China’s debt problem is back. Around Christmas, the seven-day repo rate, a benchmark used to gauge how much money is in the banking system, spiked to nearly 9%, then fell again to around half that after the Chinese central bank injected cash into the system through reverse repos.
It’s not quite clear why this happened again (something similar happened back in June), but Patrick Chovanec blames loose Chinese monetary policy. Calling China a “runaway train running out of track”, he writes:
Two simple words — bad debt — are the key to understanding why China has too much money, yet not enough. In the years since the global financial crisis, China has racked up impressive growth in gross domestic product by engineering an investment boom, fueled by a surge in easy credit. Total debt has risen sharply, from 125 percent of GDP in 2008 to 215 percent in 2012. Credit has spiraled to $24 trillion from $9 trillion at the end of 2008. That’s an additional $15 trillion - - the size of the entire U.S. commercial banking sector -- lent out in just five years”.
David Keohane adds to this, saying he finds it interesting that China’s National Audit Office released a report on public debt Monday, but left out corporate debt, which now stands at more than 100% of GDP. Keohane also quotes Anne Stevenson Yang of J Capital, who notes most Chinese businesses have to pay off their loans every year. But Stevenson says only an estimated 30% those companies are paying off that debt without taking on new credit, which creates a spiral of credit growth.
For the average Chinese citizen, credit is not necessarily market-based: the state has a huge, informal shadow banking system. Meanwhile, official Chinese lending rates are kept high, meaning big profits for state-owned banks. Nicholas Borst has a good overview of the difference between the Chinese rates that are market-based, and those that are not, like the general loan rate, and why it matters:
Half of all credit in the Chinese financial system is issued at market-determined rates but in an inferior regulatory environment. The other half of credit is issued at distorted interest rates, but is more closely regulated. China’s peculiar bifurcated financial system is a risky proposition over the long run.
George Soros thinks China has a long-term debt problem. “The growth model responsible for its rapid rise has run out of steam”. To briefly recap Soros’ narrative, the People’s Bank of China started trying to curb debt growth in 2012. When that started negatively affecting the economy, the Chinese government stepped in and eased credit. However, he writes, “restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years”. -- Shane Ferro
On to the links:
Theory
Rebellion! And four other potential responses to the financial crisis - Jacobin
Milestones
"We have passed peak lightbulb" - New Scientist
Alternative Currencies
US dollars are a terrible way to pay for stuff - Guan Yang
Banks are the reason why the US payments system is archaic - Shamir Karkal
Alpha
Why isn't Steve Cohen in jail? - Sheelah Kolhatkar
Wow
"Drone pilots have nothing on foxes" - NPR
Just an FYI
There are no time travelers in Twitter at present - Daily Dot
Oxpeckers
"The lesson of the viral epidemic for news publishers is that, if you battle for attention with entertainment, you lose" - John Gapper
Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.
| |||||||||||||||||||||
