How China can rewrite the balance sheet for its own gain
Andrew Sheng says the central government, grappling with an internal debt issue, can afford to transfer some state assets into the people’s hands, which would create wealth
How can this be normal? Twenty-nine countries with roughly 60 per cent of the world’s gross domestic product have monetary policy rates of less than 1 per cent per annum. The world is awash with debt – over US$230 trillion, or roughly three times world GDP. To finance their large debt and deal with deflation, both the European Central Bank and Bank of Japan are experimenting with negative interest rate policies. If these do not work, look out for helicopter money, which means central bank funding of even larger fiscal deficits. Either way, at near-zero interest rates, the business models of banks, insurers and fund managers are broken.
Negative interest rates are causing a major problem in the global economy
The problem is that no one can ascertain whether exceptionally low interest is a symptom or a cause of deep chronic malaise. An exceptionally high debt burden can only be financed by exceptionally low interest rates. The Fed now feels confident enough to raise interest rates, which means that the US asset bubbles will begin to deflate, spelling trouble for those who borrow too much in US dollars. As Nomura chief economist Richard Koo asserts, the world has followed Japan into a balance sheet recession, with the corporate sector refusing to invest and consumer/savers too worried to spend. The solution is to rewrite the balance sheet, which most democratic governments cannot do without a financial crisis.
Japan’s central bank must wake up to economic realities
Like Japan, China’s dilemma is an internal debt issue of the left hand owing the right hand, since both countries are net lenders to the world. The Chinese national balance sheet is almost unique because the financial system is largely state-owned, lending mostly (about two-thirds) to state-owned enterprises or local governments. The Chinese household sector is also low-geared, with most debt in residential mortgages.
Unlike the US federal government, which had a net liability of US$11 trillion at the end of 2013, the Chinese central government had net assets of US$4 trillion. Thus, unlike the US where households own 95 per cent of net assets, Chinese households own roughly half, with the corporate sector (at least half of which is state-owned) owning 30 per cent, and the state the balance.
Sceptics would say the Chinese statistics are overstated, but even if the state net assets are halved (land valuation is complicated), there would be at least US$7.5 trillion of state net assets (net of liabilities) to deal with any contingencies.
Furthermore, unlike the others, the People’s Bank of China derives its monetary power mostly from very high levels of statutory reserves on the banking system, which is equivalent to forced savings to finance its foreign exchange reserves of US$3.2 trillion. Thus, the central bank has more room to deal with domestic liquidity issues.