Read on Twitter
1/8
Important article which supports the point I have been making for the past few months, which is that lending discipline is incompatible with a GDP growth target. "Chinese government entities responsible for funding hundreds of billions of dollars... https://www.ft.com/content/9688e712-b0fc-49b3-bb04-6272d887c366
Important article which supports the point I have been making for the past few months, which is that lending discipline is incompatible with a GDP growth target. "Chinese government entities responsible for funding hundreds of billions of dollars... https://www.ft.com/content/9688e712-b0fc-49b3-bb04-6272d887c366
2/8
in infrastructure projects," the article starts, "are struggling to raise cash after a series of defaults by state groups rocked the country’s credit markets."
The resulting credit crunch, the article continues, "has raised concerns that defaults at state-owned...
in infrastructure projects," the article starts, "are struggling to raise cash after a series of defaults by state groups rocked the country’s credit markets."
The resulting credit crunch, the article continues, "has raised concerns that defaults at state-owned...
3/8
enterprises are spilling over into other parts of an economy whose recovery from coronavirus has been supported by infrastructure spending."
Of course they are. The purpose of allowing insolvent borrowers to default is to discipline banks and bond investors into no...
enterprises are spilling over into other parts of an economy whose recovery from coronavirus has been supported by infrastructure spending."
Of course they are. The purpose of allowing insolvent borrowers to default is to discipline banks and bond investors into no...
4/8
longer lending to borrowers who use the proceeds nonproductively. But as long as Beijing insists on setting a target GDP growth rate that exceeds the real underlying growth of the economy, local governments and SOEs must be able to invest unlimited amounts of resources...
longer lending to borrowers who use the proceeds nonproductively. But as long as Beijing insists on setting a target GDP growth rate that exceeds the real underlying growth of the economy, local governments and SOEs must be able to invest unlimited amounts of resources...
5/8
in infrastructure projects, even if, as is increasingly the case, these do not create enough economic value to justify the spending.
They cannot continue to invest in these projects if banks suddenly become unwilling to make uneconomic loans – in the past the banks...
in infrastructure projects, even if, as is increasingly the case, these do not create enough economic value to justify the spending.
They cannot continue to invest in these projects if banks suddenly become unwilling to make uneconomic loans – in the past the banks...
6/8
only lent to these projects because of implicit government guarantees. It is not a surprise that many years of these guarantees have undermined the ability of Chinese banks to play their primary role of allocating capital efficiently. Moral hazard does that.
only lent to these projects because of implicit government guarantees. It is not a surprise that many years of these guarantees have undermined the ability of Chinese banks to play their primary role of allocating capital efficiently. Moral hazard does that.
7/8
But you can't eat your cake and have it too. A GDP growth target requires moral hazard to support the rising debt burden that results from lending into non-productive investment. Because Beijing seems to have no intention to get rid of GDP growth targets, the...
But you can't eat your cake and have it too. A GDP growth target requires moral hazard to support the rising debt burden that results from lending into non-productive investment. Because Beijing seems to have no intention to get rid of GDP growth targets, the...
8/8
regulators also cannot get rid of moral hazard, and so I am pretty sure that eventually they will once again step in and resolve the bond market turmoil in favor of moral hazard.
regulators also cannot get rid of moral hazard, and so I am pretty sure that eventually they will once again step in and resolve the bond market turmoil in favor of moral hazard.
