From the article and the first few Google search results, it seems like 'Commercial Acceptance Bills' solve the same problem. They create liquidity for suppliers without reducing their customers' immediate liquidity.
And their liquidity seems to come from:
- banks widely supporting their purchase
- being transferrable
- having a future date (I'm not sure, but this part sounds like it might be like writing a post-dated cheque)
Given we normally like financial innovations that increase liquidity and keep markets moving, why should we be concerned about this market, whose current stock is less than 2% of China's annual GDP?
The contention here is that a whole economy is filled with this, to the tune of 2% of GDP! I mean, I don't know whether or not this is solvent but if it were my economy I'd be awfully worried.
1. Things are very different in China. If you can get away with not paying, it's not really wrong in the same way as in America. They have a different business culture based more around mutually assured destruction.
2. China has a massively leveraged internal economy, propped up by massive stimulus with the RMB. Only because of the two-currency BS they pull can they continue making this work. But because external nations don't actually use RMB, they could end up having a worse recession because of it. Or maybe better, because of the two currencies. Honestly, it's hard to know.
3. It's much harder to enforce these in China (unless you have the right connections, in which case you probably don't need to go through normal courts any way).
I'm not saying it's a bad idea, and I'm all for it in principle. I guess these are really more general issues with China and her economy which incidentally apply to this than issues with the concept.
This is a bit of an interesting question actually. Because in reality these IOU's aren't much different from a loan. And failure to pay a loan is punished pretty severely by china's Social credit system: https://en.wikipedia.org/wiki/Social_Credit_System . So in theory it perhaps shouldn't be too hard to punish people for this, but then again I don't really know too much about the chinese financial system.
Is this really a big issue? The current spread between CNY and CNH is less than a third of a percentage point.
Capital controls in general might be keeping CNY (and CNH) stronger than it would be otherwise.
Different rules apply.
But it's also rational to worry that it increases overall financial system leverage and that poorly-regulated pseudo-securitized debt could sustain financial bubbles and lead to worse collapses. It also creates a rather difficult problem for a credit manager being asked to accept payment in third-party IOUs.
The instruments we point at as big contributors to the 2008 housing market collapse were better regulated, rated, and more readily exchangeable than CABs.
Each with a quasi government guarantee!
As long as you can cover your tracks, things are good.
And in the end, if your secret is out in the street, you don't really care because you already developed your economy, which is a huge benefit. I guess that's an advantage of what China is doing.
In a country like china where everything is in government control, without any investigative media, systematic corruption... I don't like conspiracies, but it seems like it's possible.
With the US, the treasury uses the fact that the US dollar is one of the reserve currencies (the euro is catching up), and the US government demands payment for their security services to Japan/Korea/etc in USD, etc,etc helping maintain the demand for the USD.
No, it is not.
Government money creation should be used for actually productive purposes. While avoiding costs represents some kind of return, it's not clear that's the best plan.
> “It wasn’t like this before,” he said. But, he added, “it’s better than nothing.”
Dude is crazy/stupid. These papers are completely worthless. How is that "better than nothing"?
When he goes grocery shopping to feed his family, do they take these i.o.u's?
If you want to invest in the stock market, don't try to time it.
In other words, the bull market can't end until the last skeptic buys in.
Also bail-ins. Any significant amount of cash in a bank account is a sitting target if real trouble starts. This is more likely in smaller countries like Greece.
The bigger risk is having a large long term cash position. Large amounts of cash should have a purpose within a year or 2.
For example, my friend has investment company in British Virgin Islands, if he puts money in US index fund he ends up losing 15-20% to withholding taxes.
What are other people doing then?
We could just as easily be up or down 20% a year from now.
The S&P is currently yielding under 2%.
Snark aside, if your timeline is more than 10-15 years, why should you worry at all about recessions next year? On a long enough timeline, a recession is just a great buying opportunity.
> Did you miss 2001-2008? Or are you being purposefully deceptive.
This looks more like you being intentionally dishonest. I took DJIA figures from http://www.fedprimerate.com/dow-jones-industrial-average-his...:
January 2000: 11,722.98
December 2001: 10,021.57
March 2003: 7,673.99
October 2006: 11,850.21 (beating the high of 1/2000)
October 2007: 14,164.53
March 2009: 6,507.04
December 2010: 11,577.51
January 2015: 17,164.95
(Also, it's pretty apparent that 2001-2008 doesn't make sense conceptually as a single period.)
He still has over $100 billion in stock.
When people like Ray Dalio are vocal about it there is something to it.
It hasn't been inevitable in Japan after the early 1990s crash.
- Unemployment is at multi-decade lows; if you look at FRED graphs the unemployment hits a low right before the recession. Of course, nobody knows how low it will go, but it can't go much lower than it is now.
- Bond yields have inverted, which has been a reliable recession-in-one-year signal.
- The trade war can't improve corporate earnings.
- Maybe the trade war triggers something bad in the US and/or Chinese economy and we have another 1997.
- Any one-time earnings juice from the tax cuts is over, so the year over year comparisons are harder.
- The markets flipped out in Dec after the Fed raised rates (I think that's what it was) and dropped 20% in a week or two. The Fed made some conciliatory statements and the party was back on. The RMB appreciates by only a few percent, but over some psychological threshold of 7 RMB to 1 USD and the market flips out, dropping 3%. It feels to me like everyone is trying to pretend that the party is just getting started, but if you keep drinking, sooner or later you pass out. It's been 10 years, it's getting pretty late, people have to stop and go home sooner or later. Sooner or later something random is going to happen like in Dec and everyone is going to flip out. But this time they'll stay passed out for a while.
You have your causal link the wrong way around
The point of a loan/iou is it's okay a long as you can pay later.
This works great in a growing economy. Leverage. But once things start slowing down, the pressures start to mount and i.o.u's start never getting paid back slower and slower to never - defaulting.
There's a limit how far one economy can grow and for China it's already begun to slow. These types of loans are a symptom of that.