Tom Pepinsky

Author: tompepinsky

  • Bearish on China

    I participated in a small workshop today on contemporary issues in financial policy in Asia. I was the only political scientist there–the other participants were either academic economists or analysts affiliated with some of the big banks active around here (RBS, Citi, etc.). What was most striking to me is how bearish the group was–and this especially includes the analysts–on China's long-term prospects. The general tenor of the discussion was something like this: we (meaning the world) has escaped the worst of the crisis, and for that reason governments and banks alike are congratulating themselves on a job well-done rather than taking a hard look at the sustainability of current practices. We know that this is a problem in the US and Europe, but no one is really being honest about what this means for China.

    The evidence of unsustainable financial practices in China is not direct, but it is quite suggestive. Between 2007 and 2009, private sector debt in China rose by 20%. That's a big rise in not a lot of time. By end-2009 private sector debt was over 150% of GDP…and if you think that sounds like a worryingly high number, it is. Now, clearly high and rising bank credit to the local private sector doesn't automatically produce problems, because China still seems to be chugging along. But if you look at these figures in the comparative-historical perspective, you see that this sort of rapid growth in domestic credit is nearly always an indication that some bad stuff is going down behind the scenes. We also see that market actors tend to ignore the signs of trouble as long as possible, because they believe that "this time is different," or because they believe that even if things are bound for a correction in the future, they are smart enough to get out right before the crash. We all know that China has problems with corruption, graft, and "non-economic motives" in the allocation of credit. It's just not plausible to believe that it is immune from the same consequences associated with such problems anywhere else in the world.

    The prediction that I heard is that sometime soon, Chinese banks are going to realize that they are overleveraged. That will lead them to rein in their lending activities to protect their balance sheets, which in turn will begin to starve the domestic real sector of cash. In the best case scenario, this just leads to a difficult correction. In the worst case scenario, the real sector correction exposes further problems in banks' loan portfolios, which generates further real sector problems, etc.

    So that's interesting, but not too specific of a prediction. As an academic point, though, what was really interesting was to hear the analysts talk about how their employers just aren't interested in hearing about the long-term unsustainability of China's credit expansion. From the employers' perspective, all they want to know is over their own relevant time horizons–that is, the next month or so–is China in trouble. And the answer to that question is, no. So while analysts and local economists are pretty bearish, the market makers are still doing business as usual, quite happily. I wonder if in five years we'll wonder how good of an idea that was.

  • Building Singapore

    Due to the relative lack of anything interesting, I will not be writing about Singaporean politics while I'm here. Suffice it to say, the news this morning reported that Minister Mentor Lee Kuan Yew went to China to have a nice dinner at Jiang Zemin's house, and that PM Lee Hsien Loong had a productive meeting with Indonesia's President Yudhoyono.

    But that doesn't mean I can't reflect on history a bit. So here goes. It is a peculiarity among American scholars of Southeast Asia to say that you "don't like" or "don't enjoy" Singapore. Part of it is that Singapore is so developed and modern (almost postmodern, really) that it doesn't really feel like Southeast Asia. There's no villages. You can drink the water right out of the tap. The subway is clean and organized and goes wherever you need to go, and moreover, it interacts seamlessly with the bus. Something like 1/3 of all residents of Singapore are foreigners…probably more if you count the many domestic workers. Basically everyone you meet speaks English.

    But there's something more than that. Rather than just indifference–sort of like what China scholars think about Hong Kong, which is quite similar–I detect an active disdain for Singapore among many SE Asianists. Many resist coming here, or complain about it in non-specific terms as a place that they "don't like." I've never shared that sentiment myself. I've always found Singapore to be interesting. It's not an old country, as independence from Malaysia came in 1965. When independence came, no one thought it was a viable political entity, a tiny, largely Chinese, English speaking island sandwiched between two really big non-Chinese neighbors. But it's worked out well for Singapore. And for someone like me who wonders how in the world some countries get to be prosperous while others don't, Singapore's amazing success over the past 40 years can't help but seem interesting.

    I thought about this as I rode across the island/country today on my way to the think tank where I'm based. It reinforced to me just how small the country is. Its land area is only 700 square kilometers total. At the widest part it's maybe 20 miles or so wide. Despite that, it has to have all the things that a regular country has, like for instance a training ground for its very large military. (From my hotel room I've been enjoying watching the Singaporean Air Force F15s practice their maneuvers.) Gazing out the window of the bus, I had to think, what were the Singaporeans thinking when they became independent? Sure, they had a better go of it than most newly independent countries, being located at a vital trade route, having had good institutions built under the British, and being small enough to govern pretty easily. But still, all that can give you some economic advantages, but doesn't build a state for you. And my impression is that the independence generation here had a laser-sharp focus on making sure that Singapore would be able to fend for itself as a country. These guys woke up every morning, went downstairs, and built a modern state. That's pretty cool to think about–and that's obviously flipping hard, given that few others newly independent states were anywhere near as successful, and a good number of them failed spectacularly.

    So given that Singapore was successful at the very thing that its leaders and its people feared the most, and at creating the type of prosperity that so many other Southeast Asians dream about, why the disdain for Singapore among my colleagues? I have a couple of ideas, but nothing conclusive. One is that Singapore is actually a relatively conservative place, both socially conservative and also quite materialist and certainly constructed to appeal to your average Australian or British tourist. Related to that, perhaps its fact that the ruling People's Action Party–formerly an explicitly socialist opposition party–morphed into a party of big business and single party, pro-establishment politics. Perhaps its the explicit classism that is rather evident at times (the people at ISEAS where shocked that I took the bus there). Perhaps its a romanticized version of what Asia is "really" supposed to be like, that is to say, exotic and strange, not comfortable and familiar. I'm not sure what it is. But even if you don't like Singapore because it reminds you of any other generic cookie-cutter modern megacity, I think it's unquestionably important to think about how Singapore got this way.