Showing posts with label Good government. Show all posts
Showing posts with label Good government. Show all posts

Tuesday 25 July 2023

China's historical debt binge

September 2008, pre-Lehman Brothers bankruptcy

In September 2008, China's economy was slowing.   The Shanghai stock market had just crashed.  Property prices were weak.  The Chinese officials said China was entering the middle-income rank of nations, so it was time for it to slow down as previous Asian miracle economies, like Japan, South Korea and Taiwan, had.  They talked about cutting back on investment, downsizing large state companies and letting the market allocate credit, which at this point was not growing faster than the economy.  Between 2003 and 2008, credit had held steady at about 10% of GDP.


October 2008, post Lehman Brothers bankruptcy

Lehman Brothers filed for bankruptcy in the US and global markets went into a tail-spin.  Demand collapsed in the US and Europe, crushing export growth in China, where leaders panicked.

By October 2008, the Chinese government had reversed course, redoubling its commitment to the old investment -led growth model, this time by fueling the engine with debt.   From 2008 through 2018, total debts would increase by $80 trillion worldwide, as countries fought off the effects of the financial crisis, but of that total, $35 trillion, or nearly half, was racked up by China alone.


August 2009

By August 2009, the Chinese government had launched an aggressive spending and lending program that kept China's GDP growth above 8%, while the US and Europe were in recession.  That steadily high GDP growth had convinced many Chinese that their government could produce any growth rate it wanted.

Bank regulators were the only officials who expressed alarm and their main concern was increasingly reckless lending in the private sector.  "Shadow banks" had started to appear, selling credit products with yields that were too high to be true.  


2013

By 2013, shadow banks accounted for half of the trillions of dollars in new yearly credit flows in China.  When Beijing began to limit borrowing by local governments, local authorities set up shell companies to borrow from shadow banks.  Soon these "local government funding vehicles" became the biggest debtors in the shadow banking system.

As the flow of debt accelerated, more lending went to wasteful projects.  By some estimates, 10% of the firms on the mainland stock exchange were "zombie companies." kept alive by government loans.  The state doled out loans to incompetent and failing borrowers.


  • Lending started to flow into real estate

Much of the lending started to flow into real estate, the worst target for investment binges.  Easy loans spurred the sale of about 800 million square feet of real estate in 2010, more than in all other market so the world combined.  In big cities, prices were rising at 20% to 30% a year.

Caught up in the excitement, banks stopped looking at whether borrowers had income and started lending on collateral - often property.  This "collateralized lending" works only as long as borrowers short on income can keep making loan payments by borrowing against the rising price of their property.  By 2013, a third of the new loans in China were gong to pay off old loans.  In October 2013, Bank of China chairman warned that shadow banking resembled a "Ponzi scheme," with more and more loans based on "empty real estate."


  • At the March 2013 party congress, Li Keqiang came in as prime minister.  

He was one of the Chinese leaders who appeared to accept the reality that a maturing economy needed to slow down, which would allow him to restrain the credit boom.  Yet every time the economy showed signs of slowing, the government would reopen the credit spigot to revive it.


  • Dubious creditors grew

The cast of dubious creditors grew increasingly flaky, including coal and steel companies with no experience in finance, guaranteeing billions of dollars in IOUs issued by their clients and partners.  



2014: Chinese urged to buy stocks

By 2014, lending entrepreneurs were shifting their sights from property to new markets - including the stock market.

Even the state-controlled media jumped in the game, urging ordinary Chinese to buy stocks for patriotic reasons.  Their hope was to create a steady bull market and provide debt-laden state companies with a new source of funding.  Instead they got one of the biggest stock bubbles in history.

There are 4 basic signs of a stock bubble:  

  • high levels of borrowing for stock purchases; 
  • prices rising at a pace that can't be justified by the underlying rate of economic growth; 
  • overtrading by retail investors and 
  • exorbitant valuation.  


June 2015, Shanghai market started to crash

By April 2015, when the state-run People's Daily crowed that the good times were "just beginning,"  The Shanghai market had reached the extreme end of all four bubble metrics, which is rare.

The amount that Chinese investors borrowed to buy stock had set a world record, equal to 9% of the total value of tradable stocks.  Stock prices were up 70% in just 6 months, despite slowing growth in the economy.  On some days, more stock was changing hands in China than in all other stock markets combined.  In June 2015, the market started to crash and it continued to crash despite government orders to investors not to sell.

[Comments:

This credit binge had some characteristics unique to China's state-run system, including the borrowing by local government fronts and the Communist propaganda cheering on a capitalist bubble.  But its fundamental dynamics were typical of debt mania.  It began with private players, who assume the government would not let them fail, and devolved into a game of whack-a-mole.  As the government fitfully tried to contain the mania, more and more dubious lenders and borrowers got in the game, blowing bubbles in stocks and real estate.  The quality of credit deteriorated sharply, into collateralized loans and IOUs.  These are all important mania warning signals.

The most important sign was, as ever, private credit growing much faster than the economy.   After holding steady before 2008, the debt burden exploded over the next 5 years, increasing by 74 % points as a share of GDP.  This was the largest credit boom ever recorded int he emerging world (though Ireland and Spain have outdone it in the developed world).]


By mid 2019

By mid-2019 China had, in fact, seen economic growth slow by nearly half, from double digits to 6%, right in line with previous extreme binges.  To date then, no country has escaped this rule:  a five-year increase in the ratio of private credit to GDP that is more than 40% points has always led to a sharp slowdown in economic growth.

[Comments:

China did however, dodge the less consistent threat of a financial crisis, aided by some unexpected strengths.  One was the dazzling boom in its tech sector, without which the economy would have slowed much more dramatically.  Another was the fact that Chinese borrowers were in debt mainly to Chinese lenders and in many cases the state owned bother parties to the loan.  In short, /China was well positioned to forgive or roll over its own debts.  And with strong export income, vast foreign exchange reserves, strong domestic savings and still ample bank deposits, it has managed to avert the financial crisis that often accompanies large, debt driven economic slowdowns.]



Thursday 10 December 2020

To spot whether the government is meddling more or less.

Is the government meddling more or less?

To spot whether the state is meddling more, or less

1.  Look first at trends in government spending as a share of GDP.

2.  Then check whether the spending is going to productive investment or to give-aways.

3.  Finally, look at whether the government is using state companies and banks as tools

  • to pump up growth and contain inflation, and 
  • whether it is choking or encouraging private businesses.



In certain environment, less meddling is best

In recent years, many countries have been 

  • raising the government share of the economy, 
  • steering bank loans to big state companies, 
  • subsidising cheap gas for the privilege classes and 
  • enforcing insensible rules in an unpredictable way.

Even low income countries like India are rolling out full-service welfare systems, a luxury that the Asian miracle economies began to adopt only much later in their development.  At that point, countries like South Korea and Taiwan had already invested heavily in factories and transport networks, and they could well afford inclusive pension and health programs.

In contrast, many states are now managing the economy in ways that effectively retard growth, thereby 

  • fueling disrespect for establishment politicians, and 
  • the rise of radical populists.  
In an environment like this, especially, less meddling is best.

When Government Spending Becomes a Problem

Government Spending

 As a country grows wealthier, spending by the government tends to increase.

Is the government spending much higher (or lower) as a share of the economy than in other nations at the same income level? 

The worst case is a fat state getting fatter, compared to its peers.  


Developed economies

Among the top twenty developed economies, the king of this class has long been France.  

The French government spends an annual sum equal to 56% of GDP, more than any other country, barring the possible exception of Communist like North Korea.  

  • France's spending level is 18% above the 39% average for developed nations - the biggest gap in the world.  
  • Over the last decade, the tax burden required to support this state was driving businesspeople out of the country in droves.  
  • France's own president, Georges Clemenceau, in the early 20th century described it as "a very fertile country: you plant bureaucrats and taxes grow."


Many European states have been under pressure to cut back since the crisis of 2008, particularly where their spending amounts to more than half of GDP.  Led by France, that list includes Sweden, Finland, Belgium, Denmark, Italy and until recently, Greece.   Greece has been moving in a positive direction - with state spending falling from 51$ to 47% of GDP - in part because its creditors forced Athens to make painful cuts in civil service jobs and salaries.

Prior crises had already started to erode the welfare state in Europe in the late 1990s.  Scarred by the crisis of 2008 and its aftermath, other European nations will remain under pressure to keep the size of the state in check.


The lighter spenders in the developed world include the United States, Austria and Australia, with government spending amounting to between 35 and 40% of the GDP Switzerland was even lower, at 33%.



Emerging Nations

Emerging Big Spenders

Among the twenty largest emerging nations the outlier for many years was Brazil, where official government spending amounted to more than 40% of GDP, a level more typical of a rich European welfare state than a middle-class nation.  

  • In recent years, under a controversial right-wing government, that figure has come down to 38%, still well above the 32% average for nations with a per capita income of around $12,000.   
  • Brazil had by 2019 fallen behind Poland (42%) and Argentina (39%) for the title of the emerging world's biggest, most bloated spender.
  • Brazil's recent turn reflects the growing realization that it could not keep spending like a rich European welfare state, as well as growing frustration with the dysfunctional system.


Emerging Small Governments

The large emerging countries with the smallest governments include Indonesia, Nigeria, South Korea and Taiwan.  

The East Asean (South Korea and Taiwan) success stories were built on a model that, until very recently, delayed the development of welfare programs, kept government spending around 20% of GDP or less and focused that spending on investment in infrastructure and manufacturing.  

Even today, only 30% of Asia's population is covered by a pension plan, compared to more than 90% in Europe.    

Taiwan's public healthcare system did not exist in 1995 but now covers nearly 100% of the population and costs just 7% of GDP; that compares well to spotty coverage costing 18% in the United States.

Governments in the Andean countries of Columbia, Peru and Chile all look relatively undersized, as does Mexico, with government spending equal to 25% of GDP, 7% below the average for its income class.  It is mainly on the Atlantic coast - in Brazil, Venezuela and Argentina - that governments suffer from bloat.

Sunday 14 April 2013

The Wisdom of Thomas Jefferson



Thomas Jefferson was one of our founding fathers and his words still ring true today. He knew that we would make mistakes with our government and he also knew what we should do to fix it. After viewing this pass it on to others.

All tyranny needs to gain a foothold is for people of good conscience to remain silent.

Educate and inform the whole mass of the people .....  They are the only sure reliance for the preservation of our liberty.

Experience hath shewn, that even under the best forms of government, those entrusted with power have, in time and by slow operations, perverted it into tyranny.

I predict future happiness for Americans if they can prevent the government from wasting the labours of the people under the pretense of taking care of them.

Information is the currency of democracy.

It does me no injury for my neighbour to say, there are twenty gods or no God.

It is error alone which needs the support of government.  Truth can stand by itself.

It is incumbent on every generation to pay its own debts as it goes.  A principle which if acted on would save one-half the wars of the world.

It takes time to persuade men to do even what its for their own good.

Liberty is to the collective body, what health is to every individual body.  Without health no pleasure can be tasted by man; without liberty, no happiness can be enjoyed by society.

No government ought to be without censors; and where the press if free no one ever will.

That government is best which governs the least, because its people discipline themselves.

The government is the strongest of which every man feels himself a part.

The care of human life and happiness, and not their destruction, is the first and only object of good government.

The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.

We hold these truths to be self-evident: that all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty and the pursuit of happiness.

When the press if free and every man able to read, all is safe.

When the people fear their government, there is tyranny; when the government fears the people, there is liberty.

Saturday 10 July 2010

Training the Government towards a Good Governance

If the government is trained well enough, then they would be able to move towards a good governance. So, to set an example, the starting point for the training should be government itself.

The areas of training should be at least include:

- How to avoid Corruption
- How to respect and implement Law and Ethics
- How to implement Justice
- How to become a genuine and sincere Leader
- How to build Public and National Interest first and throw personal interest at the end.

This "Training Program” is required in the Government from top to bottom.