Doug Henwood wrote:
> [Henry, anyone - how serious is this?]
There are two dimensions to this development - political and economic. Guangdong has been the most freewheeling province in term of moving toward market economy and exercising local autonomy. After reining in the lawless Beijing clique, now its time to bring Guandong back in line. Last year, the top officials in province were replaced by new appointees from Beijing. These handwriting was on the wall for 6 months.
Economically, much of the Gitic and related loans are, if not illegal, at least not in line with regulatory standards. Many of the loans are not registered with the state foreign exchange rgulatory body, so even though they were taken out in Hong Kong where such foreign currency loans are not illegal, the central government has repeatedly declared that it will not be responsible for these unregistered loans. Yet Western, Japanese and HK banks kept lending to them, betting that the central government will not let any province owned enterprises default. This was true until 1998 when China decided to clean up its financial sector. Many the these ITICs (international trust and investment corporations) have been very badly managed, if not outright corrupt. Yet, due to their near monoploy in many market sectors, such as telecommunication, electricity generation, tolled higways, etc., they have very good and relaible revenue sources. In recent years these ITICs, led by Western, mostly American investment banks, have been speculating in derivatives for easy profit. A few even invested in LTCM. The Asian crises deflated the value of many of its investments and disrrupted cash flow. The fact that these ITICs tend to borrow short term (1 to 3 years) to finanace 15-20 years projects exposes them to risks of the lenders refusing to roll over their loans periodically. Much of the waste/corrruption/losses have been financed by increasing new loans in ponzi schemes. The ITICs also take currency risks by borrowing low interest Japanese yen when their projects have no yen revenue, or to do "carry trade" etc., etc.
But the problem, though big, is not serious in national terms. Yesterday, Derek Maugham, Vice Chairman of Citigroup, said publicly at Davos that Chinese sovereign debt rating is still excellent (in fact the ITIC defaults improves sovereign ratings), but Citigroup could be just trying to lead its clients down a thorny path and collect hadsome underwriting fees.
This is just the tip of the iceberg. The problem has been building for over a decade. But, unlike Japan, China's financial sector does not command the Chinese economy which is still highly socialistic (85%). China's experiment with finance capitalism (some call it cowboy capitalism) is a total disaster. No one knows exactly what the total bad debt exposure is. The foreign currency portion of the bad debts can be about (US$75 billion) 50% of China's foreign currency reserves (US$ 145 billion). GITIC alone is estimated to be as high as US$5-20 billion. The domestic currency (RMB or yuan) portion is incalculable. China has a so-called triangular debt problem, meaning company A owns company B who owes company C who owes company A who all owe the state own banks. Within each stae-oned-enterprise (SOE), the SOE owes wokers wages, who owes the SOE store unpaid bills and rent, and the stores owe the SOE who owes the government, so evry body is in the same soup. This problem began around 1980 and is now about 2 decades old. Each year, old debt is paid with increased new debts, and this is statistically logged as growth. The RMB has devalued over the 2 decades from Y2.5 to the current Y8 to US$1. By now, it should be very clear that China's flirtation with market economy has caused more harm than good and the CCP is facing very intense internal debates. The reformers are trying to write reform policies into the Constitution. But the left has no concrete alternatives to counter offer except righteous ideology. And no one wants to return to Cultural Revolution chaos and proverty. Chinese Premier Zhu Rongji is coming to Washington in April for a state visit. It is rumored that he will offer opening Chinese market more to American products and financial services in return for more American financing and relaxation of high tech exports and WTO membership.
The financial crisis in China is good news and bad news. It is good news for the left and bad news for the "reformers." The left accuses the reformers of merely transferring wealth from the many to a few and all the high rises and shopping centers that impress foreign visitors are merely cosmetics of an economy falling behind world atandards. So after 2 decades, the reformers have failed to delivery the one thing they promised: make China catch up with the West. Still, the CCP is the only institution that keeps China from Russian style total collapse. Fortunately, the "private sector" is still very small, about 15% of the total economy, but it has been the engine of growth and modernization. No doubt, reform will slow down for the next few yaers, but China is very resilient economically. Much of the unrest does not come from the poor but from the new middle calss who wants more and keep more from the government. The government wants to collect taxes it is owed, not raise taxes. It retained IDS (Ross Perot) to comupterize the collection a la IRS stayle and is creating all kinds of protests from rich farmers and high wage workers. The CCP will use the crisis to get rid of a lot of political dead wood; the foreign banks will write off the bad loans and recoup the loss with higher future interest, and the masses will pay for all the economic and financial losses with less consumption and another chapter of r3evitalizing china will begin in the year 2000. Meanwhile, less people will take the struggle between capitalism and socialism seriously and more will try to inch out the best living they can under the latest rules, whatever they are.
Henry