|
CHINA - Chinese Crackers - Update 2012-13 |
|
CHINESE
CRACKERS : 2012-13 UPDATE My
scepticism about the Chinese economy grew from the working principle of US
investigative journalist, the late I.F. (Izzy) Stone. The catalyst for my
becoming a China sceptic was a 2003 article titled ‘Gold into Base Metals’ in
one of the most prestigious publications in bourgeois economics, the Journal of Political Economy. Its
author, Alwyn Young, had tracked the numbers up from village level to the
national figures between 1978 and 1998, to document their unreliability,
thereby turning ‘the extraordinary into the mundane’. In December last, Paul Krugmann,
recipient of a fake Nobel Prize in self-styled Economic Science, summed up the
latest scholarly consensus that Chinese stats are a more-than-usually ‘boring
form of science fiction’. (Australian
Financial Review, 20 December 2011, p. 20) The unreliability of Chinese reporting
has pertinence for evaluating the chances of a general and deep crisis there.
The cheery optimists agree that all the numbers are phony but that since they
are all fake in the same way they give an accurate picture of trends. The dubious nature of the numbers is
compounded by the failure to collate some of the most crucial sets. The
Ministry of Housing and Rural-Urban Development hopes to integrate housing data
from forty key cities by July. That leaves 617 cities outside the system. The
lack of nation-wide figures in the housing construction makes it hard for the
State Council to enforce controls and for anyone to assess the size of the
bubble. This time last year, Surplus Value published a first update
of my 20,000-word investigation into the weaknesses in the Chinese economy that
had been posted on surplusvalue.org early in March 2011. An acquaintance in the
Department of Foreign Affairs and Trade thought that any bureaucrat who raised
those concerns would be retired as mentally incompetent. What a difference a
year makes. ‘Conventional wisdom’ is now dividing between those who predict
either a soft or a hard landing. Space
does not allow us to pursue all the issues raised in the original survey.
Hence, we shall focus on that pivotal element in every kind of capitalism - the
banking sector. Here I draw on the review by Hung Ho-Fung of Carl Walter and
Fraser Howie Red Capitalism The Fragile Financial Foundation of China’s
Extraordinary Rise on surplusvalue.org The authors are veteran investment
bankers with Morgan Stanley and J P Morgan with years of experience in China
helping to float major State Owned Enterprises (SOEs) in overseas stock
markets; both are fluent in Mandarin. To appreciate the expanse and depth of
the problems means starting from the 1997-8 Asian crisis which led to the
creation in 1999 of ‘bad banks’ known as Asset Management Companies (AMCs)
which took in the problems from the four big state banks which then became
‘good banks’. The AMCs were never adequately capitalised. The Ministry of
Finance put in RMB40bn but the other RMB858bn came in the form of 10-year
bonds. This was just creative accounting. Debts were now called bonds. The
crisis had been postponed for ten years. By 2006, the AMCs had recovered about
20 percent of the non-performing loans, enough to pay the interest on the
10-year bonds falling due in 2009. That expiry date was in the depth of the
so-called Global Financial Crisis. It became obvious that the AMCs would not be
able to repay their maturing bonds, which constituted up to half the capital of
the Big Four ‘good’ banks. As a remedy, the government extended the AMC bonds
for another ten years. This is no more than a postponement of the crisis.
Indeed by 2019 China’s financial system will be far more vulnerable: many of
the massive loans from the emergency ‘Great Leap Forward Lending’ in response
to the continuing crisis will deteriorate into a new wave of non-performing
loans, much larger than that of the 1990s. Walter and Howie conclude that a
domestic banking crisis is only a matter of time. To
reduce inflation and control the property bubble, the State Council pushed up
the reserve requirements of the banks. That limitation made it harder for small
and medium enterprises to get loans. One response has been the growth of
‘shadow banking’ with loans from individuals, small ??? . In addition,
state-owned enterprises and banks have set up financial arms to lend outside
the new rules. By June 2011, these loans stood at 20 percent of formal
financial lending. In terms of government policy, this
evasion of liquidity limits is compounded because 60 percent of the shadow
banking goes to real estate, fueling the property bubble. The risk is similar
to that from sub-prime loans in the United States. When the real estate prices
fall, the marginal developers will be forced to sell off at bargain prices if
only to deal with interest rates of up to 60 percent per annum. Once that
spreads, a domino effect could run up to the big banks which have loans
collatoralised by property. The disappearance of company executives from
Wenzhou is a harbinger of this danger. (Asiamoney,
November 2011) Just how difficult it is to keep track
of real-estate loans is exemplified by an even shadier form of lending.
Non-precious metals such as aluminum and even copper are used as collateral to
raise funds for building projects. check in The
great disorder under heaven from the boom set off by the 2009 stimulus package
required Beijing in June 2011 to buy up $US463 billion in bad debts to banks
from local governments. That bailout was half as big again proportionately as
the 2008 one in the US. In addition, Moody’s estimated that local governments
still had undisclosed debts of $540bn that the central authorities considered not
to be real claims because they were ‘poorly documented’.[1] At the same time, the State Council
tried to control inflation and the property bubble by driving the reserve
requirements on banks over 22 percent
before the end of 2010-11 financial year. Not surprisingly, bank lending shrank
by 12 percent year on year to mid-2011 while the money supply (M2) grew by only
15 percent.[2]
Nonetheless, investment in the property sector increased by 35 percent.[3] How did developers squeeze
so much more money-capital out of somewhat less? One answer is that they used copper,
aluminum and even steel as if they were gold bars in Fort Knox. Financiers
found a way around the controls on liquidity, as is their wont, until inventory financing has become so
common that one Standard Chartered report suggested that copper could be
rebranded as a form of collateral for loans rather than a commodity. Borrowing
copper and converting it into cash can be cheaper than traditional borrowing. It seems Chinese importers are paying
the terms of letters of credit. They can buy, for example, a tonne of copper at
$10,000, obtain a letter of credit from a bank by paying 20 percent, sell the
copper – either domestically or by re-reporting it – and invest in high-yield
assets, such as the property market, then pay off the letter of credit when the
term is up, typically after 90 or 180 days.[4] (The Banker, June 2011, p.
47) This
method of securing funds poses hard questions about which of the forms taken by
the capital during this metamorphosing are fictitious and which real. A store
of copper is not real just because it is in metal bars, yet becomes real when it
funds construction from which surplus value will be extracted. However, at
least some of the valuation that the owners will put on those blocks of units
and offices will prove fictitious until they can be rented at returns that
bring an average rate of profit, which is not easy in the current over-supply.
Not
buoyant exports. Some of that shift is at the cost of Australian exports Iron
ore prices fell from $170 a ton to $140 and are headed south.
Back
to the old tale of why China won’t save
us. They
wont save us even if they each bought a pair of woolen socks and put two lumps
into their green tea. The
focus is China but what happens there is affected by what goes on in Japan and
Korea. Korea
has come back after firing some missiles into the sea. A
few weeks back we did a program on Korea and war. At the time, nuclear war was
about to break out. Then
two home-made bombs went off in Boston and Korea lost its place in the news. One
more reminder of the priorities of the ‘news’ and how little attention we
should pay to ‘news’. In
particular, the mismatch between Treasury forecasts and budget revenues. Remember
when the boom was going to last until 2030? Now
it is going to be ‘over before Christmas’. Failure
of Treasury in its predictions of tax revenues. Why? The
experts are all ‘cheery optimists’. They
are not game to break from what J K Galbraith called conventional wisdoms. Or
to rephrase Orwell, some ideas are so dumb that only a committee could have
them. Stalin
joke: A
Komosol asked him whether the greater danger came from Leftwing adventurism or
from rightwing opportunism. Stalin
replied: ‘whichever one we are not watching at the moment.’ That
is a golden rule for politics and economics. They
all have one thing in common. They all go bust. Droughts are followed by floods. What’s the surprise. Financial
journalists are paid to massage the egos of investors and dealers. If
you point to problems you are accused of causing them. Eg
Paddy McGuinness as editor of the Fin
Review in the early 1980s predicted that the Fraser-Lynch minerals and
energy boom was hollow. The
warning signs about China have been around for years. My
‘Chinese Crackers’ was posted in 2010 and updates each year since then. I am no expert on China. My
advantage is that I don’t read the daily papers or watch television. First, corruption is rampant. Latest
example is of the top planner and the man in charge of energy policy. Liu
Tienan. Point
two is that stats are science
fiction. If
the top planner is corrupt how much reliance can we place on the numbers that
he puts out? Thirdly, the economy remains flat. Last
year, forward sales at the Canton Fair were down by 7 percent. This year they
dropped a further 1.4%. Fourthly, the public finances and the banking
sector are bankrupt. Three
recent warnings: >
Nomura securities is warning of a bigger bust than the US in 2008 >
Hong Kong professor Larry Lang of HK Chinese University says the mainland is
already bankrupt >
Above all, on 18 April the deputy director-general of National Audit Office
refused to sign off on financial statements from local governments. Define local governments as more than
the Yarra Council. Populations equal to Australia’s. No
big deal. First, convertibility does not apply to our
dirt. Those contracts are written in US dollars. Secondly, even if you get paid in Yuan you
have to spend them inside China. The
panic merchants in the US claim that the Chinese share of government bonds etc
is so great that Beijing will dictate policy. The
reverse is closer to the truth. Another
old story. If someone owes you trillions of dollars, that debt becomes your
problem, not theirs. China
needs to cut back holdings of US bonds etc but
China
is caught in a vicious circle. Mixed
consequences. Good for China is that the value of their
investments has stopped falling and so not so urgent to get out. Also
high dollar means the US can afford to buy more. Bad is that one reason for a rise in the
dollar is the expectation that the Federal Reserve will stop printing money. If
they do, the ‘fragile’ recovery will go back down the tubes. Then
the demand for Chinese goods will slow down too. >
Japanese devaluation cuts across China’s attempt to move into higher value
exports >
Impact of drop in consumer demand in the EU and in the USA. >
Impact of worker fightback inside China,
linked to >
Impact of attempt to drive up domestic demand. The
previous five -year Plan was for 50 percent of GDP in service sector by 2010 –
but reached only 40% Domestic
demand has to be made effective and that means higher incomes – upwards
pressure on wages. The
result is that Japanese, Korean and Taiwanese firms have flown the coop to
Indonesia. In
late 2010, Chinese investors held 0.2 percent of the shares here. At
the same time, the US held 29 percent. That
is, one in five hundred for the Chinese against nearly three out of every ten
for the US Imperialists. Back
to the question to Stalin: which one should be watching?
The financial crunch in China. What
is going on? There
are the four big ‘good’ banks. There
are four big ‘bad’ banks. And
there are shadow banks. These
shadow banks are linked to the four so-called good banks. Important
to see how the bad banks and the shadow banks came into existence. Even
the Financial Times regarding the
past four weeks did not go back beyond the 2009 stimulus in China. The
media’s memory loss illustrates my point that the media make us ignorant. They
chase the news – disconnected data. Something
that happened in 1999 is ‘ancient history’ - or never happened. How
can something from 1999 have any effect on NOW? This
what a friend of mine calls
NOW-ism not MAO-ism NOW-ism
blights the entire world. But
reported as if the crunch came from nowhere Some
of the specialist press mentioned the overhang of bad debt from the stimulus
package of 2009. But
no mention of the 1998-9 overhang of bad debts The
good banks are really the naughty banks. They
are called ‘good’ only because their balance sheets look good. Their
debts and the dodges are kept off the books. After
the 1998 Asian financial crisis, the Chinese economy slumped. One
result were lots of bad debts on the four big banks. The
central government came up with a novel solution. They
would set up four new banks which took on all the debts from the four old
banks. The
new banks were the bad banks. However,
these banks would be wound up in ten years time. The
good banks and the government would contribute to paying off the bad debts by
2009. One,
very little money went into the refinancing. Two,
by 2009 the Chinese economy was again going down the tubes. Instead
of paying off the old bad debts the government did two things One
it rolled the bad debts over for a further ten years. They
are now due to be paid off in 2019. They
are still there. Two,
to rescue the economy and perhaps the political system, the Chinese launched a
stimulus package that was larger than the one here or in the US in comparative
terms. The State Council tried to rein them in. But
the provincial and local governments kept borrowing and spending. The projects ran up more bad debts. Shadow banks There
had always been some backdoor financing But
became a major component after the 2009 stimulus package got out of hand The
Good banks began shifting deposits off their balance sheets They
thereby continued to lend. Important
to see that the shadow banks are not wildcards – they are not rivals to the
Good banks. They
are arms of the Good banks. The
banks stopped lending to each other That
was what was happening when Lehman Brothers went down in 2008 Once
that happens, the game is over. So
Beijing backed off. It
said it would bail out failing banks but only if they did as told. Assistance
would be available only to banks who stayed within the guidelines. The
debts cannot go on piling up whether on or off the books. But
writing them off and limiting new loans might tip the whole economy into a
disaster Or
at least into a deflationary cycle such as Japan has had since 1990. WA
govt just signed onto a $80bn loans with the China Development Bank They need to get out of being prisoner to US
debt Not
easy to find a safe haven Do
you want to buy Euros? Always
a solution according to the financial press.
One
clown pointed out that the Chinese banks need not go belly up because the
Chinese people have lots of savings. Indeed,
they do And
a lot of those savings are under their beds. Why
are they under the bed? Because
they don’t trust the banks. Are
they likely to trust the banks more now the news is out that they are on the
verge of going bust? If
lots of people try to sell up at once the skyscraper of cards will collapse. Instead,
they sit on those dead assets. Often
the investors cannot even get a return on their property investment. No
rent comes in from a vacant tower block. The
Chinese government also has a huge pile of savings – in the US. Those
investments are also somewhat of a liability. Beijing
can’t bring them home in a rush to shore up failing banks. Why
not? Because
that withdrawal would implode the US economy and thus puncture the global
economy. Hence,
there would be no customers for Chinese exports in the USA or Europe. And
no Chinese demand for Australian dirt. Off-shore
islands Land
grabs etc This
morning has been a reminder that Australians have more to fear from the
weaknesses in China than from its strength.
Why? Lead
up to Vietnam – a thrust by China, lied Menzies Need
for an enemy to boost military spending. New
evidence of that is coming out everyday. But
this time I want to focus on the disputes over islands. We
shall get to the detail presently. First,
we need to put the oceans into their global political-strategic context. In
particular, we need to rethink decolonization. We
need to do this rethinking in two ways. First,
is this really a post-colonial world? Secondly,
we have to raise a question that is almost never mentioned – namely, the
de-colonisation of the oceans. Those two questions provide the context we
need to understand the conflict over the islands off the coast of China. The
answer is a resounding NO So
what do we have? The
answer remains Neo-Colonialism That
is the term popularised in the early 1960s by Nasser and Sukarno. They
defined Neo-Colonialism as Constitutional independence but economic, strategic
and cultural subordination. Anyone
who thinks that we moved to a Post-Colonial world in the 1960s is ignorant of
history, politics, strategy and economics. Who
fits that bill? Prime
suspects are the self-styled Post-Modernists, Most
of whom never understood what Modernism was. They
fell out of literature and visual arts departments. They
operate in a realm of disembodied ideas. They
live in a world where the mundanities of getting and spending play no part. One
of their claims is that the grand narratives of socialism are dead. Perhaps
so, But
the grand narrative of the expansion of capital staggers on. Advances
made in Latin America We
see that across the Middle East To
revert to slicing up the Chinese melon. What
we find here is that the legacies of Eighteenth and Nineteenth-century
colonisation are alive and well. As
the biggest island continent Contrast
with states made up of thousands of islands – eg Indonesia Therefore,
archipelagic statehood very important for Indonesia and the Philippines And
thus very significant for Australian trade But
also crucial trade for Japan and all of North Asia. Quicker
to go by water than across land They
are not keen on warships sailing through the narrow straits Then
extended to twelve miles Throughout
the 1970s, negotiators for a Law of the Sea Treaty came up with idea of a 200km
Exclusive Economic Zone. 1982
agreed on UN Convention on Law of the Sea
UNCLOS 161
signatures but
not the USA nonetheless,
the Reagan admin announced that it was assuming control of the off-shore
islands as if it had signed. The
US thereby got 9.5 million square kilometers of exploitation rights. That
is in addition to the 2.5 Million EEZ from the continental USA That
is at the heart of the battle with Timor Leste over oil and gas in the Timor
sea. That
is too complicated to go into this morning but typical of the disputes that
arise when two EEZs collide. But
the EEZ is itself a recent concept – barely forty years old Giving
numbers over the radio is never a good idea So
we need to go slowly and carefully Britain
and the Falklands/Malvinas for example,
3.6m square kms in the South Atlantic No
wonder Thatcher went to war In
effect, twenty times more than China is claiming And
40 times more than China’s coastal EEZ
Who
remembers them now? Where
have they ended up? I shall find out and
let you know on Saturday. BEIJING BANK-RUPTS: Bad
banks create Good banks The article begins by noting that
China’s exports did indeed overtake Germany’s in 2009 to become the world
leader. The authors then explain why ‘Chinese companies face enormous
competitive challenges in operating on the international stage’. The crucial
problem is that China’s manufacturing and banking are not integrated into the
global networks. Instead, ‘They have to compete with the powerful firms that
now dominate almost every segment of global supply chains’. China’s prospects
are constrained because its businesses are not at the controls of this
‘cascade’ of flows. Freed from the ideological blinkers of
neo-Classical economic correctness, it is easy to see why ‘free trade’ opened
doors to further monopolising. Large companies from the advanced
economies vastly expanded their international investment, building production
networks across the globe. Although
Chinese capitals have advanced during the current crisis as their rivals slid
down the ranking of global giants, US and EU firms also strengthened their position
through further concentration, (oligopolising). China still has no place in
nine of the ten key sectors. China got onto the finance list in
part because of the loss in the market capitalisation of financial houses, but
mostly because the Chinese banks dominate their own turf. They are huge but not
networked. As Nolan and Zhang put it: It requires a huge leap to progress
from being a powerful domestic bank, operating in a heavily protected home
market, to one that is globally competitive and able to finalise large-scale
international mergers and acquisitions. Without
the links to carry through take-overs, can Chinese capitals buy their way into
the other nine sectors? Only construction equipment has a level of
concentration below 50% - at 44%. The next lowest is for PCs at 55% and third
is mobile handsets at 65%. Inevitably, these oligopolies dominate
R&D, and thus have their hands on the future drivers. They also dominate
foreign direct investment (FDI). The combined FDI by the big four newcomers - Brazil,
Russia, India and China - is less than that of the Netherlands. Two-thirds of
China’s FDI goes to Hong Kong and Macao; its next biggest destinations are the
Cayman and Virgin Islands, with 17% of the PRC’s total FDI. The much vaunted $2.3 trillion of
foreign-exchange reserves that China held in 2009 needs to be contrasted with
the $63.7 trillion available to the top 500 asset managers in the West.
Moreover, Chinese reserves amounted to only $1800 for each Chinese but $5,600
for a South Korean and $8,400 for each Japanese. Hence, by every measure, Chinese firms
are in the infancy of global corporate behaviour. The challenges are
qualitative more than quantitative. Since 1980, ‘The age of globalisation
witnessed the rapid consolidation of systems-integrator firms and their supply
chains’. China’s competitors retain advantages from nearly 150 years of
installing management systems, domestically and around the planet. Since 1980,
the non-Chinese corporations have increased and upgraded those barriers and links.
Those developments were not initiated against China, but can now channel its
growth away from over-taking the oligopolies based in the West. Catching up is not just a matter of
Chinese workers pushing out more and cheaper cars or tie-pins. It also involves
the ‘visible hand’ of management beyond the factories, the integration of
finance with supply, production and distribution. Chinese workers and
executives are more than capable of performing those soft power functions. At
issue is whether will they be able to buy their way through the gate of earthly
profit. Or will they be checked by a new great wall – one that keeps the
Chinese in, not the barbarians out? In addition to acknowledging this
obstacle, any prognosis for China needs to consider six more issues: >
distortions from the undervalued Yuan; >
a banking system carrying undisclosed loads of doubtful debt; >
a stock market corrupted by state policy (see ‘Shanghai Express’ item); >
real estate bubbles; >
massaged statistics (see ‘Chinese Crackers’ item); >
turbulent workers and unemployed. On
top of these domestic matters, Chinese growth remains vulnerable to
contractions of demand for its products in the rest of the world, whether from
budget cuts in the EU or recession in the US. In pondering China’s future, we need
to think beyond its 1.5bn people and the enormity of their output to recognise
that Chinese capitals have to meet the same needs as capital anywhere. Its
expansion requires more than the exploiting of labour – at which the Chinese firms
have been successful. The surplus value that results has to become the profit
for the next round of investment. In Volume II of Capital, Marx traces the cycle of Money, Production Commodities,
through Production, to Commodities for expanded Money to invest. (M-C-P-C-M+)
(See items in Capital Refined) Without mentioning Marx, Nolan and Zhang provide
evidence for how the global concentration of capital stands in the way of
Chinese firms being able to flow through these circuits.
Notes
from a review by Hung Ho-Fung New Left Review
(Nov-Dec 2011) of
Carl Walter and Fraser Howie Red Capitalism, The Fragile Financial
Foundation of China’s Extraordinary Rise In 2007, 20 per cent of corporate
profits from stock trading. The 1997-8 Asian crisis led to the
1999 creation of ‘bad banks’. They are officially called Asset Management
Companies. They took in the problems from the four big state banks. That
allowed them to become ‘good banks’. The AMCs were not properly capitalised.
The Ministry of Finance put in RMB40bn. The other RMB858bn came from 10-year
bonds. This arrangement was just creative accounting. The good banks still had
the debts but they were now called bonds. This device postponed the crisis from
non-performing loans for ten years. The following are extracts from the
review. Meanwhile, the SOEs became ‘cash
machines’ of the oligarchic CCP families, today’s ruling elite. Heads of the
largest SOEs are equal in rank to provincial governors and ministers of state;
many are members or alternatives on the Party’s Central Committee. P. 141 Nor has this elite been shy about
squeezing resources from these companies, which became increasingly unable or
unwilling to repay their lingering loans. As of 2006, the Asset Management
Companies had only been able to recover about 20 percent of the non-performing
loans, and the cash thus generated could barely pay the interest on the 10-year
bonds held by the major state banks. In 2009, it became clear that the Asset
Management Companies would not be able to repay their maturing bonds, which
constituted up to half the capital of the Big Four. As a remedy, the government
extended the AMC bonds’ maturity for another ten years. This is no more than a
further postponement of the crisis. Indeed by 2019 China’s financial system
will be far more vulnerable: many of the massive loans from the emergency
‘Great Leap Forward Lending’ in response to the 2008 global financial crisis
will deteriorate into a new wave of non-performing loans, much larger than that
of the 1990s. 141 The 2009 stimulus package required
municipalities to come up with two-thirds of project spending, so they
leveraged utilities, infrastructure and assets to borrow from banks and then
issue bonds. 142 With declining saving deposits as
buffers, the coming of a homegrown financial crisis is just a matter of
time. 142 The
figure at the end of 2009 could be at least 76 per cent of GDP (as of 2010 it
was 63 per cent for the US). Such a proportion indicates a heavy
interest burden, which will eventually limit the state’s ability to invest in
growth. Thus far the government has been leveraging China’s domestic balance
sheet, borrowing ‘expensive RMB now to build projects’ with the intention of
making ‘repayment at some point in the distant future using inevitably cheaper
RMB’. 142 The demystification of American-style
corporations as solidly profitable, transparent and well governed in the wake
of the Enron scandal of 2001 and the financial crisis of 2008 only redoubled
the Party’s determination to kick away the ladder from American investment
banks. 143 The
review ends on a limp note: Whether, when and how China’s
working-classes will become a key political force and assert their own independent
voices in actual political struggles remains to be seen. 144 That’s
rot. The ferment has been going on for nearly 25 years and has sky-rocketed in
the past three years. By
Paul Krugman, Australian Financial Review,
20 December 2011, p. 20. There
was rapid growth in credit – with much of that growth taking place not through
traditional banking but rather through unregulated ‘shadow banking’, neither
subject to government supervision nor backed by government guarantees. Now the
bubble is bursting – and there are real reasons to fear financial and economic
crisis. Am I describing Japan at the end of
the 1980s? Or am I describing the US in 2007? I could be. But right now I’m
talking about China, which is emerging as another danger spot in a world
economy that really, really doesn’t need this right now. I’ve been reluctant to weigh in on
the Chinese situation, in part because it’s so hard to know what’s really
happening. All economic statistics are best seen as a peculiarly boring form of
science fiction, but China’s numbers are more fictional than most. [1] ThomsonReuters.com, 11 May 2011; Asiamoney, August 2011, pp. 66-67. [2] Beijing Review, 25 August 2011, p. 36. [3] Beijing Review, 23 June 2011, p. 37; 28 July 2011, p. 38. [4] The Banker, June 2011, p. 47.
|
|
See also Economics |