On the debt question, my sense again from reading the back and forth among the top experts (and of course the art is figuring out who isn't financially or politically compromised, who is an eternal bull, and who is a chronic China-is-collapsing person, and you look at who has the best counterarguments and who stops responding to countera…
On the debt question, my sense again from reading the back and forth among the top experts (and of course the art is figuring out who isn't financially or politically compromised, who is an eternal bull, and who is a chronic China-is-collapsing person, and you look at who has the best counterarguments and who stops responding to counterarguments and then stop listening to that person haha), is that as the Chinese financial system has financed more and more projects over the last decade that were in fact unprofitable, and hence couldn't pay the banks back, the maturities on those loans were just extended indefinitely so that SOE's wouldn't go bankrupt (see Red Capitalism for the best explanation of this phenomenon in the last generation, the AFC, which explains incidentally why Chinese household income as a % of GDP declined so precipitously as a consequence).
Now, I don't see why this would necessarily cause a financial crisis, because the central bank can always just make 0's appear in any big bank's account. So liquidity itself is never an issue. The problem is that in order to create "growth," you need a never ending... increase (!) in economic activity, but if an ever-increasing proportion of that economic activity is not in fact value generating (meaning the infrastructure doesn't generate enough revenue to cover the cost, much less interest or profit, such as a fancy $200 million suspension bridge connecting two rando counties in Guizhou etc), then you need an ever-increasing amount of debt (essentially, new money) to be issued every year because the activity from prior years isn't actually producing what you claimed it was producing. So sure, you don't write down the $100 billion in bad infrastructure investments, but neither do you make a profit on them, and so if you start with 100 units of economic activity at 10% "growth," but that 10% "growth" wasn't actually value generating, you still have 100 units of GDP, and so from year 2 to 3, to get from 110 to 121, you really are going from 100 to 121, which means you need to issue even more debt, and on and on. The constraint would seem to be reached when the difference between "actual" GDP and "reported" GDP plus the growth target gets so big that it becomes simply impossible to direct enough resources into valueless infrastructure construction to make up the difference. At that point, growth as a whole grinds to a halt, and if you don't redeploy those resources, you end up with stagnation (see: Japan since 1989).
I also do not believe China will experience a crisis; and I agree: more probable outcome will be increasing stagnation : "Japan since 89". My original question to you was: how will China expand its domestic market? It now sounds as if you agree with me: it wont.
My second question: why is rising debt not a problem? - again, you seem to agree with me - or I agree with you - welcome to the Bears Club.
Haha yea. I’d point you to the work of Michael Pettis which I’ve mentioned on here quite a bit the past few weeks because I feel it would be good for the China watching community to be much more familiar with his work. I never meant to be a perma bear (Obvs spent a long time
In China with many close friends and Very successful biz there), it’s just that Pettis would make his arguments, the perma bulls would respond with things like “american west,” he would respond clearly, and they would respond to his response by saying... “american west, a$&hole.” In other words, they had no good response to his clear and detailed analysis. So I figured he was much more honest and correct than they were. And of course that led to other great macro thinkers doing similar analysis (like krugman, eichengreen, of course Keynes back in the day etc) and a reasonably coherent and informed (I think!) macro view evolved (informed for the level of informed citizen of course not expert but as citizens getting informed about the best information possible, usually curated by the best and most honest experts, is all we can do outside of our field).
On the debt question, my sense again from reading the back and forth among the top experts (and of course the art is figuring out who isn't financially or politically compromised, who is an eternal bull, and who is a chronic China-is-collapsing person, and you look at who has the best counterarguments and who stops responding to counterarguments and then stop listening to that person haha), is that as the Chinese financial system has financed more and more projects over the last decade that were in fact unprofitable, and hence couldn't pay the banks back, the maturities on those loans were just extended indefinitely so that SOE's wouldn't go bankrupt (see Red Capitalism for the best explanation of this phenomenon in the last generation, the AFC, which explains incidentally why Chinese household income as a % of GDP declined so precipitously as a consequence).
Now, I don't see why this would necessarily cause a financial crisis, because the central bank can always just make 0's appear in any big bank's account. So liquidity itself is never an issue. The problem is that in order to create "growth," you need a never ending... increase (!) in economic activity, but if an ever-increasing proportion of that economic activity is not in fact value generating (meaning the infrastructure doesn't generate enough revenue to cover the cost, much less interest or profit, such as a fancy $200 million suspension bridge connecting two rando counties in Guizhou etc), then you need an ever-increasing amount of debt (essentially, new money) to be issued every year because the activity from prior years isn't actually producing what you claimed it was producing. So sure, you don't write down the $100 billion in bad infrastructure investments, but neither do you make a profit on them, and so if you start with 100 units of economic activity at 10% "growth," but that 10% "growth" wasn't actually value generating, you still have 100 units of GDP, and so from year 2 to 3, to get from 110 to 121, you really are going from 100 to 121, which means you need to issue even more debt, and on and on. The constraint would seem to be reached when the difference between "actual" GDP and "reported" GDP plus the growth target gets so big that it becomes simply impossible to direct enough resources into valueless infrastructure construction to make up the difference. At that point, growth as a whole grinds to a halt, and if you don't redeploy those resources, you end up with stagnation (see: Japan since 1989).
I also do not believe China will experience a crisis; and I agree: more probable outcome will be increasing stagnation : "Japan since 89". My original question to you was: how will China expand its domestic market? It now sounds as if you agree with me: it wont.
My second question: why is rising debt not a problem? - again, you seem to agree with me - or I agree with you - welcome to the Bears Club.
Haha yea. I’d point you to the work of Michael Pettis which I’ve mentioned on here quite a bit the past few weeks because I feel it would be good for the China watching community to be much more familiar with his work. I never meant to be a perma bear (Obvs spent a long time
In China with many close friends and Very successful biz there), it’s just that Pettis would make his arguments, the perma bulls would respond with things like “american west,” he would respond clearly, and they would respond to his response by saying... “american west, a$&hole.” In other words, they had no good response to his clear and detailed analysis. So I figured he was much more honest and correct than they were. And of course that led to other great macro thinkers doing similar analysis (like krugman, eichengreen, of course Keynes back in the day etc) and a reasonably coherent and informed (I think!) macro view evolved (informed for the level of informed citizen of course not expert but as citizens getting informed about the best information possible, usually curated by the best and most honest experts, is all we can do outside of our field).
good; glad to agree with you; I'm reading Pettis's book with M Kline; very good; final question: why is everyone on the blog named David?
Ha King David was like a Jewish Ghengis Khan, apparently