A Financial Crisis in China? – In Praise of China
How Likely is A Financial Crisis in China? [The Diplomat]
The news that Patrick Hess is a senior financial market and China expert working at the European Central Bank is worrisome. The European Central Bank is one of the three most powerful central banks we have. And Patrick is one of their 'experts'? Let us count the misapprehensions around the three risks he enumerates:
1. Shadow banking is, as the author himself points out, "not as highly leveraged as the sectors in the U.S. and Europe, it is also insufficiently regulated and carries considerable credit and liquidity risks". So China's shadow banks have lower inherent risk than our own.
'Insufficiently regulated'? Compared to what? The UK? Let's not confuse regulation (unenforced in the USA and risible in the UK) with control. Remember, Chinese regulators don't have to go through an 18-month Congressional hearing; they pick up the phone and explain that's there's been a policy change and that henceforth…. That way of doing things works because Chinese businesspeople generally respond and cooperate to such dictums well. There's great 'long-range' trust between Chinese business people and their government, however much flouting and cheating goes on in the short term. They've enjoyed decades of steady growth thanks to well-crafted policies well implemented. Why not cooperate if your leadership is trustworthy?
'The real estate bubble (or more generally asset bubbles)'? Bubble-pickers who completely failed to pick the GFC are a dime a dozen. Chinese bubble-spotting is a sub-genre of Western journalism on China. The fact that none of their bubbles has popped in decades does not discourage bubble-spotters, it invigorates them.
China's private real estate market is only 15 years old, growing with the exuberance you'd expect. It's very exciting to people to get a new condo with indoor plumbing and nice fixtures and a coffee shop outside the elevator as you walk to the new subway. We've forgotten what a big deal that is and take it for granted. But it's all new for them. 200,000,000 MORE of them are moving into nice condos as we speak. Anyway, you pay more per square meter for real estate in Bombay and Delhi than you do in Shanghai and Beijing. Don't get me started on San Francisco, New York or London – where, though their national economies are flat – rising prices do not signal a bubble, apparently.
Private and public debt, especially local government debt'? The author has only to call his colleagues at the World Bank who'll reassure him that China's private, public and corporate debt-to-GDP burdens are MUCH lower than Japan's. Or France's. Or the USA's for that matter. None of them is growing like China. China's growing twice as fast today as it did ten years ago and articles like this simply distract us from this harbinger. If we don't start dealing with the reality and momentum of Chia's rise we'll be irrelevant in 10 years. Seriously.
Finally, as to 'To implement all the reforms necessary to avert a Chinese crisis is almost a “mission impossible,” or at least very difficult in the complex Chinese policymaking context, which involves a high degree of institutional overlap, conflicting goals and interests, and political bargaining. Even such a strong leader like Xi Jinping cannot change this context, and it is not even clear how high financial risks are on his agenda'. I simply append a Reuters report ripped from the front pages of Reuters:
"China is considering bringing together its banking, insurance and securities regulators into a single super-commission, sources told Reuters, following the summer's stock market crash that was blamed in part on poor inter-agency coordination." Read more at Reutershttp://www.reuters.com/article/2015/11/17/us-china-regulators-idUSKCN0T60XH20151117#LZjAk6IFLTOR6kfP.99