1/9
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...

caixinglobal.com/2021-09-14/in-…
2/9
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."
3/9
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.
4/9
In that case local governments could spend aggressively to build needed infrastructure, which in turn generated the growth that met (and usually exceeded) the growth target. Increases in debt were more than matched by increases in GDP, and so debt was never a problem.
5/9
But once investment levels exceeded the economy's ability to absorb new investment productively, further spending had to result in the creation of bezzle (fictitious wealth, see the linked essay), backed by debt growing much faster than GDP.
carnegieendowment.org/chinafinancial…
6/9
The spending had to continue because Beijing insisted on maintaining unrealistically high GDP growth targets, but because soaring debt also caused Beijing eventually to impose constraints on the abilities of local governments to borrow, there could only be two outcomes:
7/9
1) either local governments would "innovate" around the constraints and debt would continue to soar as much of incremental Chinese wealth came in the form of bezzle, or
2) China would not be able to achieve its GDP growth targets unless they were lowered drastically.
8/9
Beijing regulators are now trying to curb not only local-government debt but also equally problematic property-developer debt, but the continued expansion of these two sectors powers much of the growth in Chinese economic activity.
9/9
That is why without soaring debt and the continued creation of large amounts of false wealth (i.e. bezzle), i think it is all but impossible to maintain GDP growth rates anywhere near what Beijing plans for the next decade or two.
"In future, banks and insurers will refrain from providing fresh liquidity to those platforms that enjoy implicit guarantees from local governments, and will prevent hidden debts from increasing, the report said."

reuters.com/article/us-chi…

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More from @michaelxpettis

16 Sep
1/8
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...
2/8
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
3/8
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
14 Sep
1/6
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
2/6
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...
3/6
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
1/6
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
2/6
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.
3/6
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
1/5
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.
2/5
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...
3/5
"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.
Read 5 tweets
13 Sep
1/7
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.

caixinglobal.com/2021-09-13/cov…
2/7
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.
3/7
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
1/4
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.

aljazeera.com/program/counti…
2/4
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."
3/4
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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