I've long argued that the only sustainable way China can manage its economic rebalancing and resolve its bad debt is by forcing local governments to absorb the costs by transferring or liquidating assets. This year the process may be starting in earnest.
yicaiglobal.com/news/china-loc…
yicaiglobal.com/news/china-loc…
2/11
"China had CNY43.5 trillion worth of administrative and institutional state assets in 2020, according to official data. This refers to infrastructure, housing, land, vehicles, office supplies and other forms of property that belong to all levels of government offices."
"China had CNY43.5 trillion worth of administrative and institutional state assets in 2020, according to official data. This refers to infrastructure, housing, land, vehicles, office supplies and other forms of property that belong to all levels of government offices."
3/11
I suspect this doesn't include a lot of SOEs controlled by local authorities.
According to Yicai, China's MoF is demanding that Chinese local governments make better use of state-owned assets in order to manage their rising fiscal difficulties.
I suspect this doesn't include a lot of SOEs controlled by local authorities.
According to Yicai, China's MoF is demanding that Chinese local governments make better use of state-owned assets in order to manage their rising fiscal difficulties.
4/11
"Local governments", Yicai notes, "have been making more effort in recent years to dispose of idle state-owned assets as the gap between China’s fiscal revenue and expenditure widens." It cites a 63% surge in revenue this year in Fujian from the sale of government assets.
"Local governments", Yicai notes, "have been making more effort in recent years to dispose of idle state-owned assets as the gap between China’s fiscal revenue and expenditure widens." It cites a 63% surge in revenue this year in Fujian from the sale of government assets.
5/11
This process is only beginning, but I expect it to accelerate over the next few years. That's because there is no other sector that can absorb rebalancing and bad debt costs without further undermining an already strained economy.
This process is only beginning, but I expect it to accelerate over the next few years. That's because there is no other sector that can absorb rebalancing and bad debt costs without further undermining an already strained economy.
6/11
But this doesn't mean the process will be easy. It will involve a substantial re-ordering of business, financial, and political institutions and will seriously undermine local political and business elites, while creating new centers of power.
But this doesn't mean the process will be easy. It will involve a substantial re-ordering of business, financial, and political institutions and will seriously undermine local political and business elites, while creating new centers of power.
7/11
You can't transfer huge amounts of economic resources, after all, without also reorganizing political power. In my opinion this will be by far the greatest test the Beijing government will face, especially as it must occur in the context of rapidly-slowing economic growth.
You can't transfer huge amounts of economic resources, after all, without also reorganizing political power. In my opinion this will be by far the greatest test the Beijing government will face, especially as it must occur in the context of rapidly-slowing economic growth.
8/11
In their their brilliant book, Charles Calomiris and Stephen Haber note that “a country does not choose its banking system: rather it gets a banking system consistent with the institutions that govern its distribution of political power.”
In their their brilliant book, Charles Calomiris and Stephen Haber note that “a country does not choose its banking system: rather it gets a banking system consistent with the institutions that govern its distribution of political power.”
9/11
In China this will likely apply not just to the banking and financial systems, but also to all the state sector and the "commanding heights" of the economy. For better or worse China in 10-15 years will look very different from China today.
In China this will likely apply not just to the banking and financial systems, but also to all the state sector and the "commanding heights" of the economy. For better or worse China in 10-15 years will look very different from China today.
10/11
Every major economic rebalancing in history – whether that of the US in the 1930s, the USSR in the 1970s and 1980s, Brazil and Chile in the 1980s and 1990s, or Japan in the decades since 1990 – has been economically brutal and politically disruptive.
Every major economic rebalancing in history – whether that of the US in the 1930s, the USSR in the 1970s and 1980s, Brazil and Chile in the 1980s and 1990s, or Japan in the decades since 1990 – has been economically brutal and politically disruptive.
11/11
Given that China's imbalances are among the greatest in history, it is unlikely that its rebalancing will be much easier. China's political and economic evolution over the next several years will likely be heavily affected by the pace of local-government asset transfers.
Given that China's imbalances are among the greatest in history, it is unlikely that its rebalancing will be much easier. China's political and economic evolution over the next several years will likely be heavily affected by the pace of local-government asset transfers.
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