I don't think that's the right way to think about it, David. In the beginning the risk-taking appetite of Chinese investors and businesses was normally distributed, like that of businesses and investors anywhere else.
But as credit and real estate markets moved only up for 2-3 decades, as they did in China, this caused a structural shift in risk-taking. Those investors and businesses that "naturally" took on more risk were able systematically to outperform everyone else, while the...
"naturally" more prudent were eventually pushed out of business. This forced a shift in the economy in which investors and businesses either were forced to increase their risk-taking behavior or became less and less important to the overall economy.
We see this all the time — most notoriously in Japan in the 1980s, the US in the 1920s, Germany in the 1870s — and while right now China may be the most extreme example, this is happening in a lot of other places around the world.
The normal assumption is that bubbles occur because people behave stupidly, whereas I would argue that we may have the causality backwards: bubbles occur for various structural reasons, and these cause the system to shift into behavior that in retrospect seems "stupid".

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More from @michaelxpettis

16 Sep
This comment by me, supporting a comment by @ChinaBeigeBook, seems to have set off plenty of discussion and debate. The point I would make is that a financial collapse is the result not of insolvency but of...
a balance sheet mismatch, although of course insolvency can help create or exacerbate these mismatches. I argued in my 2001 book that they occur when assets and liabilities on the borrower's balance sheet are inverted or... Image
otherwise highly mismatched, so that a sudden liquidity shock can cause a rapid contraction in the liabilities that cannot be matched by an orderly or equivalently rapid liquidation of assets.
Read 8 tweets
15 Sep
Three different estimates suggest that hidden local-government debt, mostly in the form of borrowing by LGFVs, amounts to roughly 45-50% of China's GDP. The authorities have been trying for years to clamp down on this hidden debt but, as Caixin...

points out, "new measures to control local government liabilities and hidden debt were frequently followed by innovative ways to get around them, prompting policymakers to tighten supervision of debt management further to try and close loopholes."
This has been the case for well over a decade. The problem is that local governments are supposed to deliver the economic activity that allows China to achieve the GDP growth target. This was easy in the 1990s and 2000s, when much of China was still severely underinvested.
Read 10 tweets
14 Sep
China Evergrande is trying to restructure payments on its wealth management products. "These products, offered through its internet finance affiliate, Evergrande Wealth Management, are owned mostly by its own employees."

scmp.com/business/artic… via @scmpnews
I would imagine that Evergrande employees, now worried about losing not just their jobs but also their savings, are unlikely to be especially well-disposed to their employer. Under these circumstances, any potential clients willing to overcome a natural reluctance...
to buy from Evergrande will have also to deal with inattentive or even truculent agents.

By this stage, it is usually too late to resolve the problem internally. Revenues will drop further, efficiency will decline, debt-servicing costs will rise, and liquidity...
Read 6 tweets
13 Sep
Zhou Xin is right to argue that China would be better off if the economic and social discrimination from which migrant workers suffer — "the unfair treatment of the country’s 285 million migrant...

scmp.com/economy/china-… via @scmpnews
workers" — were reduced or eliminated, but I would propose that there are institutional reason why this cannot be achieved as part of the "Common Prosperity" development model.
The problem is that Common Prosperity involves fiscal redistribution and donations from businesses and the wealthy ("tertiary distribution") and, as I explain in an upcoming OpEd piece, is designed...
Read 6 tweets
13 Sep
Another large Chinese conglomerate is facing a debt crisis. Few economists, especially those focusing on the Chinese economy, understand how financial distress behavior is set off and how it systematically forces worse outcomes than expected.

This passage from Caixin demonstrates typical problems: "With 200 billion yuan ($31 billion) of debt, Baoneng faces employees demanding unpaid wages, suppliers clamoring for overdue payments, and creditors seeking loan payments.
The company, which obtained a 12 billion yuan strategic investment from the Guangzhou government, is frantically trying to scrape up cash by selling assets and requesting more government support."
Read 8 tweets
11 Sep
Al Jazeera writes that the BRICs have turned out to be a big disappointment: "Two decades ago, investment bank Goldman Sachs came up with an acronym that was supposed to shift the economic balance of power.

The BRICS – Brazil, Russia, India and China (and South Africa, which was added later) – would, over time, come to dominate the rankings of the world’s richest economies. But 20 years on, the group has failed to live up to its author’s expectations."
This cannot have been a surprise to anyone with any knowledge about the countries involved. As I wrote back in the 2000s, the concept of BRICS was never meaningful except as a clever investment-banking marketing ploy.
Read 4 tweets

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