China’s new revolutionaries

I think the mistake everyone is making is to assume that because China is a ‘communist dictatorship’ this means the party must be in control. I think this is a dangerous assumption.

Just look at bank lending. Last year the government wanted a stimulus. So the government told banks to lend. They did. In the first six months Chinese local and state banks lent out $1.1 Trillion (officially and a LOT more unofficially) and did it so fast the national government had to order them to STOP. And when they got a whiff of what the banks had loaned to, the order quickly went out for the banks to raise their capital holdings.

The central government had asked the banks to lend to local governments and enterprises. Obviously what they had had in mind was viable businesses that might make things people might want to buy and developments that might find buyers. Sadly what they got was neither. Instead all parties colluded to create, build, invest in and hope to sell on, a bubble of empty factories and empty properties. As you can imagine, lending that much that quickly doesn’t come with lots of ‘due diligence’.

Out in the country local officialls, local bankers and local aspiring middle class investors all colluded together to blow a bubble they all hoped would make them rich or richer.The central bank was reduced to repeated exhortations to the regional banks not to lend ‘for speculation’ and to take more care in what they loaned for.

The central bank found it had to make the same statement a number of times each time with more force. I get the strong feeling they didn’t think they were heard the first few times. And they were right. Here is just one example from AP on Wed. 10th March.

SHANGHAI (AP) — “The luxury apartment buildings Yang Xuhua passes on her way to work are a daily reminder of her own frustrated efforts to buy a home. Prices for even modest apartments in Shanghai have soared, putting home purchases out of reach for white collar workers and professionals.

Yang and many other young Chinese are finding their aspirations thwarted by an overheated property market that is enriching already wealthy speculators, local officials and other Communist Party allies.”

According to several leading China researchers in the west, Prof Victor Shih of Northwestern U, Prof Kenneth Rogoff of Harvard and James Chanos a hedge-fund manager, China’s local governments and banks have taken on a VAST amount of debt that is never counted by the central government statistics nor by most international statistics. This debt was funneled through specially set up Investment Vehicles specifically to get around laws designed to restrict their borrowing and risk taking.

So how much more debt? And how adrift are official estimates of Chinese debt? Well according to Shih and others the REAL level of Chinese debt could reach 96% of GDP by next year. The official IMF estimate is 22%. That 74% gap is the measure of how much the central government is NOT in control of who is taking on what debt.

My point is that we shouldn’t assume ‘China’ has a plan, or if it does, that anyone has any intention of following it. The era of absolute power of the party is over, but not because of students in Tieneman Square fighting for freedom of speech.

The new revolutionaries aren’t students and the revolution isn’t about a desire for democratic freedom. Those willing to challenge the party and ignore its decrees are the new asprirant middle class and they are driven by the desire to be rich.

There is a banking and property bubble and despite the efforts of the absolute central authority it is growing. There is a new power in China. It is called individual greed. Generally speaking there is no power that has ever stood firm against greed. China will, in my opinion be no different.