China’s Great Wall of Debt: Dinny McMahon, 2018, Book
-high rate of growth for 4 decades
-emphasis on growth: stimulate economy, short-term growth, pay for it down the road
-China uses foreign nations’ access to economy as political tool
-Beijing willing to intervene, postpone crash, possible greater pain down the road
-debt: why state firms, local govt borrowed so much, how fin systems accommodated, why technocrats allow it, why it has no solution
Ch1 Black Box
-ccp promotes market economy but without demoting role of state
-dismantle full state control but retain ability to intervene
-intervene is informal, invisible to outsiders
-smooth over bad times so companies can survive to good times, “trading space for time”
-inaccurate, non-transparent economic numbers, banks don’t know, public does not know, economic numbers opaque
-gov’t creates market structure, then meddles
-private companies need to work with gov’t
-over-accumulation of power -> corruption
-lots of meddling into economy, difficult to see problems
-encourage borrowing without long-term consequences, “original sin”, freedom to circumvent discipline
Ch2 Zombie Accommodation
-China state owned companies, 25% economic output, borrowed 60% corporate debt
-self-sufficiency more important than efficiency, gov’t guarantees buying output
-loans from people’s savings, when loans not repayed, gov’t needs to bail out
-when gov’t cannot repay: banks and companies fail, raise taxes issue gov’t debt, increase inflation, sell equity in state owned companies -> real costs
-can be easily deferred, but not indefinitely
-zombie companies: lots of employee benefits, high debt, over produce, no product buyers
-CCP fears instability, keeps them going
-local gov’t still makes 25% of VAT, rest goes to Beijing
-if want to grow, debt does not seem to matter
Ch3 Ghost Cities
-urbanization creates demand for steel, concrete, glass
-stimulate economy, maintain growth -> increase local gov’t debt
-debt repayment is a huge problem, accumulated in a short period of time
-“Local-gov’t debt is our subprime”
-banks lend to local gov’t that don’t meet standards, local gov’t has trouble repaying, bank rolls them over or has bad debt
Ch4 Robbing Peter
-expropriate land -> sell to property developer -> free profits for local gov’t
-profits supplement local gov’t taxes
-home mortgage min down payment 20%, investment property 70%
-so many people boy into housing -> bubble
-housing built low quality
-lose faith in property -> higher interest rates -> developers fail -> land prices tumble -> finsys distress
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Ch5
-can Beijing continue to bail everyone out?
Ch6
-new money usually saved
-central bank prints money to pay savers -> lends to banks
-excess money buys luxury goods, put into stock markets
-people believe CCP will bail out everyone all the time -> more expansion, risk, complexity
-add controls and changes will slow growth, cleanup will be costly
Ch7
-SOEs become special interest groups, provide strong resistance to change
-SOEs independent kingdoms in their field, with little gov’t oversight, not held accountable to public
-employees of state firms get many perks, all would be lost in reforms
Ch8
-new workers to urban slows to trickle
-aging Chinese workforce
-middle income trap: growth to a point, then stagnation and lack of growth
-Chinese consumers should be buying more, but they cannot. They have a markedly small part of the pie, most of which goes to the state
-health care and pensions have less funding
-made in China is mostly imported parts assembled in China
-lack of innovation -> hacking, acquiring
-Chinese gov’t subsidies, dumping -> impact foreign competition -> world overcapacity
-protectionist policies for numerous industries, at expense of other countries
Ch9
-China wants to increase income before aging population adds extra costs
-underlying problems still exist
-worst income disparity
-China not immune to economic slowdown, or abrupt changes in politics
-possible options
-devalue yuan: hurt middle class, Chinese travelers, foreign education more expensive
-market oriented reform: bad for state employees
-close state factories: unemployment, lost wages
-raise taxes: hurt consumption