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Prospects
An iconic billboard in the quintessential boom city of Shenzhen features Deng’s famous statement that China's “basic line will not waver for 100 years.” If Deng was right, we are less than one-third of the way into the era of “reform and opening.” But four challenges identified by Premier Wen Jiabao in 2010, that growth becomes “unbalanced, unstable, uncoordinated, or unsustainable,” threaten the boom. The key to balance lies in increasing the consumer share of GDP, allowing China to create a modern consumer economy. Stability will depend on the government's ability to address grievances as the gap between winners and losers widens. Coordination is the great test facing the ruling Communist Party, of whether it can manage the politics of growth without fundamental changes to the system. Sustainability is an issue that has global implications, as citizens of a warming planet watch anxiously to see if China is successful in greening the boom. The fifth great challenge, left out by Premier Wen, may be the external one: whether the world is successful in making room for China. |
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A Convertible RMB is Not Going to HappenPeriod: Prospects
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Click to expand What you’ve seen over the last 5 years, if you look at the leverage of this country, it’s gone like this. In 1999, total government debt including the MOF debt, the Ministry of Finance debt, the local government debt, everything, as much as everybody could determine, was around 5% of GDP. Now, if you look at all components of government debt, which includes the central government debt, policy banks, the Ministry of Railways -- which is not part of the budget -- the local governments and all of the un-written-off problem loans, it’s somewhere, easily, between 60 and 80% of the total GDP. Although people only think only about the Beijing MOF debt which is about 20% and they think that’s OK. They’ve built this place on leverage. Now, is this like Japan? People have asked that kind of question in the last few years. How can it be like Japan when Japan is like the size of Henan province, with about the same population? They can pave the entire planet here for the next 20 or 30 years and leverage themselves up, because there is no way that any foreigner, any hedge fund, any George Soros, can possibly short this place. That’s why I say that 1.7% of the financial assets are held by non-Chinese, namely us. That will not change. And all of this also suggests that the idea that the RMB will become convertible, not gonna happen. It also suggests that you’re not really going to have a consumer oriented society here because the one thing that allows you to do all this leverage is household savings. That’s the only real money in this whole place aside from foreign money. So, how can you change the fundamental parts of this financial structure right here without altering it completely it? So, these things that we’re all so fascinated by: the RMB’s liberalization, interest rates that mean something, consumption economy, these aren’t gonna happen anytime real soon.
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