Enter the New Year
I took a bit of a blogging break for the holidays, so this is a catch-up post.
Just before Christmas I appeared on another edition of Sinica Podcast, this one focused on the looming clash between the U.S. and China over accounting standards for US-listed Chinese companies. My fellow guest was Professor Paul Gillis from Peking University, whose blog I highly recommend for anyone following this subject. You can listen to the podcast discussion here.
On New Year’s Day, I took part in a special 2-hour “year in review” episode of the Today Show on China Radio International, where we covered everything from Syria’s civil war to the Greek debt crisis to the London Olympics. My suggestion for the “top story” of the year: China’s netizens, and how they’re changing the terms of China’s social and political climate. You can listen to the program here.
On New Year’s Eve, the BBC ran a story on the outlook for China’s economy in 2013, which you can read here. The conventional view is that China is headed for a strong rebound, but I questioned that conclusion:
Many analysts have warned that the model is unsustainable and have called upon Beijing to boost its domestic consumption and rebalance its economy.
For his part, the new Communist Party leader Xi Jinping has pledged to deepen economic reforms and further open up China’s economy.
However, there are concerns that a shift in its growth model may hurt China’s growth in the short term.
“They must embrace real economic adjustment, which will bring real pain and likely translate to slower growth, at least for a time,” said Patrick Chovanec of the Tsinghua University in Beijing.
Analysts and observers fear that China may not be able to bear the short-term slowdown and may turn back to the traditional model of growth.
Those fears have been fanned further after Beijing approved infrastructure projects worth more than $150bn (£94bn) as its growth pace fell to a three-year low in the July to September quarter.
“In recent months, China’s economy has seen a ‘rebound’ engineered by looser lending and a renewed surge in investment,” says Mr Chovanec.
“Markets have cheered, but others worry that China’s new leaders may be shying away from the tough choices that must be made to get China’s economy back on track.”
As I tweeted the other day (@prchovanec):
“Markets should be rooting for China to embrace real economic adjustment, not to deliver yesterday’s growth targets with yesterday’s growth engine.”
I reiterated my concerns about China’s “rebound” in a Bloomberg article published this weekend:
“Lots of projects have been approved to stimulate this economy,” said Patrick Chovanec of Beijing’s Tsinghua University. “The banks are extremely reluctant to lend to them, and that says a lot about what they really know about credit risk in this country.”
(What I went on to tell the reporter is that the funding, instead, is coming from the banks selling trust and private wealth management products. The banks won’t touch the credit risk themselves, but they’re happy to take a fee for dumping it onto their clients, while promising even higher returns. Sounds like subprime mortgage origination all over again).
But I was particularly gratified to see my friend David Loevinger, the former director of the Strategic & Economic Dialogue (S&ED) at US Treasury, now a private sector analyst, make much the same point about China’s latest “rebound”:
“If China tries to sustain growth by adding debt and investing it inefficiently it will be like cotton candy: a short-term high with no lasting value,” said Loevinger, now an Asia analyst in Los Angeles at TCW Group Inc. “The U.S. got into trouble because institutions like Fannie Mae and Freddie Mac were too big to fail. … China’s financial system is full of Freddies and Fannies.”
Tomorrow morning I’ll be back on China Radio International, this time talking about the new “special zones” China is in the process of setting up to experiment with financial reform, in Wenzhou, the Pearl River Delta, and now Quanzhou. I’ll post that later tomorrow when the audio is available.
Patrick Chovanec 
When i came to China in 2007, i sat with a Beijing banker who was excitedly teling me about the new WMPs that he was selling like hot cakes. I asked him what kinds of investments were these funds making. He said the funds had a high yield. I asked what were the underlying investments? He finally admitted that most were commercial loans often with long tenors of over 3 years. Who is on the investment committees of these funds, i asked? He said executives. Any credit guys on the committees? No, just “executives”. But they have “guidelines”, he said. As it turned out the guidelines were sufficiently broad that they could invest in about anything. “My moeny was safe…i could take it out after 7 days.” I asked him how could a portfolio of loans of more than 3 years be able to handle the potential withdrawal of investors capital after such a short lock up period? Not to worry he said, there is always new investor money coming in. Right then, i knew that China’s miracle was not so miraculous.
By the way, Patrick, welcome back! Missed your posts during the holiday.
Thanks, Patrick, and Happy New Year. This seems analogous to what is happening in Japan, where they are very unsure what today’s or tomorrow’s growth model should be!
Sent from my iPhone