“…”Asia’s equity markets have gone as far as they can go without a real bond market… livelier debt markets would reduce companies’ reliance on banks for loans, making for more- efficient allocation of wealth and risk. Asia also is facing another “mismatch” scenario, de Boursac said. In 1997, the region imploded because plunging markets created a mismatch between exchange rates and foreign-currency debt payments… The creation of pan-Asian bond funds is making it easier to buy debt without the hassle of dealing directly with individual countries and issuers… Such efforts will have two big payoffs in the long run… they will help Asia bring home some, if not all, of the trillions of dollars of savings parked overseas in assets such as U.S. Treasuries… The trouble is, Asia could use those benefits now. Countless companies that now borrow from banks would prefer to tap the capital markets for financing. Governments often crowd out private issuers. Asia has been slow to create the kinds of non-government markets like ones for mortgage-and asset-backed securities. Hedging investment positions can also be a challenge…”
http://www.bloomberg.com/apps/news?pid=20601039&sid=aNUIfY78VqV8&refer=columnist_pesek

and agreeing the DBRS: “…”There has been a lot of over-reaction in the market,” said Alan Reid, a DBRS managing director of U.S. financial institutions in New York. “We do not expect wholesale downgrades of banks with exposure to subprime.”…” http://www.reuters.com/article/fundsFundsNews/idUSN0223320120070802

http://www.imf.org/external/pubs/ft/wp/2006/wp06265.pdf

Bank loans haven’t been a huge driver for recent capital investment in China.

Most bank funding of SOE’s involved social service programs which have either been shut down or are now funded from other sources such as direct government revenues.

Even a lot of the funding for the SOE’s ultimately didn’t come from personal savers. Keeping the SOE’s afloat led to bad loans and insolvent banks. In order to keep the banks afloat, much (probably about a third) of the $500 billion in bad loans ultimately was funded by the Chinese government when it recapitalized the banks. OK, putting money in a bank account, you might lose 2%/year due to inflation. Put it into a stock or real estate, and you could easily lose 90%.

And from the point of view of an SOE employee, losing 100% of their income in exchange for a few extra percentage points on their bank account is a really, really bad deal.

I think what is happening a lot is that people look at a situation and are making assumptions based on what happened in the Soviet Union or Japan or what was happening in China in 1998, and those assumptions may not be valid.

What I’m arguing is that a lot of the problem is that circumstances have changed, and institutions haven’t quite yet adapted. I’m also arguing that too much of the economics literature is still thinking about scenarios in which “China fails” and not thinking enough about the real problems (energy issues, nationalistic backlash, environmental issues) that exists if “China succeeds.”

Stated goals vs real goals?

It is great to be a capitalist in communist china!!

The reason *that* distinction is important, is that SOE’s have access to easy bank credit from the big state banks, but collective enterprises don’t.

‘Murdoch’s dealings in China: Building personal ties for business’ http://www.iht.com/articles/2007/06/26/business/murdoch27.php

‘Wife and Ex-Wife Now Shape News Corp.’s Fate’ -”…underlying tension is growing over eventual control of the News Corporation, the globe-spanning media company that Mr. Murdoch has built over four decades, with Ms. Deng and Mrs. Mann playing crucial roles…” http://www.nytimes.com/2005/08/02/business/media/02murdoch.html?ex=1280635200&en=5c789c6ad6150e79&ei=5088&partner=rssnyt&emc=rss

“…Dow Jones now has more than 10,000 indexes, spanning 58 countries and covering commodities and hedge funds along with stocks, according to its Web site. The company calculates and markets indexes created by Wilshire Associates, including the Dow Jones Wilshire 5000, the broadest gauge of U.S. stocks. The company also has a one-third stake in Stoxx Ltd., a joint venture with the owners of the German and Swiss stock exchanges that calculates pan-European indexes… Murdoch’s News Corp. stands to reap benefits of future growth once his $60-a-share offer for Dow Jones succeeds…” http://www.bloomberg.com/apps/news?pid=20601039&sid=a.rxtlMQubE8&refer=home

Presume this is the Bloomberg’s version:

“The Bush administration is urging China’s central bank to buy more government-backed mortgage bonds in an effort to sustain financing for U.S. home loans. U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a corporation under HUD that guarantees $417 billion in federally insured, fixed-rate mortgages. “It’s not a matter of whether they’re going to do more business in mortgage-backed securities,” Jackson told reporters in Beijing. “It’s who they’re going to do business with.” HUD aims to tap China’s $1.33 trillion of foreign-currency reserves…” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aE7I.0mnjrSY

Thanks for feedback.

I’m assuming capital outflow controls are associated with lower rates and a lower domestic cost of capital, because there is less global price competition for domestic sources of financing.

The Prasad paper argues that capital outflow controls are the riskiest component in the set of China’s current monetary arrangements. He prescribes that FX rates should become flexible, but liberalizing capital outflow controls should be done more slowly. Controls add to the task of current FX intervention, but the risk in their abrupt removal is that if the FX rate becomes more highly valued and/or more flexible in future, it would be exposed to more downside volatility risk.

I agree that averages are as useful or useless as their interpretation. I don’t know if China is over-investing or not. Perhaps it is fully compatible with the massive population and employment challenges they face. But, as part of a trifecta of high investment, high saving, and high current account surplus relative to GDP, it is unusual. Perhaps B. Setser can confirm, but I believe the global investment share of global GDP is around 24 per cent or so - and only mildly volatile through economic cycles. So I suspect China is a number of standard deviations away from the global average - in the ‘head in the oven’ zone of observations. It may well be explainable, but it says something about imbalances and challenges.