Saturday, December 31, 2016

Brit pundit on peoples china facing socialist market contradictions

"There are limits in China’s socialist market economy, but they lie on the liability side of banks’ balance sheets, not on the asset side."


"  If bank assets amount to over 300% of GDP – more than $30 trillion – so, too, must the combination of bank deposits, bank bonds, wealth-management products, or other bank liabilities held as assets by companies or individuals. What these investors do with their holdings is crucial."


" If they shift their money abroad, the managed exchange rate will become unsustainable: even China’s $3 trillion of foreign-exchange reserves, down from close to $4 trillion in 2014, look small next to $30 trillion of financial assets. "

" ...in an economy open to trade and direct investment, both inward and outward, there are multiple opportunities to disguise short-term flows of financial capital as current-account and long-term-investment operations. "

" Rapid credit growth has  been matched in 2016
 by tightening restrictions on capital flows, with more likely in 2017."
"The alternative policy would be to let the exchange rate fall."

" But that risks an aggressive response from a protectionist Trump administration"

".. and could produce self-reinforcing inflation as savers seek to spend their money 
before it loses value. "

"Even a hybrid socialist market economy faces constraints 
if it also wishes to be an open economy. "

"Sharp contradictions between different strands of Chinese policy are becoming ever more obvious."
"The root of these contradictions is the absence of hard budget constraints
 – of either a market or a planned-economy form –
 on SOEs and local governments."


" And the barriers to reform are political: 
unwillingness to face SOE job losses, particularly in China’s northern rust belt, 
and radical decentralization of economic decision-making 
to competing city and provincial governments."


Sooo...
" There are limits in China’s socialist market economy, but they lie on the liability side of banksbalance sheets, not on the asset side. "

" If bank assets amount to over 300% of GDP – more than $30 trillion – so, too, must the combination of bank deposits, bank bonds, wealth-management products, or other bank liabilities held as assets by companies or individuals."

" What these investors do with their holdings is crucial."
"If they shift their money abroad, the managed exchange rate will become unsustainable: even China’s $3 trillion of foreign-exchange reserves, down from close to $4 trillion in 2014, look small next to $30 trillion of financial assets. Every Chinese citizen is legally entitled to take $50,000 out of the country each year, and if just 1% of adults have the wealth to do so, that could mean annual capital outflows of $500 billion.
Moreover, in an economy open to trade and direct investment, both inward and outward, there are multiple opportunities to disguise short-term flows of financial capital as current-account and long-term-investment operations. Rapid credit growth has therefore been matched in 2016 by tightening restrictions on capital flows, with more likely in 2017.
The alternative policy would be to let the exchange rate fall. But that risks an aggressive response from a protectionist Trump administration, and could produce self-reinforcing inflation as savers seek to spend their money before it loses value. Even a hybrid socialist market economy faces constraints if it also wishes to be an open economy. Sharp contradictions between different strands of Chinese policy are becoming ever more obvious.
The root of these contradictions is the absence of hard budget constraints – of either a market or a planned-economy form – on SOEs and local governments. And the barriers to reform are political: unwillingness to face SOE job losses, particularly in China’s northern rust belt, and radical decentralization of economic decision-making to competing city and provincial governments.
The crisis will hit forex markets