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10-08-2022, 08:51 AM
The boom and bust of capitalism is pronounced and sometimes devastating if one looks through history.
The story of John Law, 1929, great financial crisis tells us we are dealing with a system inherently volatile that produces both good times and bad. For Asians we are reminded of the pain caused by Asian Crisis during which many rich men were reduced to paupers.
If you look at all these crisis they were caused by debt. Debt would build up during good times and hurt you during bad times.
For this reason, prognosticators of doom often pointed to the high debt levels in the Chinese economy as signs of its impending death. The Chinese economy crashed multiple times without prolonged pain defying predictions of its critics. One example was the stock and property crash o 2015 that to down the Chinese Market rapidly inviting predictions of doom. 4yrs later the economy came back singing and dancing with property property prices at new highs. So what's the secret?
In the West, the government avoids moral hazard aka using tax payers money to bail out debt ridden companies. Remember Lehman Brothers? Bush was told if he did not bail them out the economy would collapse and collapse it did.
In China such bailouts are so routine the govt has 3 banks specialising in buying bad debts to bail out companies. One of them known as Huarong became so corrupt the CEO was executed. Without these bailouts, the sector can go into free fall like the property sector. It is a mistake to think tye Chinese government is not in full control of the situation. It is a deliberate effort to shrink the other sector and get rid of many debt ridden developers. When the government is happy with the cleanup, it will step in to put a floor to the downside.
The 2nd secret the Chinese use currency control. This create a duality that gives it flexibility to tackle internal economic crisis without restraints of a freely traded currency. For trade, the US Dollar dominates. This allows them to print as much Yuan as they want without bringing down the dollar Yuan exchange rate. Its an important tool they can use when the time comes.
Forecasting the Chinese economy using a normal template often gets you the wrong prediction.
The story of John Law, 1929, great financial crisis tells us we are dealing with a system inherently volatile that produces both good times and bad. For Asians we are reminded of the pain caused by Asian Crisis during which many rich men were reduced to paupers.
If you look at all these crisis they were caused by debt. Debt would build up during good times and hurt you during bad times.
For this reason, prognosticators of doom often pointed to the high debt levels in the Chinese economy as signs of its impending death. The Chinese economy crashed multiple times without prolonged pain defying predictions of its critics. One example was the stock and property crash o 2015 that to down the Chinese Market rapidly inviting predictions of doom. 4yrs later the economy came back singing and dancing with property property prices at new highs. So what's the secret?
In the West, the government avoids moral hazard aka using tax payers money to bail out debt ridden companies. Remember Lehman Brothers? Bush was told if he did not bail them out the economy would collapse and collapse it did.
In China such bailouts are so routine the govt has 3 banks specialising in buying bad debts to bail out companies. One of them known as Huarong became so corrupt the CEO was executed. Without these bailouts, the sector can go into free fall like the property sector. It is a mistake to think tye Chinese government is not in full control of the situation. It is a deliberate effort to shrink the other sector and get rid of many debt ridden developers. When the government is happy with the cleanup, it will step in to put a floor to the downside.
The 2nd secret the Chinese use currency control. This create a duality that gives it flexibility to tackle internal economic crisis without restraints of a freely traded currency. For trade, the US Dollar dominates. This allows them to print as much Yuan as they want without bringing down the dollar Yuan exchange rate. Its an important tool they can use when the time comes.
Forecasting the Chinese economy using a normal template often gets you the wrong prediction.
I, being poor, have only my dreams; I have spread my dreams under your feet; Tread softly because you tread on my dreams.
