Briefing: 旧的不去,新的不来 how to reform the state-owned enterprises? Look to Korea.

If the old doesn’t go, the new won’t come.

As discussed in the last post, central to solving China’s debt problem is the reform of a system that keeps state-owned zombie enterprises on life support, while new, innovative companies are denied the privilege.

Here’s a nice idea by Michael Schuman, a Bloomberg view columnist, and one that I always thought of writing, but he did it better than I previously conceived in my mind.

Look at what Korea did with its Chaebols, copy/adopt it. I say this, not just because, or maybe partially because I’m from South Korea.

1. Break the tripartite relationship between Government-Corporations-Banks

South Korea has followed state capitalism model for development, starting from rule of the military dictator Park Jung-hee (father of the current president) whereby policymakers directed credit to strategic industries, and ordered major business leaders to focus on them. The result was dramatic growth.

But by the ‘90s, these chaebols, so central to the growth miracle, had become just like what China’s SOEs look like: bloated, inefficient, hoarding resources that can go to those with better business plans.

Notably though, it did take a crisis for this status-quo system to unravel. The ’97 Asian Financial Crisis. Massive restructuring took place.

Banks were freed from state reins, became well more efficient and held to more stringent standards. Everything from the way window customer services were conducted to loan decisions were revamped to distribute resources more efficiently and as quick as possible.

And chaebol affiliates won’t be able to make loans to each other to survive. Off the dole they were, as Schuman puts, and once on their own, they began to, well, behave more like corporations in a normal capitalist economy. For them, it meant “streamlining their business by cutting staff and selling assets”. This happened to a lot of other firms too, if they weren’t forced to go bankrupt or go through mergers. There were many suicides.

Can we call it necessary evil?

Now, Samsung is just second to Apple in smartphone productions, although not the most well-known, Hyundai cars are being sold the world over, etc. It’s a miracle to see corporations from a nation of 50 million that has risen from the ashes of war just 50 odd years ago to be shouldering with the world’s top corporations. Did I say I was South Korean?

As a caveat, I have to mention that it took a financial crisis to urge Korean corporations transform themselves into what they are now. Debates are still ongoing as to possibilities of a hard-landing, but China has a stunningly solid macroeconomic environment, as the World Economic Forum report has pointed out, making a crisis very unlikely. Lest, the government deliberately lets one happen. But that’s highly unlikely, for the ruling Communist party will surely lose all credibility.

Where has China got too? As Schuman points out, China is nowhere near doing this.

About 80% of all loan so to state-owned companies whose returns are only a third of private firms. Beijing has shown balls of steel in radically restructuring state-owned firms back in 1990s. But as of now, I’m not sure what’s holding them back, but local governments for sure are continuing to funnel subsidies to these state-owned zombies. Why? They used to be biggest tax contributors. Their local growth may depend on these firms, which often are the biggest employers especially in heavy industry regions like the Northeastern provinces, Shanxi, and Inner Mongolia. And also they fear social unrest if mass layoffs happen all too quickly. According to China Labour Bulletin’s monitor, number of labour related protests have perceptibly gone up since 2013.

But Caixin has argued that there is a new economy up and coming to absorb the pain from scalping away the old. Just need to give more gas to the younglings? However, I do think that especially in areas like Manchuria where there is little sign of the new economy, things are looking quite bleak. More on that later.


Briefing: China’s debt problem

Here is what’s wrong with debt in China: too huge, built-up too fast, and hard to count.

Huge compared to produced goods:

Although economy has grown at 6.9% in Q3 y-o-y, yet bank loans increased by 15.4% in Q3 compared with the same period in 2014.  China’s overall debt-to-GDP ratio is continuing its steady upward march.

Growth in credit did slow down. Measured by total social financing (TSF) growth (bank loans + corporate bonds + shadow lending) soared to 35% in 2009, but rose by 13% this quarter from a year earlier. But what is important is to see how much debt is rising vis-à-vis GDP, to truly measure indebtedness.

Fast Buildup:

In 2007, debt was 160% of GDP. Now the ratio stands at more than 240%, 161 trillion yuan ($25 trilliion). That’s almost double the buildup in debt in the US and UK in the run-up-to the financial crisis.

Here is the graph that Bloomberg produced based on McKinsey numbers:


Hard to count:

The sheer pace of new lending, regulatory loopholes, shadow banking practices, and a murky system of implicit guarantees (not clear whether debt is backed by the government or who would be allowed to go bust)

A crisis?

Since most of the debtors are state-owned companies and creditors, state-owned banks, the Chinese government can still control the situation. It has done so by simply rolling over non-performing loans when they are due, or extend the deadline.

SOE and finance reform central to reducing debt:

However, that only spares the economy of an eventual reckoning in the short-run. And in addition, when there is a need for loans to be distributed to soft-land growth, a lot of it is still being funneled to zombie corporations rather than the enterprising private sectors.

This situation has got worse. 6 years before the crisis, one yuan of credit brough 5 yuan of national output. Now that ratio has come down to 1/3.

Indeed, central to reducing debt is restructuring old and unproductive SOEs as well as overhauling a financial system which continues to favour these at the cost of new, full-of-potential companies that will precisely be the new drivers of growth.

What has the government done so far?

The government should bravely have pulled the plug on these old SOEs continuing to extend loans and not letting them go bust (the power equipment maker Baoding Tianwei, and Kaisa Group which has failed to pay overseas bonds) apart from but it hasn’t done so because it fears of social unrest and the toll it might take on.

It has so far tried to get a clearer picture of liabilities:

  • – require local government to compile and display better data on debt.
    – force banks to bring more of their shadow loans onto balance sheets (they have made more official loans to substitute shadow loans)

    It has also used monetary easing and low cost bonds (longer payback periods)-swap program (2 trillion yuan worth of high-interest debt) for local governments to reduce cost serving debt.

One problem is the last solution. People think this is just brushing the problem else where. Net bond issuance in first nine months of 2015 was 8.7 trillion yuan, up 67% y-o-y. More on bonds later. 

Optimism and Pessimism:

Optimists say companies and local governments will simply grow their way out of the problem with an expanding economy. As China continues to grow (still at 6 something %, it will need additional projects; one road one belt, though by itself will not be enough). And the Chinese government has plenty of money to cover bad debt.

They also pluck on specific types of debt. The ratio of debt to equity for listed companies, for instance has peaked at 159 % in the middle of 2012, aand has started to edge down. It’s some distance away from the 234% in the US just before the Lehman collapse. Additionally, while those in the old economy do indeed have excess credit, with close-to zero return on assets, those in the new economy like e-commerce Alibaba are more innovative, cater to consumers, post much less debt to equity ratios and more impressive return on assets. The private sector is outpacing state sector in output, profits, and employment. Service sector’s contribution to GDP has been bigger than manufacturing since 2013.

But pessimists say risks are mounting as China’s economy cools and slower inflation threatens to make debts harder to repay. The Chinese government does have an unusually strong fiscal firepower and can bailout everyone. But high debt can drag on growth, like it did on Japan and Europe. IMF puts the drag-on-growth threshold at 96% of GDP. 

보수언론의 FOX NEWS化

밑 사진을 보면, 대표 보수신의 1면은 온통 빠리태러 사건/ 별개 기사로 도배 되있고, 대표 좌파신문1면엔 광화문 시위/ 박근혜 정부 비판하는 기사로 도배 되있다.

물론 ISIS가 선동한 파리 및 다른 중동국가 시민들에 대한 테러는 모든 인류가 주의하고 애도 해야 할 사건이다. 그렇지만 나라가 왈칵 뒤집힌 상태에 동 나라 신문사가 1면을 해외 사건으로 도배 했다는건 분명 고의적인 편집상 결정이다. 이에 따라 문제 제기를 하고 싶다:

기본적으로 우리나라 보수언론은 보수권력 앞에선 기어다닐 줄 밖에 모른다. 단순하게 폄하 하려는게 아니다. 소위 우리나라 지식분자/엘리트들이라는 조중동 기자들을 비판해야하는지, 아니면 그 소유주들을 비판해야될지. 아마 권력에 대한 충성심이 보수언론DNA에 바킨건 후자의 책임이 더 클 것이라 생각된다. 이 중 조선일보 그리고 조선TV (한국에 나올 때 가끔 보면서 느낀 건 tv조선은 미국 대표 막장걸래언론 FOX뉴스의 영업모델 및 철학…멘토로 모신 것 같다)가 제일 악질 적이라고 생각한다. 이런 친권력 언론의 편집부는 한국에서 일자리를 못 찾으면 중국국가 선전부 (propaganda department) 소속이나 다름 없는 국영매체 인민일보나 CCTV같은 곳에서 대환영을 받을 것이다. 다들 뻔히 아는 사실이지만, 이럴 때 다시 한번 강조 하고 싶다: 언론은 태생부터 권력자들이(기업이건 정부건) 일반 무력한 시민들을 착취하지 못 하게 하려고 설립된 단체로서 民主주의가 제대로 돌아가게 해주는 중대한 역할을 맡는다. 피와 같은 진실된 정보와 투명성을 대중에게 멈춤 없이 공급 해줘야되는 언론이 제대로 기능을 못 하면 民主주의는 막말로 하자면 심장마비걸린 사람 처럼 뒤진다.

역사 교육의 목표

“역사교육의 목표는 국민 만들기다? 무슨 교육목표가 그란게 있습니까? 교육이 뭐에요? 교육은 제 생각엔요, 우리 모두는 국민이기 전에 인간이에요. 국민으로서 생각하기 전에 인간으로서 생각 해야되요.” (유시민 2015)

The Beijing Mayor’s head is safe

-“The Beijing mayor has vowed on his own head to control the smog, but we still have to rely on the wind to control it,”…
-“Hi Mayor, I’m here, waiting for your head,” a person using the Internet handle “I Love Rao Zizhao” wrote
-People’s Daily editorial said, “It is the determination and active actions that will lead to the most-wanted clean air, not the promised ‘head.’”

Chinese Gov’t ‘Causes an Investment Gap with U.S.’

(Beijing) – There is a widening gap between Chinese investments in the U.S. financial sector and those heading the other direction, mainly caused by the Chinese government’s restrictions on market access against foreign investors, an expert from the U.S. research firm Rhodium Group says.

Chinese merger and acquisition deals in the U.S. financial services this year are expected to break a record, reaching more than US$ 2.8 billion, up from last year’s US$ 100 million, data from Rhodium show.

Deals that are expected to be completed next year totaled nearly US$ 1.6 billion.

Meanwhile, U.S. investments in the Chinese financial sector are expected to reach only US$ 115 million, down from the US$ 163 million last year, the data show.

An important factor behind the decline is restrictions on investment imposed by the Chinese government, said Thilo Hanemann, research director at Rhodium. He said the limitations amounted to a protectionist barrier that does not affect Chinese investors in the U.S. financial sector as much.

The major restriction on U.S. companies is a limit on the equity stakes they can hold, he said.

Chinese investors are far more likely to be allowed to hold majority ownership in companies they invested in the U.S. financial sector than U.S. firms seeking partners in China, and this was caused primarily by Chinese government restrictions, Hanemann said.

Investments worth US$ 4.4 billion from China to the U.S. financial sector, where Chinese investors hold bigger stakes than their U.S. partners in a co-founded venture, have been made or are expected to be completed from 2000 to the end of next year, Hanemann said.

Meanwhile, only US$ 731 million worth of investments heading the other direction have majority U.S. ownership, he said. In deals worth US$ 3.2 billion, U.S. investors’ ownership fell in the range of 10 to 50 percent.

Chinese government restrictions on market access are “particularly acute in the most attractive sectors under the new growth model, including high-tech manufacturing and modern services,” Hanemann said.

In sectors like communications and financial services, China scored 0.75 on the OECD FDI Regulatory Restrictiveness Index. The United States scored 0.11 and 0.042, respectively. Lower figures signify fewer restrictions.

The U.S. business community has been one of the most important drivers of an American policy of engagement with China, Hanemann said. If it is being excluded from attractive sectors of the Chinese economy, he warned, that could “tip the scale in favor of less engaging” policy toward China.

China’s stock market crash and its links to the global economy: not all that bad.

Despite the Chinese economy’s deep integration with that of the world (slowdown in China’s growth rate has been a major factor in the globe’s commodities slump), its stock markets are still relatively insulated.

First, the direct links: foreign investors only hold 2% of all Chinese equities, the rest is all dominated by retail investors. Chinese investors, who may have lost a fortune in recent, and ongoing crash, also have very limited holding of global financial assets, apart form of course the official foreign reserve.

Secondly, and you must be aching to ask, the knock-on effect: if the stock market crash impacts consumer and business spending, or worse yet, says something about the health of the economy, surely it will diminish Chinese demand for world goods (and that’s serious because not only is China the second largest economy, but it is also the top trading partner of more than 100 countries).

1. Remember the bull run since January occurred in the midst of a comprehensive slowdown; skyrocketing equities had little to do with actual economic activity, but more driven by retail punters
buoyed by the crowd enthusiasm, and funded my margin financing. And as Chen Long points out, “the economy is actually showing signs of stabilisation as industrial value-added business and property sales are rebounding.”

2. Surely it would significantly reduce consumer and business spending, the former having lost wealth, and latter losing one of its capital-raising channels? First, only stocks held is worth about RMB 13 trillion, less than 5% of Chinese household assets—RMB 50 trillion are bank deposits and property assets are more than RMB 150 trillion. Out of total financing in China, equities only represent 5%. So again, though a channel may have been lost, the more important source of capital, in China that’s loans from banks and bonds, are still very much on a green light.

Taken together, the impact on the economy, as it stands, is relatively minimal. So, we may shift all our energies and attention unto the situation in Europe, and hope that the people of Greece make the right choice.