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Friday, February 10, 2012 12:07 AM


China Financial Markets: When Will China Emerge From the Global Crisis?


I am saddened to report that Michael Pettis' site China Financial Markets has been blocked. The link redirects to a site with a one line message "This Account Has Been Suspended". When I have more details, I will post them.

Note: I just heard back from Pettis who is unsure of what happened. Hopefully this will be cleared up soon. I am leaving the rest of this post as I originally wrote it.

This is really a shame because Pettis is invariably a great read. I am personally indebted because he has taught me most of what I know about trade.

Michael Pettis is Professor of Finance at Peking University, and Senior Associate at the Carnegie Endowment for International Peace.

When Will China Emerge from the Global Crisis?

Via email (this may have been posted on his blog but obviously I cannot tell), please consider snips fromWhen will China emerge from the global crisis? by Michael Pettis.

Caixin, one of my favorite magazines, has an interview with Liu Mingkang, former China Banking Regulation Commission chairman. In it Liu says: I've said in the past, that this economic crisis will spread from the United States to Europe and finally land in Asia. Now we can see that it's already begun influencing Asia.

In 2008 and 2009 I argued that the crisis we were undergoing would affect every major economy in the world, but not necessarily at the same pace. I suggested that the US typically is quick to adjust and, given the pace of deleveraging that was already taking place, I expected that it would be the first major economy out of the crisis, probably in the next two to three years, as private debt levels continue to decline and public debt growth slows.

By now I think the prediction that the US will be among the first and China among the last to escape the crisis no longer seems as eccentric. Others are making similar predictions. There is growing awareness that China has not yet addressed the changes forced upon it by the global crisis, and will have to do so soon. It has certainly become easier to see how the crisis has spread, as Liu points out, first from the US and then to Europe and now to Asia.

It is important to note that it is not just Liu who is thinking along these lines. There were for example two other interesting articles last week in Caixin which I think are useful in understanding China. The first article, by Wang Lan, addresses the problem of State-Owned-Enterprises (SOEs) in China.

In Stifling the Nation's Vitality Wang addresses one consequence of state investment.

The vitality of the Chinese economy is being stifled by SOEs, especially central-level, or top, SOEs, and this is borne out by research. In 2010, the capital of 102 central-level SOEs was equivalent to 61.4 percent of GDP, and their earnings equaled 42.2 percent of GDP. 

The second national economic census taken in 2008 reported profits of nearly 900 billion yuan by finance industry central-level SOEs. Banks accounted for 64 percent of that profit. 

These gargantuan SOEs have not only failed to lead us toward a new stage of development, but they have actually inhibited the vitality of the Chinese economy by distorting resource allocation.

Wang recommends that Beijing begin a privatization process to wean SOEs from their addiction to excessively cheap capital, monopoly power, and distorted governance. This, he says, will force the SOEs to address and resolve their role in wasting capital, stifling innovation, and concentrating wealth. It will also allow China to grow in a much healthier and balanced way.

I have always thought that the least painful way for China to rebalance its economy requires that it radically redistribute income and wealth away from the state sector and to the household sector. There are many ways this can happen, some better and some worse, but privatizing SOEs and using the proceeds to clean up the banks (whose Non-Perfgorming-Loans are a future claim on households), to shore up the social safety net, and to permit SME’s more scope in which to compete is, in my opinion, the most efficient ways to do so. It would also weaken sectors that are able to restrain change in the economy.

Returning to the System

For many years we were told that privatization was pretty much out of the question in China. I disagree, and have argued often that within two or three years the constraints imposed by the current growth model will ensure that policymakers and their advisors in Beijing will be discussing privatization much more actively.

This discussion actually ties into the second Caixin article, by Tsinghua University sociology professor Guo Yuhua China: A Country Where No One is Secure.

Guo starts by referring to a deep malaise in the country:

What is the most common feeling in China today? I think many people would say disappointment. This feeling comes from the insufficient improvement in their lives that people are achieving amid rapid economic growth. It also comes from the contrast between the degree to which individual social status is rising and the idea of the "rise of a great and powerful nation."

Guo asks for a more robust social system in which the benefits of economic growth are not so heavily skewed towards a political elite and in which members of the various strata below the elite have increased opportunities of participating in the economic process:

Power is becoming too formidable and cruel. It is out of control, and without limits. It has kidnapped society and strangled reform. Facing this, finding a solution is a matter of vital importance. In a situation where special interest groups have choked off the possibility of various types of progress, building a just society and enacting reform is difficult. Moreover, there is not a ready-made civil society waiting to settle into the void.

Civil society is produced by the participation of citizens. Extrication from stagnation and the restoration of social vitality can only come from the start of civil consciousness and civil action. Only by empowering society and enlightening citizens can the strength to reform be developed.


This is becoming a pretty contentious debate. Over the past several months, in fact, we have seen a noticeable surge in articles and reports like this one – often by very prominent academics and policy advisors – criticizing the power of special interests in China. Their main concern seems to be over the constraints these special interests impose on further Chinese development, with the entrenched interests that have benefited over the last decade or two having become so powerful that they are making it increasingly difficult for China to adjust.

I apologize for the rather abstract and dry description in this and the three previous paragraphs of what is actually a gripping and very interesting topic, but for perhaps obvious reasons this is something about which I am reluctant to say too much. Still, anyone trying to predict China’s economic outlook for the next few years should be very aware of this fierce debate.
Reasons Obvious

Above emphasis in red is mine.

Yes Michael, I am saddened to say the reasons are indeed obvious.

In China, when you overly criticize government you are going to run into problems, such as your entire blog being blocked (or something much, much worse). My blog is blocked in China as well.

While on the subject of blockage, please consider Country Specific Blog Censorship by Google; Twitter Employs Censorship as Well; Echo Comments Not Working on Redirects.

Also, please reconsider paragraphs above in italics by Guo Yuhua, starting with "Power is becoming too formidable and cruel. It is out of control, and without limits. It has kidnapped society and strangled reform. ...Only by empowering society and enlightening citizens can the strength to reform be developed."

Is Guo talking about China or the war-mongers, the unions, the banks, and the corporate lobbyists in the US? My vote is all of the above.

Addendum 2012-02-12

Pettis is working on getting his site back up at another service provider. The outage may be provider related rather than state related as I first suspected.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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