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 Good analysis of china's borrowed growth |
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BigSwingingD
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作者：BigSwingingD 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Article from Wall Street Journal
China's Borrowed Growth
By WEIJIAN SHAN
China's economy is a paradox. On one hand, it has been growing at an average annual rate of 8.6% since 1980, outperforming any other country at any time in history for such a sustained period of time. On the other, Hong Kong's Hang Seng China Enterprises Index, which tracks the stocks of some of China's most prominent companies, has fallen by one-third since its inception in 1993.
It's hard to understand how China can grow at such a record rate while investors lose by putting their money into the country's best listed companies. Even more inexplicable is the fact that the fastest growing economy has been and remains probably the most inefficient major economy in the world, as measured by the bad-loan ratio of its banking system.
At the micro level, if a firm makes chronic losses, it is likely to suffer from productive inefficiency. At the macro level, if resources continue to flow to such producers, allocative inefficiency arises from such misallocation. Both types of inefficiency are reflected in the level of bad loans in a country's banking system, to the extent bank lending represents the bulk of resource allocation in an economy. This measure is particularly applicable for China, since bank loans made up 97.8% of the total financing for companies for the first half of this year.
Foreign analysts estimate that the bad loan ratio of Chinese banks is about 50%, or twice the official estimate. That is arguably the highest of all major economies in the world. Even if you believe the official numbers, the Chinese banking system makes the largely insolvent Japanese banks look well capitalized by comparison.
This is why the economy with the highest growth rate in the world is also the most inefficient. This paradox gives rise to strikingly divergent views on China's future. Books with titles like "China's Century" and "The Coming Collapse of China" present plausible scenarios.
Of course, China is not the first country to turn the accepted logic of economics on its head. Once upon a time, there was another economy whose rapid growth confounded the experts. Although the Soviet Union's inefficiencies were also well known, it became the world's second largest economy. Then it literally collapsed, with the gross domestic product of the post-Soviet states falling almost 50% during the early 1990s, to less than 10% of the size of Japan's. Today, the Russian economy is only about one-third the size of China's. So was the Soviet growth real?
In retrospect, the Soviet economy was simultaneously real and unreal. After the Soviet Union broke up and foreign products flooded in, demand for Russian-made products dropped precipitously. Without demand, much of the productive assets became worthless overnight. The economic power of the former Soviet Union evaporated like a puff of smoke as its doors opened. So growth was real when the economy was closed, but turned unreal when exposed to foreign competition.
Closing the doors, however, is a necessary but not sufficient condition to achieve high growth in an inefficient economy. North Korea is as closed as it gets, but its people are starving. The Soviet Union also had a high savings rate, another necessary condition.
Economist Paul Krugman caused a controversy in 1994 with his observation that the growth of Singapore's economy could be explained by increases in measured inputs, particularly the supply of educated labor and capital, but not by productivity increases. The difference from the Soviet model was that Singapore was already fairly efficient.
Similarly, China enjoys a high household savings rate -- at more than 40%, one of the highest in the world. But unlike the former Soviet Union, China has become a relatively open economy, with foreign products ubiquitous throughout the country. And products "made in China" are also found in every department store in the West. Trade represents more than 40% of China's GDP, higher even than Japan.
The other necessary condition for Soviet-style growth, autarky, does not apply to China. However, one part of China's economy does remain closed. Capital, with the exception of hot money, is essentially free to come into the country, but it is not free to leave. Chinese citizens can buy foreign products and services, but they cannot convert their money into foreign currency for the purpose of investing abroad.
That is crucial to explaining China's growth, as a simple model shows. Consider an economy with only three players: a firm, a bank and a worker. It is an open economy which exports all it produces and imports all it consumes. Its currency is freely convertible under the current account, but its citizens are not permitted to invest capital abroad.
In the first period, the firm invests $10 in production facilities, which it borrows from the bank. It receives an order for 100 units of some widgets and is paid $90 in advance, or 90 cents each. The firm pays the worker $1 for each hour worked and it takes the worker an hour to make a widget. So labor costs the firm $100 for the entire job. The firm organizes production and makes delivery to order. Not counting capital expenditure, it makes a loss of $10 in this period. The worker saves $40 of his $100 earnings and spends the rest on imported stuff.
The bank began with $10 in equity and $10 in assets consisting of the loan to the firm. But after accepting the $40 savings deposit from the worker, at the end of the first period its balance sheet shows assets and liabilities of $50 each, with $40 in cash.
In the second period, the firm receives a larger order, for 200 units of widgets. It increases production capacity with a capital expenditure of $15, $5 more than required to meet current demand, as it wishes to build more capacity for the future. But the price has fallen so it will be paid 85 cents for each unit produced, or $170 in total.
Let's also assume the firm only needs to pay $190 for labor, because there has been a productivity gain so that it now takes only 0.95 of an hour to make a widget. The firm needs $205 to organize production, requiring financing for the difference of $35. The bank lends the firm $35 and ends up with a period-end balance sheet of $126 including $76 deposit by the worker as he continues to save 40% of his earnings.
Notice that this is an inefficient economy: The firm loses $10 in the first period and $20 in the second, for a cumulative loss of $30 over two periods, not counting capital expenditure. Yet the firm can count on the bank to continue lending.
This inefficient economy has achieved remarkable growth. At the end of the second period, production capacity is up 150%, GDP 100%, personal income 90%, bank assets 152%, and savings 90%. Personal wealth has reached $116. There is a productivity gain of 5%. In addition, external trade has risen sharply and the country enjoys a healthy trade surplus which swells its foreign exchange reserves.
More complexity can be added to the model without changing the basic results. Allowing the bank to pay and charge interest will simply mean that the firm makes bigger losses, the bank makes bigger loans and the worker accumulates savings a bit faster. Creating a government which collects taxes and spends its revenue by investing in the firm either directly or through injecting capital into the bank makes no difference to economic growth, except that part of the personal savings of our worker-cum-taxpayer becomes "public wealth." The government will even be able to run a budget deficit and inject more money into the economy than it receives from taxation, further boosting growth.
Now replace the firm, the bank and the worker with unprofitable state-owned firms, state-owned banks and a large labor force, and you are staring at China's economy. Growth can continue as long as households continue to save at a high rate and the government maintains capital controls so those savings aren't allowed to flow out of the country in search of better returns associated with more efficient economies.
In this model, removal of capital controls would create a financial crisis. The bank cannot hope to collect its loans from the firm to pay back the depositor because the firm has made only losses. Without another source of capital, the bankruptcy of either the bank or the firm will bring down the other. To keep itself going, this country will have to go to the International Monetary Fund for help.
This is essentially what happened to Korea in 1997-98. After two decades of nonstop economic growth driven, to a large extent, by relentless and unprofitable capacity expansion fueled by cheap lending of Korean banks, it seemed that Korea's success was real and sustainable. Seoul removed capital controls in the mid-1990s. The failure of Korean banks to further lend and to collect their loans in the wake of capital flight in 1997 bankrupted many, as well as their chaebol customers.
The IMF provided a rescue package on the condition that Korea restructured its banks. Eventually, Korea spent $130 billion, or more than one-third of its GDP, to clean up its banking system. To this day, the Koreans call this debacle the "IMF Crisis," as if the IMF was to blame for it.
For Korea, the wealth destruction in terms of write-offs of bad loans, equity lost in bankruptcies and capital injected for bailouts dissipated years of economic growth. What had been real growth came unraveled and Korean citizens paid the cost.
In general, an inefficient economy produces lower average returns on capital in real terms than a more efficient one if capital is not allowed to flow freely. This can be seen in the persistent differential between the stock prices of Chinese companies traded in Chinese and overseas markets. For example, shares of Jiangsu Expressway bought on the domestic stock exchange are almost three times as expensive as the same shares traded on the Hong Kong Stock Exchange. The average price differential of all dual-listed Chinese companies is about two-to-one. In other words, the average return on capital in China, given the same risks, is about half of that outside of China.
China is probably unique in the world today in possessing both of the necessary conditions for an inefficient economy to achieve fast growth. But these conditions also make China's growth simultaneously real and unreal.
Mr. Shan is a partner of Newbridge Capital, a private equity firm.
作者：BigSwingingD 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 Good analysis of china's borrowed growth -- BigSwingingD - (21134 Byte) 2003-9-04 周四, 04:15 (1169 reads) - WSJ 也不可全信 -- 小嫖虫 - (398 Byte) 2003-9-04 周四, 21:57 (323 reads)
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