Tom Pepinsky

Category: Asia

  • 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.

  • Greetings from Siem Reap

    As it turns out, our hotel in Siem Reap does have internet access, so we will be able to update from here.  Cambodia is really neat.  As we landed in Siem Reap, we flew over Lake Tonle Sap, which is a huge freshwater lake that produces a lot of seafood and allows for lots of wet rice cultivation.  The land here is very lush, much like Java, but the difference is that the land here seems totally flat.  So unlike Java and Bali, where terraced rice cultivation is the norm, the land is patchworked with regular old paddies.

    I didn’t think that this would be possible, but it appears to be actually hotter here than in Java.  It’s definitely more humid.  We went for a walk in Siem Reap’s Old Market (Psar Chas) at around 2:30 and were drenched immediately.  We don’t think that we’ve been this hot in Indonesia. (Although we remember the area inland from Yogyakarta as much hotter than Jakarta.  Maybe Southeast Asian Hindu-Buddhist complexes are just hot.)

    A couple of more interesting things.  First, the monetary system here has never really recovered from decades of civil war under the Khmer Rouge and afterwards.  So, dollars are accepted openly here.  But there are no coins as change.  So if you have bill for $6.50, you have to pay with a five dollar bill, a one dollar bill, and two thousand Cambodian riels.  This happened to us over lunch today.  The policy consequences of having a currency that no one trusts as a store of value are quite interesting, incidentally.

    Second, there are a lot of Westerners here.  When you go downtown to "sightsee," they are everywhere. The reason why we put sightsee in quotes is that Siem Reap, we have decided, has very little to offer for sightseers aside from its proximity to the temples at Angkor Wat.  The town just has markets that offer cheap goods and restaurants that cater to lager louts.

    Third, Khmer is an interesting language, closely related to Vietnamese but with a notable set of loanwords from the Malay/Indonesian family of languages.  We have noticed a couple:

    m’rech = pepper (related to merica in Indonesian)
    barang = counter for things that are shaped like sticks (the same as barang in Indonesian, which means the same thing)
    kampong = village (same as kampong in Malay)
    sala = snakefruit (related to salak in Indonesian)
    psar = market (related to pasar in Indonesian and Malay, which is
    borrowed originally from Turkish and which gives us the English word bazaar)
    pheasar = to speak (we hypothesize that this is linked to bahasa.  It is clearly not related to the Vietnamese word for language, which is tiếng, or Vietnamese for talk, which is nói)

    Fourth, we are happy to report that a college friend of TP’s, known for this blog’s purposes as J, will be joining us for the next couple of days.  We are going to meet him in about an hour, and will be touring the temples together tomorrow and perhaps the next day.