April 16, 2009
April 5, 2009
Rajesh: The data shows that most of the Chinese savings rate does not come from individuals, the savings occurs in businesses and state owned enterprises.
The current savings rate is 50% households and 50% SOE’s. The amount of household savings has remained constant for the last 30 years, but what happened after 2000 was that you had this burst of SOE savings.
Looking back it now appears that the Chinese banking reforms of the late 1990’s was one of the most successful examples of basic financial restructuring, and it’s something that the US should try to learn from. (And China modeled a lot of the reforms on the US savings loan fix in the 1980’s.)
Rajesh: Now for most small businesses, it is academic whether the savings are attributed to the business or its owner but for the larger enterprises it implies that those funds can not easily be diverted to consumption; they are more likely invested in new plant and equipment.
It’s not that hard. The government can take a dividend and invest in health and education. There are two problems 1) is political which is that the SOE’s don’t want the government to take their money and 2) you need to set things up so that the incentives are right. If the government takes SOE money any time they make a profit then there isn’t much point in making a profit.
Rajesh: Also most of the larger companies, because they have large profit margins, are self-financing and less dependent on banks for loans (which explains why the economy did not slow down as the central authorities raised interest rates and reserve requirements.)
I think that isn’t the big explanation. The government can just order the big companies not to spend money. They are state owned after all, and the government has control over their capital budgets.
The big explanation for why it was hard to cool the Chinese economy I think was that large sectors of the Chinese economy (like exports and construction) were big financed by Western banks. One of the ironies is that the economic downturn hasn’t hit Chinese banks which whose lending to construction was limited, but it has hit Western banks hard.
It’s ironic because for about a decade, Western banks and economists were lecturing Chinese banks on the need to improve risk management and avoid NPL’s, and Chinese banks took those lectures seriously. Western banks didn’t.
Rajesh: Peasants in China for the most part do not have bank accounts. Much of the rural economy is on a cash or barter basis.
This isn’t true, most peasants do have bank accounts. Rural China has a pretty extensive banking network in the form of rural credit cooperatives. A lot of this comes from China’s socialist past. Because the major banks are state-owned, having a bank in a small village is like having a police station or a post office. It’s a sign of state authority (and Japan has a huge postal savings bank).
Most of these rural banks are totally insolvent, but they are there. The fact that rural Chinese are tied into the financial system is what makes China very different from Latin America.
There is a huge problem with rural banks, but it is on the lending side and not on the deposit side. The problem is that because the rural banks are broke, they aren’t lending to rural areas, which is one reason why urban areas are developing so much faster than rural areas.
It’s also why Western banks never got very far in commercial banking. The idea that Western banks had was that they would be so much more efficient, that people would abandon Chinese banks for Western banks. It turns out that at the retail level, people don’t care how efficient your bank is. The care that they have an office around the corner.
April 3, 2009
This article illustrates a piece of the puzzle, i.e. who was pumping money into the Chinese real estate market in the boom years. It turns out that it was a lot of Western banks and private equity firms that are now facing huge losses.
One thing that the article didn’t mention is *why* Chinese real estate companies went to Western banks for funding, and it was because the Chinese government wouldn’t let Chinese banks touch the stuff, largely because the government had just bailed the Chinese banks out once before and weren’t about to do it again.