China Financial Markets Tue 2010-04-20 09:17 EDT

Who will pay for China's bad loans?

Michael Pettis

...pessimists are starting to worry about excessive debt levels in China, about which they are very right to worry, and many are predicting a banking or financial collapse, which I think is much less likely. Optimists, on the other hand, are blithely discounting the problem of rising NPLs and insisting that they create little risk to Chinese growth. Their proof? A decade ago China had a huge surge in NPLs, the cleaning up of which was to cost China 40% of GDP and a possible banking collapse, and yet, they claim, nothing bad happened. The doomsayers were wrong, the last banking crisis was easily managed, and Chinese growth surged. But although I think the pessimists are wrong to expect a banking collapse, the optimists are nonetheless very mistaken, largely because they implicitly assumed away the cost of the bank recapitalization. In fact China paid a very high price for its banking crisis. The cost didn't come in the form of a banking collapse but rather in the form of a collapse in consumption growth as households were forced to pay for the enormous cleanup bill...

China Financial Markets; China's bad loans; pay.

China Financial Markets Thu 2010-03-04 08:47 EST

Stuck in neutral -- what Japan's rebalancing can teach us

Michael Pettis

...A few days ago I read a good article (``Stuck on Neutral'') about Japan [from] the Economist...about Japan's post-1989 rebalancing, ...discusses why, in spite of every attempt, Japan has not been able supposedly to rebalance the economy and achieve any real growth during the two lost decades after 1990. Private consumption never took off to drive economic growth...After many years of excess investment driving growth, Japan's rebalancing process, which occurred after corporate, bank and government debt levels prevented the investment party from continuing, locked the country into many years of slow growth because it had to grind through years of debt-fueled overinvestment...it doesn't matter what individual policies we take to boost consumption if these polices don't in the aggregate represent a real transfer of income to the household sector, as they did not in Japan...Japan's experience suggests one of the risks China faces...Chinese household consumption will undoubtedly rise as a share of Chinese GDP over the next decade or two, but the process nonetheless can be disappointing for growth. It depends on lots of other moving parts, most importantly perhaps the change in investment and the speed with which income is transferred to households. And the change in investment might depend on debt capacity constraints and the extent of earlier overinvestment.

China Financial Markets; Japan's rebalancing; neutral; stuck; teach.

Mon 2008-08-04 00:00 EDT

London Banker: What's up with the covered bond push?

"Whenever Henry Paulson at Treasury, Ben Bernanke at the Fed and Shiela Bair at FDIC agree on anything, American taxpayers should check for their wallets...When the troubled bank nonetheless fails, our golden circle creditors get the good collateral in an expedited release from FDIC under its new policy statement. The FDIC is left with all the toxic waste assets and liability for depositor insurance claims, with no prospect of recovery"

covered bond push; London Banker; s.