|See IMF link below|
A former official of China's central bank says China should welcome a
recession to work through distortions that have built up over three decades of
Joe Zhang, chairman of a microcredit company in Guangzhou, China, a former
official at the People's Bank of China and author of “Inside China’s Shadow
Banking: The Next Subprime Crisis?” says China’s bank credit has expanded at a
compound annual rate of 18%, and money supply at 21% over the
last 27 years. and has left "a large array of ills to sprout up alongside - -
environmental degradation, resource depletion, income inequality and runaway
government debt. All these ills are interlinked, and they are becoming
In The Financial Times today, Ruchir Sharma,
head of emerging markets and global macro at Morgan Stanley Investment
Recent studies have isolated the most reliable signal of a looming financial
crisis and it is the 'credit gap,' or the increase in private sector credit as a
proportion of economic output over the most recent five-year period. In China,
that gap has risen since 2008 by a stunning 71 percentage points, taking total
debt to about 230% of gross domestic product.
A credit boom of this scale is not likely to end well. Looking back over the
past 50 years and focusing on the most extreme credit booms - - the top 0.5% - turns up 33 cases, with a minimum credit gap of 42 percentage points.'
The International Monetary Fund uses the term 'augmented government debt' for
Chinese public debt that includes local government debt.
IMF staff estimate the augmented government debt has risen to around 45%
of GDP in 2012, having increased sharply through the global crisis. "Nonetheless,
that level still falls within sustainability thresholds. For 2012, staff
estimate that the augmented net borrowing was around 8% of GDP and the
augmented fiscal deficit was on the order of 10% of GDP."
However, the authors of
an IMF paper [pdf] this month acknowledge that others have higher
Joe Zhang wrote in
an op-ed piece published by The South China Morning Post of Hong Kong
- "I want to see tariffs on water, gas and electricity rise substantially -
- by as
much as two to three times immediately, if possible - - In the past decade, or
two or three, the prices of utilities have lagged far behind inflation, and
this has led to huge amounts of waste, pollution and depletion of resources;
- Second, in most of the past 35 years, China’s interest rates on bank
deposits have not reflected the sacrifice of the savers who are delaying
consumption. And, indeed, interest on those deposits has been below the
inflation rate. That rip-off has led to huge and persistent subsidies to
business. They get low interest rates on loans and consequently low hurdle
rates for returns on investments. That has artificially boosted economic
activity for too long;
- Finally, whatever your school of thought, the clearest test of a currency’s fair
exchange rate has to be its trade balances in the medium and long term.
The fact that China has run a trade surplus of large magnitude in the past two
decades proves the point that its currency is undervalued."
Zhang goes on to make his case for a recession by
citing America's most famous investor:
Warren Buffett split the 34 years between 1964 and 1998 into two equal periods
to give a lesson on investing.
Zhang says China’s rapid growth, fuelled by
fiscal and monetary stimulus, will stop. The only questions are when and how?
"Given the dominance of the state sector, which has a high tolerance for low
returns, and the existence of millions of low-wage workers, China Inc’s business
model can continue for a long while to come.
But that does not mean that allowing it to do so is in the best interests of
Finfacts: Economic convergence is a myth in Europe and in
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