Multi-Disciplinary Reading – Book Reviews

China’s Great wall of Debt, Dinny McMahon, 2018 – This was my second read on China, after Red Roulette. While Red Roulette had a insider’s perspective and lot of details that made it almost a thriller, this one is an outsider’s view and it shows. It had a lot of details though on the Chinese economy, its banks, local govt. structures, its state firms, shadow banks, corruption and the CCP

My notes –

• A lot of growth in iron ore mines in Australia in the past few decades have come up to finance the China’s boom. In return Australian govt. took a leap of faith to allow Chinese investments overseas. Today CCP’s capital flows into most major Western cities

• For decades, the West (United States and Europe) were the twin engines of growth and this caused a risk of both sputtering at once, as it happened during GFC

• Even in 2003, Japan was the main destination for Australian iron ore. Today 80% goes to China

• Chinese economy is driven by exports is a common misconception. It hasn’t been the case at least since GFC

• Post GFC, when growth came to shuddering halt, China launched a massive stimulus and the heavy lifting was done by banks (Not the govt. as it was in the west). The financial system lent vast amounts of money towards housing and infrastructure

• China’s total non-financial debt to size of its economy was 160% in 2008 but climbed to 260% by 2016, same as US (Today its 295%)

• Extravagant govt. buildings in China have more rooms than it has officials

• Land has been reclaimed from the sea for factories that haven’t been built. The country is dotted with factories that have never been used.

• Chinese debt crisis and collapse has been predicted at least since 2001. Gordon Chang in ‘01. Jim Chanos in ‘10 (on a treadmill to hell) and Soros in ‘14

• Australia has benefited economically from China’s rise than any other country. The mining boom gave way to farm boom as Chinese middle class bought more beef, seafood, wine, honey and dairy

• Since 2016, Xi has been trying to pare back the excesses and to structurally transform the economy

• Beijing is willing and able to intervene and kick the can down the road indefinitely, albeit at the cost of greater future pain (The West has done no better)

• A hedge fund that published a report that a Chinese Silver mining company (Silvercorp) wasn’t producing as much as it led its North American shareholders to believe was hit with a defamation suit (criminal as well as civil offense) and its executive jailed

• The detention center is about putting you in inhuman conditions to force you to sign a confession

• Chinese owners would fleece US investors who blindly overpaid for growth. Revenues were mis-stated by orders of magnitude

• Chinese hedge funds avoid scrutiny into state-owned companies as the govt. will go any extent to protect its interests

• China looks as though it embraced free market capitalism – there’s pvt. ownership, stock markets, mortgage loans, VC funds, auction houses, skyscrapers and high-end cars

• State capitalism is rampant as the govt. nurtures its own companies for capital formation and sends them abroad to buy up resources and strategically useful infra and also throwing subsidies at industries like robotics and semi-conductors, where it wants to be the global leader

• Pvt. companies can summon govt. thugs to do their bidding as in crony capitalism

• Markets thrive but the presence of govt. is ubiquitous – the interplay uniquely Chinese

• Bad loans were at 1% in ‘13, a metric no one believed in. They believed in make believe – transparency while it may be a good thing, may not be the right thing. Companies were allowed to hide until better times so they can be nurtured back to health – trading space for time

• “Trading space for time” is what the Chinese army did after losing Shanghai to the Japanese in WW-2. They withdrew far into the west, stretching Japanese supply lines while they gathered time to regroup and attack

• Why should China endure unnecessary pain if the authorities could just waive the rules for awhile?

• Chinese banks could avoid capital raise to cover for bad loans due to waiving of rules. Market never has accurate information to value bank shares (National interest warranted deceiving the market)

• Chinese official stats are for “Reference only”. What issues can be reported on, what words cannot be used in certain stories is circulated on a day-to-day basis by CCP

• No division of power among executive, legislative and judiciary. The party controls all three. Rules are simply tools for governance, not to be adhered to but rather to be applied or ignored, in service of given agenda

• The criminal code doesn’t say which law you violated. As long as your behavior is found to be harmful for the country, you can always be charged with something

• Party members (CCP) wear the party hat and govt. hat. The party always came first

• “Numbers make officials, so officials make up numbers”. Some provinces report economic growth faster than the country itself, for years on end

• Villages lie to townships, townships lie to counties and so on, all the way to State council (made up numbers are systemic)

• World’s biggest closed-dye hydraulic-press force, a 22k ton press (80k tons of force) could produce bulkheads, landing gear, aircraft carriers and mining tools is in Erzhong province

• Heavy press forges are vital to aircraft industry as they mold the metal through a die, instead of beating hot metal into shape. Bigger the force, lighter the components it can produce

• State firms want to build large passenger aircraft to take on the likes of Boeing and Airbus

• Chinalco spent $13b in ‘07 buying Rio Tinto shares so it prevent it from merging with BHP Billiton (State interests and Beijing foreign policy uses state firms)

• State firms produce 25% of all economic output and 1 in 5 jobs. State firms in Aluminum, Steel, Shipbuilding, oil companies, telecom firms etc. all are virtual oligopolies

• State firms have 60% of all corp debt while producing only 25% of output (most risky ventures under these.). Official govt. debt is low but state firms own it

• Evergreening of loans to state firms is the norm as zombie firms are kept alive

• Social stability is CCPs most imp. agenda. Improving online and offline surveillance and beefing up internal security is its preoccupation

• 25% VAT ensures companies are still contributing to state while being unprofitable (So unprofitable businesses never die as the cost of closing down is high)

• In China industrial land could take upto 25% of a city’s area (most parts of the world its 10-15%)

• Cement, aluminium, shipbuilding, steel, power gen, solar panels, wind turbines, construction machinery, chemicals, textiles, paper, glass, shipping, oil refining and heavy engineering suffer from serious overcapacity

• Constant, non-stop building is an addiction in China. There are at least 50 Ghost cities (Baidu researchers)

• If-you-build-it-they-will-come model taken to extreme. China’s housing can house 3.4 billion people, more than twice its population

• China provides large subsidies to companies like Foxconn, funding construction while also reducing their pension funding, shipping costs, VAT, corp tax

• All rural land belongs to village collective. There’s no pvt. ownership of land. Farmers use it under 30 yr leases (Easy expropriated by govt. officials)

• Between 2011 and 2013, China laid more Cement than US did during entire 20th century

• Real-estate accounts for 20% of GDP, provides 16% employment to urban population, 30% of loans. A slowdown in construction thus hit everything

• In Beijing people pay 20x their annual income vs 2.5x annual income in most parts of US (This sounds like cherry-picking)

• Typical pvt. businessperson keeps 3 sets of books – one for the banker, one for tax authorities and an accurate one for himself (occasionally a 4th for the spouse)

• Shadow banking barely existed in 2008. In ‘14 it had risen to 40% of China’s GDP. By’16 doubled to 80%

• Credit isn’t regulated by interest rates but by supply of credit. Govt. rations credit by telling banks how much they’re allowed to lend

• Banks don’t make loans themselves but facilitate it for a charge. So depositors money in WMP (wealth management products) bear the risk if loan goes bad

• During most booms, people are not only blind to the risks but they devise explanations for why risks don’t even exist

• If US banks are too big to fail, China’s depositors think no deposit is too small to be bailed out by govt.

• China’s banks are glorified pawn shops. They lend not based on company’s needs and cash flow but based on what its assets are worth. This collateral is worthless due to interlocking mutual guarantees

• Between ‘07 and ‘15, China is responsible for 63% of all new money created globally

• Construction of tallest skyscraper in the world has been synonymous with imminent onset of economic crisis (Empire State, Chrysler buildings, Petronas towers, Burj Khalifa preceded one)

• As of ‘16 China is building 25 skyscrapers taller than the Empire state. Of 100 tallest building under construction, 55 were in China

• Beijing’s commitment to financial stability in stock market collapse of ‘15 – preventing use of words like ‘slump’ or ‘collapse’. Nudging fund managers to only buy and not sell. Nudging the national team (state firms) to buy shares, arresting people for spreading rumours

• ‘02 – ‘12 ruled by Hu Jintao and Wen Jiabao is considered the lost decade. Environmental degradation, income inequality and corruption became worse

• Xi stifled dissent and consolidated power. Clamped down academia, media, NGOs and legal profession and became “Chairman of everything”

• Chinese people have and use a lot of cash. Fake receipts are readily available for sale to legitimise grey income

• China previously had quotas on what it could export to US but post joining WTO in ‘02, quotas disappeared and exports quadrupled (200 US textile factories closed)

• In ‘14 manufacturing was only 5% more expensive in US than in China. China’s endless cheap labour has reduced causing wages to rise

• China’s working age population started shrinking in ‘12. Will fall by 45m between ‘15 and ‘30 from 1b in ‘12. Further by 150m by ‘50

• China’s population is aging faster than anywhere in the world. From 7.7 working age adults per senior citizen in ‘15 to 4:1 by ‘30 and just 2:1 in ‘50 due to one-child policy

• China will remain stuck in middle-income trap without rise in population and increase in wage growth

• Supply-side economics (Reaganomics) is driven by corp-tax cuts vs demand-side economics by stimulating demand

• China needs to innovate its way to close the technology gap or it will remain an assembling economy (R&D spends already surpass Europe and US now in China)

• China has a disconcerting track-record of globally dominant in industries where it has no natural advantage (through subsidies so that even unprofitable industries can thrive)

• Only 15% of China’s land is arable and a 5th of that is heavily polluted

• China has generated 30% of global growth since GFC. China consumes about half of world’s iron ore. 41% of all lead, 51% of tin and Cu, Zn, Al and Ni. Any slowdown will adversely affect commodities and mining countries

• Party uses education to mold the youth. Schooling is about political control

• In theory, above a certain avg. level of income, a country’s middle class will agitate for great political rights – but China’s middle class have been politically acquiescent and genuinely supportive of CCP

It was an informative read but stopped at that, lacking insights. Great books vault that barrier. Also, a lot of what’s said is true about the US as well and the author while pointing to instabilities of the financial system in China ignores the fact that what the West has, hasn’t proved any better and the truth is no system dealing with mass human behavior ever will, long as we possess our primitive lizard brain. 8/10