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| China-Japan-Koreas |
| Decades of unresolved debt pressures China's finances, yuan |
| 2005-05-20 |
| China is highlighting its debt problems in order to deflect criticism of its exchange rate regime. Despite China's undisputed growing economic stature, the country remains mired in billions of dollars (could well be trillions) in debt that is pressuring its currency and financial system, the ministry of commerce says. The fiscal hangover from China's command economy days means the yuan faces significant pressure from hidden deficits worth trillions of yuan in non-performing loans (NPLs) and unfunded pension liabilities, it said. Although China has massive foreign reserves -- 659 billion dollars at the end of March -- the country's overall fiscal deficit is huge, the ministry said in a quarterly economic assessment report of the nation, posted on its website. These massive obligations will hamper efforts to keep the yuan firm over the longer term, said the ministry. China's target deficit for 2005 is 300 billion yuan, down 19.83 billion yuan from last year's fiscal budget, but it is at the same time facing "trillions of yuan in non-performing assets and pension fund liabilities in the country's financial system." The ministry did not give any specific figures but on Monday the China Banking Regulatory Commission reported that outstanding NPLs in the banking sector in the first quarter fell 3.56 billion yuan to 1.83 trillion yuan. China's pension liabilities are estimated to range in the hundreds of billions of dollars. Central bank governor Zhou Xiaochuan also warned this week that efforts to deepen bank reform would be tested during the next economic downturn and expressed fears that a debilitating problem with NPLs could return. The country has attempted to build a nationwide social security fund to take over the previous pension obligations of state-run companies, which took on retirement benefits of China's workers in the past. That system is no longer sustainable as China adopts market-driven policies and many state companies go out of business. Although the National Social Security Fund plans to invest up to one billion dollars overseas to boost its returns, the ministry called on Beijing to funnel foreign exchange reserves into international markets as well on behalf of the social security fund. Separately, the ministry defended China's record by saying that the nation may have a large trade surplus with the United States but the overall surplus with the rest of the world was not that big. "China's annual trade surplus is not that large and this shows that the yuan is not greatly undervalued," it claimed. Internal debt and its quality is not directly related to the exchange rate, although a banking crisis would undoutably drive own the level of the Yuan. Washington and several other trade partners have complained that China maintains the yuan at an artificially low level to give its exports an unfair advantage. And they are right. |
| Posted by:phil_b |
| #11 If China is buying up oodles of dollars to keep the ratio up, let's crank them out. We'd have to be sure not to cause massive domestic price increases, but we could trade a bunch of paper for shoes or whatever they're selling. Jackal, That's exactly what we've been doing. That's what those $659 Billion of foreign currency reserves are, lots of paper. And it is also just about the amount of bad loans in the Chinese banking system. When this baby blows, let's hope we've got somebody as good as Greenspan running the Fed. |
| Posted by: Mrs. Davis 2005-05-20 21:05 |
| #10 lex: What's mandarin for bubble? Shui pao. |
| Posted by: Zhang Fei 2005-05-20 20:31 |
| #9 Imagine that: China's economic statistics aren't very transparent or accurate. What's mandarin for bubble? |
| Posted by: thibaud (aka lex) 2005-05-20 16:01 |
| #8 Didn't Tom Clancy write a book about all this a few years back? He also wrote about the Islamic terrorist before 911. Is he the power behind all this stuff? |
| Posted by: Jack is Back! 2005-05-20 15:22 |
| #7 Well, OK, then, how about this: If China is buying up oodles of dollars to keep the ratio up, let's crank them out. We'd have to be sure not to cause massive domestic price increases, but we could trade a bunch of paper for shoes or whatever they're selling. Or we could just wait until they attack Tawain and say "we're repudiating our debt to you." |
| Posted by: Jackal 2005-05-20 12:37 |
| #6 mhw: The above tells you why China doesn't want to revalue the Yuan. If the Yuan goes up by 10%, China effectively loses $60 billion. Actually, it's not that simple. These currency losses aren't really a concern - they're a cost of doing business. Just about every other exporting country in East Asia has taken similar losses over time. The reason they take them is because it's a cheap and efficient way of subsidizing in-country domestic and foreign investments.* Every exporter benefits from the subsidy of a cheap currency. Foreign exporters who build plants in China to take advantage of the cheap currency help to keep domestic exporters honest. * The point of accumulating US dollars is to keep the yuan undervalued, and Chinese exports competitive. Think of the foreign exchange losses as a universal subsidy to every company that exports from China, domestic and foreign. It's much more efficient than sponsoring a particular industry, like Malaysia is doing with its national car project. Because foreigners can benefit from the exchange rate subsidy by building plants in China, inefficient Chinese producers are driven out. The benefit from this is that any plant that is built in China will be price-competitive on a global basis, and be able to export everywhere, meaning that they will generate jobs not just from domestic Chinese consumption, but from foreign consumption as well. This strategy isn't original to the Chinese. The Japanese pioneered it, and its use spread to the rest of East Asia, where it is still in use, before being adopted by China. The Chinese have proven to be quick studies. |
| Posted by: Zhang Fei 2005-05-20 11:40 |
| #5 Ed, thats not really the issue. The USA could bring down the yuan exchange rate at any time by offering to buy yuan at a higher rate than the fixed rate. There are two possible outcomes. One is currency drains out of China and they are forced to revalue and the USA makes an enormous profit ala George Soros, or China repudiates its currency and plunges into chaos. Its a high risk game to say the least. |
| Posted by: phil_b 2005-05-20 10:13 |
| #4 Two differnet exchange rates do not work. Let's say: China 10yuan/$1, USA 5yuan/$1. Currency trader takes his $1 and buys 10yuan from China, then sells that for $2 to the US. Profit $1. Money for nothing, zero risk, and completely unsustainable. |
| Posted by: ed 2005-05-20 09:38 |
| #3 China says the Yuan is fixed at X to the dollar, not using a floating market rate. OK, what if we say "Nope. It's X/2 to the dollar." They can define their currency in terms of ours, but we can't do the reverse? |
| Posted by: Jackal 2005-05-20 09:31 |
| #2 China has massive foreign reserves -- 659 billion dollars at the end of March The above tells you why China doesn't want to revalue the Yuan. If the Yuan goes up by 10%, China effectively loses $60 billion. |
| Posted by: mhw 2005-05-20 09:04 |
| #1 If they float the yuan, they start a banking crisis. If they start a banking crisis, millions get put out of work. If millions are out of work, they're going to find someone else to lead the country other than the Communist Party. Yuan revaluation ain't gonna happen, not anytime soon. |
| Posted by: gromky 2005-05-20 04:56 |