This isn't the article I was looking for, but it is a good one anyway.
The Bear's Lair: How China will collapse
By MARTIN HUTCHINSON, UPI Business & Economics Editor
WASHINGTON, Aug 6 (UPI) -- The publication of a very interesting new book,
Gordon Chang's "The Coming Collapse of China" (which I shall review
tomorrow) has combined interestingly with a sharp downturn in the Shanghai
stock market.
Chang talks a lot about Chinese politics; but more interesting are the
economics: such as why Chinese collapse is likely, when it might happen, and
what could trigger it off.
The downturn in the stock market, first, is quite sharp, and unexpected.
Shanghai A shares, restricted to domestic investors only, have dropped by 8
percent in the last week, and by 18 percent since the market high in June. B
shares, which took off like a rocket earlier this year when domestic
investors were permitted to buy them, have dropped by 20 percent in the past
week and 40 percent since the June high. Of course, this is all relative; A
shares are still up by 66 percent since the low of early 1999, while B
shares are up an astounding 700 percent. But it begs the question: if the
Chinese stock market took off like Nasdaq, albeit boosted by heavy buying by
the Chinese state sector, is it, gasp, possible that it could drop like
Nasdaq?
There are a number of features that suggest it is. The government has been
selling off minority shares, with essentially no control rights, in state
owned enterprises (SOE's) to small investors, producing such monstrosities
as a steel company Initial Public Offering (IPOs) at 27 times earnings,
whose earnings themselves were not audited to international standards.
Meanwhile state owned enterprises and the banks have been buying shares when
necessary, and, together with Party-connected brokers, manipulating the
market, thus causing both a sharp upward market trend and a consistent bias
in returns against the unfortunate retail investor, whose money is simply
cannon fodder for inside manipulation. On close examination, in short, the
shenanigans in the Chinese domestic stock markets dwarf even the most
acerbic view by critics of what went on in Wall Street in 1998-2000. At some
stage, therefore, the bubble has to crack.
However, the most damning feature of the Chinese economy, as revealed by
UPI in March, is not the stock market but the banking system. The Big 4
banks are all state owned, and have loan portfolios largely consisting of
loans to SOE's. When the Party needed SOE's to be bailed out, there the
banks were, ready to lend and with no concerns about their balance sheets.
Hence the size of the Chinese bad debt problem, in terms of gross domestic
product roughly three times that of Thailand, a country whose banking system
commentators have largely written off as dead.
There are a number of estimates of the Chinese bad loans problem, but the
most likely current figure seems to be around $500 billion of a GDP of $1.1
trillion, on top of the $170 billion already transferred from the Big 4
banks to asset management companies in exchange for government guaranteed
debt.
Total retail deposits in China's banking system currently total around
$800 billion ($720 billion at the end of 1999.) This is presumably a fairly
solid statistic, although I understand it includes some "gray market"
corporate deposits.
Then at least one possible mechanism for collapse is blindingly clear. The
Chinese state banks currently have the confidence of their depositors, but
have lost already $670 billion of the $800 billion entrusted to them. At
some point, probably fairly soon given a world economic downturn that will
presumably increase the losses in the SOE's, the state banks will have lost
all their retail depositors' money. At that point, quite simply, they will
have no cash.
There have already been examples of sporadic "runs" on particularly
illiquid regional branches of the Big 4 state banks; once banks start
refusing to pay out cash to depositors demanding it, news of condition will
spread with "Internet speed" whatever the Chinese government's restrictions
on the Internet (reflect, after all, that bank runs happened with surprising
speed in the slow-communication U.S. economy of the nineteenth century.)
The result will be systemic collapse, final and total.
Of course, $170 billion of the bad assets held by the banks have been
replaced by government guaranteed bonds, but it seems very unlikely indeed
that the Chinese authorities will be able to realize what is happening, get
together tens of billions of dollars in cash from their foreign banking
friends, and siphon the cash into the domestic banking market, all without
waking even the well-doped suspicions of their supporters in the Economist
and the Financial Times.
Once the actual state of the Chinese banking system and the Chinese
economy in general becomes a matter of firm public knowledge outside China,
confidence will collapse, just as it did in Russia -- it must be remembered
that in 1998 Russia's progress in the international media from white hope of
economic prosperity to defaulting Commie basket case took less than a month.
Of course, the "Chinese Emperor" has a number of defenses against any
suggestions that he is less than perfectly attired. For one thing, foreign
journalists who report adversely on Chinese progress tend to have their
residency papers revoked. This doesn't need to happen often; most foreign
journalists are keen to further their career in reporting on this exciting
market, and so take care to keep their residency papers in order by looking
on the bright side.
Another favorite Imperial trick is to produce apparently plausible
statistics that "prove" that China is the fastest growing country in the
world. Naïve foreign journalists print this claim, and continue to do so
even when the Emperor makes claims contrary to clear factual evidence, such
as that, following Jiang Zemin's 1998 exhortations, the SOE's have all moved
from huge losses into profit, or that, in the first half of 2001, Chinese
economic growth continued absolutely undisturbed by the downturn in the
world economy, at an annual rate of 8.0 percent. This latter claim, like all
China's GDP statistics, was produced within a few days of the end of the
period concerned, thus suggesting that Chinese statistics are produced by a
well designed computer model, spitting out statistics in seconds, rather
than by a laborious process of actually measuring output, which would take
months.
In any case, even if China's 1991-2001 average GDP growth rate of 8
percent were accurate, it does not take account of the $670 billion of bad
debts in the system, none of which are accounted for in the official
statistics. Hence, even taking the official statistics as accurate in other
respects, deflating output sufficiently to produce $670 billion of losses
over 10 years reduces China's growth rate from an average of 8 percent to an
average of 5.9 percent, or 4.9 percent per capita -- still impressive but by
no means the "fastest growing economy in the world."
An additional deflation can be arrived at by examining "foreign investment
in China." Nominally, this is $45 billion per annum; in practice, as I
outlined in an article in June, around half the pool of $350 billion net
investment into China represents "round-trip" investment by Chinese savers.
Since the return on the remainder of the investment is close to zero, this
represents another $175 billion of cost free foreign funds transfer to the
Chinese economy. Subtract that from the statistics, and the growth rate
becomes 4.3 percent per capita.
And what of the much vaunted 40 percent Chinese savings rate? With
personal income representing around 60 percent of gross domestic product, if
the Chinese had saved 40 percent of their income since 1991, and had
received a net 5 percent dollar return, their total savings today would be
$2.49 trillion, well over 200 percent of GDP. However, the domestic banking
system is almost a monopoly; until very recently, there was no significant
stock exchange, and foreign banks are not allowed to take deposits from
domestic savers. Therefore, the pool of savings in 2001 must comprise total
domestic bank deposits of $800 billion (including any "gray" corporate
deposits), plus "roundtrip" foreign investment of $175 billion, plus a
maximum of say $200 billion in gold and stock market investment, giving a
total savings stock of $1.18 trillion, less than half the figure that it
would be if the savings rate were 40 percent (it's possible, too that there
were some savings before 1991.)
On this analysis, the Chinese net savings rate is not 40 percent but 19
percent, which looks about right for a nation of diligent savers thwarted by
an oppressive economic system.
In short, therefore, Chinese statistics, like Soviet statistics before
1991, are made up out of whole cloth - the Chinese Emperor, like the Soviet
Czar, is naked. The Chinese banking system is tottering towards collapse,
and the stock market is way overdue for a Nasdaq style correction. Whether
the banks finally running out of money in 2002-2003, or whether (more
likely) the stock market collapsing before then causes a crisis of
confidence, a run on the banks, and a collapse of the system, is the only
question.
Not whether, or even how, but only when.
-0-
vny.com |
