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Curzon
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Curzon

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January 12th, 2006

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Stratfor dissects the Chinese Miracle

Stratfor has issued a pretty scathing report on Foreign Direct Investment in China. Like the Japanese miracle in the 80s and the tech boom in the 90s, Stratfor says China does not live up to the hype.

More than half of the $1.1 trillion in foreign direct investment that has flowed into China since 1995 has not been foreign at all, but money recirculated through tax havens by various local businessmen and governing officials looking to avoid taxation. Of the remainder, Western investment into China has remained startlingly constant at about $7 billion annually. Only Asian investors whose systems are often plagued (like Japan’s) by similar problems of profitability or (like Indonesia’s) outright collapse have been increasing their exposure in China.

The report makes its point from several angles: state firms are so indebted that their balance sheets are a joke; banks are swimming in bad debts (a far larger proportion than Japan’s crisis in the late 1990s); and the proletariat are getting angrier.

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junk politics
January 12, 2006
3:25 am
Skeptical of the Chinese Economic Miracle

Dissecting the 'Chinese Miracle' By Peter Zeihan The "Chinese miracle" has been a leading economic story for several years now. The headlines are familiar: "China's GDP Growth Fastest in Asia." "China Overtakes United Kingdom as Fourth-Larg...
DBm
January 12, 2006
3:31 am
I didn't read the whole article but the highlight seems scandalous indeed. Stratfor? I had read several of their reports in the past. They didn't strike me as a particularly impartial group. I had problems with their reasoning and their interpretations of statistics and facts, most importantly, they didn't seem to worry about getting the facts straight. Now just let me read what they write this time.
Jing
January 12, 2006
11:36 am
I'm also not a big fan of Stratfor, but not because of any faulty interpretations or the lack of impartiality, but rather because their authoritativeness isn't much more than any Joe Blogger, less than some really (ESWN). An interesting read as often as not, but not as definitive as some people would credit it as. As I said at Simonworld, anyone could do what they do with a little brainpower, google, and lexis-nexis. That being said, the economic arguement despite being unoriginal, has its merits. There are definetly long term structural problems with the Chinese economy. Though as I said on Simonworld, he seemed to have gone off the edge towards the end of his article with his strange reading of the history of Qing China.
Jing
January 12, 2006
12:11 pm
A more critical reading of the Stratfor article will reveal a degree of sloppiness.

"This last point was -- and remains -- of critical importance to the Chinese Politburo: they know what can happen when the proletariat rises in anger. That is, after all, how they became the Politburo in the first place.

The cost of keeping the money circulating in this way, of course, is that China's state firms are now so indebted as to make their balance sheets a joke, and the banks are swimming in bad debts -- independent estimates peg the amount at around 35-50 percent of the country's GDP. Yet so long as the economic system remains closed, the process can be kept up ad infinitum: After all, what does it matter if the banks are broke if they are state-backed and shielded from competition and enjoy exclusive access to all of the country's depositors?"

Firstly the first paragraph is mostly rhetoric. The Communist Party of China did not gain power as a result of the prolitariet but rather due to successful military action against the Nationalism Army and rural peasant support for its platform of land reform and redistribution.

Forgoeing that minor quibble, the second paragraph also reveals two significant errors. First, China's non-performing loans are not 35-50% of total GDP. What it should be is that non-performing loans are 35-50% of TOTAL loans. The "independant" estimates which the author cites but doesn't identify (probably because he didn't even bother to check) are S&P estimates for 2002 and 2004. S&P estimated the total percentage of non-performing loans as being 50% in 2002 but improved down to 35% in 2004. Still nearly double the official figures though an improvement. The CBRC (China banking regulatory commission) also noted a decline in the percentage of non-performing loans of the four principal chinese state banks as down to 8.71% as of the third quarter of 2005 from the 12.85% at the beginning of 2005. Now of course those banks are probably a lot healthier than many of the smaller institutions but they are by far the largest banks in China. The total estimated sum of all non-performing loans in China is 157.83 billion US dollars, at least according to the CBRC.

The author is also significantly wrong on the impact of market liberalization on the Chinese banking system. Rather than destroying the state banks, entry requirements for the WTO have seemed to facilitate in banking reform which has reduced the percentage of bad debts. China's banking system is still problematic, but the trend is improving rather than deteriorating.
ElamBend
January 12, 2006
2:35 pm
Jing's criticism of Stratfor is spot-on. The get somethings right in the broad strokes, but when you look at the details it's a little off.

I disagree about the China's banking system, though. I think it's 2007 when foreign banks can start taking domestic Chinese deposits. The locals no how bad the Chinese banks are and this change in rules could cause a run on some Chinese banks which would cause chaos. I'm sure the Chinese government will do its best through rules and reforms to prevent this. However, the banking problem and other problems in China make its economy susceptable to outside shocks. I wouldn't be surprised if they go boom-bust for a couple of generations.
As for proletariat, bourgeois, nuevo-rich, or whoever rising up and denouncing the communist, I must confess ignorance. People just want to get wealthy and not have the local boss siphon their funds. I think it's less about democracy and more about corruption.
Saru
January 12, 2006
4:05 pm
No time for a lengthy comment, so I'll just say that I'm with Jing on the end of that article. That last paragraph was terrible.
Dan Harris
January 21, 2006
6:09 am
So what? Even if half of China's "FDI" is actually money being recirculated by people living in China or companies from Asian countries "with profitablity problems of their own," it still shows confidence in the Chinese economy.
P.S. Thanks for listing us on your blogroll

www.ChinaLawBlog.com
kushibo
January 23, 2006
10:44 am
Korea is now the #1 or #2 investor in China, for a host of reasons by competing interests in Korea. How much does the article talk about that? Is Korea put into the same category as Japan (i.e., Asian investors whose systems are often plagued by similar problems)?

I guess my more crucial question is something I've been wondering for a while: how much of Korean investment into China is in largely or predominantly Korean areas? A friend of mine just did a journalistic field study of the Korean Autonomous Prefecture, and it looks a lot like it's turning into a provincial Korean city--which could be both good and bad.

Anyway, interesting point about how a lot of the "foreign" capital is just Chinese capital being recirculated back in, if that's true.