Stimulus will remain in China's tool box - Victor Shih

Victor Shih

China's government seems eager to control debts, even when it means a mitigation of economic growth. But the financial stimulus will remain a trusted tool in the country's financial toolbox, in case growth drops too far, says financial analyst Victor Shih at the Deutsche Welle.

The Deutsche Welle:

Experts say the Chinese government needs to slow down the pace of infrastructure investment if it wants to resolve the debt problem. But they doubt that the government is willing to push ahead with such a measure. 

"Because it [infrastructure investment] already is a large contributor to growth, slowing investment will substantially reduce growth rates," said Victor Shih, an associate professor of political economy at the University of California in San Diego. "This is not what the leadership wants."... 

Analyst Shih believes that once China's economic growth drops to a certain level, Beijing would again resort to stimulus to boost expansion. "I still think that if growth falls below a certain level, the top leadership will order a stimulus, which involves acceleration in debt growth," said Shih. "That is the only viable tool in China's arsenal if the economy slows too much."

More at the Deutsche Welle. 


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Local debts keep rising, but will not cause financial crises - Victor Shih

Victor Shih

China faces a financial dilemma, as it wants economic growth, and forces local governments to borrow more money, against the wishes of the central government, says financial and political analyst Victor Shih in the CeMEAS Conversations on China's economic future. But external threats to the country's stability do exist, he adds.

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Why China is a Ponzi scheme - Victor Shih

Victor Shih

Calculating China's debt has been a major political game, and political analyst Victor Shih claims the country's debt "around 328% of GDP in May", writes Livemint. The central bank overcalculated banking assets, he says.

Livemint:

Prof. Victor Shih at the University of California at San Diego thinks that the PBoC estimates of banking system assets are overstated because there could be double-counting. He has come up with his own calculations in a new brief for the Mercator Institute for China Studies in Germany (Merics’ China Monitor: “Financial Instability In China: Possible Pathways And Their Likelihood”, 20 October). According to him, overall credit to the non-financial sector (including households, Central and local governments) from banking and non-banking channels (including shadow-banking channels) was around 328% of GDP in May. For comparison, the Bank for International Settlements puts this number at 257.8% as of March. Given this huge debt burden, China’s interest payments are rising much faster than its nominal GDP. He notes tersely, “China as a whole is a Ponzi unit.” That does not leave much room for doubt.

More at Livemint.

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China: Not heading for a financial crisis - Arthur Kroeber

Arthur Kroeber

Debt levels and slower GDP growth are China not pushing into a financial crisis, as some experts want us to believe, says renowned economist Arthur Kroeber in the South China Morning Post. "“There is a double standard at work here, where people have invented the concept of productivity of credit to say bad stuff about China.”

The South China Morning Post:

Arthur Kroeber, founding partner of the China-focused Dragonomics research service, debunked the contention that rising debt levels amid slowing GDP growth suggest China has a credit productivity problem that may tip the world’s second-largest economy into a tailspin. 

In a discussion hosted by the New York-based China Institute, Kroeber pointed out that from the 1960s to the 1990s, the US, Japan and Canada saw their GDP growth decline while debt surged, all without any economic routs. 

“GDP growth steadily decelerated even as credit growth continued to build [in the US, Japan and Canada]. There was no one in the 1980s who was pointing to these numbers saying ‘isn’t this economy heading for a collapse?’ 

“There is a double standard at work here, where people have invented the concept of productivity of credit to say bad stuff about China.”

More in the South China Morning Post.

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It's the economy, stupid - Arthur Kroeber

Arthur Kroeber

Journalists and political analysts look at the political bubbles emerging from the ongoing meeting of the Communist party in Beijing, it makes more sense to look at the underlying economic current, says renowned economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know®. At NPR he looks back at some difficult years.

NPR:

China's unstable economy has its beginnings not in China but on Wall Street in 2008, when Lehman Brothers filed for bankruptcy, setting off the worst economic crisis in living memory. 

"In the year after the Lehman Brothers bankruptcy, the value of Chinese exports fell by about 20 percent, which is a very big deal," says Arthur Kroeber, a founding partner of Gavekal Dragonomics and author of China's Economy: What Everyone Needs to Know. In 2008, exports were the beating heart of China's economy, employing hundreds of millions of migrant workers who were working their way up China's social ladder to make up the world's largest consumer class. 

"The estimates at the time were that somewhere in the neighborhood of 20 million workers in export-related industries along the coasts lost their jobs and had to return home," says Kroeber. "It was a pretty major shock to China." 

How would a country accustomed to double-digit economic growth cope with tens of millions of workers suddenly out of work? China's leaders didn't wait to find out. Within weeks, they passed a historic stimulus package, injecting nearly $600 billion into the economy, an amount worth 15 percent of China's entire economy. 

"It was by far the largest fiscal stimulus, in absolute terms or relative to GDP, of any economy in the world at that time," says Kroeber. 

It worked a little too well. 

Millions of Chinese went back to work on infrastructure projects like the world's most extensive high-speed rail network, highways and subway systems. By 2010, China was back into double-digit growth territory again. 

But all this new money flowing through local governments exposed deep-seated vulnerabilities in China's political system — namely corruption, says Kroeber. 

"Corruption throughout the economy, it kind of got out of control," he says. "It was pretty bad before the financial crisis. The stimulus, I think, just poured gasoline on the fire of corruption."

More at NPR.

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Bad loans: government avoids bankruptcies - Paul Gillis

Add caption

The government has been pulling in bad loans, rather than letting companies face bankruptcy and letting the markets do the job. For China's leaders stability is key, says Beida accounting professor Paul Gillis to Reuters.

Reuters:

Stability is always uppermost in the minds of Chinese leaders, and even more so this year, ahead of the five-yearly party congress this autumn, when a new generation of senior leaders will be selected. 

"China is avoiding the crisis of calling in loans that can't be repaid anyway," said Paul Gillis, professor of accounting at Peking University's Guanghua School of Management. "This buys time to do things in an orderly way."... 

Premier Li also identified debt-for-equity swaps among key items in the toolkit for bringing down corporate debt, and the figures demonstrate their extensive use. 

Since October, China's banks have undertaken nearly 500 billion yuan in such swaps at more than two dozen firms, mostly state-owned coal and steel enterprises, according to analysts. 

That could double to more than 1 trillion yuan by next year, preventing as much as 3.5 trillion yuan in total loans from turning bad in the near future, according to estimates by Hou. 

"A lot of these loans needed to be looked at as equity in the first place," said professor Gillis. 

"There was never any realistic possibility that the companies would be able to pay them back," he added.

More in Reuters.

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Making sense out of the financial zigzag policies - Victor Shih

Victor Shih

Making sense out of Beijing`s recent financial direction is hard, even for veteran political and financial analyst Victor Shi. In the Wall Street Journal, he tries to give it a shot. “As with any addiction program, the first step is to admit you have a problem."

The Wall Street Journal:

“It’s really difficult for the Chinese government to regain global confidence because it’s really difficult for them to actually deleverage, since that could lead to a financial crisis,” said University of California, San Diego professor Victor Shih, who calculates that interest on China’s existing debt now accounts for 20% of GDP. “They’re walking a very tight rope.” 

The week’s articles follow other zigzag moves. After pledging in 2013 that Beijing would let the marketplace take a “decisive” role in the economy, Mr. Xi’s administration intervened aggressively last summer when the stock market fell, then sparked fears of a global currency war in August when it rolled out a new currency-management system with little warning. 

Mr. Shih said the articles included no specifics on how China should tackle its debt habit, although the unnamed person in Monday’s question-and-answer article appeared to nod at the scale of the challenge, even citing the risk of a “crisis.” “As with any addiction program, the first step is to admit you have a problem,” Mr. Shih said.

More in the Wall Street Journal.

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China´s old growth model does not work anymore - Arthur Kroeber

Arthur Kroeber

Building more infrastructure has been a receipt for China to keep its economy growing double-digit for a long time. But that old growth model is no longer working, tells economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know® in an interview with QZ.

QZ:

Arthur Kroeber: I think there are two reasons why it doesn’t work anymore. One is that when you’re in that phase of growth, a lot of what you’re doing is building the enabling infrastructure. So you’re not just building the factories. You’re building the housing. You’re building the roads. You’re building the power plants. You’re building the ports. You’re building the airports. 

You’re building a lot of stuff.

That’s right. And eventually you get to the point where you don’t really need to build any more of that stuff. You can continue to grow your economy without additional power plants or that additional port. You can just use [what you have] more efficiently. 

And it doesn’t actually help to build a third power plant when you’re already getting enough power from the first two.

Yeah that’s exactly right. So, part of the growth over the last 30 years was building all the infrastructure. And that job isn’t completely done. But it’s done enough so that it becomes a much much smaller part of the equation. 

So is that why China’s GDP growth has slowed down? They’re still building a lot of infrastructure as we speak, but those large projects don’t generate the GDP pop that they used to?

Well I think there’s a couple ways you can look at this. The simplest way is to say that for 30 years roughly, from 1980 until four or five years ago, China was growing at about 10% a year on average. And roughly speaking, half of that growth came from the creation of new capital—new roads, new ports, etc. And the other half of that came, essentially, from productivity growth.

So you take someone off the farm where he’s producing a value of maybe $300 a year, and you put him into a factory and automatically he’s producing $3,000 a year. So you get a huge productivity jump. 

And that by the way is the classic story of economics, whether it’s a Scottish guy going to work in the textile mills of northern England in the 19th century or an American farmer moving to Pittsburgh to work in a steel mill.

Exactly. Now we’re at a point where because you built all this capital, you have basically the capital stock that you need. You can’t get five points of growth by adding capital. It just doesn’t produce that much value.

Much more in QZ.

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Lower GDP hurts paying back debts - Victor Shih

Victor Shih

China´s GDP dropped to 6.4% and while many countries would be happy with such a growth, it creates a major problems for China, as current debts cannot be served, warns financial expert Victor Shih in Bloomberg.

Bloomberg:

While in yuan terms the slowdown is more gradual, the decline in nominal GDP gains is still dramatic -- to a 6.4 percent pace at the end of 2015 compared with 10.1 percent back in 2013 and in excess of 18 percent in 2010 and 2011. The slide highlights the need to follow through on slashing excess industrial capacity, eliminating unprofitable enterprises and revving up new drivers of expansion. 

"The biggest problem with plunging nominal GDP growth is that the cash-flow growth to the corporate sector has declined at a time when growth in its debt servicing has accelerated," said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. "Because debt is so much larger than the economy, debt servicing each year will still be two to three times the incremental growth of nominal GDP." 

China’s debt-to-GDP ratio surged to 247 percent last year from 166 percent in 2007, propelled by a lending binge in the aftermath of the global financial crisis. Days before the National People’s Congress, the central bank this week lowered the ratio of deposits major banks must hold in reserve, letting them deploy more in lending.

More at Bloomberg.

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China´s central bank is safe for another year - Arthur Kroeber

Arthur Kroeber

How deep are the pockets of the People´s Bank of China (PBOC) to keep on funding its financial system? According to economist Arthur Kroeber they are safe for another year, and can use the time to clean up the current mess. Learning how to communicate with the markets is one talent that needs urgent development, he tells Bloomberg.

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State will continue to guarantee sovereign debt - Sara Hsu

Sara Hsu

China´s debts level has reached record heights, but the state will continue to guarantee sovereign debts, writes financial analyst Sara Hsu. And that support is also extended to state-owned companies like Cosco and ChemChina, despite downward pressures from the rating agencies, she argues in the Diplomat.

Sara Hsu:

Non-performing loans accumulated to 1.95 trillion RMB in 2015. As Shang Fulin, chairman of the China Banking Regulatory Commission (CBRC), stated last month, non-performing loans had increased for 17 quarters straight by the end of 2015. Now, banks are calling on the government to loosen its bad loan provisions, and the CBRC is considering this request. The big four banks are already close to the bad loan provision floor. Non-performing loans have surged to their highest level since 2009. As bank lending only loosens, concerns are rising that the level of total debt is becoming insurmountable. 

Also of concern has been the debt position of some companies purchasing assets abroad. ChemChina, a highly indebted company that has the luxury of being backed by the state, recently snapped up Syngenta, a large Swiss producer of seeds and pesticides. 

ChemChina is excessively leveraged, but it is owned by the state-owned Assets Supervision and Administration Commission. China Cosco Holdings, another highly indebted company, recently acquired the Greek port of Piraeus. Without state backing, these companies would barely be standing, much less acquiring assets all over the world. 

Still, the lesson of ChemChina and Cosco is that where the state is present, losses are far less likely. This is not the U.K. or Germany, in which the markets wield ultimate power, but China, in which the state rises above the rest. While China’s leveraging status is certainly of concern, it does not mean that the powerful nation will enter crisis mode, as many bears are predicting. Nonperforming loans? The government will play ball, adjusting regulations to accommodate the need for banks to prop up the flagging economy. Asset management companies may, as in the past, purchase these loans to improve banks’ balance sheets. Indebted local governments? Let them issue munis. Poorly performing real estate sector, at the expense of property developers? Loosen home-buying rules. 

For sure, the debt situation in China is serious, and the threat to China’s debt ratings is real. It is likely that ratings on corporate debt, and perhaps the rating on China’s sovereign debt, may be pushed downward in the months to come. However, investors should remember that China is ultimately a different animal. Although high leverage presents a problem for China’s debt ratings, it is unlikely to present a threat to China’s economic future. The state is present to ensure that any type of crisis scenario remains unrealistic.

More in the Diplomat.

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China´s economy bubbles into more problems - Victor Shih

Victor Shih

Things look not well for China´s economy, say a range of economists to Bloomberg. They include political and financial analyst Victor Shih, who fear the lack of income might force China into even larger debts, as it wants the economy to keep on humming.

Bloomberg:

With strength in consumer spending and services not yet enough to tip the balance, pressure is on the central government to embrace deeper fiscal deficits, at the risk of adding to the nation’s debt. For now, officials are focusing on expanding a local-government bond swap that’s given regional authorities a break on financing costs for past projects. 

"Fiscal income growth has been sluggish yet the government continues to roll out numerous expenditure initiatives," said Victor Shih, author of the book "Factions and Finance in China: Elite Conflict and Inflation." "Deficits this year will likely be higher than anticipated; sustained growth in deficits will further erode investors’ confidence." 

China needs annual growth of no less than 6.5 percent in the next five years to realize a goal to double 2010 gross domestic product and per-capita income by 2020, Xi has said.... 

China’s policy makers are in a tight spot, trying to maintain a floor under growth at the same time as reining in debt and reducing industrial capacity. 

Further monetary easing may create "an even bigger credit bubble" and trigger potentially massive capital outflows if the U.S. Federal Reserve also hikes rates, says Shih. Because of that, the central bank may have more scope to cut banks’ required reserve ratio -- or the amount of their deposits they must lock away -- he said.

More in Bloomberg

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Debts hamper local governments - Victor Shih

Victor Shih

Debts are high on the agenda of the central and local governments, as local resources to pay debts of get capital for investments diminish, tells associate-professor Victor Shih in Bloomberg. The efforts of the central government to relieve local governments from debts might not help everybody.

Bloomberg:

The severity of the local-authority funding squeeze is especially acute in the northeastern province of Liaoning, where first-half revenue slumped 23 percent, and this month it failed to sell bonds even with coupons 15 percent higher than similar maturity sovereign debt. 

“With the decline in land sales in all but a small handful of cities, many localities will have problems servicing debt, much less to finance new construction projects,” said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. 

While the central government has put in place a program to swap higher-interest local debt with longer-maturity, lower-cost bonds, that initiative won’t help every region, according to Shih. It “will mainly favor provincial capitals and major cities, leaving smaller cities in deep fiscal distress,” he said.

More in Bloomberg.

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China´s unsustainable debts - Victor Shih

Victor Shih

China has accumulated debts US$25 trillion and because of the relative high interest rates, that level of debt is unsustainable, argues financial analyst Victor Shih at the USC U.S.-China Institute. And when China gets into trouble, there is no IMF-style institution with enough capital to save it. A crashing stock market also does not help.

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The interaction between political and financial elites - Victor Shih

Victor Shih

Scholar Victor Shih is interviewed by the China Daily, on how he analyzed the links between different factions in China´s politics. A dive into China´s capital markets since 2009, achieved Victor Shih high praise as one of the first to document China´s serious debts.

The China Daily:

The book is considered by some the first in academia to develop a framework with which to analyze how elite politics affect monetary and banking policies. 

Scholars review this book as a clear, well-researched explanation of the dynamic driving China's reforms. 

"It is both a fascinating portrait of elite politics in China and a rigorous test of an analytical model," said Bruce Dickson, political science professor and director of Asian studies at George Washington University. "Most scholars are good at one approach or the other. Shih shows he is equally gifted at both." 

Shih began his study of China's capital markets in 2009. His findings on China's local government debt were published in China Economic Review in 2010, creating a stir in the US and China. He noted in the thesis that combining the findings of the National Audit Office (NAO), the China Banking Regulatory Commission (CBRC) and the People's Bank of China, the total official estimates of local governmental debt is much higher than the National Audit Office (NAO) said in its report. 

"My estimate was entirely based on official numbers that the government announced to the public online," Shih said. 

His study suggested that Chinese government must have the resolve to stop local-level leveraging before risks in the financial system steam out of control. 

"I noticed that in recent years the Chinese government has taken many efforts to control the total amount of local debts," said Shih. "I also noticed that the Chinese government tends to be more transparent about the financial figures." 

Shih said now People's Bank of China published the total debts of the entire country and he's able to observe the whole situation in China. "My intention is to answer such a question - how China's total debts affect China's rapidly growing economics?" 

China has significant ability to control the economic fluctuations. 

Shih argued that "China needs to bring some financial risk to some degree. "In financial markets, there have to be some failures," Shih said. "If your bonds are bad ones, your company shuts down. So people won't count on the government all the time as the final straw for bad business. Any market has risks. 

"The only thing I see purely possibly run by a market economy is the so-called underground banking system, which is illegal in China." 

Shih believes that the Chinese government will make more of an effort to balance the economy. 

"Slowing down a bit is not bad, and sometimes needed," Shih said.

More in the China Daily.

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