China's Economy Is Running on Borrowed Money – and Time | Ruchir Sharma

[Bussard Ramjet]

China's Economy Is Running on Borrowed Money – and Time | Ruchir Sharma

You should take his words seriously.

He was one of the biggest China bulls of the last few decades.

@Shotgunner51

 

[艹艹艹]

He should contrast the Chinese economy with the Indian economy.
I'm sure there will be a lot of people interested in it

 

[randomradio]

China's debt problem is a big issue, not just for them but for the whole world.

I had earlier pointed out the same thing in another thread, that China is using up $4 worth of debt to create only $1. And this difference will only keep growing. The bigger problem is whether the debt is actually bigger than what's officially revealed.

This gives a pretty balanced view.
http://www.businessinsider.in/every...bt-problem-all-wrong/articleshow/56656456.cms

The report argues that they need to give more credit to private companies in China rather than public companies.

He should contrast the Chinese economy with the Indian economy.
I'm sure there will be a lot of people interested in it

India's economy is incomparable, insignificant and irrelevant. Let's keep the discussion to the Chinese economy.

 

[艹艹艹]

India's economy is incomparable, insignificant and irrelevant. Let's keep the discussion to the Chinese economy.

Thirty years ago, China and India were almost at the same level.

 

[Bussard Ramjet]

He should contrast the Chinese economy with the Indian economy.
I'm sure there will be a lot of people interested in it

You can google. He has talked in depth about the two.

 

[Nilgiri]

The statement applies to USA a lot more than China actually.

With Trump the US has a chance to rectify (or at lease mitigate in the mid term) this now (another topic)...but China has to keep up what it essentially started about 5 years back (massive debt) for many more decades and create large liability pools along the way too like the US has done since the late 60s.

The video author assumes two things:

a) The Chinese will continue the rate of debt accumulation at the highest impulse. I believe this will not be the case because the Chinese govt at its core is run by economists and technocrats who have time to make plans to de-ramp and de-leverage. This relates to the next part:

b) Chinese Central Bank and monetary policy control is like the Federal Reserve. While the Chinese fed (People's Bank of China) is certainly an integrated member of the international banking system (through its support/lending/policy to several of China's other banks which accumulated this exposure since Deng's reforms)...there is one key difference....the Federal Reserve of US is not under complete US govt (congress) control...rather it itself is quite a private, "independent" institution with many loyalties and control by the larger US private banking system. Thus its priorities have always been oriented toward helping the banking system first and foremost and not the general public. When there is intersection between the two, there was a good solid economic growth in the US overall. This win-win scenario essentially decayed and ended starting at the Vietnam war. That's another very long topic and too much sidetracking.

This is essentially why China has to seriously try really hard to tank its economy through debt. The govt has control of its own printing press and central banking policy....and both are dictated (at least at highest bureaucratic theory) by the desire for public good/interest.

The Chinese certainly are not insulated from the US dollar the Federal Reserve prints/creates, but that is a currency that they do not print or inherit or partake any seigniorage in (which the US has inherited from its glory years)...they simply created a stockpile over decades now as part of their economic integration with the world (which is dominated by the US dollar because of the aforementioned seigniorage).

So there will be asset bubbles and such sure. But there is not a sustained policy in China going on for decades now of relying on seigniorage (which will take probably another 20 years to even become an issue for China to handle if you look at reserve and trade currency preference percentages) and massive liabilities prompted essentially by a privately controlled central bank.

In summary, China at its core simply has neither the type of US central bank and monetary policy....neither the time accumulated in running a massively debt-fuelled economy like the US through seigniorage. The only thing of concern for China is the exact debt ramp pattern (intensity especially compared to the flat line from before) that they have indulged in to hold up their growth rates....like going on a big sugar based diet. But even the pre-diabetes stage is well in the future (if you look at the stockpile of reserves and the wooden planks they have placed at strategic areas underneath them). Then top that all off with a govt controlled central bank answerable to the public good (and not banking sector good)....yeah I don't see it.

Now China can certainly migrate to the US model down the line if they are not careful...but in many ways they are actually more democratic (as far as answerable to the public good) than the US in the highest corridors of their power structure regarding economy/finance.

It's sad because there is no reason the US cannot be either...and as much as I appreciate Trump, I don't see him changing that fundamental aspect of US economy.

P.S Lets keep the discussion as much as possible to China.

 

[The Accountant]

The statement applies to USA a lot more than China actually.

With Trump the US has a chance to rectify (or at lease mitigate in the mid term) this now (another topic)...but China has to keep up what it essentially started about 5 years back (massive debt) for many more decades and create large liability pools along the way too like the US has done since the late 60s.

The video author assumes two things:

a) The Chinese will continue the rate of debt accumulation at the highest impulse. I believe this will not be the case because the Chinese govt at its core is run by economists and technocrats who have time to make plans to de-ramp and de-leverage. This relates to the next part:

b) Chinese Central Bank and monetary policy control is like the Federal Reserve. While the Chinese fed (People's Bank of China) is certainly an integrated member of the international banking system (through its support/lending/policy to several of China's other banks which accumulated this exposure since Deng's reforms)...there is one key difference....the Federal Reserve of US is not under complete US govt (congress) control...rather it itself is quite a private, "independent" institution with many loyalties and control by the larger US private banking system. Thus its priorities have always been oriented toward helping the banking system first and foremost and not the general public. When there is intersection between the two, there was a good solid economic growth in the US overall. This win-win scenario essentially decayed and ended starting at the Vietnam war. That's another very long topic and too much sidetracking.

This is essentially why China has to seriously try really hard to tank its economy through debt. The govt has control of its own printing press and central banking policy....and both are dictated (at least at highest bureaucratic theory) by the desire for public good/interest.

The Chinese certainly are not insulated from the US dollar the Federal Reserve prints/creates, but that is a currency that they do not print or inherit or partake any seigniorage in (which the US has inherited from its glory years)...they simply created a stockpile over decades now as part of their economic integration with the world (which is dominated by the US dollar because of the aforementioned seigniorage).

So there will be asset bubbles and such sure. But there is not a sustained policy in China going on for decades now of relying on seigniorage (which will take probably another 20 years to even become an issue for China to handle if you look at reserve and trade currency preference percentages) and massive liabilities prompted essentially by a privately controlled central bank.

In summary, China at its core simply has neither the type of US central bank and monetary policy....neither the time accumulated in running a massively debt-fuelled economy like the US through seigniorage. The only thing of concern for China is the exact debt ramp pattern (intensity especially compared to the flat line from before) that they have indulged in to hold up their growth rates....like going on a big sugar based diet. But even the pre-diabetes stage is well in the future (if you look at the stockpile of reserves and the wooden planks they have placed at strategic areas underneath them). Then top that all off with a govt controlled central bank answerable to the public good (and not banking sector good)....yeah I don't see it.

Now China can certainly migrate to the US model down the line if they are not careful...but in many ways they are actually more democratic (as far as answerable to the public good) than the US in the highest corridors of their power structure regarding economy/finance.

It's sad because there is no reason the US cannot be either...and as much as I appreciate Trump, I don't see him changing that fundamental aspect of US economy.

P.S Lets keep the discussion as much as possible to China.

Great analysis ... and it is amazing to see such a true and unbiassed analysis coming from an indian ... Really appreciated sir ...

Another aspect I would like to highlight here the OP is missuqoting the term chinese debt ... In pure economic terms chinese debt will only be public i.e. debt owned by government ... Debt owned by gov of China is still very low and given the reserves and investments they have its very small ...

The debt to which OP is referring is probably the total Chinese debt... It is important mention that such a high increase in debt is to stimulate domestic growth ... During the current decade China has changed its economic model from export based growth to domestic consumption based growth ... For that purpose China has to raise income level of domestic population and hence they introduced cheap loans for business and general public ...

OP is right to the extent that there is a risk of non-performing higher in the process but Chinese banking system is not like US ... It is primarily controlled by government and government of China's ability to absorb few non-performing loans is much higher ... Remember in case of China major business are under control of government therefore already have a check on that and there are very few chances for any major corporation including banks or insurance company to bankrupt ...

But the bottomline is Cina might have to bear slight cost of bosting its deomestic economy but the fruits it is expected to reach in future are far more greater ... There is a reason that in the world's list of billionaire share of chinese is increasing at a rapid pace ...

 

[Nilgiri]

Great analysis ... and it is amazing to see such a true and unbiassed analysis coming from an indian ... Really appreciated sir ...

Another aspect I would like to highlight here the OP is missuqoting the term chinese debt ... In pure economic terms chinese debt will only be public i.e. debt owned by government ... Debt owned by gov of China is still very low and given the reserves and investments they have its very small ...

The debt to which OP is referring is probably the total Chinese debt... It is important mention that such a high increase in debt is to stimulate domestic growth ... During the current decade China has changed its economic model from export based growth to domestic consumption based growth ... For that purpose China has to raise income level of domestic population and hence they introduced cheap loans for business and general public ...

OP is right to the extent that there is a risk of non-performing higher in the process but Chinese banking system is not like US ... It is primarily controlled by government and government of China's ability to absorb few non-performing loans is much higher ... Remember in case of China major business are under control of government therefore already have a check on that and there are very few chances for any major corporation including banks or insurance company to bankrupt ...

But the bottomline is Cina might have to bear slight cost of bosting its deomestic economy but the fruits it is expected to reach in future are far more greater ... There is a reason that in the world's list of billionaire share of chinese is increasing at a rapid pace ...

Yes I just skipped through the video so I might have missed that. Chinese public debt only has increased from a base line of about 35% (pre-2008) to around about 45% today.

You can compare the scenario with the US here:

http://www.tradingeconomics.com/china/government-debt-to-gdp

http://www.tradingeconomics.com/united-states/government-debt-to-gdp

I was talking about total debt, where the ratio for China has increased drastically over the past 10 years now (approx from 150% to 280%).

There are many options for the Chinese govt should major trouble unfold down the road (mostly private debt based). It will all be about maintaining the best balance for the people of China and banks of China should it happen....rather than be skewed so heavily in the US case to the banks.

If drastic (final case, nothing else worked scenario) measures are needed, they do have a huge stockpile of US dollar reserves. That would effectively test (for the entire world and not just China) what the depth of US dollar seigniorage actually is....both sides would face much pain....but the important thing to realise the risk/reward ratio is much higher for the US compared to China in this situation....a huge part of the US economy (finance based) would collapse....because you cant have your cake and eat it (the US printed the money exploiting its seigniorage, it cant suddenly abandon it in such a terrible situation without making it even worse for itself).

But anyways, the Chinese state finances are in pretty robust and solid shape...but they must be wary about their private sector based asset bubbles....especially high job level + job inelasticity based ones. I am sure its the primary research the Chinese govt has had underway for some years now.

 

[The Accountant]

Yes I just skipped through the video so I might have missed that. Chinese public debt only has increased from a base line of about 35% (pre-2008) to around about 45% today.

You can compare the scenario with the US here:

http://www.tradingeconomics.com/china/government-debt-to-gdp

http://www.tradingeconomics.com/united-states/government-debt-to-gdp

I was talking about total debt, where the ratio for China has increased drastically over the past 10 years now (approx from 150% to 280%).

There are many options for the Chinese govt should major trouble unfold down the road (mostly private debt based). It will all be about maintaining the best balance for the people of China and banks of China should it happen....rather than be skewed so heavily in the US case to the banks.

If drastic (final case, nothing else worked scenario) measures are needed, they do have a huge stockpile of US dollar reserves. That would effectively test (for the entire world and not just China) what the depth of US dollar seigniorage actually is....both sides would face much pain....but the important thing to realise the risk/reward ratio is much higher for the US compared to China in this situation....a huge part of the US economy (finance based) would collapse....because you cant have your cake and eat it (the US printed the money exploiting its seigniorage, it cant suddenly abandon it in such a terrible situation without making it even worse for itself).

But anyways, the Chinese state finances are in pretty robust and solid shape...but they must be wary about their private sector based asset bubbles....especially high job level + job inelasticity based ones. I am sure its the primary research the Chinese govt has had underway for some years now.

I completely agree with your analysis ...

By the way slightly off.topic but whats your take on US financial management ?

I am of the view that trump policy of made in US will result in loosing grip on world and if influence of China grows to an extent that people substitute Dollar from other mode of international transacrions than US is devastated ... they will no longer be able to use dollar as commodity and it means worth of dollar will collapse ...

 

[beijingwalker]

The west has been saying that for almost 4 decades already and it seems that we borrowed a lot of time.

 

[Götterdämmerung]

China's debt is for everyone to see. Tonnes of ghost cities which are inaccessible to all foreign journalists have trillions of dollars invested where even rats won't move in.

Mind to tell me which "ghost city" in China is not accessible to foreign journalists? Name me one!

 

[windywine]

Yes I just skipped through the video so I might have missed that. Chinese public debt only has increased from a base line of about 35% (pre-2008) to around about 45% today.

You can compare the scenario with the US here:

http://www.tradingeconomics.com/china/government-debt-to-gdp

http://www.tradingeconomics.com/united-states/government-debt-to-gdp

I was talking about total debt, where the ratio for China has increased drastically over the past 10 years now (approx from 150% to 280%).

There are many options for the Chinese govt should major trouble unfold down the road (mostly private debt based). It will all be about maintaining the best balance for the people of China and banks of China should it happen....rather than be skewed so heavily in the US case to the banks.

If drastic (final case, nothing else worked scenario) measures are needed, they do have a huge stockpile of US dollar reserves. That would effectively test (for the entire world and not just China) what the depth of US dollar seigniorage actually is....both sides would face much pain....but the important thing to realise the risk/reward ratio is much higher for the US compared to China in this situation....a huge part of the US economy (finance based) would collapse....because you cant have your cake and eat it (the US printed the money exploiting its seigniorage, it cant suddenly abandon it in such a terrible situation without making it even worse for itself).

But anyways, the Chinese state finances are in pretty robust and solid shape...but they must be wary about their private sector based asset bubbles....especially high job level + job inelasticity based ones. I am sure its the primary research the Chinese govt has had underway for some years now.

Great analysis. Usually the total debt includes four sectors: government, financial, non-financial enterprise, and personal & household. When people talks about and compares different countries' debts, they have to clarify which debt. Apart from non-financial enterprise, China's debts among government, financial and household are very healthy. All of these three sectors are just around 40% of the entire GDP. In contrast, individual sector among these three sectors of government, financial and personal & household in Japan and US has reached around 100% of its own GDP. The total debt over GDP has reached 500% or even 600% for Japan and UK.

The problem for China's debt is the part of non-financial enterprise. The debt from non-financial enterprises has increased to around 140% of China's GDP. This is owing to that the GDP growth has been taken into account for the key prerequisite for local officials' promotion and force every local official to use every possible method to stimulate economy such easy loan for companies.

The central government of China had realized this issue several years ago. It not only reduced the percentage of GDP growth in local officials' promotion requirements, but also introduced the quality of GDP growth by considering the environment protection, energy consumption, and high tech growth etc. The central government also performed so called supply-side reform. Supply-side reform is focused on the sector of non-financial enterprise. One of methods is turning the debt into share. This had been carried out years ago, and I believe, will reduce the debt drastically. And also, this is targeted to avoid the situation happened in 2008 USA crisis that greedy capitalists who generated the mess easily escaped with tremendous wealth and left the nation a mess and disaster

 

[Nilgiri]

I completely agree with your analysis ...

By the way slightly off.topic but whats your take on US financial management ?

I am of the view that trump policy of made in US will result in loosing grip on world and if influence of china grows to an extent that people substitute Dollar from other mode of international transacrions than US is devastated ... they will no longer be able to use dollar as commodity and it means worth of dollar will collapse ...

I think we need to give at least 1 year of Trump administration before I can make a comment on this.

I don't see a collapse of US dollar internationally or anything (and such a collapse would hurt a lot of countries including China)...but it may face much more competition from other currencies in the forex realm if it focuses on using this money for domestic programs rather than letting it sit in foreign stockpiles.

In a way Trump wants to recall this wealth in large amounts back to the US....thats his overall strategy. The money when produced at the US treasury (on instruction from the Fed, not the US govt) has little inherent value (beyond what it inherits through seigniorage), but it accumulates value through the multiplier effect and eventually makes it way to one of the many "sinks/sponges"...the biggest being the Chinese forex reserve. So in effect by recalling, you get a lot of value accumulated on each dollar originally printed (this is equivalent as well to how much the Chinese govt spends to keep the Yuan stable w.r.t US dollar...which in effect is a job subsidy).

Recalling this wealth would promote two things simultaneously: deleveraging the US dollar internationally but improving the domestic US economy. Both actually are two sides of the same coin, one cannot happen without the other. Again if its done in a balanced way, no reason why the long term is not win-win for everyone. Its like with NATO, the US benefits domestically by not continuing to give a series of blank cheques to make up for other countries avoiding spending for it (and thus force them to spend more if they want the same level of security - which actually will help them long term even if they cant see it now).

Trump is pretty pragmatic in theory, but like I said I need to give him a year to implement and then make a firm comment on where things are headed.

 

[Jlaw]

Mind to tell me which "ghost city" in China is not accessible to foreign journalists? Name me one!

he can't because there are no ghost cities.

 

[beijingwalker]

The west has been saying that for almost 4 decades already and it seems that we borrowed a lot of time.

If one believes those daily basis issued China doom reports, China should have crashed multiple time every week