Signs mounting of traditional build-up to serious financial crisis, which is just being put off with another bout of easy credit
Despite the President’s call to shutdown overcapacity we are still seeing
crude steel production at all time record, and ports clogged with record inventories of iron ore
It [communist party journal Study Times] also said Xi [Jinping] used to carry 100 kg loads of wheat on one shoulder along a 5 km stretch of mountainous road.
Sunday Morning Post
- July 30
And that’s why they call him a strongman. It makes you wonder why he should be satisfied with the presidency of China when his country might long ago have entered him as its champion in the Crossfit Games.
What interests me more, however, in this report we carried of his early life is his unshakeable confidence in the Communist Party. I certainly cannot be the first person to ask whether his early career was perhaps lived in too narrow an intellectual cradle for the understandings he must master as president.
I particularly ask it because of his remarks at a financial work conference earlier this month in which we he told financial regulators they must anticipate and tackle risks that could lead to financial crises, such as those that sparked the stock market rout of 2015.
“Failing to detect financial risk is a breach of duty; spotting it but [doing so] without addressing risk is a dereliction of duty,” we quoted him as saying on Sunday’s front page.
Finance and risk. The two are inseparable. You might as well talk of knives without blades or trees without trunks. Take away risk and you don’t have finance. We don’t live in a world of such certainty.
What’s more, every attempt to reduce risk in any element of finance creates a moral hazard that only invites greater risk in the overall financial framework. Make an investment a certainty and all you get is bigger and wilder bets in similar investments.
That supposed stock market rout of 2015 was not a rout anyway. It was a one-year blip, a much smaller bubble than the fivefold boom and crash on the Shanghai market only eight years earlier.
Was it really a dereliction of duty on the part of regulators not to close the market in early 2015 when the authorities in Beijing were chortling about how greatly the general public was helping banks to finance China’s development and everyone was rejoicing in a market rocketing up day after day?
Any regulator who tried to stop it at that time would have lost his job in a matter of mere hours. Regulators cannot stop this sort of thing. The most they can do is catch the cheats and enforce some ground rules for financial arrangements.
Their powers are limited and certainly do not extend to foresight on when a market has gone up too far and should go down.
Xi has tasked his regulators with the impossible. They are certain to fail him.
He would do better anyway to look closer to home for the big risks. It may or may not be true that state direction is a good way of choosing the industrial initiatives on which a country should embark but it is certainly true that state direction does not know when to stop.
In Monday’s newspaper we reported the mainland shut down 42.39 million tonnes of crude steel capacity in the first half, equal to 84 per cent of its closure target for the whole year.
Yet my database tells me that crude steel production in June alone was an all time record of 73.2 million tonnes, almost five times as much as all of Europe combined. Even so the ports were clogged with a record inventory of 143 million tonnes of iron ore. Some shutdown.
And what is told in steel can be told in cars, cement, ships and across most key industrial sectors. There was some slowdown last year in response to worries about an overheated economy but everything is picking up again with the risks of off-the-scales overproduction spotted but not addressed.
Isn’t that what you labelled a dereliction of duty, Mr Xi?
What we have here is the traditional build-up to a serious financial crisis and it is just being put off with another bout of easy credit, which will only make the final reckoning worse yet.
But blame the regulators. Let’s teach them their jobs by making them trek 100kg sacks of grain uphill on one shoulder. That’ll learn ‘em.