I’ve lately been wondering if my negative opinion of China’s near-future prospects is influenced by a strong predilection towards disaster, decay, and pervasive entropy in everything I see. Even if the sky isn’t falling, one can find reasons to suggest otherwise. Perhaps this view is wrong, even if this guy seems to generally agree, though depression, implosion and regime change seem like strong descriptors. Many people here are old enough to remember the Cultural Revolution – given the human toll during that period, it’s hard to imagine ~20% unemployment proving to be a serious challenge to the CCP.

Of course, if things do get really bad, it will be easy to look back and find any number of explanations: isn’t change is fomented by the young, who, seeing opportunities disappear in front them amid an otherwise really shitty and stressful life so far, go a little crazy? After all, Ma0 himself was an unsuccessful scholar who found more remunerative engagements for his creative energies.

But there is little value in such digression: we must pay close attention to the facts. Via Naked Capitalism, Bloomberg reports about efforts to loosen credit provided by Chinese banks, For years onlookers have been worried about the amount of non-performing loans (NPLs – 不良贷款) that state run banks have issued. Loosening restrictions will spur short-term expansion, but if the state banks have had trouble determining who was credit worthy in boom times, what are the prospects for being able to effectively do so amidst a contraction? 

Measures to boost credit include allowing banks to lend to businesses afflicted by “temporary” financial woes due to the global recession but with sound fundamentals, Liu said. Lenders can also “restructure” loans and “scientifically” adjust the types and maturities of debt, and the regulator will support the sale and securitization of loans…

Securitization of potentially dubious loans? Hmmmm…

This WSJ article (via Dingel, with some additional points) discusses fears of a surge in protectionism. Particularly interesting is the argument that global integration provides a potentially more effective avenue for rent-seeking: 

Global economic integration was expected to make dumping cases obsolete. If a steel company owns plants in the U.S., India and Brazil, the theory went, it wouldn’t join dumping cases for fear that some of its facilities would be targeted. Instead, said a WTO official, dumping cases have become potentially more potent. That same steel company can now file complaints in all three countries against a competitor in, say, China to cripple it.

According to the latest WTO survey, 16 countries launched 85 new antidumping cases during the first six months of 2008, compared with 61 investigations the year earlier. Expect a sharp rise in those numbers because the economic crisis deepened in the second half of the year. Almost half the complaints targeted China.

There was an international festival at  one of the universities here some time ago – foreigners were invited to showcase different elements of their particular cultures. Kitschy stuff: the Africans had stalls selling bread/meat, the French had… a cheese sampler. Was this close to setting up a stand to sell “American: complex financial instruments. Invest today.” Didn’t go through with it in the end – assessment was that event-goers wouldn’t be very interested in purchasing Tony futures fund, thereby financing my current consumption of junk through debt.

MSM seems to have caught on to a similar meme – the NYT has a simplistic article “China Losing Taste for Debt From the U.S.” Sure, Chinese purchases of U.S. debt will be down in 2009, but only because trade is falling off a cliff, and Beijing is caught scrambling to get its pants on before the pitchforks come out. It’s a complex topic - Yves Smith offers an excellent dissection:

Smith: One remarkable omission in the piece is the failure to mention that the massive FX reserves resulted from China running first a hard, and then a dirty peg against the dollar. And correspondingly, there is no consideration of why China no longer needs to be as active to keep the yuan (which now appears to be back to a hard peg) where China wants it to be. A presumably smaller current account surplus and a capital exodus would seem to be prime suspects…

Ah yes. The currency peg rears its ugly head.

NYT: The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China’s foreign reserves, said Fan Gang, an academic adviser to China’s central bank, at a conference in Beijing on Tuesday…

Smith: No mention, zero, zip, nada, that the reason that China had to sop up so many Treasuries was to keep the RMB from appreciating too much versus the dollar, and that the strength of the dollar relieved China of the need to intervene…

Exactly. There hasn’t been much coverage (here or elsewhere) of how badly China is going to take it in the face from the financial crisis – perhaps I’m biased since I now spend the majority of my time talking to unemployed migrants – but the point still stands: at present, China has no domestic growth engine, and a bubble in real-estate (construction is much more labor intensive than export industries). The only realistic avenue open to 5-year support harmonious society plan will be to massage the already declining export machine. Additionally, there are concerns that given the existing amount of FX reserves, the People’s Bank cannot allow too much Yuan appreciation, which would rapidly erode the value of existing FX holdings, already under pressure from inflation:

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From the same Southern Weekend article – the author points out that there is one ray of light in this mess:

… Since the currency exchange rate system reforms started in 2005, the RMB has appreciated 20% – but since August 2008, the US Dollar has [contrarily] began gaining strength, and [as this rarely happens] its value against the RMB rose. This is becoming the new the RMB’s near future non-pegged growth trend. 

自2005年汇率体制改革以来，人民币已对美元升值约20％，但从2008年8 月始，却因美元重拾升势而出现人民币罕见的贬值，这造成人民币未来走势的不确定性增强。

Non-pegged growth trend my wind-flesh/muscle. Reading Chinese tea leaves is obviously problematic, but it’s not like we didn’t see this coming – currency controls are going to be a critical part of China’s export subsidies. 

An excellent Jan 1 NYT article indicates that (accounting for inflation and currency controls) China’s exports fell by 11.2% in November alone; figures for December are “expected to be even worse.”

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