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.

"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."
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.
"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.
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.
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.
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.
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 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.
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.
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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More from @michaelxpettis

Nov 5
"To achieve high-quality development, the economy needs effective demand such as investment with a reasonable return and consumption supported by income, Liu wrote, adding that supply-side structural reform should focus on quality and efficiency."

This is a pretty clear statement that Liu recognizes the difference between productive and non-productive investment as sources of domestic demand, and the importance of the latter in China which he wants to reduce in favor of the former.
The problem is that he wants both to expand domestic demand and to deepen supply-side structural reform so as to reduce China's dependence on non-productive investment, but in practice this has always meant suppressing domestic demand to subsidize domestic production.
Read 7 tweets
Nov 4
More on asset dispositions: according to SCMP, "the central government is instructing local-level authorities to tap into their idle state-owned assets – if possible – to ease their financial distress."
But while some analysts argue that it will be nearly impossible for local-government assets to boost government revenues by selling assets, ultimately what matters is not the extent to which these assets supplement government revenues.

What really matters is the extent to which local government assets can be directly (through sales) or indirectly (through explicit or implicit transfers) used to resolve bad debt and boost household income.
Read 4 tweets
Nov 3
Guo Shuqing warns that the massive financial resources of high-tech sectors like the internet and big data "put them at greater risk of becoming over-leveraged, and this must be prevented."

sc.mp/6k9u?utm_sourc… via @scmpnews
This suggests a potential conflict. One way Beijing hopes to manage a much-needed reduction in property and infrastructure spending without a sharp corresponding drop in growth is to redirect resources from those sectors into "more productive" sectors of the economy.
The prime candidates of course are the high-tech sectors, but as I've long pointed out, property and infrastructure comprise at least 4-5 times the share of GDP as does high tech, and the latter is already flooded with capital and resources.
Read 4 tweets
Nov 2
China’s exports to India increased by 31% in the first nine months of this year, according to China’s customs administration, while Indian exports to China declined by 36.4% per cent in the same period. This probably shouldn't come as a surprise.

Chinese manufacturing is extremely competitive internationally because, as a recent CSIS study shows, direct subsidies to the manufacturing sector are far larger as a share of GDP in China than those of any other of the countries it measured.

Indirect subsidies – including overspending on logistics and infrastructure, suppressed household income, administered credit, etc. – are even larger, making the manufacturing sector that much more competitive relative to foreign manufacturers.
Read 5 tweets
Nov 2
While I agree with Martin Wolf that the process of deglobalization is likely to be associated with numerous adverse consequences, there are two very different ways of explaining this relationship, and thus two very different sets of implications.

The conventional explanation is that deglobalization is driven largely by politics, and that the economic problems associated with deglobalization are thus the consequences of this political process of deglobalization.
In that case we should do what we can to pull back from the politics of deglobalization and should instead further strengthen its existing institutions.

But there is an alternative explanation that reverses the relationship and has very different implications.
Read 7 tweets
Oct 31
We seem top have forgotten that a key part of the success of many Chinese "entrepreneurs"during the high-investment boom phase was their privileged access to a heavily administered (rather than market-driven) banking system.
In a financial system with highly-repressed lending rates, government-directed equity capital, and extensive "window guidance" driving the direction and quantity of credit creation, privileged access to credit and funding all but guaranteed business success.
Repressed interest rates were transferring at least 4% of GDP (according to IMF) every year from households to borrowers. Under those circumstances financial repression probably did more to benefit the most successful businesses than "animal spirits".

Read 4 tweets

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