OK, you’ve been pushed out of an airplane and are plummeting to the ground. You want to pull on the parachute ripcord, but there is this economist that says that you shouldn’t because you might break your arm, and in any case you can’t keep pulling ripcords and expect a parachute to come out.
But you tell the economist to go stuff it, you pull the rip cord, it turns out that you did break your arm, and then the economist tells you ‘ha ha I told you so.”
That’s basically the story of the Chinese economy over the last few months. The government pulled the parachute, it came up, and now people are worried about non-performing loans. It’s not clear whether you have a broken wrist, a broken arm, or are just sore.
If the government keeps pumping the accelerator, yes it will have an NPL problem, but I don’t see one happening if it takes its foot off the accelerator and starts gently tapping on the brakes. Even if you do have an NPL problem its better than the alternative.
People keep on talking about the massive NPL’s that the government ran up in the “last loan expansion” Actually it didn’t. Since the 1998 reforms, there have been two periods of massive lending. One in 2001 and one in 2005. Neither of them seem to have resulted in massive amounts of NPL’s. This time you can argue that because of the massive expansion of the Chinese economy, you have more NPL’s, maybe but…….
I’m going to say something shocking…
*Running up massive NPL’s in the early 1990’s was the right policy*
In economics, there are no good or bad policies, only better and worse ones. The massive bank loans of the early 1990’s lend to a problem that took China about a decade to solve, but it was better than what happened to Russia. Because Russian banks didn’t issue massive NPL’s, you ended up with hyperinflation combined with huge unemployment. In the case of China, the NPL’s kept the system going long enough so that it could be dismantled in an orderly way.
Right now we don’t how bad China’s new NPL problem is or whether it has one at all. Personally, I think it’s important to worry about it, and now that you aren’t going to fall to your death, you can start worrying about your arm. I don’t think it’s going to be that bad, but however bad it is, it is better than the alternatives.