To: jrhana who wrote (20710 ) 10/26/2004 9:56:44 AM From: mishedlo Read Replies (3) | Respond to Misconception: China Will Remain A Deflationary Force For the World Because of its Excess Labor Pool Misconception: China's Massive Bubble Infrastructure Building is Very Deflationary But the challenge in China is that the cycle can not unfold in this way for the simple reason that the current end-owner of all the "weak assets" is the government. And the government will unlikely become a "forced seller"! The recent sharp increase in capital spending in China has not been financed by private lending institutions but by state-owned government banks. A big part of China's growth is occurring either directly on the government's balance sheets (i.e.: spending by local authorities, towns and regions...) or indirectly on the government's balance sheet (i.e.: commercial banks). If/when the returns on capital fall below the cost of capital, we are unlikely to see a fire/sale of leveraged assets typical of a supply-side cycle deflationary bust; if for no other reason that a lot of the assets are on the government's book. In China, the government is the loser of first resort. So the important question on China is: what will the government do with its unproductive assets once their returns are below the cost of capital? Using History as a guide, it seems likely that the government will a) sell off its bad debts for cents on the dollar to foreigners willing to buy them (and take the loss on its books) and b) print money to cover its losses and ensure that the cost of capital does not rise too fast.
