PRC Economy and Industry: News and Discussions

[ashi]

China's trade surplus is a function of arbitrating cheap energy and rock bottom worker wages to cheap products. If you are willing to do the same you too can join in. Most countries including India hesitate. We expect value for national wealth/effort.

What China is doing today, Japan/Korea/Taiwan/Hong Kong have done it before, and they are all successful. Don't kid yourself, average Chinese earns lot more money, lives longer, have better education etc than average Indian.

[RamaT]

More grist for the mill.

http://www.nytimes.com/2011/07/07/busin ... om.html?hp

And the Wuhan Metro is only one piece of a $120 billion municipal master plan that includes two new airport terminals, a new financial district, a cultural district and a riverfront promenade with an office tower half again as high as the Empire State Building.

In a report this year, the investment bank Credit Suisse identified Wuhan as one of China’s “top 10 cities to avoid,” saying its housing stock was so huge that it would take eight years to sell the residences already completed — never mind the hundreds of thousands now under construction.

But criticism has not deterred Mr. Ruan, the local party secretary, who has vowed to keep his foot on the shovel. “If we don’t speed up construction,” he said in the speech in February, “many of Wuhan’s problems won’t be solved.”

The whole system is like a drug addict addicted to easy money, and the need for its next hit is ever present.



http://the-diplomat.com/2011/07/05/chin ... debt-bomb/

There are only two sources of income to service such debts. One is to sell land controlled by local governments (land is used as collateral for securing bank loans). The other is to use the cash flow generated by these projects (power plants, ports, and toll roads). With the frothy real estate teetering, local governments shouldn’t count on land sales to come to their rescue. The economic viability of their newly invested infrastructure projects is even more abysmal. One banking regulator revealed that only one third of these projects can produce enough cash flow to service their loans. This implies that local governments won’t be able to recoup the bulk of their infrastructure investments – or repay the banks

I thought I was being conservative when I earmarked 40% bad loans.. but 2/3rd?? Holy Cr*p!!!

For all practical purposes, bank loans borrowed by government entities are actually free money – they don’t have to be repaid even when they go sour. Beijing has always come to the rescue, something local government officials are fully aware of. But we all know what happens when people get to spend free money.

Human nature can't fight the free lunch.. it's how empires from the Romans to the Ottomans have fallen. Unless the CCP can pull a rabbit out of its hat it's their turn next.

[amit]

How can one justify the fact that China with 1/6 th the economic size of the US ( a short while ago) had more steel making capacity than the 10 countries that followed it?

JMT

1） China is the world's factory and manufacturing center
2) large scale and rapid urbanization and industrilization

And so? What does these two Motherhood statements imply?

Please try to follow the arguments here very closely. If China stops or slows down its building of ghost cities and HSR network where will all the steel made in Chinese factories go to? Who will buy it? Who will buy the cement output? Who will give employment to the millions of Chinese construction workers.

Ashi, I personally feel China has made great achievements over the past 20 years. However, your CCP leadership is not infallible. It is right now sitting of a powerkeg of a bubble that may burst anytime. Don't assume that they are always right. However, for your sake, the sake of 1.3 billion Chinese and the world at large I hope the CCP can ride this one out.

There will be hell to pay if they can't. Don't pretend it would be otherwise.

[Theo_Fidel]

China's trade surplus is a function of arbitrating cheap energy and rock bottom worker wages to cheap products. If you are willing to do the same you too can join in. Most countries including India hesitate. We expect value for national wealth/effort.

What China is doing today, Japan/Korea/Taiwan/Hong Kong have done it before, and they are all successful. Don't kid yourself, average Chinese earns lot more money, lives longer, have better education etc than average Indian.

I didn't say anything about the life of the average Chinese. Relative to his/her productivity he/she is deeply under-paid. Japan, Taiwan, etc did not dwell at this stage for 40 years either.

As I said we will see. Pandaland is domestically mostly disconnected from ROI. This has always been a recipe for disaster. No exceptions.

-------------------------------------------------------

Human nature can't fight the free lunch.. it's how empires from the Romans to the Ottomans have fallen. Unless the CCP can pull a rabbit out of its hat it's their turn next.

IMHO they have some more to go. One must remember Greece was technically insolvent in 2006 but the construction and wild lending kept going another 4 years. And it CPC BTW.

For those who admire Panda infrastruture let me say Greece has some really wonderful infrastructure. Built for the next 50 years of capacity. like this one. No one cared about the ROI then. See how cool it looks.

[amit]

[What China is doing today, Japan/Korea/Taiwan/Hong Kong have done it before, and they are all successful. Don't kid yourself, average Chinese earns lot more money, lives longer, have better education etc than average Indian.

Ok now we're down to the familiar our shit tastes better than your shit and we have more shit than you line of arguments. It's my experience over the years that whenever Chinese drones start this line it means that some raw nerve has been hit.

But tut tut, you are comparing the development path of the Middle Kingdom with countries that should pay tribute to China? Small puny countries like South Korea and Taiwan, not to mention Japan which you just overthrew to become the second biggest economy? My, my...

What you need to understand is all the development/infrastructure building that has occurred in these countries have been market driven and not party driven with quotas fixed for every provincial government. That's the fundamental difference and the reason that Chinese banks are in such a mess today.

That's what is being discussed here. Please try to understand that before throwing flame baits.

[amit]

RamaT, great find, thanks. Ties in very nicely with what we've been discussing.

[somnath]

What China is doing today, Japan/Korea/Taiwan/Hong Kong have done it before, and they are all successful. Don't kid yourself, average Chinese earns lot more money, lives longer, have better education etc than average Indian.

Indeed, which is why China is a benchmark for us!

One can also in the same vein say that the average Indian is freer, has access to better higher education, is a more efficient user of resources, and have better banks! But thats just quibbling, which shouldnt be the idea..

Think again about HK, Japan, Korea et al...How much of the global trade do you have to capture incrementally to get to even Turkey's level of per capita income? How much does the CNY need to remain undervalued to do that?

[ashi]

And so? What does these two Motherhood statements imply?

Please try to follow the arguments here very closely. If China stops or slows down its building of ghost cities and HSR network where will all the steel made in Chinese factories go to? Who will buy it? Who will buy the cement output? Who will give employment to the millions of Chinese construction workers.

Ashi, I personally feel China has made great achievements over the past 20 years. However, your CCP leadership is not infallible. It is right now sitting of a powerkeg of a bubble that may burst anytime. Don't assume that they are always right. However, for your sake, the sake of 1.3 billion Chinese and the world at large I hope the CCP can ride this one out.

There will be hell to pay if they can't. Don't pretend it would be otherwise.

My " Motherhood statements" imply that economies have different kinds. Some are more focus on service/finance, thus they use less raw materials. China is heavy on manufacturing and is in the stage of rapid urbanization. that's why she needs more steel/cements/raw materials comparing to other countries given the same number of GDP.

China is aware of what are the problems lies ahead. Didn't Wen openly say that China will try to slow down on GDP growth, but more focus on the "qualities" of the growth? Wen's proposed target for GDP growth is 7.5% for the next five years, and trying to move up in the value chain. Flip a few pages back, you can see the links to those articles.

[amit]

How much of the global trade do you have to capture incrementally to get to even Turkey's level of per capita income? How much does the CNY need to remain undervalued to do that?

Ouch! That hurts Somnath.

Even with its current growth rate in per capita terms China will remain poor even as its working population starts to shrink - all thanks to the wonderful one child policy.

I wonder, who will stay in all those millions of shinning apartments being built and will they be able to pay even the nominal cost of rent, never mind the principal and interest?

[somnath]

But, the question I have is what is the quality of the infrastructure built? If picture below is any sign of the quality, then many of those investments will go waste

Lets not be cussed - that pic doesnt prove anything, it might be an under-construction site...Anyone who has been to China can see that the quality of infra is very very good - not US/Europe level perhaps, but very good...

Back in the 1990s, they had bad loans from SOE (State operated Enterprises) that were a far larger percentage of a far smaller Chinese economy than the possible bad loans we see today. A magic wand was waved and all four banks were re-capitalized, all the SOE's debt disappeared into these holding corporations that kept debt that will never be repaid

there was no magic wand - they used a part of the Fx reserves and also sold minority stakes in these banks to forieng banks @ huge premiums...It was a temporary fix, by most accounts didnt work, and the problem is arguably much larger today...

As far as I know, those $3T are sovereign wealth since China gets it foreign reserves by "washing" all foreign currency that comes into the hands of its citizens.

No, Fx reserves are only obligations that the state has swapped into a different currency...Sovereign wealth can be earned from two sources - surpluses in the fisc and profits out of state-owned businesses...China does have some surpluses, how much, one doesnt know...But given the general profitability of their SOEs, cannot be very large...Net net, using Fx reserves for very large amounts for fiscal interventions is dangerous territory - which is why India has been so cagey about putting its reserves to work (there was a clamour on part funding some infra with it)...

[amit]

My " Motherhood statements" imply that economies have different kinds. Some are more focus on service/finance, thus they use less raw materials. China is heavy on manufacturing and is in the stage of rapid urbanization. that's why she needs more steel/cements/raw materials comparing to other countries given the same number of GDP.

China is aware of what are the problems lies ahead. Didn't Wen openly say that China will try to slow down on GDP growth, but more focus on the "qualities" of the growth? Wen's proposed target for GDP growth is 7.5% for the next five years, and trying to move up in the value chain. Flip a few pages back, you can see the links to those articles.

I've seen what Wen has said, trust me I don't need to read that stuff on BRF. Your point about manufacturing vs services is a very disingenuous argument. This discussion has not been a China vs India comparison. Irrespective of whether India is services oriented or not, there is a massive infrastructure deficit in India and all of us here acknowledge the problem and express it freely, we don't expect midnight knock on our door because of that.

And your China relies heavy on manufacturing and is in the stage of rapid urbanization is not supported by numbers. Look at the China National Bureau of Statistics chart a few posts up. 70 per cent of GDP is spent on infra and real estate. Does that look like a manufacturing led GDP growth?

[ashi]

[What China is doing today, Japan/Korea/Taiwan/Hong Kong have done it before, and they are all successful. Don't kid yourself, average Chinese earns lot more money, lives longer, have better education etc than average Indian.

Ok now we're down to the familiar our shit tastes better than your shit and we have more shit than you line of arguments. It's my experience over the years that whenever Chinese drones start this line it means that some raw nerve has been hit.

But tut tut, you are comparing the development path of the Middle Kingdom with countries that should pay tribute to China? Small puny countries like South Korea and Taiwan, not to mention Japan which you just overthrew to become the second biggest economy? My, my...

What you need to understand is all the development/infrastructure building that has occurred in these countries have been market driven and not party driven with quotas fixed for every provincial government. That's the fundamental difference and the reason that Chinese banks are in such a mess today.

That's what is being discussed here. Please try to understand that before throwing flame baits.

So here we go again, accusing someone to be "drones" and "throwing flame baits" ... What I wrote is a reply to

Theo_Fidel wrote:
China's trade surplus is a function of arbitrating cheap energy and rock bottom worker wages to cheap products. If you are willing to do the same you too can join in. Most countries including India hesitate. We expect value for national wealth/effort.

Don't take it out of context.

[somnath]

China is aware of what are the problems lies ahead. Didn't Wen openly say that China will try to slow down on GDP growth, but more focus on the "qualities" of the growth? Wen's proposed target for GDP growth is 7.5% for the next five years, and trying to move up in the value chain.

Indeed...I often quote this very basic and rudimentary maths...China uses ~50% savings (domestic+foreign) to generate a 9-10% growth..India uses 37-38% savings to generate 8-9%...that is the maths that your leaders will be trying to change...the chalenge is how to do it in a system that is not "free", and depends on undervalued CNY and increasng investment to maintain the growth rate to keep social tensions in check....

[amit]

China is aware of what are the problems lies ahead. Didn't Wen openly say that China will try to slow down on GDP growth, but more focus on the "qualities" of the growth? Wen's proposed target for GDP growth is 7.5% for the next five years, and trying to move up in the value chain.

Indeed...I often quote this very basic and rudimentary maths...China uses ~50% savings (domestic+foreign) to generate a 9-10% growth..India uses 37-38% savings to generate 8-9%...that is the maths that your leaders will be trying to change...the chalenge is how to do it in a system that is not "free", and depends on undervalued CNY and increasng investment to maintain the growth rate to keep social tensions in check....

China's capital utilization ratio is one of the worst in the world.

[chola]

Very good arguments Chola.

However, one point: Nothing exists in vacuum. I don't see how a China sans institutions - which allow the release of public frustrations - can keep on building infrastructure the way they are and in the process make large sections of their populations impoverished (and these are the educated people who have the money to invest in speculative buying of housing) and still be able to keep the lid on discontent indefinitely. IMO somethings got to give. Already there are a lot of anecdotal reports of massive protests in various interior parts of China it will take little for all that to snowball.

As I said before. I don't expect China to keep the lid on for eternity. But I do hope they can hold on for a few decades. Those lack of institutions is what will allow India to catch up. A colored revolution in China will bring in the US and in no time, we'll see China in the American mode. A democratic China with anywhere near the efficiency of a Taiwan, Hong Kong or South Korea, never mind Japan, we will most likely never catch up since they are already three times wealthier.

Also another point you make, that of 80 per cent of the Chinese people wanting to be urbanised over the coming decades doesn't sound right in terms of numbers. According to the CIA Factbook in 2008 43 per cent of China's population was already urbanised. And according to Reuters by as early as 2015 more people will be living in cities in China than in rural areas.

Sorry. I might have been using earlier numbers stuck in my brain from my heydays as an analyst. I show know that. At any rate, even at 43%, you are talking about astronomical numbers. With 1.3 billion, 43% equals 559 millions. Even if half of that become urbanized, you are talking about a population as big as the US. I sincerely doubt that China has anywhere enough modern housing for that many people. Remember, people are trading in literally caves and mud huts in some regions. We must not forget that vast areas of China are as poor as Africa or Bihar.

I don't think there was ever any major infrastructure project undertaken in the US or Japan which did not have a sound business case (again we come to the all important RoI) to push it.

Actually, most major infrastructure projects in the US or Japan made no sound business sense if business sense means dollar profits in the immediate future. The US Interstate system never came close to being paid for by the pittance in tolls it collected. They were collected locally for state governments any way. Most bridges took decades to paid back if ever. Nearly all subways systems in the world are subsidized.

That is why government built infrastructure. They are the usually the only ones who can wait decades for the money to begin rolling in or ever.

In China what's the business case of a city like Ordos which has been lying empty for close to a decade?

I was always skeptical of the empty town idea. No country, especially not a dirt poor one like China, is able to haphazardly build empty towns just for the heck of it. I looked it up and found this:

http://blogs.wsj.com/chinarealtime/2010 ... -of-ordos/

Revisiting China’s ‘Empty City’ of Ordos

Famously dubbed China’s “empty city” in a November 2009 report by Al-Jazeera English, the town of Ordos in Inner Mongolia has become the favored example of those convinced that China is in the midst of a runaway property bubble unmoored from reality.

The town’s mostly uninhabited new district of Kangbashi is now routinely cited by bearish investors, and got further unfavorable coverage in a photo essay and article in Time magazine earlier this year.

Bank of America-Merrill Lynch economist Ting Lu decided to pay a visit to Ordos to see for himself, and detailed the result in a fascinating report this week. He did indeed find a city that is, at least on weekends, largely empty.

But rather than the poster child for a national property bubble, Lu sees Ordos’ economic circumstances as mostly unique, and largely caused by the huge wealth it has reaped from its wealth of coal. In fact, he argues, the city is an interesting example of how a resource-rich area has fairly successfully handled the enormous windfall it has seen in recent years, and avoided the “natural resource curse.”

Once poor, Ordos has been blessed by the commodity boom: It has one-sixth of all of China’s coal reserves, and one-third of is natural gas reserves. Its gross domestic product has grown a “staggering” 25% a year over the last eight years, Lu reports, more than twice as fast as the national average. The city may well be the richest in China: Its per-capita GDP of $21,600 is more than twice than of Beijing, and is likely under-reported.

“Blessed by rich coal reserves, Ordos cannot resist the temptation of lavish government projects, but it has escaped most of the classical curses of natural resources by reasonably allocating the windfall gains,” Lu says.

“Blessed by rich coal reserves, Ordos cannot resist the temptation of lavish government projects, but it has escaped most of the classical curses of natural resources by reasonably allocating the windfall gains,” Lu says.

Rather than sit back and watch newly-wealthy locals put their money elsewhere, the local government has tried to keep the coal wealth closer to home. In 2003, as the coal boom took off, it started planning for a much bigger city, of up to 1 million people. The old town was expanded, and an entirely new urban district, called Kangbashi, was built from scratch, designated the administrative capital and expected to house up to 300,000 people. The plan mostly worked.

“Its strategy is to invest massively in local infrastructure and urban expansion to attract coal bosses to buy local properties,” Lu says. “In this regard, Ordos has been successful. The old town has expanded three-fold over the past decade and homes in the new town are all sold out.”

The main reason why Kangbashi is empty seems to be a planning issue: The new town is 25 kilometers from the old town, which has discouraged people from moving. Though a government official may work in the new town, his family may have little reason to move there. With few residents, supporting services like restaurants can’t survive in the new town, which is a further reason not to move there.

Why is the new town so far away? Lu says local officials said the main reason is to be close to rivers – the old town is chronically short of water – and to another mining town, Yulin. Local residents have been happy to buy houses in the new district – Lu says a new development sold out in a couple of days just before his visit – but local officials are still trying to find ways to encourage people to actually move into their houses.

“We found a brand new but empty city, but reporters could easily distort the overall picture, exaggerate problems, and overly generalize findings. In fact, Ordos is very unique – and it is quite misleading to assume what happens in Ordos could happen in other parts of China,” Lu says.

– Andrew Batson

There is no doubt overbuilding to some extent. I just can't imagine an overcrowded nation of 1.3 billion would ever have empty buildings over time. Anyone who've been to the Far East and seen the entirely wretched condition of overcrowding even in wealthy places like Hong Kong and Tokyo never mind poor ones like those in China would have empty homes for long.

How can one justify the fact that China with 1/6 th the economic size of the US ( a short while ago) had more steel making capacity than the 10 countries that followed it?

Perhaps China is a lot bigger than 1/6th the size of the US. The truth is corporate America (of which I am part of) had long suspected that the Chinese market is far bigger what is claimed and had planned accordingly. GM is not the number one car seller in China, with more sales than the US, by chance. It is the biggest market for good old American fried chicken with KFC making more profit in China than the US.

We don't know if the average Chinese citizen is a tax cheat but the amount of American midsize and German luxury sedans bought every year points to an economy far bigger what it supposed to be. In fact from consumption figures, China is treated as an American sized economy for a wide range of companies. Corporations don't care about apparent GDP size but they do care about sales.

Consumption of steel and cement might simply reflect a much bigger economy than GDP figures show just like cars and chicken.

That said, it might make absolute sense for an undeveloped nation to build infrastructure at a much higher rate while a wealthy nation is already saturated with infrastructure so needs less of it.

[ashi]

My " Motherhood statements" imply that economies have different kinds. Some are more focus on service/finance, thus they use less raw materials. China is heavy on manufacturing and is in the stage of rapid urbanization. that's why she needs more steel/cements/raw materials comparing to other countries given the same number of GDP.

China is aware of what are the problems lies ahead. Didn't Wen openly say that China will try to slow down on GDP growth, but more focus on the "qualities" of the growth? Wen's proposed target for GDP growth is 7.5% for the next five years, and trying to move up in the value chain. Flip a few pages back, you can see the links to those articles.

I've seen what Wen has said, trust me I don't need to read that stuff on BRF. Your point about manufacturing vs services is a very disingenuous argument. This discussion has not been a China vs India comparison. Irrespective of whether India is services oriented or not, there is a massive infrastructure deficit in India and all of us here acknowledge the problem and express it freely, we don't expect midnight knock on our door because of that.

And your China relies heavy on manufacturing and is in the stage of rapid urbanization is not supported by numbers. Look at the China National Bureau of Statistics chart a few posts up. 70 per cent of GDP is spent on infra and real estate. Does that look like a manufacturing led GDP growth?

I said "China is heavy on manufacturing and is in the stage of rapid urbanization". Urbanization needs a lot of infrastures to be build.? China is largest exporter of the world, and service is a small part of it, so what is China exporting? Goods, stuff needs to be build and made from raw materials.

[amit]

[I said "China is heavy on manufacturing and is in the stage of rapid urbanization". Urbanization needs a lot of infrastures to be build.? China is largest exporter of the world, and service is a small part of it, so what is China exporting? Goods, stuff needs to be build and made from raw materials.

China is on rapid urbanization and so 70 per cent of your $5 trillion or so GDP needs to be spent on houses and infra like roads and bridges? Forgive folks who can't see the economic logic of this binge.

[amit]

How can one justify the fact that China with 1/6 th the economic size of the US ( a short while ago) had more steel making capacity than the 10 countries that followed it?

Perhaps China is a lot bigger than 1/6th the size of the US. The truth is corporate America (of which I am part of) had long suspected that the Chinese market is far bigger what is claimed and had planned accordingly. GM is not the number one car seller in China, with more sales than the US, by chance. It is the biggest market for good old American fried chicken with KFC making more profit in China than the US.

Chola,

Just one point, that 1/6 number was a from a couple of years ago - I think I reflected that in my post. At that point of time China was 1/6 the size of the US and yet it had that massive steel output.

The point is as Somnath and others have pointed out, spending 70 per cent of GDP on infrastructure and housing year after year cannot be justified under any economic yardstick. And there's a limit to how long the CCP can keep a lid on the financial mess that is brewing in the banks.

It's all grand for Wen to talk about lower growth rates of 7.5 per cent. But the economy does not have a "kill switch" or a calibrated lever. I'd like to see Wen walk the talk without major consequences.

It will be interesting to see how all this pans out.

[shyam]

But, the question I have is what is the quality of the infrastructure built? If picture below is any sign of the quality, then many of those investments will go waste

Lets not be cussed - that pic doesnt prove anything, it might be an under-construction site...Anyone who has been to China can see that the quality of infra is very very good - not US/Europe level perhaps, but very good...

Try some googling to get reports about this. Yes, everything looks good when they are constructed. But can they stand tall under stress? This building is not the only one news that came out.

[chola]

Back in the 1990s, they had bad loans from SOE (State operated Enterprises) that were a far larger percentage of a far smaller Chinese economy than the possible bad loans we see today. A magic wand was waved and all four banks were re-capitalized, all the SOE's debt disappeared into these holding corporations that kept debt that will never be repaid

there was no magic wand - they used a part of the Fx reserves and also sold minority stakes in these banks to forieng banks @ huge premiums...It was a temporary fix, by most accounts didnt work, and the problem is arguably much larger today...

It was a magic wand. Look at the Chinese economy today. When the top four banks of a nation are insolvent, it should have annihilated any hope of growth for that nation for decades. There weren't much forex or foreign investment in 90's since China was under an practical embargo after the Tiennenmen massacre.

As far as I know, those $3T are sovereign wealth since China gets it foreign reserves by "washing" all foreign currency that comes into the hands of its citizens.

No, Fx reserves are only obligations that the state has swapped into a different currency...Sovereign wealth can be earned from two sources - surpluses in the fisc and profits out of state-owned businesses...China does have some surpluses, how much, one doesnt know...But given the general profitability of their SOEs, cannot be very large...Net net, using Fx reserves for very large amounts for fiscal interventions is dangerous territory - which is why India has been so cagey about putting its reserves to work (there was a clamour on part funding some infra with it)...

Every dollar brought into China whether from SOEs or private/foreign joint venture is washed out of the system and then used to buy mainly US treasuries but also stocks, overseas resources and to fund dedicated sovereign wealth funds. You can't buy US treasuries with swapped obligations. Now there are dollars held for profit repatriations. But my guess is the vast majority of it is sovereign wealth.

[chola]

It's all grand for Wen to talk about lower growth rates of 7.5 per cent. But the economy does not have a "kill switch" or a calibrated lever. I'd like to see Wen walk the talk without major consequences.

It will be interesting to see how all this pans out.

It would be nice to see it all blow up but if it is anything like the 1990s then blowing up will basically mean that China gets a clean start and heaps of new infrastructure.

Maybe I'm a pessimist but every time I hope to see the chini contradictions collapse on themselves, the lizard confounds me and gets wealthier.

[somnath]

It was a magic wand. Look at the Chinese economy today. When the top four banks of a nation are insolvent, it should have annihilated any hope of growth for that nation for decades. There weren't much forex or foreign investment in 90's since China was under an practical embargo after the Tiennenmen massacre.

The embargos disappeared by the early '90s...And recapitalisation doesnt happen by "magic" you need to find the cash! I forget the exact years, but stake sales hapened in early 2000s, recap a bit before that..

Every dollar brought into China whether from SOEs or private/foreign joint venture is washed out of the system and then used to buy mainly US treasuries but also stocks, overseas resources and to fund dedicated sovereign wealth funds. You can't buy US treasuries with swapped obligations. Now there are dollars held for profit repatriations. But my guess is the vast majority of it is sovereign wealth

Chinese exporter Mr Ling has income of 100 dollars - he converts 100 dollars into CNY with CBC..For CBC, assets - USD 100, Liability - CNY 676 (he has to create 676 CNY to pay Mr Ling)...Now he deploys USD 100 as equity in BOC..BOC goes bust, USD 100 is worth zero...But Mr Ling can come back and ask for USD equivalent of CNY 676, thoeretically..CBC says, fornicate off, not paying by fiat..Fair enough..But what happens then to Mr Jones who has investments in China? What about his confidence levels? What does he do?

Compare with China Petroleum earning USD 100 as profits...Govt takes out USD 100 as dividends and deploys it in BOC as equity...BOC goes bust - USD 100 is zero now...Well, barring a wastage of money, nothing much in macro terms (well, ignoring the impact of BOC going bust!)..

thats the difference between Fx reserves and Sovereign wealth...Hence, while some part of the reserves can be used to recap banks, it can never be an bottomless pit...

Last year, India had to recapitalise a few state-owned banks - SBI included (to cope with their growth targtes)...It wasnt much, ~5 billion..We took out a loan from WB, rather than use Fx reserves, which we have 300 bill of...Part of the reason is the above..

[Singha]

1.china is a net +ve cash flow in $$ terms
2.every day it gains trade surplus
3.some goes to US treasury
4. some to bank or govt as savings or taxes
5.govt owns the bank
6.banks lends to SPVs setup for these infra projects
7.stuff get built
8.loans may not be paid back (lets say) - the infra still exists and public pays for its upkeep via local taxes and tolls
9.but there are no external borrowings from outside china and the govt can print some notes and compensate the loss of the bank and keep it solvent
10. the banks are likely not listed cos and can cook their books with govt approvals

this is not the case of icelanders or greeks buying up swiss or japanese currency

I figure so long as they have export momentum, growing internal market, zero to minimal external borrowing, and a govt control on the banks this "ride the surf" party can continue with no side effects

if at all there is a shortage of cash, the Govt can cut the iron rice bowl pensions and let the old fade away into poverty.

[wong]

IMHO they have some more to go. One must remember Greece was technically insolvent in 2006 but the construction and wild lending kept going another 4 years. And it CPC BTW.

For those who admire Panda infrastruture let me say Greece has some really wonderful infrastructure. Built for the next 50 years of capacity. like this one. No one cared about the ROI then. See how cool it looks.

This Greek bridge was built with German and French money and 3rd world labor (possibly even Chinese or Indian labor). All Chinese bridges are built with Chinese money with Chinese labor. Huge difference economically.

[somnath]

I figure so long as they have export momentum, growing internal market, zero to minimal external borrowing, and a govt control on the banks this "ride the surf" party can continue with no side effects

Not true, China's ext debt-to-GDP ratio is ~12%, Idnia's ~18-19%...China's overall debt-to-GDP is estimated to be 96% (a big variance over the official numbers), actually a bit higher than India's!

Net net, high growth (of exports and GDP) masks the issues for a time...Question is how to keep masking the issues when growth needs to be moderated...Without breaking up the banking system..Which is the challenge that China faces..

This Greek bridge was built with German and French money and 3rd world labor (possibly even Chinese or Indian labor). All Chinese bridges are built with Chinese money with Chinese labor. Huge difference economically

Whether the money is Chinese or foreign makes little difference economically...Yes, if all labour is foreign, then to the extent of labour wages, the mulitplier impact to the local economy is muted...It only means that there is lower unemployment in the local economy!

[wong]

One can also in the same vein say that the average Indian is freer, has access to better higher education, is a more efficient user of resources, and have better banks! But thats just quibbling, which shouldnt be the idea..

Freer - Yes, politically. In terms of social mobility, the two are comparable. China may even have an edge here.

Better Higher Education - Not according to any academic ranking, test score or international competition I've seen

More Efficient User of Resources - Why is this even relevant? Americans have the highest resource and energy use per capita in the world, but they also enjoy the highest standard of living.

Better Banks - Not according to the CDS spreads. They are 50 to 100% wider on average.

[somnath]

Wong, I have immense respect for the Chinese and their accomplishments (I said that in many ways China is a benchmark for us), so not getting into a pissing match..But..

Better Higher Education - Not according to any academic ranking, test score or international competition I've seen

I want to hire a high-end programmer who can work across US and India - I hire from?
I want to hire an entry-level financial analyst who can juggle between NY, Singapore and London - I hire from?

Test scores? Lemme give you a small data point...The IIMs in India recently started 1 year exec-MBA programmes (INSEAD style)..This is clearly a less-than-top programme (the premium programme is 2 year degree programme)...In two of them (IIM-A, IIM-C), the GMAT average scores required for admission to the 1 year course is 725....You can imagine what the standards of the 2 year course are...I had an MT recently from one of your elite schools in Shanghai - his GMAT score was 650....

More Efficient User of Resources - Why is this even relevant? Americans have the highest resource and energy use per capita in the world, but they also enjoy the highest standard of living

Its not per capita consumption, its efficiency of output...You use ~50% savings to generate 9-10% growth..India uses 37-38% savings to do 8-9%...Who's more efficient?

Better Banks - Not according to the CDS spreads. They are 50 to 100% wider on average

Not true..My bbg tells me, 5 year CDS:
SBI: 185 bps
BOC: 162 bps

In terms of accounting norms, your own people admit they are about 15 years behind the West..India is at par with the West...

[wong]

^^^^
I definitely don't want a pissing contest as I'm a guest here.

I'm not at work, but isn't SBI used as a proxy for Indian sovereign credit. Most banks are in the 220 range. Chinese banks are 120 to 160. Sovereign is 90.

If I was a really, really smart would I want to be born as a peasant in India or China. I don't know the answer to that question, but it will probably define the ultimate winner is this economic race between our two countries.

[vina]

This Greek bridge was built with German and French money and 3rd world labor (possibly even Chinese or Indian labor). All Chinese bridges are built with Chinese money with Chinese labor. Huge difference economically.

I don't know which is smarter . Let me give you a counter example. The US was "made" by railways and yes, those railways were largely built with British capital and imported "3rd world" labor, Irish in the east coast and Chinese in the west coast. Nearly every single mile of track was laid down by the Chinese and Irish . When the railway boom went bust, guess who came out as winners ? Was it the British capitalists who funded it and the Chinese laborers who built it (ask the west coast 5th Gen Chinese about that sad sad story of suffering and marginalization)?

Maybe, with the coming bust in the Chinese Railways, the Chinese would have been far smarter in getting the Japanese, Germans and French finance the railways and when they go bust (as it most definitely will), picked it up in bankruptcy for pennies to the dollar!

[vina]

If I was a really, really smart would I want to be born as a peasant in India or China. .

Neither. You would want to be born as Norwegian!

[somnath]

I'm not at work, but isn't SBI used as a proxy for Indian sovereign credit. Most banks are in the 220 range. Chinese banks are 120 to 160. Sovereign is 90.

It is, because the Indian govt does not borrow offshore, so SBI is te closest benchmark...If China sovereign didnt have offshore bonds o/s, BOC would have been the proxy...

[gakakkad]

The CCP seems to have set up a Bharat-Rakshak task force. Good to see 3 representations from panda land. @ Somnath , chola etc . Kripya kabhi chipkali land meIN mat jaana. ab tak to aap sab ke dossiers ban chuke honge aur wajibul cattle order aa chuka hoga. sach kadva hotaa hain . u guys made them realise what good number of economist could not.
Gladly I will never need to go there. wish bharat rakshak has decent security and our ids are safe. mein kuch mahino tak unkil land se baahar nahin niklunga. and when i travel to India it will be 12 hours non stop.

[Theo_Fidel]

I don't know the answer to that question, but it will probably define the ultimate winner is this economic race between our two countries.

I think right there is Pandalands problem, they think this is a race. Their sense of superiority is palpable. They can not let the GDP number drop below other countries no matter what. ROI be damned.

Vina's example of the US railways is a good one. After the boom was done, the US had about 250,000 miles of railroad. Most of them went bankrupt and were scrapped. It now has only about 120,000 miles.

The question is how much further they can increase their export market. Even Japans surplus was a huge strain on the world. Where is the next trillion of exports going to come from.

From our point of a ROI delinked economy in Pandaland will be to our benefit.

[VikramS]

http://www.zerohedge.com/article/guest- ... -get-guang
Another example of grandeur overcoming common-sense. Why make a train station so far away from city center?

=============

somnath:

At least read the articles properly before ranting. It clearly states that Citi was reversing what was done earlier. And it was done en-masse. Bear may not have been able to do it but once it hit the fan, that was the name of the game. With spreads blowing up on everything how do you think the banks survived with 20,30:1 leverage? Even AAA corporate was trading at a 80c/dollar with totally outlandish spreads
http://www.google.com//finance?chdnp=1& ... LQD&ntsp=0

And about me, it was at one of the two surviving IBs in fixed income (prop).

[Abhijeet]

Test scores? Lemme give you a small data point...The IIMs in India recently started 1 year exec-MBA programmes (INSEAD style)..This is clearly a less-than-top programme (the premium programme is 2 year degree programme)...In two of them (IIM-A, IIM-C), the GMAT average scores required for admission to the 1 year course is 725....You can imagine what the standards of the 2 year course are...I had an MT recently from one of your elite schools in Shanghai - his GMAT score was 650....

This is exactly the wrong metric to use, but typical of Indian attitudes. A program is not automatically better just because it is more selective. There may be (and probably is) a far wider variety of good to excellent programs in China, which is why even an elite school in Shanghai doesn't need to set the admittance threshold at 99.9999999% like "elite" programs in India.

The quality of a program is not a function of how few options people have otherwise to get a decent education. It should be measured by many other metrics -- research output, even starting salaries --- but not the "cutoff percentage".

It's unfortunate that this distasteful elitism still permeates the thinking of most Indians, educated or otherwise.

[Hari Seldon]

^^^The sun seems to have risen from the west what with somnath-ji passionately defending the Yindian model despite its relatively yindu growth rates compared to soaring-dragon rates in PRC. Mysterious are the ways of the world indeed....

[amit]

Aha! I was waiting for the typical self flaggalation and crab mentality of sniping at each other. If I was Chinpanda I would be rolling with laughter. No wonder Dear Leader Mao called the Indian PM a "useful idiot". We ate a nation full of such brilliance. Sigh!

[amit]

^^^The sun seems to have risen from the west what with somnath-ji passionately defending the Yindian model despite its relatively yindu growth rates compared to soaring-dragon rates in PRC. Mysterious are the ways of the world indeed....

Sheldon Saar,

Gustaphi maap, but Somnath seems to have done a better job of defending the Yindian model than some TAFTA deshbhakts who stroll the corridors of BRF and occasionally poke their heads into various rooms to make catty comments.

[somnath]

It clearly states that Citi was reversing what was done earlier. And it was done en-masse. Bear may not have been able to do it but once it hit the fan, that was the name of the game. With spreads blowing up on everything how do you think the banks survived with 20,30:1 leverage? Even AAA corporate was trading at a 80c/dollar with totally outlandish spreads

VikramS-ji, why quibble with blog/press blurbs over something that can be easily clarified from the primary source?

Here is Citi's 2009 balance sheet..

http://www.annualreports.com/HostedData ... /c2009.pdf

Do you see the "Trading Acocunt" book marked as "0"? Does it even represent a "big" reduction from 2008? Also refer to the section on "reclassification of assets"...

Net net, reclassifications were done, are still done - but they are never en masse, never have been...If that were possible, Lehman perhaps would still have been around, ditto with Bear, Merrill - and the US govt would have had to put up a far less amount as cash to recapitalise these banks...

^^^The sun seems to have risen from the west what with somnath-ji passionately defending the Yindian model despite its relatively yindu growth rates compared to soaring-dragon rates in PRC. Mysterious are the ways of the world indeed....

There is no "defending" - the world's not a black-and-white place...I said many times, China in many ways is an exemplar for India - to deny that would be childish...At the saem time, it is an interesting experience for all of us to see how China manages some of the inherent issues with their growth model - some of which defy economic sense...India, on the other hand, ploughs its own burrow - some of which has lessons for China! For the common citizen, if there was a way to combine India's economic/political freedom with China's civic infrastructure - that would be the best!

program is not automatically better just because it is more selective. There may be (and probably is) a far wider variety of good to excellent programs in China, which is why even an elite school in Shanghai doesn't need to set the admittance threshold at 99.9999999% like "elite" programs in India

I wont get into "research output" etc of Indian schools, but your point is essentially right, on India...Therefore, I was comparing a "commercially oriented" programme in India with a vanilla, top-of-the-line programme in China...

Having said that, anyone hiring (both Chinese and Indians) would be able to know the difference in quality - its partly felicity with English, but also the general level of higher education...

[VikramS]

somnath:
An annual report will not tell you what happened during those 12 months. The trading books may have been built up again as the deleveraging led to fire sale prices for money good assets. And I do not consider ft.com as a blog source; it is as reputable as it gets.

I am sure you can do a basic sanity check: When spreads had completely blown up and AAA corporate trading at 80c, is there any way these assets could have been kept in trading books without completely destroying the banks capital base, given the typical leverage they have? A 20% haircut would not have survived a 5:1 leverage trading book. And the leverage in the system was significantly higher.

The original question came up about how US banks were allowed to hide their toxic wastes. My point was apart from the mark-to-model changes, what saved the system was the permission to reclassify the assets.