Tom Pepinsky

Category: Current Affairs

  • 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.

  • Sensationalism

    Alert! Facebook is a Menace, Clerics Say! Muslim Clerics Declare Ban on Facebook!

    These are recent headlines from the Jakarta Globe, the newspaper that I get delivered to my hotel room every morning free of charge. I asked for the Jakarta Post, which is a better and more established paper, but there was a snafu, I guess. I have become increasingly frustrated by the sensationalist language that newspapers use in their headlines here.

    Why is this sensationalism? Because if you actually read the articles, rather than the headlines, you learn a couple of things. One is that "clerics" mean a limited number of clerics in East Java, not all Indonesian clerics (or even all East Javanese clerics). Second is that "menace" means "a problem for enforcing single-sex educational practices." Third is that "ban" means "declare it to be forbidden to use Facebook for things that are already haram (forbidden)" and "only for schoolchildren in their schools." So Facebook is not a menace, not all clerics agree, and the ban is not a ban. Details details.

    I should note that this is not a problem with just the Jakarta Globe or with coverage of Islam. Rather, I think that the Indonesian press does a particularly good job of making news out of nothing, and a bad job out of covering real news. The coverage of the upcoming presidential elections is an illustrative example. Reading the big newspapers here, you'd think that there's some sort of close three-horse race between the tickets. In reality, SBY-Boediono is going to cream the other two. No one seems brave enough to give a clear run-down of the likelihood of each ticket winning, or brave enough to write (outside of the opinion section) about the criticisms of the two other presidential pairings. When Mega-Prabowo declare that economic growth will average 10 percent a year under their five year term, without explaining how in the world they will achieve this, it makes front page news. The response from market watchers is buried in the business section several days later. Guess that type of stuff doesn't sell papers.

    I don't think that this is just a problem with Indonesian newspapers–of course American journalism can be sensationalist–but my sense is that even the best newspapers here are not as committed to telling it like it is as I would prefer. So let me respond in kind. TP Declares Indonesian Newspapers A Menace!  TP Refuses to Trust Indonesian Newspapers!