Monday, June 18, 2012

"China is a kleptocracy of a scale never seen before in human history "

Hedge fund manager and top financial blogger John Hempton looks at the Chinese economy - basically describing how Chinese workers, forced by demography (one child policy) to save for their old age, and limited by the state in their investment options (to bank accounts with a below-inflation return), are robbed by inflation - the money going at low interest rates (negative real rates) to State Owned Enterprises - which are then looted by the elite.

The Chinese banks are the finest deposit franchises in human history. They can borrow huge amounts at ex-ante negative real returns.

And those deposits are mostly lent to State Owned enterprises.

The SOEs are the center of the Chinese kleptocracy. If you manage your way up the Communist Party of China and you play your politics really well may wind up senior in some State Owned Enterprise. This is your opportunity to loot on a scale unprecedented in human history.

Us Westerners see the skimming arrangements. If you want to sell kit (say high-end railway control equipment) to the Chinese SOE you don't sell it to them. You sell it to an intermediate company who on-sell it in China. From the Western perspective you pay a few percent for access. From the Chinese perspective – this is just a gentle form of looting.

And it is not the only one. The SOEs are looted every way until Tuesday...

A normal business – especially a State Owned dinosaur run by bureaucrats – would collapse under this scale of looting. But here is the key: the Chinese SOEs are financed at negative real rates.

A business – even a badly run business – can stand a lot of looting if it is (a) large and (b) funded at negative real rates.Those negative real rates are only possible because there are copious bank deposits available at negative real rates to State controlled banks.

People saving for their old age, then being robbed by high inflation to enrich a financial elite who benefit from negative real rates of interest? Thank God it couldn't happen here!


"... a broad consensus of Chinese economists says the country is overdue for another big push to encourage private enterprise and to foster a shift toward a more consumer-driven economy. The challenge, they say, is turning back China’s domineering state sector. But that seems increasingly unlikely. Publicly controlled enterprises have become increasingly lucrative, generating wealth and privileges for hundreds of thousands of Communist Party members and their families. And in a clear sign of its position, the government has moved to limit public debate on economic policy, shutting out voices for change. "


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