1/5
The deputy director of a Chinese research institute argues that in order to prevent provincial debt problems from getting worse, local governments must cut back on wasteful infrastructure spending.
caixinglobal.com/2021-12-24/opi…
2/5
"Based on the structure of expenditure in these regions," he says, "the only way to alleviate debt risks is to reduce general expenditures by reducing unnecessary infrastructure expansion, and to improve the efficiency of investment in infrastructure and public transport."
3/5
While there are still a few people who don't think wasted infrastructure spending is a major source of China's soaring debt burden, by now most economic policymakers and advisors seem to recognize how serious the problem has become.
4/5
But this has been a problem for over a decade. The reason it hasn't been addressed until now isn't because no one understood the problem but rather because resolving this problem clashes with other important objectives.
5/5
Specifically, the reason for much wasted infrastructure spending has been to boost economic activity. As long as GDP growth targets remain high, local officials have to choose either to meet the targets or to continue sending unnecessarily.

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More from @michaelxpettis

27 Dec
1/11
Zhou Xin makes a very important point here – obvious to my economist friends who specialize in Latin America, but not always to those who specialize in China – about the intense pro-cyclicality of high levels of infrastructure spending.
scmp.com/comment/articl… via @scmpnews
2/11
It always works the same way: high levels of spending create rapid growth in economic activity, which in turn justifies even higher levels of spending. This can continue long after the growth in economic activity has become illusionary.
3/11
As rapid growth in the past encourages predictions of rapid growth in the future, these predictions are used to justify the need for even more infrastructure, on the grounds that at the pace at which it is growing, China will soon outgrow its existing infrastructure.
Read 11 tweets
27 Dec
1/11
Good article. While a 2021 current account surplus of 6.8% of GDP is better than the 8.6% it ran in 2016, the fourth largest economy in the world should not be running persistent surpluses anywhere near this level.
wsj.com/articles/germa… via @WSJ
2/11
They create huge problem for the rest of the world, and especially for Germany's European partners. I am surprised there hasn't been a lot more pushback from the countries who have had to absorb the bulk of the country's beggar-thy-neighbor policies.
3/11
Germany’s current account surplus is 2-4 times the levels that Japan and China are running. Even if the surplus does decline to 5.5% in 2022, as @TomFairless suggests here, this is still irresponsibly large, and the world should not be forced to absorb it.
Read 11 tweets
27 Dec
1/4
All national income is retained collectively by households, businesses and governments. In the first 11 months of the year, business profits, which is the form in which businesses retain their share of national income, soared by 38%.
yicaiglobal.com/news/china-ind…
2/4
"Next year," according to Yingda Research Institute, "average profit growth at industrial firms is likely to be lower than this year, but probably not less than 10 percent, as the government has proposed new cuts to taxes and fees."
3/4
With GDP growth expected to be a lot less than that, this is just another way of saying that the government will implement supply-side policies that increase the share businesses retain of total income.
Read 4 tweets
27 Dec
1/12
After several years as the US’s top trading partner, according to this article by Ken Roberts, China may finish this year third, behind Mexico and Canada.
@forbes forbes.com/sites/kenrober…
2/12
“The U.S. trade deficit with China,” Roberts adds, “is like to be the lowest total since 2014, excluding 2020. While it will still be three times the size of the deficit with Mexico, it was about five times greater in 2018.”
3/12
Is this evidence that the US and China are decoupling economically, and that the Trump administration tariffs have somehow “worked” to reverse the trade imbalances of both countries?
Read 12 tweets
24 Dec
1/6
According to Caixin, "China has condemned a city government in the northern province of Hebei for arbitrarily fining and collecting fees from thousands of businesses to fill the hole in its coffers".
caixinglobal.com/2021-12-23/cas…
2/6
The Bazhou government is being criticized on the grounds that randomly charging fees and penalties simply to bridge their fiscal gap "has undermined market confidence and the people’s livelihood."
3/6
While this may seem reasonable in principle, it sidesteps altogether what I suspect is a much larger, systemic problem, and one that affects a lot of local governments besides that of Bazhou.
Read 6 tweets
22 Dec
1/10
I was wrong in the tweet below. Turkey's new deposit scheme is not like Mexico's 1994 Tesobonos, in which peso payments on onshore bonds were indexed to the US dollar, but with higher interest rates. This is much more dynamic and non-linear.
2/10
In that sense it has more in common with the dual-currency bond issue that marked Mexico's return to the international capital markets (1998?) after the December 1994 crisis and the $50 billion rescue package organized by the Clinton administration in January 1995.
3/10
As I understand it, with the new deposit scheme, investors are getting lira deposits at the normal interest rate plus (in effect) a free put option that allows them to sell their lira for a fixed amount of dollars at the current rate (i.e. at the money).
Read 10 tweets

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