1/4

Interesting and important article by @KeithBradsher about new rules that limit how much money foreign banks can transfer into China from overseas and that require them to tighten their balance sheets. While some see these measures as designed...

nytimes.com/2021/04/02/bus…
2/4

to limit the ability of foreign banks to operate in China, I suspect they have much more to do with worries about the impact of foreign financial institutions on domestic financial stability.

That is why I disagree with those who propose that measures like these...
3/4

are likely soon to be reversed as China continues opening up. As I have long argued, in spite of its extremely fragile financial balance sheets, China was never likely to have a financial crisis in part because as long as its banking system was closed it could easily...
4/4

restructure its liabilities. I've also long argued that this was the reason why it would be so difficult for China to open up its capital markets.

After just 2-3 years of opening up, it is pretty clear that the regulators are already pretty worried about the implications.

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More from @michaelxpettis

4 Apr
1/11

Although engineers in democracies may look longingly at the ability of authoritarian governments to force through major infrastructure projects, it is a mistake to think that this is the important difference between...

wsj.com/articles/what-…
2/11

infrastructure building in China and the US. The checks and balances in democratic systems may reduce efficiency, but they are better at long-term adjustment, and so the differences reflect little more than the standard trade-offs between the two systems.
3/11

What really matters is the relationship between desired and actual investment. In the early 1990s, when it really began its infrastructure-building spree, after five decades of war and Maoism China was hugely underinvested in infrastructure for its level of development.
Read 11 tweets
3 Apr
1/6

By now it should be pretty clear how much of a problem debt is in China, how much risk there is embedded in the financial system, and just how worried the regulators are. We should have been able to see this well over...

cnb.cx/3dnfslD
2/6

a decade ago, but economists are not very good at understanding the dynamics of debt and how balance sheet structures condition economic behavior. It is only once debt has become unmanageable that we begin to worry that we may have a a problem with debt.
3/6

For the same reasons what seems to be much less clear to most analysts is the relationship between these risks and the underlying performance of the Chinese economy. The problems of soaring debt and increasing financial fragility are not just incidental, in other words.
Read 6 tweets
3 Apr
1/7

While Rogoff is right that a large economy like that of China's should have independent monetary policy, in which case its currency should not be managed against other currencies, it is unlikely that Beijing will let the currency float freely until...
theguardian.com/business/2021/…
2/7

it has substantially cleaned up and reformed its banking system, something that could take decades at best.

Given China's extremely high debt levels and the economy's reliance on soaring debt for growth, the insolvency of the banking system, and the structural inability...
3/7

of the banks to make economic decisions, Beijing has been extremely reluctant to risk administering any shock to the economy, or even to reduce its control over the financial system – in fact many would argue that in recent years Beijing has actually increased its control...
Read 7 tweets
1 Apr
1/8

This article has been pretty widely circulated, which is why I want to point out why I disagree with it. It complains that by creating demand for commodities, China’s investment binge is making Joe Biden's infrastructure investment program more...

bloomberg.com/news/articles/…
2/8

expensive, and that, to make matters worse, Beijing has been very cleverly racing ahead of the US by stocking up on commodities last year when it didn't yet need them.

But aside from the fact that China’s investment binge is no more making Joe Biden's stimulus more ...
3/8

expensive than Joe Biden's stimulus is making China's investment binge more expensive, it isn't really true. In fact Chinese investment surged last year, accounting for nearly 200% of the country's GDP growth. This is the main reason China bought large amounts of...
Read 8 tweets
1 Apr
1/5

"He added the trade tensions are long-standing and they will continue to exist as China’s economy becomes increasingly competitive across every part of the value chain."

This suggests substantial confusion over basic trade dynamics. Trade tensions...
scmp.com/economy/china-…
2/5

are not caused by economies becoming more productive, because in that case their export success is rewarded with rising imports.

Trade tensions are caused by economies that achieve "competitiveness" by keeping wages, relative to productivity, lower than that of their...
3/5

trade partners. It is only because of lower relative wages that surplus countries cannot convert export success into imports, and instead convert them into persistent trade surpluses.

Countries like Germany, Japan, China, etc. don't run persistent surpluses because...
Read 5 tweets
1 Apr
1/3

Last year China reported its first financial account deficit in four years, which I assume was driven mainly by a very counterintuitive (to put it politely) surge in the net dollar position of large banks. This has led inexorably to huge losses...

caixinglobal.com/2021-03-31/chi…
2/4

both from the negative carry and on the currency position, but the banks seem not only willing to take the losses but even to increase their positions.

While the yuan has been quite stable against the CFETs basket during the past four years, technically the PBoC has not...
3/4

intervened at all, but then thanks to the intervention of these big banks, which (coincidence?) has risen and fallen in lockstep with the net inflow every year for the past four years, there was no need for it to do so.
Read 4 tweets

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