Financial Chinoiserie

By Sol W. Sanders
Monday, March 30th, 2015 @ 1:49PM

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A most peculiar crisis is developing for the Chinese economy – and, indeed, for the regime — while the world’s attention is riveted on the chaos and terror in the Mideast and Russian aggression in Ukraine.

Not the smallest element is the clever manipulation by Beijing’s strategists of the world’s hopes for continued remarkable Chinese growth as a last call instrument to bail out a dawdling world economy.

That misapprehension of China’s economic capacities may well forestall, again, at least for a time, an inevitable coming to grips with basic problems of it vast society under the Communist Party monopoly. But there is growing evidence that China’s financial problems have reached a crescendo that Beijing can no longer manage.

In that marvelous game of speculation on one of the world’s oldest cultures, I have always joked that the Chinese have two “extra” genes to others’ DNA: one is an inordinate capacity for hospitality, and the other for unlimited risk at gambling. Both are in full flower at the moment.

In effect this has led to foreign Old China Hands increasingly coming around to a pessimistic view of the outcome of events that some of us have held for years. The spectacular growth of China with the release of the unique energy of its people with the collapse of Maoism was nevertheless jerry built. Some of us have argued that it inevitably would crack – although as so many times in similar historical situations, what would be the final straw and when it will happen was unpredictable. As a result, I have had to suffer my friends continued scorn with “Yeah-yeah-yeah! you have been saying that for years” — and I have. But there is no doubt now that that moment of decision is rapidly coming closer.

Still, a continuing element in the Chinese equation is the rush of its trading partners to either help camouflage the actual situation, or, indeed, scurry to its aid. That is the case now with their acceptance of a proposal by China for a multibillions-dollar multinational bank to be directed by Beijing, ostensibly lending for Asian infrastructure. It would rival the Bank for International Reconstruction [the World Bank] and its financial sister the International Monetary Fund.

The World Bank, after a more rapid than anticipated completion of the post-World War II European reconstruction for which it originally was created, almost accidentally turned under U.S. direction to financing longer-term infrastructure projects in the undeveloped world, And then, having met much of that challenge, under Robert S. McNamara it again turned to social welfare projects. There is a substantial argument that in a world of incredibly sophisticated international lending enhanced by the digital revolution; its mission is long since over.

Now Beijing comes along, proposing that it head a copycat international banking operation, which would fund infrastructure. But Beijing running a multinational financial operation for “good works” is hardly parallel to that task undertaken by the U.S. and its allies in the post-World War II world.

The Chinese are notorious for corruption in their international lending as in all their economic transactions – and ignoring such ephemeral but important concepts such as environmental concerns and credit safeguards. But at the moment Beijing faces a series of collapsing overextended binational international lending problems. Tens of billions in loans, many of them swap credits against a now deteriorating energy market; include Angola, Venezuela, Nigeria and Brazil. They will now have to be refinanced, although how is far from clear.

In the face of Beijing’s growing overseas debt, foreign banks have begun demanding collateral even for loans to its highly favored huge state corporations, apparently preparing for a rise in defaults in the world’s second-largest economy. This is all overhung with an economy growing at its slowest pace since its dramatic opening to foreign capital and technology, and with an unknown downward trend, which Beijing is desperately trying to disguise.

If the Chinese were successful with their new venture calling for a new international infrastructure bank under their direction, it would be an operation in reality to refund Beijing’s failing overseas lending and another attempt to boost its highly subsidized exports, already wrenching the world economy out of shape but faced with rapidly rising costs and intense competition from other low wage producers. That there are willing partners in this situation for such an obvious strategy among its trading partners goes back to the continued wishful thinking about the Chinese economy.

The Obama Administration, increasingly notorious for its foreign policy gaffs, opposed the new Chinese bank. But its campaign of opposition to the participation of its allies has, for the moment at least, collapsed. The lure of the Chinese growth mirage has been just too powerful even for London, with its famous City expertise notwithstanding, not to succumb. And it remains to be seen whether such already hard-pressed economies such as Australia’s – ironically suffering from that precise downturn in commodities prices, its principal exports, brought on by the drop in speculation on Chinese continued high growth rates.

Underlying all these decisions is the incredible Chinese lack of transparency and outright counterfeiting of its statistics. There is no end to what we don’t really know about the Chinese economy, whether shadow-bank lending, local-government financing, intra-local-government borrowing, unfunded pension and health-care liabilities. household finances, etc. There is considerable doubt that even the most studious and independent economic observers in and out of the Chinese government know themselves.

What we do know is that in all these issue, debt has been rising at a phenomenal rate. That means, as Michael Pettis, a finance professor at Peking University, has warned: “The problem in China is not the stock of foreign debt but the commitment to a growth model that requires an unsustainable rise in debt simply to keep the engine running.”

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A version of this column will be posted Monday, March 30, 2015, on the website http://yeoldecrabb.com/

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Categories: ACD/EWI Blog, Anti-Corruption, China, Communism, Economy, Finance, Mideast, Russia, U.S., U.S. Policy, Ukraine
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