morning Post, and the Asia-Pacific Headquarters of CNN. He is the author of five books on China, including the recently published Chinese Politics in the Hu Jintao Era: New Leaders, New Challenges. Lam is an Adjunct Professor of China studies at Akita International University, Japan, and at the Chinese University of Hong Kong.
(This article first appeared in The Jamestown Foundation. Used with permission.)
(Copyright 2011 The Jamestown Foundation.)
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中國經濟會泡沫化嗎？ - P. Krugman
Will China Break?
PAUL KRUGMAN, 12/18/11
Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit -- with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting -- and there are real reasons to fear financial and economic crisis.
Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now.
I’ve been reluctant to weigh in on the Chinese situation, in part because it’s so hard to know what’s really happening. All economic statistics are best seen as a peculiarly boring form of science fiction, but China’s numbers are more fictional than most. I’d turn to real China experts for guidance, but no two experts seem to be telling the same story.
Still, even the official data are troubling -- and recent news is sufficiently dramatic to ring alarm bells.
The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.
So who’s buying the goods and services China produces? Part of the answer is, well, we are: as the consumer share of the economy declined, China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.
The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. And surely much of the rest of the increase was from firms expanding to sell to the burgeoning construction industry.
Do we actually know that real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back -- think coastal Florida.
And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system. There were huge differences in detail: shadow banking American style tended to involve prestigious Wall Street firms and complex financial instruments, while the Chinese version tends to run through underground banks and even pawnshops. Yet the consequences were similar: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.
Now the bubble is visibly bursting. How much damage will it do to the Chinese economy -- and the world?
Some commentators say not to worry, that China has strong, smart leaders who will do whatever is necessary to cope with a downturn. Implied though not often stated is the thought that China can do what it takes because it doesn’t have to worry about democratic niceties.
To me, however, these sound like famous last words. After all, I remember very well getting similar assurances about Japan in the 1980s, where the brilliant bureaucrats at the Ministry of Finance supposedly had everything under control. And later, there were assurances that America would never, ever, repeat the mistakes that led to Japan’s lost decade -- when we are, in reality, doing even worse than Japan did.
For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners -- among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations -- does not sound like a mature government that knows what it’s doing.
And anecdotal evidence suggests that while China’s government may not be constrained by rule of law, it is constrained by pervasive corruption, which means that what actually happens at the local level may bear little resemblance to what is ordered in Beijing.
I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.
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中國的信貸風暴隱然成形 - A. Evans-Pritchard
China's epic hangover begins
China's credit bubble has finally popped. The property market is swinging wildly from boom to bust, the cautionary exhibit of a BRIC's dream that is at last coming down to earth with a thud.
Ambrose Evans-Pritchard, 12/14/11
It is hard to obtain good data in China, but something is wrong when the country's Homelink property website can report that new home prices in Beijing fell 35pc in November from the month before. If this is remotely true, the calibrated soft-landing intended by Chinese authorities has gone badly wrong and risks spinning out of control.
The growth of the M2 money supply slumped to 12.7pc in November, the lowest in 10 years. New lending fell 5pc on a month-to-month basis. The central bank has begun to reverse its tightening policy as inflation subsides, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains.
The question is whether the People's Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble.
Chinese stocks are flashing warning signs. The Shanghai index has fallen 30pc since May. It is off 60pc from its peak in 2008, almost as much in real terms as Wall Street from 1929 to 1933.
"Investors are massively underestimating the risk of a hard-landing in China, and indeed other BRICS (Brazil, Russia, India, China)... a 'Bloody Ridiculous Investment Concept' in my view," said Albert Edwards at Societe Generale.
"The BRICs are falling like bricks and the crises are home-blown, caused by their own boom-bust credit cycles. Industrial production is already falling in India, and Brazil will soon follow."
"There is so much spare capacity that they will start dumping goods, risking a deflation shock for the rest of the world. It no surpise that China has just imposed tariffs on imports of GM cars. I think it is highly likely that China will devalue the yuan next year, risking a trade war," he said.
China's $3.2 trillion foreign reserves have been falling for three months despite the trade surplus. Hot money is flowing out of the country. "One-way capital inflow or one-way bets on a yuan rise have become history. Our foreign reserves are basically falling every day," said Li Yang, a former central bank rate-setter.
The reserve loss acts as a form of monetary tightening, exactly the opposite of the effect during the boom. The reserves cannot be tapped to prop up China's internal banking system. To do so would mean repatriating the money – now in US Treasuries and European bonds – pushing up the yuan at the worst moment.
The economy is badly out of kilter. Consumption has fallen from 48pc to 36pc of GDP since the late 1990s. Investment has risen to 50pc of GDP. This is off the charts, even by the standards of Japan, Korea or Tawian during their catch-up spurts. Nothing like it has been seen before in modern times.
Fitch Ratings said China is hooked on credit, but deriving ever less punch from each dose. An extra dollar in loans increased GDP by $0.77 in 2007. It is $0.44 in 2011. "The reality is that China's economy today requires significantly more financing to achieve the same level of growth as in the past," said China analyst Charlene Chu.
Ms Chu warned that there had been a "massive build-up in leverage" and fears a "fundamental, structural erosion" in the banking system that differs from past downturns. "For the first time, a large number of Chinese banks are beginning to face cash pressures. The forthcoming wave of asset quality issues has the potential to become uglier than in previous episodes".
Investors had thought China was immune to a property crash because mortgage finance is just 19pc of GDP. Wealthy Chinese often buy two, three or more flats with cash to park money because they cannot invest overseas and bank deposit rates have been minus 3pc in real terms this year.
But with price to income levels reaching nosebleed levels of 18 in East coast cities, it is clear that appartments – often left empty – have themselves become a momentum trade.
Professor Patrick Chovanec from Beijing's Tsinghua School of Economics said China's property downturn began in earnest in August when construction firms reported that unsold inventories had reached $50bn. It has now turned into "a spiral of downward expectations".
A fire-sale is under way in coastal cities, with Shanghai developers slashing prices 25pc in November – much to the fury of earlier buyers, who expect refunds. This is spreading. Property sales have fallen 70pc in the inland city of Changsa. Prices have reportedly dropped 70pc in the "ghost city" of Ordos in Inner Mongolia. China Real Estate Index reports that prices dropped by just 0.3pc in the top 100 cities last month, but this looks like a lagging indicator. Meanwhile, the slowdown is creeping into core industries. Steel output has buckled.
Beijing was able to counter the global crunch in 2008-2009 by unleashing credit, acting as a shock absorber for the whole world. It is doubtful that Beijing can pull off this trick a second time.
"If investors go for growth at all costs again they are likely to find that it works even less than before and inflation returns quickly with a vengeance," said Diana Choyleva from Lombard Street Research.
The International Monetary Fund's Zhu Min says loans have doubled to almost 200pc of GDP over the last five years, including off-books lending.
This is roughly twice the intensity of credit growth in the five years preceeding Japan's Nikkei bubble in the late 1980s or the US housing bubble from 2002 to 2007. Each of these booms saw loan growth of near 50 percentage points of GDP.
The IMF said in November that lenders face a "steady build-up of financial sector vulnerabilities", warning if hit with multiple shocks, "the banking system could be severely impacted".
Mark Williams from Capital Economics said the great hope was that China would use its credit spree after 2008 to buy time, switching from chronic over-investment to consumer-led growth. "It hasn't work out as planned. The next few weeks are likely to reveal how little progress has been made. China may ride out the storm over the next few months, but the dangers of over-capacity and bad debt will only intensify".
In truth, China faces an epic deleveraging hangover, like the rest of us.
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中國的潛在金融風暴 2 - M. Pei
Swimming Naked in China
Minxin Pei, 11/03/11
With the Chinese government tightening credit, the massive leakage from the formal banking sector into the ‘shadow system’ ultimately risks sinking the country’s financial system.
For quite some time, analysts of China have been puzzled by a strange phenomenon: the country’s public and financial institutions are decidedly subpar by any international standard, but its economic growth rate is anything but. This puzzle can only be explained by two conclusions: either China has been fudging its growth data, or Chinese institutions aren’t as bad as outsiders commonly think.
There is, however, a third possibility. During the peak of the credit bubble in the United States, bankers on Wall Street had a popular saying: “When the tide is high, nobody knows you are swimming naked.” What this aphorism means is that apparent economic prosperity can cover up many dubious if not outright shady practices that eventually lead to financial calamities.
So if we apply this expensive lesson learned from Wall Street, it’s hard not to suspect that a lot of people have been swimming naked in China in recent years as well. The prudish Communist Party hasn’t acquired Scandinavian-level tolerance and allowed nudist beaches in China (it has not). Instead, based on the recent spate of worrying financial news out of China, it’s obvious that high economic growth has concealed many high-risk and illegal activities and practices that may have bolstered growth, but also sowed the seeds for financial mass destruction.
Of all the disquieting news from China these days, such as stubborn inflation, slowing growth, and social unrest, the sudden bankruptcy of a large number of private firms in Zhejiang, the most entrepreneurial province in all of China, is by far the most disturbing. Press reports suggest that most of the bankruptcies involved small and medium-sized private firms that couldn’t service their debt or had their credit lines withdrawn by China’s “shadow banking system.” This consists of state-controlled banks and illegal private financial intermediaries that funnel loans to credit-starved private firms.
Of course, the bankruptcies themselves have led to a panicked reaction in Beijing because they not only made tens of thousands of workers jobless and ignited some protests, but because they also could cause financial contagion within China, leading to the “shadow banking system” to call in loans and triggering a cascade of new bankruptcies. So Chinese Premier Wen Jiabao and senior officials hurried to Wenzhou, the epicenter of the emerging financial distress, to try to restore calm and confidence.
But the task of stanching off this incipient financial panic is daunting. In the short-term, this involves the formulation and execution of policies that would effectively bail out those who have been swimming naked in China’s high but turbulent economic tide. For years, China’s state-owned banks systematically restricted credit to China’s dynamic private sector. While Chinese private firms are the fastest-growing economic entities and creating most of the new jobs, the Chinese government channels the bulk of bank loans to state-owned companies. The data on bank loans show that, as of 2009, explicitly identified non-state firms accounted for only 2 percent of all outstanding loans.
This discriminatory policy forces private firms to tap the “shadow banking system.” Such a system came into being because state-owned banks wanted to make more money with their low-cost (if not free) household deposits, because when state-owned banks lend to state-owned firms, they can charge only regulated (low) interest rates and repayment is not assured. Generally, such lending is politically safe (since no bank managers go to jail for making bad loans to state-owned enterprises) but economically unprofitable. On the other hand, lending money to private firms is politically unsafe (bank managers risk corruption charges should loans go sour) but economically lucrative (as they can charge high rates).
To manage the political risks of lending to private firms, Chinese state-owned banks created new investment options for their depositors, who are eager to invest their hard-earned savings at rates higher than government-controlled rates for deposits. Called “wealth management vehicles,” these new financial instruments effectively enabled state-owned banks to channel consumer deposits into loans targeting credit-starved private firms at rates that, when annualized, normally reach double digits. Effectively, the “shadow banking system” has been siphoning off credit from the state-owned banks. In the last few years, when Beijing opened the credit spigot to stimulate the economy following the global financial crisis, few noticed the effects of such leakage, which has grown enormously. Estimates by economists put the total amount of outstanding loans made by the “shadow banking system” at close to 20 percent of all outstanding bank loans.
However, as in the case of a falling tide, Beijing has been tightening credit to fight inflation for a year now. In this process, state-owned banks have been forced to call in the loans made through the “shadow banking system,” thus hurting the debtors and triggering a spate of bankruptcies.
The proposed short-term solutions – making more loans available, restructuring the terms or rolling over maturing loans – will do no more than put a dent in a more serious systemic problem. As long as the Chinese state monopolizes the financial sector and discriminates against private firms, corrupt and high-risk behavior such as lending hundreds of billions of dollars through an unregulated informal banking system will continue.
The question on everybody’s mind is whether the massive leakage from the formal banking sector into the “shadow banking system” will be big enough to sink the Chinese financial sector. While nobody knows the real answer (in all probability, private firms are better risks than China’s traditional deadbeats, such as local government entities and SOEs), what makes a Chinese financial meltdown a more probable catastrophe would be a combination of several similar disasters. While each of them may be financially manageable in isolation, their total severity and simultaneous eruption could overwhelm the Chinese state.
Of course, here we are talking about the other two big holes in the Chinese financial system: local government debt (roughly 30 percent of GDP) and loans to real estate developers (the magnitude of which nobody knows).
So it appears that Chinese private entrepreneurs are not the only naked swimmers. They are in some distinguished company.
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中國的遠慮和近憂 – W. Pesek
Crisis of 2012 May Be Harder on China Than U.S.
William Pesek, 10/26/11
Economists were probably too busy watching markets gyrate to contemplate last month’s big news in science. Physicists detected particles travelling faster than light, which, if the reading was accurate, means time travel is possible.
Now, let’s play a quick mind experiment that would surely captivate the deans of the dismal science: Pretend you have just been transported 10 years into the future to see how this incipient global crisis pans out. It would be hard to find anyone who isn’t desperate to know.
What if, a decade from now, the U.S. comes out the winner of today’s market chaos at the expense of Europe and China?
This intriguing contrarian view is the subject of “The American Phoenix,” a new book by Hong Kong-based economist Diana Choyleva and her Lombard Street Research colleague Charles Dumas. Bargain bins are loaded with China-crash titles. What’s different about this book is that it turns all we think we know about the interplay between the Group of Two on its head.
If the last few years taught us anything, it’s that the unthinkable has an uncanny knack of happening. From Arab Spring protests to China bailing out Europe’s markets to a U.S. presidential candidate suggesting it’s treasonous for the Federal Reserve to do its job, the world really is upside down.
So it’s worth considering an alternative trajectory for the U.S. and China as another meltdown seems to be unfolding. It’s hard to be optimistic for 2012 as Europe dithers, Washington bickers, Japan’s paralysis deepens and China experiments with ways to avoid overheating.
If there is an accepted narrative about the G-2 in Asia, it goes something like this: China will grow 8 percent or 9 percent a year indefinitely, grabbing global market share as it moves from sweatshops to a knowledge-based, innovation-driven model. Hiccups may happen, but China will surpass the U.S. economy 10 or 20 years from now.
The U.S., meanwhile, experiences a slow, steady slide as the magnitude of its challenges overwhelms a political system ridden with gridlock, an excessive debt load and chronic joblessness. The reason Occupy Wall Street went global in ways the Tea Party didn’t is that the former reflects the reasons for America’s decline, while the latter is mere handwringing over it.
The question is whether the U.S. recovers relative to Europe and China as global markets swoon anew. The operative word is “relative.” No one should expect the U.S. to prosper in some great way from a 2012 crisis. It’s that Europe and China will be far worse off as contagion whips around the globe.
“When you look at the problems facing the world, the bubbles and imbalances, America’s are easier to fix than most,” Choyleva told me in Hong Kong yesterday. “It says a lot about the state of things globally.”
It would surprise few to imagine Europe having a harder decade than the U.S. A Greek default is a given and may drag down Portugal, Spain and, in the worst case, even Italy. Europe may be lucky to get away with just one lost decade.
Many would be taken aback to think that China, too, might experience its share of setbacks compared with the U.S. Some are well-known, including inflation that fans social unrest and a financial crisis erupting as the massive stimulus of 2009 comes back to haunt Beijing. All that investment created the illusion of economic vitality. Too much of it was funneled into unproductive sectors of the economy, setting up China for a banking meltdown.
Choyleva adds a less obvious twist to the critique: how China’s financial proximity to the U.S. is a bigger problem than many people appreciate. By tying itself to the dollar and amassing more than $3 trillion of currency reserves, China essentially merged with the U.S. financial system. When the Fed pumps money into the economy, it inflates China more than America.
There are rumblings in Washington about punishing China for its undervalued currency. Yet China is only now realizing the extent to which it surrendered sovereignty to the U.S. As the Fed adds more cash to markets, China’s inflation becomes more entrenched and Beijing loses even more control. Over time, this dynamic will harm China’s competiveness more than if Beijing had allowed the yuan to strengthen, as per the U.S.’s demands.
China could increase interest rates to temper rising prices, but that would devastate growth. The thing about the G-2 is that pundits often view China as being in the stronger position -- its massive reserve holdings are both leverage and a fortification. Yet China is trapped. It’s addicted to cheap U.S. financing and is increasingly feeling the side effects.
For all its troubles, the U.S. has inherent strengths: It’s home to many of the world’s top 20 universities; it has institutions that may still get their act together in ways Europe can’t; a fertility rate that exceeds deaths, meaning America can ultimately outgrow its debt -- unlike, say, Japan and Europe.
If Japanese and European officials could travel in time, it wouldn’t be to fix mistakes of the past. If Chinese officials don’t act more assertively to tweak their model, they’ll have similar regrets a decade from now.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Hong Kong at firstname.lastname@example.org
To contact the editor responsible for this column: James Greiff at email@example.com
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