All truth goes through three stages. First, it is is ridiculed. Then it is violently opposed. Finally, it is accepted as obvious. --Arthur Schopenhauer
Back in 2007 it used to be a lot tougher being a China bear. I would get reams of hate mail from China bulls ridiculing my prediction that China's banking system would eventually implode, taking with it a sizable chunk of its GDP.
It did little good that I pointed out that exact same thing happened in 1999, when the Chinese government had to inject an amount equal to 30% of its GDP to bailout its financial system. To put that number in perspective, a similarly sized U.S. government bailout in 2008 would have cost about $5 trillion dollars. And China's much-praised response to the financial crisis of 2008, throwing good money after bad, only upped the ante.
Well, I had to smile when I read in this morning's Financial Times that the all-knowing mandarins in the Chinese government have now given orders from the commanding heights of Beijing for Chinese banks to roll over the $1.7 trillion in local municipality debt that was to come due in (gulp) the next three years.
That's a bill equal to 25% of China's GDP, due by 2015.
To put that number in perspective, think about all the hullabaloo surrounding Greece. Yet Greece accounts for a mere 3% of European GDP. And Greece's current bailout package is less than 10% the size of the Chinese debt being rolled over.
But not to worry. China's mandarins have everything under control. As Fan Jianping, chief economist at the State Information Office, reassuringly put it: "A maturity extension for the bank's is appropriate." He continued: "The investment projects launched during the financial crisis will have no problem generating a return. It is just that many have not yet been completed. They would be under a lot of pressure if debts had to be covered immediately."
Sure. If you believe that, I have several hundred Chinese "bridges to nowhere" I'd like to sell you.
Jianping also failed to mention that municipalities borrowed this money despite an official central government ban on them doing so. So until they were rolled over this weekend, these debts didn't really exist. Kinda like how Fannie Mae and Freddie Mac weren't on the U.S. government's books until the day they blew up.
You gotta give the Chinese credit. They have chutzpah and a terrific PR machine to match. But the pliable Western media are complicit as well. They cut the Chinese a lot of slack. Just think about the words the media uses. Measures that are a bailout of corrupt Greece are simply signs of flexibility (the words of the Financial Times) by savvy bureaucrats when they happen in China.
To me, pronouncements by the likes Jianping are straight out of George Orwell. Maybe it's because it reminds me so much of what I heard when I trudged around behind the Iron Curtain and spoke to assorted Big Wigs at Communist financial ministries and economic think tanks. (Yes, Virginia, Shanghai's Pudong skyline notwithstanding, China is run by a tight knit group of 300 Communists working in an unmarked building in Beijing.)
When I had lunch with one of these folks last week, now CEO of his country's very capitalist stock exchange, I asked him about the bad old days when entire libraries of economic statistics were little more than lies fabricated to please Communist apparatchiks upstairs.
"Was it not obvious to you that we were simply making these numbers up?" he smiled.
"No, it wasn't obvious to me." I replied. "But I think it would have been to Arthur Schopenhauer."
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