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…

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.

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:

Smith: Very few seem to be looking at the gives and gets in a hard-nosed fashion. China has to know the Treasuries it holds will, under NO plausible scenario, be in economic terms worth face value. In fact, were there any realistic way for them to dump them now, that would probably be the value-maximizing course of action…

… That does not mean China will dump Treasuries, but merely that any cold-blooded analysis needs to start from how bad likely scenarios would be for the Chinese, what actions are open to them, and how they affect risks and outcomes.

The critical question seems to be the extent to which China can maintain a peg to prevent appreciation without altering the size of their reserves, and what happens if the Dollar weakens. Given the amount of treasury debt that will be issued ($1.3 trillion - seriously?) any decline in purchases might feel like Beijing abandoning America’s debt binge – unfortunately the Times article fails to acknowledge any of this. As Smith points out, there doesn’t seem to be many good analyses of these scenarios – I certainly don’t have the background required.

With regards to another emerging trend – animosity – Smith also (accurately) points to the potential for anti-American sentiment in China, even as anti-Chinese rhetoric in the U.S. seems to be becoming more chic:

Separate and apart from China’s changing fortunes, the continued purchase of US debt was becoming controversial in bureaucratic and popular circles. The tone increasingly was that China had been snookered into buying lousy US paper. And since the regime had depended on continued growth to maintain legitimacy and social cohesion, the officialdom will need to find scapegoats for the downturn. Regardless of where one thinks the truth really lies, it’s a no-brainer that the US will become a leading culprit. 

Brad Setser also has a rebuttal, pointing out that Chinese purchases of short-term U.S. treasuries actually increased in September-October.

… 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.”

With regards to the 5-year every home in China has a washing machine plan, the article elucidates legal and practical difficulties for industry conversion: 

Important bureaucratic obstacles also exist. Chinese factories are allowed to import equipment while paying little or no duty, provided that the equipment will be used only to produce goods for export. Obtaining approval to switch the same equipment to making goods for the domestic market can take two years and require the payment of much of the import duties that were previously avoided, a payment that many factories cannot afford.

Not quite buying that. What the law says and what is actually enforced is monumentally different, especially for something that has so rapidly become a national priority. More investigation required.