1/5

Economically troubled Liaoning province is merging 12 banks into one “first-class urban commercial bank” that has a “clear shareholding structure, abundant capital adequacy, tight internal risk control and fine governance.”

caixinglobal.com/2021-01-29/lia…
2/5

While the provincial government hasn't given any information about which banks will be merged, what their new structure will entail, and how they will be capitalized, there is an important lesson here about the positive feedback between GDP growth and bank expansion.
3/5

When the economy is growing rapidly, banks learn to expand credit too generously and encourage borrowers to take on balance-sheet risk, both of which further encourage growth. The problem is that once the economy begins to slow, this highly pro-cyclical process goes..
4/5

into reverse: slower growth gets overextended banks into trouble, and the resulting rise in the debt burden and contraction in lending puts even more downward pressure on growth.

We are already seeing this start to happen in China's more troubled provinces. Beijing will...
5/5

probably respond by increasingly diverting resources from stronger provinces, but while this tactic will limit the overall slowdown in the country's real economy, it will also extend the ultimate adjustment period.

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More from @michaelxpettis

29 Jan
1/4

I don’t think population density fully explains the difference, Houze. The EU’s population density is not much below that of China (it is nearly 80% of China’s), but while China has 2.4 times the geographical size and 3.1 times the population of the EU, it has 4.2 times...
2/4

as many miles of HSR as the EU.

Japan’s population density, on the other hand, far exceeds that of China (it is 230% of China’s), and while China is 25 times the size and has 11 times the population, it has more than 12 times as many miles of HSR as Japan.
3/4

Even this means comparing apples to oranges. EU workers are roughly 3.5 times as productive on paper as Chinese workers, and the Japanese 4 times as productive, and the real difference is greater if you believe, as I do, that GDP in China tends to overstate real...
Read 4 tweets
28 Jan
1/5

I disagree strongly with the methodology used, Damien. For one, it is based on passenger projections that depend on China’s remaining within the positive part of a highly pro-cyclical process for another 30 years. It also assumes significant passenger diversion from...
2/5

conventional rail, air travel and highways and includes the benefits of this diversion while ignoring the infrastructure cost of building these alternatives. When you have no alternatives, a piece of infrastructure is much more valuable than when you have plenty of...
3/6

alternatives on which you have spent heavily.

The biggest problem is that it is almost impossible correctly to calculate the total economic value of a substantial infrastructure buildout – most of the costs and benefits are indirect – so usually the best you can do is...
Read 6 tweets
27 Jan
1/8

For the past 2-3 years regulators have encouraged Chinese banks to issue perpetual bonds as a way of recapitalizing. The newest twist involves perpetual bonds with an equity-conversion feature, with two Zhejiang banks selected for pioneering issues.

caixinglobal.com/2021-01-26/chi…
2/8

The problem is that most of these bonds, as I was told by two former students working in the industry, are bought by other banks, and what is worse, usually by similarly-sized banks in similar markets. In this case, for example, my understanding is that most of...
3/8

the bonds were purchased by other small Zhejiang banks. Similarly, the big national banks are the main buyers of each other's perpetual bonds, regional banks are the main buyers of perps issued by other regional banks, and so on.
Read 8 tweets
27 Jan
1/5

Caixin says that regulators may soon forbid Chinese provinces with excessive amounts of hidden LGFV debt from borrowing for any other reason than to service existing debt (although much of their borrowing is done for precisely that reason).

caixinglobal.com/2021-01-27/chi…
2/5

While this will probably be manageable in 2021, once we get through the initial economic surge driven by the partial reversal of last year's collapse in consumption, a constraint on the ability of provinces to leverage up will run up against any possibility of the...
3/5

country's annual GDP growth rate exceeding 2-3%. Provinces can only generate much higher growth rates by borrowing huge amounts and aggressively funding investment projects, most of which do not generate enough productive capacity to service the debt.
Read 5 tweets
26 Jan
1/6

It's great to hear that Lu Di's band, Hardcore Raver, will contribute to the upcoming Gang of Four Tribute Album. Less than three month's before he died, Andy Gill called me to say that Gang of Four were coming to Beijing. When he arrived we...

radiichina.com/andy-gill-trib…
2/6

had a long dinner together while the rest of his band went partying.

I'd met him in 2013 after I had contacted him to see if he'd agree to come to Beijing to produce an album by Lu Di's previous band, the brilliant AV Okubo. To my shock and delight he agreed, even after...
3/6

I warned him that we were an indie label with very limited resources and would just be able to cover the cost of his flight and accommodations.

Andy and I saw each other several times since then in Beijing and London, and during our dinner that October we agreed that...
Read 6 tweets
26 Jan
1/6

We've been having this discussion for years with no resolution, and I would argue that resolution isn't possible without a major – and as yet unlikely – transformation of the growth model. Property development is the engine of growth in China, and...

ft.com/content/4c866d…
2/6

expectations of rising real-estate prices drive the demand that drives property development. Beijing recognizes that continually rising real-estate prices are “politically not acceptable”, so it must stabilize them without causing them to drop, which is difficult enough.
3/6

But even if it somehow succeeds, that means a gradual decline in the demand for new apartments and office space, and eventually with it in the expansion in property development, which means losing the economy's growth engine.

Only rapidly rising debt can keep this game...
Read 6 tweets

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