AJ: Brad- I wonder if the trigger to adjust will come from an internal crisis in China’s financial system. As Michael Pettis noted yesterday China’s mortgage market actually looks a lot like the US market in 2006 and their financial institutions are even more precarious,
We’ll see over the next several months, but I’ve had a long standing disagreement with Michael Pettis over the health of the Chinese banking system, and I am much more optimistic that it will withstand a slowdown than he is. In particular, I do not think that Chinese banks generally are more precarious than US banks.
The basic problem with US banks is that they were able to use securitization to circumvent restrictions on lending and reserve requirements. Chinese banks just weren’t allowed to do this. Yes people in Chinese banks may have tried to circumvent the restrictions on lending, but it makes a big difference if you have to make some effort to circumvent the regulators, than if the regulators are simply not standing in your way.
One big difference is that Chinese officials have been worried about a banking collapse since 1998 and have been working very hard not to make it happen. By contrast, if you go to 2004-2005, none of the regulators seemed very concerned about the possibility of banking problems, and so the US allowed things that Chinese officials simply did not. For example, there is nothing in China that I can see that corresponds to widespread lending of subprime mortgages or the securitization infrastructure that supported this mess.
One other difference between China and the United States is that urban wages in China are growing rapidly whereas wages in the US have been stagnant since the late-1990’s. This means that there is much less pressure to extend massive amounts of consumer credit.
Again, I might be wrong about this and it could be the Chinese banking system is going to collapse in three months. However, if it turns out that the Chinese banking system doesn’t collapse or experience major difficulties in the next year, I think the psychological impact in global politics and economics is going to be profound.
The assumption that people have is that the US is better than China and so if something is bad in the US, then it is worse in China. If we have a situation in which this turns out obviously not to be the case, it’s going to shake some basic assumptions people have on the way the world works, and as people try to make sense of the new order of things, unexpected things will happen.