I was at Columbia Law earlier this year, I noticed something interesting. All
of the management were saying how the Chinese economy was in trouble whereas
all of the finance people were saying how wonderful the Chinese economy was.
Since, I’m a finance person I’m on the “everything is wonderful” view, but I
really need to talk to a management person to understand their point of view.
An example of a manager is Huang Yasheng at MIT. I happen to disagree with just about
everything that he says about the Chinese economy, and I’ve been meaning to write an article going through point by point, the issues that I have with his interpretations. The weird thing is that 1) I like his methods and 2) although we disagree about just about the interpretation of every item, we are oddly in almost total agreement about what China should do (with the exception of rural land).
The basic issue I think is this. Bankers and managers are on opposite sides
of table. Almost every metric that Huang Yasheng thinks is a bad thing, I
happen to think is a good thing. For example, the fact that 80% of
businesses can’t get all of their funding. A manager thinks that this is
horrible. A banker thinks this is wonderful. I
The general consensus among bankers and finance people is that:
1) The Chinese banking system is in o.k. shape and the NPL problem has been
largely resolved except for ABC.
2) What was interesting was that Huang Yasheng was talking about the great
expansion of rural credit cooperative loans to private businesses, and how
the government cut that short. From a banker point of view, the government
was correct in shutting down the RCC’s because they were on the verge of
3) The consensus among bankers is that China is exporting capital, not
importing it, and that FDI is not essential to the Chinese economy.
4) The only metric that Huang Yasheng offers that I do think is a bad thing is
increasing capital intensity, but I’d argue that this is a statistical issue.
That before the market reforms of the 1990’s, capital goods were undervalued
whereas outputs were overvalued, once that got fixed, then it looked like
capital intensity increased whereas it actually decreased.
5) Increase in money velocity, manager – bad thing. Banker – good thing
6) My own view (which isn’t at odds with the consensus view of bankers) is
that what has happened is that SOE reform has been a victim of its success.
SOE’s are now wildly profitable, and since they can’t distribute their
profits in dividends, it’s getting poured into the banks, which are now
sitting on top of more cash than they know what to do with.
One question that I have is where is all of this financing for infrastructure
construction coming from? It’s not coming from the big four banks. CCB is
the only one of the big four that makes major real estate loans and they also
have the best risk control.
7) I also think that increasing industrial efficiency is not important for
China in the next ten to twenty years. China right now is in the phase were
it can increase wealth by moving people from farms to factories, even if the
factories are hideously ineffecient. (such as what the Soviet Union did in
the 1950’s or Japan in the 1970’s). The day of reckoning will come when
urbanization rates start hitting 80% (which is what happened in Eastern
Europe and the Soviet Union in the late-1960’s) at which point if you don’t
have an economy that improves TFP, you stagnant.
Anyway rather than resolving the issue, I’m wondering if someone could write a paper that defines the problem “why do managers think that the Chinese
economy is in such a mess while bankers think the economy is in great shape?”