Saturday, July 24, 2021

Evergrande Crisis, XiXiP's Economic Strategy

22-3-28 China's Economic Rise—End of the Road - cfr > .
22-1-23 China’s Domestic Drivers | Kevin Rudd - geopop > .
> Xitting the Wall - Xina's Economic Decline >>
China's Secretive Economy - enDürer >> .
Recession, Depression, Crisis - anffyddiaeth >> .  


In economics, moral hazard occurs when an entity has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk knowing that its insurance will pay the associated costs. A moral hazard may occur where the actions of the risk-taking party change to the detriment of the cost-bearing party after a financial transaction has taken place.

Moral hazard can occur under a type of information asymmetry where the risk-taking party to a transaction knows more about its intentions than the party paying the consequences of the risk and has a tendency or incentive to take on too much risk from the perspective of the party with less information. One example is a principal–agent problem, where one party, called an agent, acts on behalf of another party, called the principal. If the agent has more information about his or her actions or intentions than the principal then the agent may have an incentive to act too riskily (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.

In the case of Chinese lending markets moral hazard underpinned everything. Chinese regulators have quite deliberately decided not to bail out Evergrande with the goal of transforming (and improving) the financial system. There is a real goal in China to move away from unproductive growth and focus on real growth. This can even be seen in the recent crackdown on Chinese tech companies.

In economics, a country's current account (balance of payments) records the value of exports and imports of both goods and services and international transfers of capital. It is one of the three components of its balance of payments, the others being the capital account and the financial account. Current account measures the nation's earnings and spendings abroad and it consists of:
  • the balance of trade
  • net primary income or factor income (earnings on foreign investments minus payments made to foreign investors), and,
  • net unilateral transfers, that have taken place over a given period of time. 
The current account balance is one of two major measures of a country's foreign trade (the other being the net capital outflow). A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.

If you are a rapidly-growing developing country and you are significantly under-invested and have insufficient domestic savings to meet those investment needs (which is the typical definition of a developing country) then a high domestic savings rate is optimal. That was what China had in the 80s and 90s = very low levels of investment so that high savings rate poured savings into investment, which which caused growth to rise very rapidly, which caused household income to rise very rapidly

The current problem is that China is now over-invested. So the CCP is trying to reduce the investment rate. But the current account surplus is simply savings minus investment. So, if you try to reduce investment without reducing savings, your current account surplus goes up. In the case of China, clearly the world cannot absorb a rising Chinese trade surplus and China recognizes that they're trying to bring the surplus down. So they celebrate every time imports rise faster than exports. However, the problem is that in order to do that you've got to bring the savings rate down, and there are three methods:
1) you can allow unemployment to soar, which they don't want,
2) you can allow debt to soar, which is what they've had to deal with, or
3) you can raise the consumption share of GDP by increasing household income, but that's the hard part because increasing household income requires transfers of income from the government sector, mostly local governments, to the household sector.
Politically, such a transfer is very, very hard to accomplish. So it's all different facets of the same problem. 

Comment 1: "Just like Evergrande, Huarong Asset Management “was” placed number 102 in  World's Largest Banks by assets ($250 billion USD). Huarong’s income dropped 90+% from 2017-2020. Chinese Auditors are still bamboozled by the problems uncovered with SOE’s loans which are endemic In Chinese Banks. While it will be imperative for China to keep these defaulting loans out of the spotlight, it clearly demonstrates how bail-ins have taken place via SOE’s (state owned enterprises). Fitch ratings shows the disturbing trajectory of Bond defaults of Chinese SOE’s. Very conservatively speaking Bailed-in bank deposits = Half of all $50+ trillion (equivalent USD) of all Chinese Banks. Global traders have rejected RMB as a trading currency and with the property collapse Chinese depositors will reject domestic property, businesses and shares. It is well-known that CCP have stopped all OVERSEAS invest/spending including personal consumption holidays or physically taking Hard currency, precious stones & metals overseas. IE :-COVID-19 stopped the Annual 140 million Chinese overseas trips taken up to 2019. So, $50+ trillion Chinese Bank “deposits” will now stay in Banks-which appears to be CCP’s end game. Factual and accurate BOP and FX statistics will determine China’s financial future which is now dire. Tread with caution."

Comment 2: "Chinese Consumption is repressed by the choices on offer in the “market” ie- Very limited innovation in Housing, Food, Automotive, textiles and health. This Contrasts starkly with successful innovations in mass transit, gaming and highly repressed but cutting edge information technologies. China’s restrictions of consumer society is perfectly represented by the CCP ending the evolution of payment systems - Ant financial Ali-pay. Chinese with money will not spend big or take on a lot of debt unless presented with a genuine value and perfectly evolved & honest product. This means money will seek an exit offshore, or bounce around banks & property or anything else which will offer the “least worst” security and income. Obviously domestic savings are being subverted by CCP to property & banks by only satisfying consumers basic needs whilst CCP retains controls over other every aspect of people’s lives. One child policy has compounded an already “soul destroying oppressive culture “."

Comment 3 "... Obviously domestic savings are being retained by CCP Banks by only satisfying basic domestic needs and hyper-inflated land rent."

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