Satyajit Das: Potemkin Villages – The Truth about Emerging Markets

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”

Martin Gilman (2010) No Precedent, No Plan: Inside Russia’ 1998 Default; MIT Press, Cambridge, Massachusetts

Victor C. Shih (2008) Factions and Finance in China; Cambridge University Press, Cambridge, Massachusetts

Carl E Walter and Fraser J. T. Howie (2010) Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise; John Wiley, Singapore

According to myth, Russian minister Grigory Potyomkin ordered the erection of fake settlements, consisting of hollow facades of villages along the Dnieper River, to impress Empress Catherine II, about the value of her new conquests during her visit to Crimea in 1787. More than two centuries later, emerging market nations have borrowed the strategy. These three books provide insights into the Potemkin-village-like structure of emerging economies.

In “No Precedent”, Professor Gilman, a former International Monetary Fund (“IMF”) staffer and experienced Russian hand, focuses on the 1998 default of Russia on its debt. “No Precedent” is covers the chronology of the Russian default. Professor Gilman provides a highly readable description of the Russian financial crash with default on domestic treasury bills, sharp devaluation of the Ruble, and a three-month freeze of foreign bank payments.

The greatest insight, though not necessarily a surprising one, is the lack of institutional structure in post Communist Russia as well as the lack of infrastructure and expertise to deal with the opening up of the economy after 1989. The lack of political structure and leadership is evident: “The problem on the government side was that no one was clearly in charge.” Professor Gilman identifies the lack of information and absence of policy coordination. The finance minister and the head of the Russian Central Bank do not talk to each other. People without official government positions frequently make crucial decisions, often by default. “No Precedent” also provides insight into Russia’s recovery and the rise of the siloviki (shadowy military and security forces) and Putin.

For practitioners who have experience in emerging markets or under in extremis situations , the insights will ring very true. As they say, all battle plans dissolve during the first exchanges with the enemy.

Russia’s default provides useful insights into the current problems of many European sovereigns. Problems of tax collection to maintain a functioning state able to meet its financial obligations are not dissimilar to those of some peripheral European countries. Russia’s recovery from default and it financial rehabilitation were driven by devaluation of the Ruble and luck (higher oil prices). With the first option probably unavailable in the near term, it seem troubled European economies will need more of the latter. Greece, I am told, makes very good chess sets.

Professor Gilman’s favourable views of the IMF’s role, while understandable (IMF head Michel Camdessus provides a foreword), appears a little self-serving. Despite this minor criticism, “No Precedent” is well worth reading, complementing Chrystia Freeland’s “Sale of the Century” as a record of this stage of Russia’s modern evolution.

Political economist Dr. Victor Shih and bankers Messrs. Carl Walter and Fraser Howie focus on China and its banking system. Dr. Shih’s “Factions and Finance in China” focuses on the underlying political drivers that shape China’s domestic banking system. Dr. Walter and Mr. Howie’s “Red Capitalism” focuses on the financial structure of China’s banking system and its evolution over the last 20 years. Both analyses bear out the subtitle of Dr. Walter and Mr. Howie’s subtitle – Fragile Financial Foundation of China’s Extraordinary Rise.

The analysis in these two books reaffirms the non-market nature of China’s domestic economy and the over riding, paranoid controlling role of the Chinese Communist Party over any activity. The central purpose of the regime’s constant presence in the banking sector is to further two objectives: firstly, assuring depositors of the safety of their money, and secondly access to money to manipulate economic outcomes. Policymakers, frequently inexperienced in functioning market economies, seize and maintain control over financial policies to control credit. This allows the use of financial resources to provide short term apparent fixes to the economy. At a personal level it allows individuals to gain promotion and power. Camouflaged in superb state of the art infrastructure, markets are “primitive”, lacking basic mechanisms for allocating capital and pricing risk.

As Dr. Shih sums up: “”Although particular financial outcomes or control over the banking sector were not the ultimate objectives of factional politics, the banking sector became an important means of political survival in China. With its vast store of money from increasingly prosperous depositors, the banking sector became a victim of its own success as the party leadership… increasingly saw banks as a bountiful source of political resource… the political elite’s need for a highly fungible policy and political resource – money – led to a persistence reluctance to liberalise the banking sector beyond state control. Banking policies were made to bolster the short-term strength of both generalist and technocratic factions with little regard to long-term consequences.”

Despite the commentariat’s speculation about “capitalism with Chinese characteristics”, the Chinese financial system, at least, emerges as a relic of Soviet era bureaucracy, where Borgia court intrigues substitute for decision making. Perhaps, there is little difference between the Chinese banking system and Wall Street after all.

The historical background provides insight into China’s recovery from the 2008 crisis. Predictably, the State instructed the banks to lend vast sums to restore growth to target levels. Based on previous experience, the lending, much of it secured over land, will result in large NPLs (non-performing loans). In 1999, NPLs were 39% of total loans of Chinese Banks. Between 2001 and 2007, the major banks spun off $480 billion in bad loans into government sponsored Asset Management Companies (“AMCs”) to prepare them for initial public offering to raise capital. Most of these NPLS remain unresolved, being rolled over with Government guarantees indefinitely.

The central importance of bank depositors from ordinary Chinese to the entire system of financial games also raises questions about the willingness of China to increase domestic consumption. The absence of these deposits would destroy a central pillar of the system of patronage and control dominated by the Chinese Communist Party. The structure also focuses attention on the productivity of investments, fuelled by bank lending.

Both books also highlight the myth of low debt levels in China. Dr. Walter and Mr. Howie argue that actual government debt levels, properly measured, are not 20% of GDP but closer to 76%.

The puzzling thing is investor’s willingness to ignore these deep fault lines in the popular narrative about the China growth story. The reason is provided by Stanley Fischer, now Governor of the Central Bank of Israel but at the time at the IMF:

One has to wonder how people can both have been investing at triple digit interest rates and expecting that in the end the West would find the money to enable Russia to continue to pay. Surely, they should have understood that the markets were trying to tell them something. Actually, there may be an explanation. The people who did not expect Russia to be able to pay were already out of the market. Those who remained in the market were the optimists, who thought that somehow the market had got it wrong. Those were the people who appeared genuinely shocked when Russia could no longer pay.

The relevant question was not whether Grigory Potyomkin’s villages were fake. The real question was always whether Empress Catherine believed them to be real.

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  1. skippy

    Counter argument…whom…will pay off in the end, not whom looks truthful today.

    Skippy…the Potyomkin villages on the north side of DMZ or the 12 divisions south vs. 24 divisions north…which is Potyomkim…um.

  2. john haskell

    1. Instruct Russian government to overvalue ruble to “fight inflation”;
    2. Become confused as Russian exporters, esp. oil sector, become uncompetitive;
    3. Further confusion as tax collections fail and economy begins to seize up, urge increases in tax rates;
    4. Government defaults and expels you from country;
    5. Blame institutional immaturity for failure to execute your genius plan
    6. Absent your “assistance,” Russian Central Bank reserves increase from $10 billion to $200 billion; economy grows from US $160 billion to $1 trillion in a decade;
    7. Write book.

    1. Parvaneh Ferhadi

      He.he. Truly capitalist, isn’t it. You help someone to get in trouble (for a fee, of course) then you help them out of trouble (for another fee of course) and then you write a book about it (for still another fee, of course).

      Another indication that capitalism never really solves any problems, it just creates new business opportunities to be taken advantage of.

    2. stelios theoharidis

      ‘A little self-serving’ that is a brilliant.

      So we call it lobbying in the USA they call it corruption in Russia. The only difference being that there is some semblance of competition in our form of lobbying, although that competition is dominated by those with the financial wherewithal. We just have more groups vying and more coin spent.

      The inability of academics, IMF/WB personnel, or their agents to put privatization into the context of widespread corruption and concentration of political and economic power in Russia was a stunning failure. The notion that it wouldn’t have happened any other way due to the nature of Russian institutions or lack thereof is absurd. The counterfactual would have simply been not allowing privatization to occur in the first place until such institutional depth and breadth had developed.

      They will remain in their cushy academic/institutional positions as will the architects of the Iraq war and all of the other individuals responsible for the great blunders of the last few decades, because their failure benefited the wealthy at the expense of the poor.

  3. attempter

    Problems of tax collection to maintain a functioning state able to meet its financial obligations…

    Begging several questions there, aren’t we?

    It’s also funny how it’s univerasally agreed that no matter what happens in Russia, some kind of tyranny is needed. Different ideologues may dispute the details of what kind of tyranny it should be – Tsarist, Stalinist, neoliberal/robber baron, Putin modified neoliberal (kind of a national neoliberalism, in the same vein as the old national socialist idea) – but they all agree that actual democracy and economic self-determination is out.

    1. Ivan Karamazov

      There’s a fascinating journal article by Alfred Rieber on precisely this subject. He argues (and I agree) that the nature of Russian government and politics is predetermined by the geography and demography of the country itself.

      Russia is:
      – a vast and underpopulated place with poor communication links and permeable borders,
      – filled with ethnic groups who have their own ideas about anything and everything,
      – surrounded on all sides by neighbors who have frequently been hostile and downright aggressive, with devastating consequences.

      Much of the country’s “expansionism” and autocratic governance can in fact be better characterized as insecurity. Russia expands not because of some innate cultural drive implanted by Ivan IV. They expand because given its position on the Asian steppes and the north European plains space and time are the only defense. This also creates a need for a disproportionately powerful military – and government revenues to support it – which is only possible in an autocratic regime.

      It’s a fascinating article, but it’s not possible to summarize all of it here…

      1. attempter

        Sounds similar to several Stratfor essays I’ve read on the subject.

        I don’t discount such arguments out of hand. I’m well aware that one of the reasons it’s so much easier to advocate anarchism for America is its relative geographical invulnerability, while it may not be so simply in Eurasia. We’ve discussed that at my blog a few times. (Although Mahkno provided proof of concept that it can work there even under civil war conditions.)

        But I notice that those who make such arguments seem prone to deny that neoliberalism itself was one of those foreign aggressors from which Russia needed to protect itself.

        1. Ivan Karamazov

          It’s not an argument you’ll find me making. I’m not of the opinion that Western-style capitalism is an appropriate political solution for every place on the planet.

          In a lot of ways ‘neoliberalism’ is just a lump term for a variety of different systems patched together over three or four centuries in Western Europe and North America. These systems may have been mutually compatible, and shared some common characteristics, but to throw them all together as one blurs some important distinctions. To apply such a system haphazardly to other peoples and places ignores their historical and cultural context. Russia has always had an autocracy, and it’s always had corruption. The Russian people are the only ones likely to change that, ever.

          I’ll also add that neoliberalism came at a time when Russia was in a unique state of cultural vulnerability. After the nihilism of the Brezhnev years everyone wanted to believe in something. They decided to believe in West German magazine ads – Mercedes-Benz and vacations in Andalucia. Well, it didn’t quite go that way. When you learned all you ever needed to know about modern capitalism from Radio Free Europe, that can happen.

          1. attempter

            I wasn’t saying you were making that argument, but referring to how Stratfor and other Western Realpolitik types don’t seem all that “realist” about neoliberalism itself. (Although they do at least usually omit blather about the US seeking to “spread democracy” or nonsense like that.)

            My definition of neoliberalism (and that of others who use the term rigorously) is that it’s the strategy and practice of terminal stage capitalism (i.e. where “growth” and textbook “profit” are no longer possible) seeking to morph back into full feudalism through oligopoly, kleptocracy, radical corporate empowerment, deregulation, privatization, gutting all non-thug government, smashing unions; that it does all this using sham pseudo-democracy and some liberal politics as cover; that it relies mostly on brainwashing, debt as social engineering, fraudulent liberalism, and general social atomization to enforce conformity, rather than police repression. But it will deploy the latter more and more.

          2. Otter

            It is possible that insistence on rigorous definitions leads only to interminable disputes over definitions.

            Actions founded on inaccurate definitions may well become inaccurate themselves and require correction, of both definitions and actions. But at least there are actions which might be corrected.

            There is anecdotal evidence that the only way to find out if a rigorous definition is correct, or even rigorous, is to act on it and see how the results differ from those you expected.

      2. PrinceOf Thebes

        own ideas about anything and everything,
        – surrounded on all sides by neighbors who have frequently been hostile and downright aggressive,

        Love it

  4. kievite

    In “No Precedent”, Professor Gilman, a former International Monetary Fund (”IMF”) staffer and experienced Russian hand, focuses on the 1998 default of Russia on its debt. “No Precedent” is covers the chronology of the Russian default. Professor Gilman provides a highly readable description of the Russian financial crash with default on domestic treasury bills, sharp devaluation of the Ruble, and a three-month freeze of foreign bank payments.

    I love the term “experienced Russian hand” as for IMFers.
    What kind of experience those hands have is another question.

    Some useful information can be found at:


    1. kievite

      Here is an interesting historic document: a letter to Johnson’s Russia List from Adil Rustomjee (Yale University).

      From: (Adil Rustomjee)
      Date: Thu, 6 Aug 1998 13:18:14 EDT
      Subject: Role of foreign advisers in
      the Russian Privatization Program.

      From: Adil Rustomjee
      Yale University
      135 Prospect Street 
      New Haven, CT 06511

      Dear David,
      Many thanks for your superb news service. Johnson’s Russia List is fast becoming an excellent resource for those who work, who have worked on, or who just share a fascination with that disturbing country. I am writing this letter to humbly suggest a research topic that should be of great interest to JRLs readers. It is a subject that deserves better treatment than that received to date. The topic itself is the exact role of foreign advisers in
      the Russian Privatization Program.
      It is a marvelous tale waiting to be plainly told. The Russian Privatization Program, despite its subsequent vilification, ranks as one of the great experiments at social engineering in the twentieth century. It attempted an authoritative allocation of property rights – and consequently of power – within society on a scale never attempted before. It is therefore a very significant historical process, more significant in the long reach of events than even Stalin’s collectivization campaigns of the 1930s. It deserves its own Robert Conquest. 
      The process itself went through two distinct phases – the voucher phase, and what for want of a better word, we call the “loans for shares” phase. It is the “loans for shares” phase of the program that has attracted the most attention, primarily because of its spectacular abuse by Russia’s oligarchs. The real story is in the first voucher stage of the process and the dubious principles it was based on. 
      The entire voucher program was a product of foreign economic advice. Consider the basic timeline. The Soviet Union itself was dissolved in December 1991. In June 1992, the crucial document governing the voucher privatization effort came out – the State Privatization Program. This seminal document outlined the basic concepts behind the voucher phase of the program. It also rationalized what became a state sponsored giveaway of Russia’s national patrimony to the country’s managers. The implementation of the State Privatization Program document took a little over two years. By June 1994, Anatoly Chubias , Russia’s privatization chief, was announcing the end of the voucher program. In a scant two years, Russia had gone from a communist country with no private sector, to a country with a private sector – that on paper at least – was larger than Italy’s !!! Such progress could never have been possible without substantial foreign economic advice. It is a commonplace that privatization is essentially a “learning by doing” process.
      Russia could never have gone through a learning curve in such a short time span. Its reformers basically rubberstamped a scheme conceived by Western economists in the crucial 6 month period between December 1991 and June 1992. 
      Yet despite this, the precise story of the economists behind the entire effort has not been told. Good attempts have been made by Janine Wedel and Anne Williamson – and I will discuss them later – but from a technical standpoint, the story has yet to be told well. 
      Who were these advisors and what did they achieve? Three groups of actors may be identified – academic economists, bureaucrats from the World Bank, and Western consulting firms. A close examination of the interaction between these three groups itself will offer interesting insights into the birth and dissemination of ideas. For the major ideas behind the Russian program came from a group of academics – many associated with Harvard. These ideas were picked up in the early years and became established “transition economics”
      orthodoxy at the World Bank. The substantial implementation of the basic ideas was carried out by consulting firms like the Big Six working (often) on USAID contracts.
      This is as it should be. Academia is usually the source of the most original thinking on economics. International bureaucrats – particularly those associated with the World Bank – are surprisingly timid and cautious people. They are institutionally incapable of boldness – and great audacity was called
      for in the Russia of 1992.
      Was this boldness misplaced? I believe it was. A rational examination of the process will, I suspect, lead to a damning indictment of Russia’s foreign advisors. They created desolation and called it reform. The defining feature of the program was based on remarkably dubious ideas. Foremost among these was the belief that privatization was a series of payoffs – or bribes, as one of its leading advocates, Harvard’s Andrei Shleifer, called it – to various ” stakeholders” in the program. Given an uncertain legal environment and some
      appropriation of state assets by these stakeholders, – euphemistically referred to as “spontaneous privatization” – , better to legalize what was believed to be a trough feeding frenzy. This was the program’s dominant idea. 
      There is little empirical evidence from the early years about the exact extent of ” spontaneous privatization”. Anecdotal evidence abounds, especially from many near – hysterical accounts of the early 90s but the actual empirical evidence is slender. The decisions to sell a great nation’s patrimony – a one shot historical phenomenon with irreversible long range implications – were basically conceived within a six month time frame by a bunch of frightened foreigners, using dubious assumptions, with little basis in empirical understanding. Astonishing. 
      The actual privatization was accomplished through basically giving away large segments of Russian assets – and consequently cash flows – to these stakeholders. The most notable insider stakeholders – the managers – ended up the biggest winners. They ended up owning most of Russian industry. This august group, more often than not, makes the Marx Brothers seem like models of German efficiency. For a variety of reasons, insider-owned firms are very inefficient, and indeed a long list of papers from the Bank – Fund complex testifies to this. Consequently, Russia is today reaping the whirlwind of its privatization policy. The long delayed supply-side response of the economy, that is supposed to be led by these insider-owned firms, simply refuses to happen. 
      To round out this stupidity ( and to make it theoretically neater), the advisors had to deal with the problem of insider ownership. They dealt with it in time honored economist fashion – they assumed it away. This was done by trotting out that most venerable of economic propositions – something called the Coase Theorem. In a series of seminal papers written at Chicago in the thirties, Ronald Coase reached a blindingly obvious conclusion on property rights. He proved that the initial allocation – or misallocation – of property rights would not matter as long as those rights could be traded till they found their highest valued end use. In other words, the advisors told the Russians, “Sure, we’re making second-best or third-best policy choices on privatization , but hey guys, it doesn’t matter. Through the magic of Coase, even if we misallocated the rights, they’ll trade up to their highest valued end user, and we’ll all live happily ever after “. Consequently, nothing mattered except getting the assets away from the government (depoliticization) and into the “private sector”, thereby allowing
      the Coase Theorem to work its magic.
      The Russians believed this nonsense. The problems with using Coase as a rationale were commonsensical : too much monopoly power in the Russian economy and the fact that Coase himself never had anything remotely resembling Russia in mind, when he formulated the theorem. More crucially, capital markets which would be needed to trade property rights to their highest valued end use, were nonexistent or nascent, and continue to be so. One marvels at the Russians’ own capacity for advice of this nature. My comfort is philosophical : It has often been said of the Russians, that they exhibit in extreme form, certain universal characteristics of the human condition.
      Perhaps this tendency to extremes applies to their propensity for social engineering too.
      In response to critiques of their advice, the foreign advisors resort to a “burden of proof ” defense. In other words, they say, ” What a pity it’s a mess and had to be this way, but you’ll have to prove it could have been otherwise”. It is this “proving otherwise” that is a key issue. ” Proving otherwise” would require a person with substantial economic expertise. Unfortunately most of the critiques of the advisors in Russia have come from people outside the economics community, which on Russia is quite tight knit.
      Janine Wedel and Anne Williamson have made good first attempts . But given the enormity of the catastrophe in Russia that the advice has wrought, the definitive account will have to be from a person with some economic stature. 
      Who were these people anyway ? They include, Wedel and Williamson point out, Andrei Shleifer a Harvard economics professor, Jonathan Hay a freshly minted Harvard Law graduate, and Makim Boycko who was their man in Moscow. Shleifer, a Russian йmigrй who remains a tenured professor at Harvard, must have possessed the great advantage of speaking native Russian. In December 1991, Shleifer on a World Bank consultancy authored a paper titled Privatization in Russia – First Steps. It is, I believe, the first systematic attempt at outlining the program’s defining feature – privatization as a series of payoffs (or bribes as he called it) to key stakeholders in the process.
      Later explications of the basic idea may be found in articles he co-authored with Robert Vishny on the process. Both the unpublished document and later articles remarkably parallel the basic philosophy of the State Privatization Program of June 1992. 
      A sense of moral outrage over the effects of their policies – while a great temptation – has to be avoided at all costs. This is especially difficult when one considers that the principal protagonists – Andrei Shleifer and Jonathan Hay – are under investigation for alleged insider trading and conflicts of interest in Russia. [ GAO and USAID having found that they “abused the trust of the US government ” etc ]. The temptation might therefore be to focus on that entire shabby episode as Wedel and Williamson have done ( in part, but only in part). There is no need for this. The charges are unproven. Besides the amounts Shleifer and Hay are accused of improperly dealing in, are a pittance, compared to the wholesale thievery their ideas sanctioned. The real story is in the voucher scheme they designed and implemented. Told coldly, rationally, and solely concerned with the truth, it will still be a great story. Behind the story after all, loom the long shadows of the millions of Russians whose lives were effected by these disastrous policies. They deserve the truth. 
      Will the story be told with integrity. I am afraid not. There are too many reputations and too much credibility at stake. The usual candidate would be someone of stature in academia. This is not really an option. The old Kremlinologists have been largely rendered irrelevant by the pace of events and are struggling to retool themselves. The younger economists who work on Russia, who have access to the data and hands-on experience, are the least likely candidates given the devastating outcomes of the policies they advocated. Self serving rationalizations with little intellectual integrity are all that can be expected from this group. Witness for example, Anders Aslunds’ comic absurdity “How Russia became a Market Economy”. If Russia is a market economy, then I, sir, am a monkey’s uncle ! Finally it would be too much to expect the protagonists themselves – Shleifer and his collaborators – to say ” We were wrong, terribly wrong”. An old man named Robert McNamara looking back on his life, said that about a war that ended twenty five years back, and look at the condemnation that brought him. It would be too much to expect Shleifer and the others – all reportedly in their late thirties and early forties – to make such an admission.
      The World Bank is another candidate, but they will distort the tale. The Bank’s division that does such studies – the Operations Evaluation Department – will use the standard bureaucratic boiler plate it excels at. Besides the Bank itself picked up the substantial ideas and policies from the Harvard group, and has its own credibility at stake. While some hand wringing can be expected, so can a less than zealous concern for the truth. Besides, even if it is honest, the drama of the story will be lost in the telling. 

      Source material may not be a problem. The basic documents, in all probability, can be found at the World Bank , Harvard, and USAID. A whistle blower might be necessary at the Bank and at Harvard. Interviews with the key protagonists would also help. The problem is none of them are talking much – either to the press or to a potential researcher (legal concerns raised by GAO or USAID investigations may be a reason). They might talk some years later – as MacNamara did after Vietnam – but that would entail a long wait. 
      The effort calls for a person with the technical acumen of a Milton Friedman, the long historical sweep of a Jim Billington, and the aloofness of a Padma Desai. It also calls for substantial intellectual integrity. While on the subject of the ideal candidate, it would not hurt if the person had something of a literary touch – just a touch ( this is Russia after all)!!!!! Consider for example, Tolstoy as the supreme example. In War and Peace , he looks at the Teutonic military advisors who advise Napoleon at Borodino. How Tolstoy mocks them – these pedants who reduce war in all its fog and chaos to absurd geometric theorems and matrices. Were Shleifer and gang a little like that too? Perhaps. Russian privatization will after all, prove as significant to Russia’s future, as Borodino was to Russia’s past, and the fog of economics hangs thick on the country. If Tolstoy could analyze and mock Napoleon’s foreign advisors, and reveal them for what they were, why can’t our ideal candidate do the same for Chubias’ ??
      Is there such a person out there?
      I’d appreciate a discussion. 

  5. Max424

    China basically has four Federal Reserve banks, the United States — theoretically — has only one (Point for China!).

    China’s four big state banks — though they may be be corrupt and inefficient — are working for China. They do their level best, in other words, for the good ole nation-state.

    Can the same be said for the main bank of the United States? First, you would have to make a case that the Federal Reserve is a part of the United States. No easy task there. Second, you would have to make a convincing argument that the Federal Reserve is operating in best interests of the United States. This, in my opinion, would be an almost impossible task.

    It would be easier to make a case that the Fed is doing their “level best” to ruin the United States at the behest of an elite gang of international criminals (I hate to say it, but that really does seem to be where most of the evidence is pointing).

    In the final analysis, ChinaBank Incorporated is at least $3 trillion in the black — so how bad can they be doing? ChinaBank is rich, and ChinaBank is going to get immeasurably richer.

    The US, in contrast, by the open — bi-partisan!!! — admission of its leaders, is broke, bankrupt and insolvent. It is also $14 trillion in the red. And the group that must support all this debt, and prop up dozens of insolvent banks and mega-banks besides, is not the Fed, in the end, it is American households. And American households, mostly as a result of 30 years of corrupt and malicious banking practices, are themselves saddled with more than $13.5 trillion in very bad mojo.

    As an American citizen, I can only say in summation; thank god my country isn’t totally reliant on a consumer-based service economy, or we’d be screwed.

  6. vasra

    “government debt levels, properly measured, are not 20% of GDP but closer to 76%.”

    I find that very hard to believe.

    1) Chinese GDP is still surging and is at a higher level than ever before. Even a small dip in GDP would raise the debt/gdp substantially and if it’s already supposedly at 76% at these GDP levels, then things are really out of whack.

    2) If the assets are not in China, and they surely are not in the rest of the OECD (except perhaps Germany to some extent), then where are they? Who have the OECD governments indebted themselves to, if not the Chinese? Are the authors suggesting that perhaps India is holding all the chips? or Africa :)

    3) Although a higher debt to assets ratio does indeed help ROA during boom times, I find it hard to believe that the Chinese government would go on supporting infrastructure deployments in Africa, or buying up resources all over the world with *debt* money, when they have tons of USD denominated assets on their books of which they are fearful of turning sour very soon.

    All in all the analysis smacks of politically motivated attack.

    I’d like to see the data, the sources, the basis for estimates and the reasoning chain that the authors have gone through.

    Taking their numbers at face value seems a bit foolish to me.

    Anybody have further data on this issue?

    1. Yves Smith Post author

      In all honesty, your comment reveals you are not qualified to opine on this topic.

      Shih is a serious economist and spent six months putting his estimates together. He most certainly is not a hack.

      I’d suggest you do basic homework before spouting unfounded opinions.

      You must not have been paying attention when China increased its money supply by 40% (

      “Diana Choyleva from Lombard Street Research said the money supply rose at a 40pc rate in 2009 and the first half of 2010 as Beijing stoked an epic credit boom to keep uber-growth alive, but the costs of this policy now outweigh the benefits.

      “The economy is entering the ugly quadrant of cycle – stagflation – where credit-pumping leaks into speculation and price spirals, even as growth slows.”

      In all honesty, your comment merely reveals you are not qualified to opine on this topic.

      You also clearly do not understand that the US $ reserves cannot be used in China. If China were to sell them, they’d have to sell dollars and buy renminbi. That would send the RMB to the moon. China is CONTINUING to by dollars to keep the RMB low. These reserves are an economic dead weight.

  7. Parvaneh Ferhadi

    Despite the commentariat’s speculation about “capitalism with Chinese characteristics”, the Chinese financial system, at least, emerges as a relic of Soviet era bureaucracy, where Borgia court intrigues substitute for decision making. Perhaps, there is little difference between the Chinese banking system and Wall Street after all.
    Yes, true. That’s because in both instances you are dealing with State Capitalism. The Soviet Union (since Stalin), China and the US are – or were in case of the SU – state capitalist economies.

    By Wikipedia’s definition State Capitalism is:
    «State capitalism has various different meanings, but is usually described as a society wherein the productive forces are controlled and directed by the state in a capitalist manner, even if such a society calls itself socialist.[1] Corporatized government agencies and states that own controlling shares of publicly-listed firms, thus acting as a capitalist itself, are two examples of state capitalism. State capitalism has also come to refer to an economic system where the means of production are privately-owned and the state exerts considerable control over the allocation of credit and investment.»

    However, controled by the state is quite misleading in this context. The control actually lies with a tiny minority (the capitalists) who control the state and us it for the capitalist goals.
    In China the control lies with a tiny party-elite. as was the case in the Soviet Union. The people who actually compose the state had no say in it at all.
    The US is simliar. The only difference is that the all-controlling elite is better hidden and not readily identifiable.
    That has changed now and people are starting to see the similarities.

    1. kievite

      I don’t pretend fully understanding the difference but I think China and the USA has important differences along with obvious similarities. I would not call the USA state capitalism, it look to me more like crony capitalism model.

      State capitalism presuppose state ownership and control of capital assets. I think classic model of state capitalism was bothe Russia under NEP. China is very close to this model. All command height and strategic assets are under the direct control o the state and the ruling party. In this sense there is a big difference between China and the USA.

      China Communist Party still has a considerable control of the economy, while in the USA Wall Street has considerable control of the state and both parties. Net result is the same but models are quite different. Huge overhead due to excessive centralization of functions is inevitable in state capitalism model, where state is like giant holding corporation owns has direct or indirect controlling stake in any significant enterprise of the nation.

      Under state capitalism the executives of large corporations, the politicians, and the bureaucrats are by-and-large the same people. And they often change positions during the career cycle. Direct enrichment of themselves is generally punishable by exclusion from the Party and subsequent criminal prosecution. Of course like with the situation of Catholic Priests celibacy plea, this norm is violated, often in perverse forms, but still it is a norm.

      Under crony capitalism the situation is more complex but revolving door operates as an alternative mechanism permitting former government officials quickly enrich themselves and former corporate brass directly influence government policy by taking government position. Different industries exert different levels of influence with some like military-industrial complex closer to state capitalism model then other.

  8. decora

    “At a personal level it allows individuals to gain promotion and power. Camouflaged in superb state of the art infrastructure, markets are “primitive”, lacking basic mechanisms for allocating capital and pricing risk. . . . . emerges as a relic of Soviet era bureaucracy, where Borgia court intrigues substitute for decision making. Perhaps, there is little difference between the Chinese banking system and Wall Street after all.”

    I found this to be fascinating. In Greenspan’s book Age of Turbulence, he describes his visits to the Soviet Union and his view of their problem. They had no feedback mechanism, and their ‘bankers’ did not understand how to price risk. Sorry if i flub the details but I hope my point has something to it.

    What was the CDO market? A breakdown of the ability to price risk? What happened to ordinary decision making at the banks, normally found in a free market? It was replaced by a system of bonus making and deal making. The ratings agencies were conflicted with the banks, the insurance companies as well. Fannie and Freddie were another example. anyways etc etc.

    Kievite describes why the US and China differ in state control, I wish to also point out that in China, this blog would be banned and Yves Smith might be in a labor camp. If you don’t believe me go look up

    some people seem to think the bill of rights is a wishy washy luxury item… in fact perhaps its role in the economy is more important than the interest rate, trade policy, tax rates, social funding, etc.

    1. skippy

      The bill of rights[?], oh yeah the one that is taken away when you need it most, a mental pacifier taken away when ever the aristocracy *feel* threatened.

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