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梦里有梦
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游客
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作者：游客 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Is China’s growth real?
China’s economy is a great paradox.
On one hand, it has been the fastest growing economy in the world rising 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 has fallen by 1/3 since it first began in 1993.
In no other country at any time in the world history one would lose money investing in a portfolio of the best companies a country has to offer if that economy grows anywhere near the pace of China. In fact, that kind of growth usually turns everyone, even the dumbest dart throwers, into a smart investor in the stock market.
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 average bad loan ratio in its banking system.
At the micro-level, if a firm makes chronic losses, it is likely to suffer from productive inefficiency. At the macro-economy level, if resources continue to flow to such producers, allocative inefficiency arises from such misallocation. Both types of inefficiencies are captured in the form 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 as 97.8% of the total financing for companies was bank loans for the first half of this year.
Foreign analysts estimate that the bad loan ratio of Chinese banks is about 50%, or about twice the official estimate. That is arguably the highest of all major economies in the world. Even by official estimates, the Chinese banking system makes the largely insolvent Japanese banks look vastly over-capitalized.
It defies conventional wisdom in the extreme that the economy with the highest growth rate is also the most inefficient.
In this sense, China’s growth is as beyond belief as a polio patient winning Olympic gold medal in heavy-class weightlifting. No one in the history of mankind has ever accomplished such a feat, except in the movie Forrest Gump, who, exhibiting no signs of post-polio syndrome, still pales in comparison as he plays only the easier stuff like football and Ping Pong.
This paradox gives rise to such opposing views on the future of China’s economy as reflected in book titles ranging from “China’s Century” to “the Coming Collapse of China.” Unable to reconcile such seemingly sharp contradictions and yet unwilling to accept either of the extreme views, many China observers have questioned the truthfulness of China’s published statistics. Pundits point to numerous data inconsistencies, such as the large gap between the aggregate of provincial numbers and those released by the central government and the significant mismatch between economic growth and energy consumption.
It seems, however, that the Chinese data have largely stood the test of international scrutiny. The debate was put to rest last year by Andy Xie of Morgan Stanley, who convincingly shows that the increase of China’s economic size of 5.5 times in real terms in the past 20 years is supported by verifiable data, such as the even faster growth in household savings and the more rapid growth in China’s exports which are corroborated by import statistics of its trading partners.
If China’s growth is real, what then is the secret of China’s growth which seems to turn accepted logics of economics on its head?
Once upon a time, there was another economy whose rapid growth seemed at odds with mainstream economic theories as its inefficiencies were also well-known. That was Stalin’s Soviet Union, which grew to become the second largest economy in the world, only after the US.
But it literally collapsed after the breakup of the USSR with its gross domestic products, or GDP, falling almost 50% in early 1990s to less than 10% of Japan. Today, Russian economy is only about 1/3 of China’s in size. Had the Soviet growth been real?
A friend of mine used to visit Russia often after Gorbachev’s perestroika. He always noticed a big sign hanging in front of the TV screen in his hotel room. Paying no attention, he would remove the sign before turning on the TV to watch it. One day, by chance, he read in an English paper that the biggest cause of fire in Moscow was televisions. Puzzled and somewhat alarmed, he took a Russian friend to check out the sign. It read: “Please keep a safe distance while watching as this TV set may explode at any time!”
Now the Soviets bought exploding televisions because they did not have any better choice. Imagine Soviet factories churning out increasing number of exploding televisions year after year. That was real production and real growth. In fact, thousands of Soviet factories produced increasing quantities of all kinds of shoddy products. They also exported many of their products including such large items as automobiles and aircraft to Eastern European countries and China. The Soviet economy was real and so was its growth.
But when foreign goods invaded after the Soviet break-up, the demand for Russian made products dropped precipitously. Why would a Russian consumer still wish to buy an exploding television if he could buy a cheaper Sony? Without demand, much of the productive assets became worthless overnight. The economic power of the former Soviet Union just evaporated like a puff of smoke as its doors opened.
In retrospect, the Soviet economy itself was simultaneously real and unreal. It was real when closed but turned unreal when foreign competition came in.
Closing doors, however, was a necessary but not sufficient condition to achieve high growth of an inefficient economy. North Korea is as closed as it gets, but it starves its people. The Soviet Union had the advantage of a high savings rate which was another necessary condition.
Paul Krugman caused a controversy in 1994 with his observation that the growth of Singapore 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 is that Singapore “has already been fairly efficient.”
China enjoys the similar favorable condition of 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. Products “made in China” are also found in every department store in the west. Trade now represents more than 40% of China’s GDP, a ratio larger than that for Japan. One of the necessary conditions for the Soviet growth, autarky, does not apply to China.
One part of China’s economy, however, remains closed. That is capital control. Chinese citizens can buy foreign products and services, but they cannot convert their money into foreign currencies for the purpose of investing abroad. Does that make any difference?
This question may be best answered through a simple model. 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, or the account of trade and services, but its citizens are not permitted to invest their 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 in advance for $90, 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 begins with $10 in equity and $10 in assets consisting of the loan to the firm. But by accepting the $40 savings deposit from the worker, its balance sheet shows assets and liabilities of $50 each at the end of the first period 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 the 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. It only needs to pay $190 for labor, because there is 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, or $30 cumulative loss over two periods, not counting capital expenditure. Yet, the firm can count on the bank to continue to provide 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 rises sharply and it enjoys a healthy trade surplus which swells its exchange reserves.
More complexity can be added to the model without changing the basic results. Allowing the bank to pay and charge interests will simply mean that the firm makes bigger losses, the bank makes bigger loans and labor accumulates his savings a bit faster. Creating a government which collects taxes and spends its revenue on either investing in the firm 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 substitute the firm, the bank and the worker for unprofitable state-owned firms, state-owned banks and the labor-force, you are staring at an economy a lot like China’s.
The moral of this story is that it is plausible for an inefficient economy to achieve real growth. There are two necessary conditions. The first is high savings rate, which is a natural condition. The second is capital control, which is an artificial condition. Suppose our worker for some reason stops saving, the growth will stop when the bank runs out of excess cash to loan to the firm. The growth will also stop if savings are allowed to flow out of the country in search of better returns associated with more efficient economies.
Removal of capital control will thus create a “financial crisis.” The bank cannot hope to collect its loans from the firm to pay back the depositor because the firm has only made losses. Without another source of capital, the bankruptcy of each of the bank and the firm will bring down the other. To keep itself going, this country will have to go, well, perhaps to International Monetary Fund, or IMF, for help.
This, essentially, was what happened to Korea in 1997-98. After two decades of non-stop economic growth driven, to a large extent, by relentless and unprofitable capacity expansion fueled by cheap lending of Korean banks, it seemed that the Korea’s success was real enough and fail-proof. Korea removed capital control in mid-1990s. The failure of Korean banks to further lend and to collect their loans in the wake of capital flight bankrupted many among them as well as their chaebol customers. IMF came to the rescue with a condition that Korea restructures its banks. Eventually, Korea spent $130 billion, or more than 1/3 of its GDP, to clean up its banking system alone. To this day, the Koreans call the debacle “IMF Crisis,” as if 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, wiped off years of economic growth. What had been real growth came unraveling and its citizens ultimately paid the costs.
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 persistent price differentials in the stock prices of the Chinese companies whose shares are simultaneously traded in the Chinese and overseas markets. For example, the price for domestically listed Jiangsu Expressway is almost 3 times as expensive as the same stock traded on Hong Kong Stock Exchange. The average price differential of all dual-listed Chinese companies is about 2 to 1. In other words, the average return on capital in China for the same risks is about half of that outside of China.
China is probably unique in the world today by 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.
It is real because with capital control, the high savings rate of China translates into high investment rate, through banks, propelling relentless capacity expansion, particularly by the state-owned sector. Such investments produce rapid and verifiable growth in asset formation, personal income, savings and exports, along with and proportional to the increase in the size of the economy, although, critically, Chinese firms need not to be profitable.
It is also unreal. The misallocation causes great waste in scarce resources. For example, the Chinese state-owned sector only contributes to less than 30% of China’s industrial output but accounts for more than half of the country’s fixed asset investments. The price for such inefficient growth is paid in the accumulation of bad loans in Chinese banks. Standard & Poor’s, an international credit rating agency, estimates that it will cost some $518 billion, or more than 40% of China’s GDP, to clean up China’s banking system. These costs plus the equity write-off of those companies which will go bankrupt without continued funding from banks translate into years of negative growth. China’s growth therefore can be regarded as borrowed at very high costs which will need to be paid sooner or later.
In fact, the concept of “borrowed growth” explains almost all observed Chinese data inconsistencies except man-made ones. For example, if one builds a new factory but leaves it idle, GDP goes up but energy consumption does not.
Suppose China lifts capital control and allows RMB to become freely convertible. It will likely trigger a capital outflow. That will endanger state-owned banks as well as those highly leveraged but unprofitable state-owned companies. Even if the government bails them out, banks will no longer be able to finance unprofitable firms. Not only will the wings of China’s growth be clipped, it will not fly again until both banks and firms are made truly competitive on their own.
Can capital control sustain China’s “borrowed growth?” The answer is no because the other necessary condition, high savings rate, will likely decline as the population ages in about ten years time, if not sooner, for two reasons.
First, Chinese baby boomers, born after the Korean War in 1950-60s, will begin to retire. The much tighter birth control policy after the baby-boomer years ensures that the ratio of the number of workers supporting pensioners will drop off a cliff then. As China’s pension system is substantially under-funded, the aging of the population will mean less saving but more withdrawals.
Second, the Chinese are culturally much more frugal than, say, the Americans, due to historical uncertainty and volatility of their livelihood. But this culture is changing. The younger generation consumes more, saves less and has even learned to consume on borrowed money. No country can sustain household savings rate of more than 40% and China will not be an exception.
Capital control is, ultimately, very costly as it distorts efficient resource allocation. The cost of cleaning up the banking system will have to be borne by citizens sooner or later. The longer such distortion is allowed to continue, the more costly it will be in the future.
Furthermore, China has joined the World Trade Organization or WTO. Under the WTO framework, China has committed itself to letting foreign banks in to conduct local currency business without restrictions beginning from 2007, or in just about three years. Foreign banks are unlikely to fund inefficient producers. Unless China’s own banks adopt sound banking practices, it will become difficult for them to compete for deposit money. Therefore, the game will be over for inefficient producers.
Finally, China has committed itself to the full convertibility of the RMB without which many of China’s economic ambitions will not be realized. For example, Shanghai has long aspired to be an international financial center. But it will not be such until China allows free flow of capital across borders, a prerequisite for any international financial center.
If so, does it mean that the Chinese economy will eventually collapse, when the payback time inevitably comes for the “borrowed growth?” Yes, if China’s economic policies continue to favor, protect and subsidize inefficient firms through its already weak banking system. It will just be a matter of time.
There are reasons to be cautiously optimistic, though. To be sure, the Chinese economy is not well, contrary to popular perception, and it requires urgent treatment including major surgeries. However, anyone who considers the Chinese economy to be terminally ill might as well call it a walking dead, since he would have certified it dead 25 years ago when it was in infinitely worse shape. It is anything but. It has changed almost beyond recognition in the intervening years. It used to be a closed, Soviet style command economy not even quite capable of producing exploding televisions, but it now competes with Sony in America. The Chinese economy is more viable and dynamic today than at any time in its history. After all, China is full of surprises, as we all know.
In the past two decades, the successive Chinese leaderships have not just thrown stimulus measures at the economy to maintain growth; they have also pushed for reforms. As a result, the Chinese economy is far more efficient, especially on the production side if not as much on the side of resource allocation, than when reforms first began in 1978. As recently as 1991, a US manufacturing worker was 40 times more productive than his Chinese counterpart. By 2000, that gap was narrowed to only 10 times. Chinese labor productivity has increased by 4 folds in the past decade. Whereas it was a centrally planned economy dominated by the state-owned sector, it is basically a market economy, although still troubled by legacies of the past.
By comparison, China’s achievement in “structural reforms” puts Japan to shame. By absolute amount, Japanese banks have more bad loans than anyone else in the world. On top of it, Japan’s domestic savings have fallen by 23% per year for the past five years alone, to a household savings rate of only 3%. Capital outflow has made Japan the largest creditor country in the world by far. Without the ability to retain capital, all the massive stimuli have failed to return Japan to the path of growth. Koizumi won the election by promising structural reforms, which, as even a school child in Japan knows, is the only way out for the economy. Yet, Japan’s continued failure to take tough actions has frustrated the world and its own revival.
True reforms are painful. The benefit is for the future but the pain, especially using taxpayers’ money to clean up banks, is immediate. This is not exactly the kind of risk-reward profile politicians look for, except in public speeches. A leadership must have the vision and, more crucially, the resolve to pursue it in the face of guaranteed political opposition. In this regard, China has proven to be more determined and decisive than, say, Japan. The question only is whether it has the will and wherewithal to go all the way.
It does seem that the Chinese reforms have picked up pace, with the decision by the top leadership at the last-year’s Communist Party congress to privatize the vast majority of state-owned firms, to shut down the hopeless ones and to clean up banks. It remains to be seen if China will succeed in all of these.
Reform of the banking sector is the most fundamental of all reforms. Without sound banking practice, banks will continue to create bad loans and breed inefficient corporate customers, state-owned or private. A weak banking sector produces inefficiencies in private economies as well, as evidenced by other Asian economies. It come as no surprise that most of China’s private companies are poorly run, in addition to being subscale and speculative. In fact, more than 70% of all bank loans made to small and mid-size companies eventually become bad. Most of bank scandals in China involve unscrupulous private entrepreneurs. As a result, banks are reluctant to lend to private firms as they tighten credit approvals. Lending on the basis of credit quality is the ultimate way to improve corporate efficiency as companies will be forced to focus on cash-flow in order to access bank capital.
Realizing that the WTO clock is ticking, Chinese policy makers have turned their attention to cleaning up banks. A number of important measures have been taken. A large amount of non-performing loans have been transferred to several government financed asset management companies, which have successfully sold first batches to foreign buyers of distressed debts. Banks are ordered to have their books audited by international auditors and to reveal as well as to reduce bad loan numbers.
However, much, much more needs to be done. All Chinese banks are woefully under-capitalized and to recapitalize them will stretch government finances. While it is possible for banks to reduce bad loan ratios by quickly growing its loan book, or the denominator of the ratio, the challenge is how to prevent new loans from turning bad as they near maturity. To do so, banks must build a credit culture to lend on the basis of cash-flow as opposed to collaterals, relationships or policy guidance. This is a lot harder to do than adopting risk control procedures of best international banks, as it requires training and proper incentive systems. But all will fail if the government continues to interfere in lending and personnel decisions because of perceived political and policy necessities. There is so far no sign that the government is prepared to relinquish those powers.
Chinese banks have been poorly regulated. Not only there exists the incestuous relationship between banks and firms under state ownership, owners of a few joint stock banks habitually borrow more loans from their banks than the capital they put in. Some of these loans sour as well. Such conflict of interests creates moral hazard and puts banks at risk. Many private businesses clamor loudly for the right to set up more private banks. But without proper regulation prohibiting self-dealing, private banks are in danger of becoming private coffers of their owners, which is the reason why America’s Bank Holding Company Act prohibits non-financial companies from owning banks and vice versa.
The good news is that banking regulation is expected to tighten and substantially improve, with the establishment of the new banking regulatory commission. Both the central banker, Zhou Xiaochuan, and the top banking regulator, Liu Mingkang, are tough-minded banker-turned-regulators of impeccable integrity with intimate knowledge of international best practices in banking and regulation. They are world-class regulators to get the job done.
The challenge to Chinese banks is to find good credits to lend to. There has been an explosive growth in retail lending. Although there are more bad credits than good ones among domestic firms, China is blessed with a large “foreign funded” sector which operates side by side with the inefficient state-owned ones and have already transformed China into a dual economy. China has brought in $400-$500 billion cumulative foreign direct investment in the past 10 years, more than the rest of Asia combined. Foreign firms are responsible for 65% of China’s three-fold increase in exports in ten years. Most foreign funded firms are well run and competitive, and would make good credits.
But most of them will tell you that China is a very tough market. In the two decades before 1997 Asia crisis, well-capitalized American and European firms had gone through a process of downsizing and “core-competence” building to have improved their competitive edge. Ironically, it was precisely during this period of time they collectively lost significant market share to highly-leveraged and over-diversified Korean chaebol and Japanese keretsu whose competitiveness was largely derived from access to cheap financing by their home banks. Similarly in China, bad banking practices will continue to breed incompetence and inefficiency, which crowd out good credits, at the expense of both the banks and the economy. To date, few foreign firms compete successfully in China’s domestic market and most only manufacture in China for exports.
There are however signs that this distortion is in the process of being corrected. As the pressure to reduce bad loans intensifies and regulation tightens, Chinese banks have begun to favor foreign firms, which report a surge in lending by Chinese banks to them in the first half of this year. The leveling of the playing field in bank lending will go a long way to address the distortion in resource allocation in the economy.
In conclusion, if the Chinese economy looks surreal, it is. In a way, China is like a world champion on performance-enhancing steroids, financed by banks wasting household savings. This, at the expense of long-term health, cannot last. Only by freeing itself from bad habits will China really be able to grow healthy and compete like everyone else without the aid of the crutches of capital control. The process to get there is not without pain, to be sure. But the sooner it does it, the better it is for its future, as the heavy costs of a “borrowed growth” compound by the day.
作者：游客 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 一篇挺有意思的文章，不知是否已有人转过 -- 梦里有梦 - (53862 Byte) 2003-10-31 周五, 21:13 (2137 reads) - 梦破之后谁来买单？ -- DCF - (572 Byte) 2003-11-01 周六, 09:31 (346 reads)
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