

It's China's turn to wrestle with a pile of bad debt - chailatte
http://www.msnbc.msn.com/id/43600432/ns/business-eye_on_the_economy/

======
ChuckMcM
I expect effects on China's economy will be the biggest story of the 10's or
20's. So many things were lined up to make the system they had work, educated
but under employed labor, a voracious appetite in the world for their cheaply
manufactured goods, and a relatively docile population. Every single one of
these 'advantages' seem to be deteriorating.

So the new learning we'll get this time around is if the Chinese version of
Communism can keep the economy from driving off a cliff or not. If not, will
it kill communism in China?, or the world's economy? or both? And how will the
folks in power respond?

Very interesting times indeed.

~~~
aneth
On the contrary, I would say their economy is maturing with domestic
consumption becoming a dominant portion, their production methods are becoming
more efficient as labor costs increase, their production scale is second to
none, their educated and motivated population is poised to bring a new era of
innovation and entrepreneurship to China.

And for the record, "communism in China" is already dead.

In response to the article, China's balance sheet was worse in 2004 before the
triumphant expansion of the last 7 years. I had doubts they could outgrow
their debts then. I have doubts today, but fewer.

China is controlled by the smartest, most effective technocrats in the world.
Don't underestimate them.

~~~
dimmuborgir
_"I would say their economy is maturing with domestic consumption becoming a
dominant portion."_

You've got it completely wrong.

Consumption in China has been rapidly decreasing with respect to GDP. Their
consumption was some 55% of GDP in the 90's. Then it came down to 46% around
2000 and now it stands at 34%. [[1]] All the efforts that China made to
increase consumption didn't materialise. The fast growing Chinese GDP is only
giving an illusion that Chinese people are massively consuming. But that's not
true.

On the other hand, the percentage of fixed-investment (roads, bridges etc.) to
GDP has been steadily increasing in China. If Jim Chanos is to be believed,
the fixed-investment now stands at a whopping 70% of GDP. [[2]] This seems to
be the actual lifeline of Chinese economy.

So in order to maintain the GDP growth, China has been recklessly building
roads, bridges etc. fuelled by local government debts. [[3]] This has been
creating massive bad-loans, over-investments and bubbles. China is building
not _'because of'_ its economy. It is building _'for the sake of'_ its
economy. This won't see a happy ending.

[[1]] [http://www.bloomberg.com/news/2011-06-16/consumers-fade-
in-c...](http://www.bloomberg.com/news/2011-06-16/consumers-fade-in-china-
economy-racked-by-inflation-with-peak-days-gone.html)

[[2]] [http://www.moneynews.com/StreetTalk/jim-Chanos-Soft-
Landing/...](http://www.moneynews.com/StreetTalk/jim-Chanos-Soft-
Landing/2011/02/02/id/384774)

[[3]] [http://www.moneycontrol.com/news/features/why-
china39s-local...](http://www.moneycontrol.com/news/features/why-
china39s-local-government-debt-is-so-scary_563013.html)

------
daemin
This article reminds me of a Cringley article that was written not too long
ago, where he speculated that this was going to be India's century rather than
China's, and China would have a decade instead. -
<http://www.cringely.com/2010/10/the-chinese-decade/>

It also reminds me of seeing a report on infrastructure projects in Japan,
with bridges going to nowhere and other crazy construction projects, all
designed to pump up the economy as well as the pockets of construction
companies owned by cronies.

It will be interesting to see how and where it goes, and I hope that Australia
can diversify its economy - from mining and sending ore to China - to
something else before China experiences any hiccups (or worse).

------
wisty
Despite the amount of hot funding going around, most Chinese are capital
constrained. Small business can't get credit because they don't have the
"connections", their books are cooked (no revenue = no tax, but sadly no
credit; and businesses that pay tax are uncompetitive), and banks would rather
loan to the government or state-owned-entities.

Thus, anyone who has the seed money to start a business can do very well, so
the "businessmen" (even small ones) make a lot more than the workers.

------
iqster
I don't get it.

This article was confusing and badly written. The Chinese govt gave the money
to local authorities to spend. Next, the article talks about bad debts showing
up in audits. Was the money a straight out transfer? If so, this doesn't
affect their debt position. Was the money supposed to be used for construction
projects and not just used to pay down old debts? If so, this doesn't affect
their debt position either. The article also talked about corruption and a
"rigged system to guarantee bank profits". No details given about either
issues.

~~~
RickHull
> _The Chinese govt gave the money to local authorities to spend._

I believe that is a overly-simplistic, "net" explanation.

I think it goes more like:

    
    
        1. China's central bank grants credit (i.e. cheap loans) to big "national" banks
        2. Big national banks grant credit to regional/provincial/municipal governments
        3. Local governments spend on infrastructure (build it and they will come)
        4. No one comes
        5. ...
        6. Profit?
    

So the big banks have bad loans on their books, but the national government /
central bank will surely bail them out.

~~~
aquark
So is the question how do these loans appear on China's central bank's balance
sheet?

I am confused by reading this article: if part of the issue in the US is that
China holds vast amounts of US debt, and now China is also highly leveraged,
then who is left holding their debt?!

What would be to problem with the Chinese central bank just writing off all
the debt?

I can see that the spending pattern may be unsustainable, but if you have been
lending the money to yourself there is no-one left to be upset when you
default.

~~~
junkbit
I think most of the world's debt is privately held. For instance the UK is the
third largest owner of US debt after China and Japan, but we ourselves have a
massive public debt.

