Dinny McMahon

The gigantic difference between China’s Great Wall of Debt and everything else you read about China in the financial press is this comes from decades of following developments from the inside. Whereas news items offer financial analysis, ratios, percentages, projections and bottom lines (none of which can be trusted), Dinny McMahon derives insight from repeated personal visits, interviews and knowledge of current affairs as a financial reporter for pretty much all his adult life. An Australian whose parents forced Chinese on him as a child, McMahon was drawn to China repeatedly until he moved there for good. He provides a western journalist’s perspective on a complex economy.

Chinese finance is amorphous. The rules are ignored, and the government intervenes often and often bizarrely. The central government put a floor under interest rates, allowing banks to make money automatically. (They say a small dog could occupy the chairman’s seat and every bank would make as much money.) Banks promote scams for third parties. They operate shadow banking themselves, selling products the government doesn’t want them to or which are too new to have rules. When loans go bad, it can be the depositors who take the hit, even though that’s not what they signed up for.

The biggest driver is real estate. It has come to the point where the land is insanely more expensive than the building could ever be. (The Chinese call this paying more for the flour than the bread.) So Chinese buildings are low quality, badly designed and badly built. And everyone and every company is about real estate. There are manufacturers that are financed by their real estate plays. Local governments evict longtime residents to give land to developers for profit. Nationwide, loans are in the trillions of dollars. This “ball of money” drives up asset prices and creates bubbles in new products almost daily. Businesses import way more raw materials than they or the entire industry can ever use, to employ as collateral for more loans, often just to speculate in real estate. The constant inflating and bursting of asset bubbles has created an epic portfolio of bad loans. The extent is hidden first by the banks, then further by the central government, so that no figures have any validity. But everything appears stable.

Then there’s business: Chinese startups need a good 200 official stamps to open, and any number of made-up infractions can close them unless palms are well greased. McMahon tells of one business that simply closed, because no one knows what the rules are, and officials were on a rampage. Companies pay off police and cover their expenses, and police act directly on their behalf against customers, complainers, and the public. But then, this is a country with a thriving business in fake receipts to be claimed by the purchaser. As one victim found out the hard way, “The issue has been elevated. You just have to be punished. There’s nothing we can do.”

Despite all the distortions, President Xi has chosen to turn the economy towards supply-side economics, or voodoo economics as it was known at its invention. Rather than stop the extortion, the bribes, the fines and the confiscations that honest state institutions would ensure, Xi is pumping up business and production. His party’s main fear is social unrest. As long as people feel better off than last year and look forward to more, the unrest (there were 180,000 incidents in 2010 alone) will be controllable. The government is on a treadmill to oblivion, but so far, it is keeping up.

David Wineberg… (mehr)