Tag: Economy of the People’s Republic of China

Oh Shiz.. Another default nightmare?

Get ready for a llot more news like this one as the real Chinese economy gets to finally come out and play:

On Friday, Chinese state media reported that China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products matures on January 31, the first day of the Year of the Horse.

The Industrial and Commercial Bank of China sold the China Credit Trust product to its customers in inland Shanxi province. This bank, the world’s largest by assets, on Thursday suggested it will not compensate investors, stating in a phone interview with Reuters that “a situation completely does not exist in which ICBC will assume the main responsibility.”

There should be no mystery why this investment, known as “2010 China Credit-Credit Equals Gold #1 Collective Trust Product,” is on the verge of default. China Credit Trust loaned the proceeds from sales of the 3.03 billion-yuan ($496.2 million) product to unlisted Shanxi Zhenfu Energy Group, a coal miner. The coal company probably is paying something like 12% for the money because Credit Equals Gold promised a 10% annual return to investors—more than three times current bank deposit rates—and China Credit Trust undoubtedly took a hefty cut of the interest.

Zhenfu was undoubtedly desperate for money. One of its vice chairmen was arrested in May 2012 for taking deposits without a banking license, undoubtedly trying to raise funds through unconventional channels. In any event, the company was permitted to borrow long after it should have been stopped—reports indicate that it had accumulated 5.9 billion yuan in obligations. Zhenfu, according to one Chinese newspaper account, has already been declared bankrupt with assets of less than 500 million yuan.

The Credit Equals Gold product is not the first troubled WMP, as these investments are known, to risk nonpayment, but Chinese officials have always managed to make investors whole. CITIC Trust did that in 2013 on a steel-loan product in Hubei province, and a mysterious third-party guarantee rescued a Hua Xia Bank WMP. An investment marketed by ICBC’s Suzhou branch was similarly repaid.

Maybe Zhenfu was another victim of Obama’s anti-coal agenda. Who knows? Anyway, the big problem here, as I am hearing from people in the know, is the fact that this is going to start happening a lot because even the Chinese government can’t provide cover for these bad investements anymore, and it is going to have world wide implications. Crony capitalism sucks and fails everywhere, I guess.

How Big is Our GDP? How Big Do You Want It To Be?

I am Hal’s complete lack of surprise:

Baseline Chinese economic data is unreliable. Taking published National Bureau of Statistics China data on the components of consumer price inflation, I attempt to reconcile the official data to third party data … To correct for these manipulative practices, I use third party and related NBSC data to better estimate the change in consumer prices in China between 2000 and 2011. I find that using conservative assumptions about price increases the annual CPI in China should be adjusted upwards by approximately 1%. This reduces real Chinese GDP by 8-12% or more than $1 trillion in PPP terms.

This is just one paper, of course. But it’s also not the first time I’ve heard this.

Argentina does the same thing, incidentally. Economists who aren’t named Paul Krugman have decided to just ignore any economic data coming out of Argentina, since it is all officially washed and dry-cleaned by the Kirchner regime. The old Soviet Union also did this, massively overstating their GDP (in part because presenting realistic numbers to authorities was a good way for a factory manager or local ruler to end up in Siberia).

(Our own measures of inflation are controversial, but they have one thing that China lacks: transparency. It’s quite easy for people to use the data to build alternative estimates of inflation and many have.)

China’s economy is in for a rough time in the decades ahead. They’ve basically picked all the low-hanging economic fruit. They will now have to deal with massive rural poverty, problematic infrastructure, absurd levels of pollution and, thanks to their one-child policy, a population that’s going to get older faster than any country in history. So expect more deception out of their government on. And expect people like Thomas Friedman to eat it right up.