https://thicelengboxti.cf/jfks-final-hours-in-texas.php By the s, though, it had largely caught up. Once it had reached the frontier of technology, pushing that frontier outward would mean letting old industries die so that capital and workers could move to new ones. As a result, the next wave of technological progress, based on the Internet, took root in the United States, whose economic lead over Japan grew sharply over the course of the s. In the long run, though, a country becomes rich or stagnates depending on whether it has the right mix of people,. Between and the U. Yet, it once was. The Industrial Revolution brought about a massive reorganization of production in England in the mids and later in Western Europe and North America.
Since then, steady growth—the kind that the average person notices—has been the norm. Its modest standard of living was on a par with that of Europe and the United States. But China then stagnated under the pressure of rebellion, invasion, and a hidebound bureaucracy that was hostile to private enterprise. The average Chinese was poorer in than in So why do some countries grow and some stagnate? In a nutshell, growth rests on two building blocks: population and productivity.
Population determines how many workers a country will have. Productivity, or output per worker, determines how much each worker earns. The total output a country can produce given its labor force and its productivity is called potential output, and the rate at which that capacity grows over time is potential growth. So if the labor force grows 1 percent a year and its productivity by 1. Thus, an economy grows. An economy needs workers to grow.
And, usually, the higher the population, the higher the number of potential workers. Population growth depends on a number of factors including the number of women of child-bearing age, the number of babies each of those women has the fertility rate , how long people live, and migration. In poor countries, many children die young so mothers have more babies. As countries get richer and fewer children die, fertility rates drop and, eventually, so does population growth.
As women have fewer children, more of them go to work. This demographic dividend delivers a one-time kick to economic growth. But a country only gets to cash in its demographic dividend once. Eventually, as population growth slows, it ages and each worker must support a growing number of retirees. If fertility drops much below 2. Japan is not the only country to have experienced this; 40 percent of countries now have fertility rates.
In some, including Russia and Germany, population is already shrinking. The most dramatic example is China where the onechild policy and, more recently, increasing wealth and urbanization have brought the fertility rate down dramatically to just 1. Add Capital A country is not rich, though, just because it has a lot of people—just look at the Philippines, which has 21 times as many people as Ireland but an economy of roughly equal size.
For a country to be rich—that is, for its average citizen to enjoy a high standard of living—it must depend on productivity, which is the ability to make more, better stuff with the labor it already has. Productivity itself depends on two factors: capital and ideas. You can raise productivity by equipping workers with more capital, which means investing in land,.
Capital is not free, though. A dollar invested to produce more stuff tomorrow is a dollar not available to spend on stuff today. Thus, for someone to invest a dollar, someone else must save a dollar; and so a key ingredient of growth is saving. That saving can come from households, businesses, foreigners, even governments, although most governments borrow rather than save, as we see in Chapter The more a society saves, the more capital it can accumulate. There is, however, such a thing as saving too much, as we learn in Chapter Capital, though, will only take a country so far.
This is the law of diminishing returns. Season with Ideas How do you repeal the law of diminishing returns? With ideas. In , Greg LeMond put bars on the front of his bicycle that enabled him to ride in a more aerodynamic position. This simple idea sliced seconds. New ideas transform economic production the same way. By combining the capital and labor we already have differently, we can produce new or better products at a lower cost.
Combined with faster looms, textile productivity has soared, and clothes have gotten cheaper and better. Investing in more buildings and machines costs money. But a new idea can be reproduced endlessly for free. The productive power of ideas is nothing short of miraculous. But a new idea can be reproduced endlessly. Here are a few examples: business processes. Smith calculated that one worker, who could by himself make one pin a day, could now make 4, Browsers keep getting better but consumers still pay the same price, zero.
Drugs provide another example. But overly restrictive patents and copyrights discourage the spread of ideas and leave society worse off.
A lot fewer books would have been written if the estate of Johannes Gutenberg collected a fee on every one. Entire countries can turbocharge their development by strategically copying the ideas and technologies that other countries already use. They thus leapfrogged U. Since , it has moved workers from unproductive farms and state-owned companies to more productive privately owned factories that used machinery and technology bought, borrowed, and sometimes stolen from foreigners.
Foreign companies are routinely required to share their expertise with local partners as a condition of doing business in China. Still, once a country has copied all the ideas it can, future growth depends on waiting for new ideas or developing its own. Inevitably, a country at the technological frontier grows more slowly than one catching up to the frontier. It could also happen to China. Nurturing Growth Getting the ingredients right is essential to economic growth, but so is the environment that the government creates to foster its development.
Like the temperature on the oven, the wrong setting can ruin the recipe. So, what do governments do that matters most? Education and training, both forms of human capital, are essential to productivity. Korea went from third-world status to the ranks of the industrialized nations in a generation in part by rigorously educating all its children.
Its high school graduation rates now exceed those of the United States. Rule of law. Investors will invest today only if they know they get to keep the rewards years later. That requires transparent laws, impartial courts, and the right to property. Small government is better than big government, but size is less important than quality. Is democracy necessary for growth? It helps: Governments that make people poor usually lose elections. The authoritarian governments of China, Korea, and Chile ran smart policies that produced strong growth early in their development.
But dictators have done all those things and worse, bringing on social unrest that ruins the investment climate. Democracy provides essential feedback to government just as free markets do to companies, and elections are generally less disruptive than civil wars.
Letting markets work. Entrepreneurs and workers get rich coming up with new, cheaper ways to make things. In the process, they drive someone else out of business. Joseph Schumpeter, the. Policies that direct capital to favored sectors, such as housing in the United States, result in too much investment in unproductive activities and too little in promising, innovative enterprises.
The global gold standard is gross domestic product, or GDP, the value of all the products and services a country produces in a year. GDP can be measured in two ways: 1. Expenditure-based GDP. Total of all the money spent on stuff. Income-based GDP. Total of all the money earned producing stuff. Expenditure-based GDP includes spending by consumers—on such items as houses, bread, and visits. GDP excludes what business spends on inputs e. Exports are also included in expenditure-based GDP because this represents what foreigners spend on things made in the United States. Imports are subtracted from GDP to exclude what Americans spend on things made in other countries.
Expenditure-based GDP is measured in nominal and real dollars. Nominal dollars represent the actual value of activity. Suppose sales of bread rise 5 percent. If the price per loaf rose 2 percent, then real spending on bread i. In practice, however, GDP is so large and complex that it would be a miracle if calculating it two ways produced the same number. When the U. For the rest it gets creative. It sounds goofy, but it lines up pretty well with the hard data that eventually replaces it.
GDP is not the same as well-being. Still, as long as people and governments measure economic success in material terms, GDP will be their favorite yardstick. It emerged in but the ensuing expansion has been slow and halting. Unemployment declined much more slowly than after the previous worst recessions, those of to and to Is the pessimism warranted?
Because productivity in China is rising so quickly and the value of its currency is rising against the dollar that point will probably be reached by the end of this decade. That is not a sign of American decline but of China exploiting the time-tested recipe of education, urbanization, and industrialization to graduate from poor- to middle-income status.
Many countries like Mexico have done the same, only to stumble before becoming rich. To avoid the same trap, China has a delicate transition: Having grown through exports, investment, and manufacturing it must now rely more on services and consumers, which are less easily steered by government overseers. What about America? As female baby boomers put their child-bearing years behind them and older boomers retire, its population and labor force will grow more slowly.
The real question mark is whether Americans will keep generating new ideas and investing in them so that productivity can keep rising. Some signposts are troubling; the technology bubble of the s left the United States with broadband Internet and businessto-business websites.
By contrast, the real estate bubble of the lates left behind vacant houses and bad property loans that made it harder for the businesses of tomorrow to get money. In , Americans expressed less faith in free markets than did Brazilians and Chinese. The business insurgents who drive creative destruction still get a warmer welcome in America than anywhere else; from Amazon.
In April , at the depths of the worst recession and bear market in memory, the Pew Research Center found that 90 percent of Americans said they admired people who get rich by working hard. Optimists would also point out that American legal and democratic traditions have survived intact. Within three years of taking stakes in nine major banks, the Treasury had sold all of them.
True, the federal government propped up General Motors; but to get the money GM had to go through bankruptcy and shear off 30 percent of its U. By contrast, France gave money to Peugeot and Renault only after they promised to preserve French jobs. Add that to labor force growth of 0. The Bottom Line Long-term economic growth depends on population and productivity. A growing population is the source of future workers, and the more productive those workers are, the richer they become.
It takes investment in both capital and ideas to raise productivity. Ideas enable us to recombine the workers and the capital we already have in new ways to produce brand-new products, or old products at a lower price. Both investment and ideas must be nurtured. Honest government and trustworthy laws encourage investors and innovators to take risks in hopes of reaping the rewards. Investment in education enables workers to take advantage of the latest ideas.
And free markets ensure that dying, unproductive industries are culled so that growing industries can attract capital and workers. Let 10, Projects Bloom While our national government enjoys virtually unlimited credit, the initiators of urbanization projects, local governments, have little. A twohour drive west of the Hunan capital, Changsha, via a new expressway, its streets are lined with karaoke parlors and new apartment complexes featuring palm trees and pastel tones. At the edge of the city on what used to be farmland is a brandnew, shiny 30,seat steel stadium and an aquatic center, where workers chisel out the Olympic rings by night years after the Beijing Olympics has ended more than miles to the north.
Loudi has had its own party: Land prices tripled in the city from to , and a highspeed rail line will soon stop here. China Railway Construction Corp. Li Liguang, a young married man in a vest top with a hoarse laugh and short cropped hair, one of the first generation to move off the farm in this hilly city where beans and rice are farmed. He hauls bricks all day long to construction sites in his cobalt-blue East Wind truck. At night, he settles down in his makeshift, tarpaulin-covered home that he shares with his wife, two children, and stooped mother.
The only light in the surrounding darkness is the gleaming work site across the road for the new sports complex. He has bigger dreams. Once he finishes the house, he hopes to rent part of it out to earn money to help pay the medical insurance that comes with being a new urban citizen.
The urbanization of the country is the secret sauce of its success. Until , Li lived on his almost half-acre of land and was happy to use whatever extra money he had to buy his favorite White Sand brand cigarettes. Now, instead of. Farmer Li has become Homo Economicus. In , China became a predominantly urban country for the first time in its 5,year history. Although he has big ambitions, he really should have already arrived on Easy Street.
Property records show that land he once farmed is worth millions of yuan, many times more than the , yuan he says his family of nine received in compensation when a city-owned company forced him to sell his land. Nationwide, at least 50 million farmers have lost their land as cities expand, often receiving a fraction of the fair market price.
No city, from the skyline of Shanghai to the western mega-city of Chongqing, has been without one, or sometimes handfuls, and they have been the main conduit through which the savings of the Chinese people have been channeled into investment and construction.
But the result has led the state banking system to hold trillions of yuan of questionable debt with little accountability for its repayment. The bank invented the secret sauce. The Wuhu Model Deng Xiaoping, the short, squat, chain-smoking paramount leader of China in the early s, decided that the country needed to accelerate growth and build momentum for reform just over a decade after China had started to open up its economy and as it faced international isolation for killing student demonstrators in Tiananmen Square.
Local governments spent wantonly on hotels, villas, golf courses, and stock market speculation, getting around difficulties in borrowing money by setting up trusts and selling bonds in Japanese yen overseas. Local governments set up over 8, developmental zones, and by the end of , there were over 12, real estate companies. Who could keep track of it all? The crackdown swiftly followed. The reforms were in part political, based on centuries-old fears by the central government that it was losing control to the provinces, exacerbated by the collapse of the Soviet Union only three years earlier.
Central government revenues jumped in the years after. It was the first default since the Communists came to power in , and shocked foreign investors out of their notion that the central government would bail out every local government debt. For CDB, though, the Asian crisis was an opportunity. The founding of these special-purpose vehicles, which came to be known as localgovernment financing vehicles, or LGFVs, had its roots in the restrictions imposed on local governments. Just as in , it required spending to stimulate the economy and China was entering its golden period of urbanization, but local governments were strapped for cash.
Commercial banks were insolvent and being reformed to list overseas. The country was entering a fundamental change from a largely agricultural economy laced with Soviet-era heavy industry to the China you see today: the glitzy skyscrapers, expressways, ports, and apartment complexes. So CDB bankers headed to the Yangtze River city of Wuhu in Anhui—home province to then—vice president Hu Jintao—where they helped the city get around limits on direct borrowing set up only a few years earlier. That gave it an advantage in funding long-term. The new urban focus in China in the late s unleashed a wave of state capital boosted by growing Chinese savings.
The money stayed inside the system; this time there was no money from foreign investors or foreign banks. CDB would then help local governments set up companies to borrow, and give them initial long-term loans. Thus dressed up and empowered, the LGFVs were free to go on a further borrowing spree seeking shortterm loans from the commercial banks or selling bonds themselves on the bond market to banks and securities companies. If the central government wanted to stimulate the economy, it could send money flowing down this cash waterfall.
The risk in the end came back to their front door. But that discipline quickly broke down. The companies could be stuffed with whatever assets were needed: equity, land, stakes in local state-owned companies, and city banks. More assets meant more borrowing. Many assets benefited the public only: parks, hospitals, and schools.
CDB could bring in the other commercial banks, private lenders such as trust companies, and set up myriad different companies handling different projects. The model sounded good in theory: It would combine public benefit with capital market finance. It would turn fiscal revenue into equity. Projects that would not generate a return on investment could be combined with those that did. Since public utility investment is led by the government, objectively speaking you need to set up local financing vehicles.
He saw that China could stoke half a century of development with urbanization at its core, Yu said. The state had an advantage over the private sector: It owned all the land. CDB set the stage by devising a system to leverage the future value of land into large up-front loans, such as one it gave the port city of Tianjin in As more infrastructure was built, land values could only ever go up, as would housing prices. All the bank needed was to work with the local government to create a system that worked. And now was the chance: Between and , as the Asian crisis started, spending on infrastructure in China doubled, and by , it had risen by nearly three times, according to a book written by CDB and Renmin University.
What was better than an ever-rising state-owned asset that could be used as collateral? Wu Keming, who was the deputy mayor of Wuhu at the time, also played a key role. CDB provided 1. The company, Chery Automobile Co. In Wuhu in , a single platform designated by the government was used, the Wuhu Construction Investment Co.
As Figure 1. As Chen and the Wuhu officials saw it, they were creating a virtuous cycle. Public works like roads would boost home prices, which in turn would boost land prices. Higher land prices would mean more local government income, hence more spending. CDB built Wuhu Construction into a giant; eventually its assets grew from million to Instead, it sucked them all in. In the central city of Wuhan, it consolidated all the local government financing companies into one large company.
Every province in China—even Tibet—has now set up such companies to finance infrastructure investments. So they turned to CDB. Yet Yufu needed funding, and who would lend them money to buy a whole lot of questionable debts? Many of the bankrupt local state-owned companies had their factories on valuable city-center land; Yufu sold this land for them, moved them out to the suburbs, and used the money to buy their bad loans from ICBC. It was a perfect example of how CDB had worked closely with a local government to sort out their finances, cleaning the slate for investment-led urbanization to begin and making sure state-owned firms would still be around to benefit.
A commercial bank would have no way of resolving the problem, Chen said. But CDB was not a commercial bank. So it negotiated with the mayor and party secretary, proposing that CDB could lend 10 to 20 billion yuan to redevelop old. CDB stepped up with the money, as long as the government got rid of the bad loan. After two years of efforts by the city, the bad loan disappeared.
After itself having had its bad loans taken off its books by the central government in , as we will see in the next chapter, CDB was now helping Chongqing to do the same. It helped restructure a local bank, securities companies, and a rural credit cooperative. Without foreign investors, losses could be moved within the system, allowing the state to take increasing control of resources and avoid bankruptcies and defaults. Yufu was an embodiment of the rise of the state in the city, and CDB had funded it.
Its GDP grew by an average of 11 percent between and , and infrastructure investment grew by percent. Such companies could also set up endless subsidiaries and funnel money any which way they liked. By , they had assets of In May , CDB and its chairman, Chen Yuan, pledged further funding for the city as it faced a political crisis: Its former party secretary, Bo Xilai, had been suspended from the Politburo. Finding private capital would prove harder than first thought. China no longer needed to bother with the delays of market capitalism or the demands of foreign lenders.
LGFVs had allowed local governments to borrow beyond what they had dreamed possible. Global Financial Crisis The global financial crisis of made its way to China from the office towers of New York and the stucco homes of southern California with vicious speed. As the Chinese New Year dawned in February, the government put the number of jobless migrants at 20 million as demand for the exports they produced in coastal factories collapsed along with the US housing bubble fueled on home-equity loans. Many migrants would go home for the holidays and not return to their jobs. China faced the prospect of its exports falling off a cliff as the worst downturn since the Great Depression hit its biggest customer.
On November 5, , China announced a 4 trillion yuan stimulus, equivalent to But the central government would fund only 1. China decided to fund its program through its state-owned banking system. The secret sauce invented by CDB was about to help China sail through the global economic slowdown fomented by the financial crisis.
While CDB had been the pioneer in lending to these companies, now all of the banks started to issue loans. Total bank lending to the companies rose from 1. Local governments could not have been more willing beneficiaries. In China, there are only so many opportunities for free money, and this was one of them.
Now, favorite local projects could be built. Nationwide, fixed-asset investment grew In particular, new urban construction projects nationwide rose In two years, and , China increased its total government debt at the same speed that America did in the five years before the housing market bust in What was worse, most of these were short-term loans maturing in just a few years. There were companies backed by local governments when the World Bank did a survey in ; by the end of , there were over 6,, according to a national audit. The central bank estimated there were more than 10, such vehicles.
It was a nice round number; in truth, no one knew the exact amount of debt that was out there. Local governments had cashed in and not worried about the consequences. As long as their GDP grew, they could be assured of a promotion. For the banks, they had been told to lend, so were just following orders. The problem was, now the money needed to start providing some returns. They detail—some more than others— how at least Local officials knew that the central government would never stop the flow of credit once projects were started, and the bigger the debt, the more they would be helped.
When investors turned to the bond market, they believed that the companies were backed by local governments and implicitly by the bureaucrats in Beijing, as did the ratings agencies, whose reports endlessly detail accounts of zero cash flow and little profit but AAA or AA ratings. In the three years from to , among bond prospectuses issued by LGFVs as they turned to the bond market, some said they had received bank loans from CDB, had CDB as their bond underwriter, or had their bonds guaranteed by a CDB-funded guarantor.
In all, the companies reported loans and lines of credit from CDB amounting to Disclosure in bond prospectuses in China—a Leninist authoritarian country where transparency is not a way of life—is spotty at best. The LGFVs that issue bonds are usually among the biggest in the country, such as provincial expressway companies. One item few prospectuses omit: homage to CDB. A Town Called Loudi In Loudi, the stimulus was akin to dropping cash from the sky; it allowed the city to create a new idea of itself.
It would no longer be only a town where nothing happened in the middle of China with a loss-making steel producer. It brought work for farmer Li Liguang, as the city boomed from government-funded infrastructure projects, including the stadium and the high-speed rail line. In , the government gave it more assets than ever before: The company was incorporated with eight subsidiaries, including a tap-water company, a musty government-run hotel, and a series of construction companies.
It was handed 20 percent of state-owned equity in a local gas company. All told, during the year of the stimulus, its assets increased by 50 percent, with landholdings increasing. Documents show that the highway into town was paid for by an expressway company using borrowed money, a lot of it. A June prospectus reveals that Hunan Provincial Expressway Construction Group had lines of credit with Chinese banks totaling CDB led the pack with a Debt is increasing at a much faster clip than toll collections, which come to 4 mao 6.
A stadium was paid for in part of the bond offering underwritten by CDB, plus bank borrowing. How would the company pay for all of this? The answer lay in land sales. Total liabilities have grown from 1. After he tried to call the local propaganda bureau for permission to speak to a foreign reporter, he agreed to lunch in a busy new restaurant opposite his office, where he and his colleague were more interested in drinking. He said the company has around million yuan in loans from CDB, or around a third of its total debt.
Every year CDB invites him for training in the provincial capital of Changsha. But the prize was the local government office, the White House, which had been built right on the edge of town as far away from the population as possible, a trend popular in China as it leaves valuable city-center land available to sell. Petitioning is a practice dating from imperial times by which people take their complaints either to local officials or directly to the capital.
For the mandarins in Loudi, public infrastructure like the stadium may not be a great cash generator. The city has no major sports teams, few bands and pop singers ever put Loudi on their tour list, and. But in China, focusing on that kind of return on investment is missing the point. A stadium boosts the value of the surrounding land, and that means more money for the local government, which can sell that land to developers of apartment blocks.
But first of all, the city needs to acquire that land and bring it into its control so it can count it as an asset, as most of it is classified as rural. It is surrounded on all sides by new pastel-colored apartment blocks. The land where the family lived was countryside until the city simply took it a few years ago. By rezoning the land as urban, officials could incorporate it into their development plan, which allows them to sell the land for a wider range of uses than agricultural, according to its bond prospectus.
Villagers initially were relocated to the alleyway, where they built shanties with tarp and corrugated-tin roofs. The sports bureau took about 47 acres of land in Dawu where the stadium is and another village, issuing notices—and verbal threats—in , saying the land was needed for the stadium. Stooped, with gray hair, she recalls the clear well water they had access to before that was so clean she could wash with it. Now he makes about yuan on a good day driving his beat-up, cobalt-blue East Wind truck hauling bricks to construction sites, wages that are almost all spent on groceries.
In alone, local governments took in 2. This growing, valuable state-owned resource was now totally in the hands of local governments, and they had no obligation to publish their budgets to the public. As CDB has done overseas with oil, land-revenue streams can be used to secure loans, with the debt service paid off by land sales whose value is supposed to increase thanks to the infrastructure financed by the loans, meaning projects have to cover operating costs only.
CDB has also been more innovative than other banks in finding means to collateralize loans, using many different local-government revenue streams. In Shanghai, it funded a river cleanup project using the drainage assessment charge from affected users of the river as collateral. But relying on land, a finite resource, to repay loans, means that new land has to constantly be found and sold, and the costs of kicking people off the land has to be kept lower than the market price.
Those costs are apparent in the village. The compensation that Dawu villagers say they received works out at about 6 percent of what the city was selling land for in , a year after they were evicted. Dawu natives said they received 38, yuan per mu, a Chinese measure of land that is about one-sixth of an acre. The land is worth many times even the higher figure. Loudi city in sold its land to developers for , yuan per mu, according to the bond prospectus.
Around the stadium, land earmarked for high-rise apartment blocks can fetch 2 million yuan per mu, according to one real estate agent. At those prices, it would take Li 92 years to earn enough to buy back his still-vacant plot, based on his current wage rate. Normally the character is painted in clear red on your wall. Across China, compensation given to farmers is at least 15 times lower than prices sold for development, according to Landesa. The inequality in some cases has led to violence, far away from the confines of the state-banking system. That was certainly the case in Fuzhou, a city in Jiangxi Province, just to the east of Hunan.
There, a land dispute with the government was central to a May bombing that killed three people. Qian Mingqi allegedly set off three blasts at or near government buildings in the city amid a dispute over compensation he had been offered in a resettlement, according to reports by the official Xinhua News Agency. Qian died in one of the explosions. He had been asking for more compensation after being resettled in to make way for a highway. In , the total debt reported by some LGFVs that sold bonds that year rose by about 20 percent, according to a Bloomberg study of all bond prospectuses issued by the banks that year.
Tianjin itself is a Lebanon-size municipality of 13 million people and Binhai is its heavily industrialized port region on the Bohai Gulf, where ships appear to be sailing through fields amid the. It is there, within sight of the ruins of imperial-era forts stormed by French and British troops in during the Second Opium War, that Tianjin Binhai and other financing vehicles have embarked on what may be the most grandiose project in a nation of grandiose projects.
The East River and Hudson are there, too, with water bounding three sides of the planned financial center, which lies on an oxbow of the Hai River. So is Lincoln Center, which is advising the local government on setting up a new arts center in the development, called the Yujiapu Financial District. At the beginning of spring of that year CDB vice governor Yao Zhongmin held talks with newly arrived Mayor Dai Xianglong, who had beaten out Chen for the top job at the central bank five years earlier.
Yao proposed using revenue from land sales to guarantee the loans from CDB. The Tianjin delegation said CDB was too slow to approve finance for a previous subway line. So Yao upped the stakes. Dai was very happy and promised to give any materials to CDB that they wanted. CDB was the panacea that allowed expansion based on leverage and allowed the city to spend beyond the limits of its fiscal funds.
Before the bank turned up, Tianjin had been able to afford maintenance of its existing infrastructure only, not new building, according to a book on the case published by CDB and Renmin University. CDB could thus automatically take the money it was owed and could supervise the process of funds transfer. The loan was split into a 24 billion yuan soft loan with a more favorable interest rate and 26 billion yuan hard loan, with a total maturity of 15 years. For the first five years the city only had to pay back interest on the soft loan.
The interest rate was 10 percent below the benchmark rate for the duration of the soft loan and 10 percent below the benchmark rate for the hard loan for the first five years: In total, it was 8 percent cheaper than normal loans at the time.
The key to getting the funds was that Tianjin could use 15 years of land usage rights sales to secure the loan, both to act as collateral and as a source to pay back the funds. The city also had to promise to use its own infrastructure fund to pay back the money if land sales ran into difficulties. The bankers forecast that the land sales income would increase every year by 10 percent. That turned out to be a conservative bet: In reality, the income increased by 20 percent.
By , land income was While the outbreak of severe acute respiratory syndrome SARS in early in Beijing intervened and prevented Chen Yuan from visiting Tianjin to sign the deal, it was eventually signed in June of that year. The investment that CDB started helped bring in the property developers too and attract further funds: The riverside construction project saw 10 billion yuan of investment in infrastructure over three years but drew a total of 80 or more billion yuan of property investment. There, Xu Fei, an official at the Tianjin Binhai New Area Central Business District, stands in front of a brightly lit model of the future city, and says the total planned investment in the project, plus parks, residential towers, and the twin city across the river called Conch Bay, is billion yuan.
The first phase opens up in with the inauguration of a high-speed rail station. Both cities are under construction simultaneously, with 14 of a planned buildings being erected in Yujiapu, plus all 48 of the planned Conch Bay skyscrapers as of the end of Construction cranes crowd the field of vision on both sides of the river, and thousands of workers are teeming about the work sites.
The cities will be serviced by five subway lines, Xu says. The area is meant to attract banks, brokerages, and other investment companies, with a planned million square feet of office space for Yujiapu and Conch Bay. That includes a 1,foot-high tower, taller than the 1,foot-high 1 World Trade Center currently under construction in the real Manhattan.
Tianjin officials are employing the philosophy of the movie, Field of Dreams: If you build it, they will come. Morgan Chase fill Manhattan buildings. Xu mentions local banks Tianjin Rural Commercial Bank and Bohai Bank—minnows in the world of Chinese banking, let alone global banking—as future tenants. Xu says the buildings in Yujiapu are all being occupied by stateowned companies, including a steel company and a mining company turned real estate developer that is putting the finishing touches on.
Asked if any private companies were setting up shop there, she pointed to a hotel. In the first half of that year, its debt, mostly from bank loans and led by CDB, rose In one of the LGFVs building Yujiapu was the most indebted in the country to disclose its finances. We are very thankful. Credit Risk in a One-Party State In China, no bond has ever publicly defaulted, making investment in local governments akin to a one-way bet. With ever-rising land and property prices, there was little incentive for transparency. At the bottom were the LGFV assets, often in the form of land.
Once the LGFV could be dressed up with land assets or local government subsidies for bond issuance, investors like the state-owned banks could buy the bonds. In turn, the bonds could be packaged into so-called wealth-management products, high-yielding short-term investments that banks could sell to clients, offerings that have boomed in China over the last few years as depositors seek to beat inflation.
In theory, the companies should have a record of three years of profit and outstanding bonds to net assets of below 40 percent to sell debt in China. But who has been in charge of approving these bond deals? So why would it deny funding to its own projects? Was the market really providing any checks and balances? In the smoky port of Huanghua, the answer is a firm no. The city occupies a tiny slice of Hebei Province wedged between Tianjin and the border with Shandong Province. Somewhere out in the salt marshes is the collateral for Hebei Bohai Investment Co. New port terminals line the Bohai Gulf, especially in neighboring Tianjin, the biggest port in north China.
Hebei Bohai is helping to build the port and is majority owner in the marine fuel services company. Stacks of what look like massive concrete jacks, the building blocks for marine jetties, litter the ground on the side of the dirt road leading out to one of the piers. More than a dozen smokestacks belch soot into the air. The land seems to just give up, eventually becoming the heavily polluted Bohai Gulf. There the LGFV cannot even identify the land collateral it uses to borrow money on the bond market.
According to the bond prospectus, Hebei Bohai borrowed 5. Workers eventually gave us more details on the plots than were available in the prospectus, providing cross streets, purchase prices, and lot sizes. But it is land just like you saw driving into the port area, you know, the fields with the piles of salt. The city raised 1.
Yichun is a poor city in a poor province. Income of its residents was little more than half the national average in China International Capital Corporation gave it the lowest debt rating of any city financing vehicle.
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In contrast, Dagong rates the bonds two levels higher than US debt. The company also has financed a new reservoir, an airport terminal, and parklands, one featuring faux Corinthian columns topped by winged warrior princesses and bronze sculptures of chariot-riding local gods. Wang Zhongbing, a retired factory worker who spends summer days chatting with friends in a park next to the Yichun River, says the economic development is passing his family by. Only one of his three adult sons has a job, he says.
He came to Yichun in when he was 28 years old to work in a state-run factory. His own work unit closed. The prohibition set on borrowing by local governments was a rule observed only in the breach, just pushing the borrowing off the budget and into the arms of the state banks. Without any transparency, and with all of the capital from the state-owned banks rather than private institutions, the market has added no discipline. It had all the hallmarks of an experiment with capitalism but with none of the checks and balances.
In one case, a Shanghai LGFV borrowed 2 billion yuan of loans for a high-speed railway project, but ended up using half the money for property projects. After the experience of the late s, when many local government and state-owned enterprise loans were bailed out, the commercial banks were supposed to look after themselves, yet many of the projects they piled into led by CDB had poor returns.
An HSBC analysis by Hong Kong—based analyst Zhang Zhiming showed that 33 percent of the local government financing vehicles generated insufficient cash flow to make their debt payments and about 68 percent reported return on capital less than the benchmark lending rate—meaning the banks make a loss.
What was going on? In the summer of , as land prices fell, some of the first cracks started to appear in the system that CDB had created and helped build,. In April , one of the biggest LGFVs, Yunnan Highway Construction, which had outstanding loans amounting to 90 billion yuan, sent a letter to bankers saying it was unable to pay principal on a bank loan and would pay only interest, according to the influential Caixin financial magazine.
Such a note would normally send a chill down the spine of any banker. The market for bonds sold by local government financing companies plunged and the powerful National Development and Reform Commission stopped approving them in August CDB is an arm of the central government.
It has leveraged that status to lend to local governments across the country from Tibet to Heilongjiang. The recognition of nonperforming loans will be a political process as it was in the late s. And CDB is likely to be the last bank they default on, since it prides itself on having more analysis of local government projects than commercial banks and on doing more to structure the loans. Yunnan Highway Construction had borrowed 20 billion yuan from CDB to crisscross the mountainous southern province with roads.
So the Yunnan government stumped up the cash and agreed to inject million yuan in capital to the company and lend it 2 billion yuan. The intention was to bring a touch of the market to local government financing, and Chen had defined development finance as a bridge linking the government and the market. With most of the stimulus debt lent on short-term maturities, toward the end of , after receiving the green light from the China Banking Regulatory Commission, banks began rolling over their LGFV loan debt, giving borrowers more time to pay back.
It is also a failure of the market that CDB had created in order to value risk and capital correctly, much like the credit-default swap products the United States had invented to insure against losses in subprime debt. The risk had been passed from the local governments to the banks, and then back onto the central government. That gave the central government little choice but to force banks to resolve the debts, pushing them out into the future rather than letting the market function.
Had CDB really created a market or was it a market to be manipulated and arbitraged by local governments for their own benefit when no one was looking? From the beginning, CDB got more deeply involved with local governments than any other Chinese bank.
Up to half its loan book in could be local government lending, according to analysts, accounting for one-third of all the local financing vehicle loans and larger than that of all four of the top commercial banks put together. See Table 1. CDB started the platform, the LGFV, that allowed other commercial banks to follow, allowing an unleashing of credit in that had little oversight.
There was a fundamental mismatch: The debts and the companies themselves were left off local government budgets, even as investors, Table 1. Today, the LGFVs have dozens of subsidiaries, cross-holdings, and cross-guarantees, making it impossible to tell how much one local government is on the hook for if one link in the chain is broken. Some LGFVs have also turned into lenders, passing on money to property companies.
While China wanted to further develop the institutions and infrastructure of a bond market, at the same time as it expanded, banks did their best to hollow out the integrity and effectiveness of those same institutions. Ratings agencies gave bonds sold by local government-backed companies high ratings because they believed in the implicit back stop of the local government; investors took the yield as free money. At least the ratings agencies themselves were self-conscious enough to recognize the selfdestructive behavior. Chen Yuan of CDB had realized in , before other banks, the force of urbanization and its role in economic growth.
China long ago decided that the key to GDP growth is boosting productivity, and few economic events boost the productivity of a populace than moving them from life on a farm to life in the city. Ironically, he wishes officials would start building on his land, giving him the chance to pick up some work. Other villagers say people are borrowing money from underground banks at a rate of up to 40 percent interest.
The use of land as collateral and as a source of income to repay loans means local governments have to acquire it cheaply and sell it at a profit. Local governments have become land monopolists, trying to acquire as much land as possible by expanding cities into rural areas, such as in Loudi. The lack of compensation given to farmers has not helped China to boost consumption. Local governments could get banks to lend to projects with even the smallest amount of revenues, as the central government knew that projects had to continue. After all, you cannot leave a metro system half built.
By July , as China reported its sixth straight quarterly decline in economic growth, it was becoming clear that the country was addicted to the easy stimulus provided by the LGFV model. Official after official in the year previous had pledged to slow down growth in local lending. Four months later, banks were again being told to boost their lending to LGFVs.
The colonnades that linked the white buildings with high domes were cool in the afternoon heat. They had built a park opposite the building that was a small symbol of misdirected infrastructure: It was empty and concreted over. No office worker would dream of spending a lunch break there. It was a park designed without one single consideration of those who would use it. Intended to bring a touch of the market to local governments and let them get money despite restrictions, it has ended in a borrowing spree that has left trillions of yuan of debt and millions of farmers without land and with inadequate.
How did the bank gain so much power? Interview with Zhu Keliang, lawyer at Landesa, August Hendry, Sandy. As with many things in China, you can tell what went wrong by the rules that later prohibit it. Speech is Annex 7. When the market signal becomes stronger and market mechanism is established, the state-owned capital then gradually withdraws. GaveKal Dragonomics, presentation in Beijing, March Bond prospectuses issued on Chinabond, www. Victor Shih Interview, August Wealth Management Products reached an estimated Posted online in March When the people find that they can vote themselves money, that will herald the end of the republic.
This defaulting is not some kind of historical accident but results from the underlying fatal attraction of populism in democracies with universal suffrage. Look it up and you will find a variety of definitions. The majority defines the word as policies benefiting the common people at the expense of the rich or the elite.
But as a free market economist, I have my own definition, which is the meaning of the word the way it is used in this book. As used here, populism is a political strategy ostensibly targeting the wealth and income of the affluent elite and based on a calculated appeal to the interests or prejudices of ordinary people regardless of the economic rationality of this strategy.
As an investor, you are categorized as belonging to the rich or the elite. So populism basically is a set of programs that are ultimately aimed at reducing your wealth. Now back to our theme. Government defaults are an old story going back to antiquity. But the susceptibility of modern advanced democracies to default may come as somewhat of a surprise to most of us for whom democracy is truly a sacred concept. Suggesting that democracy has any serious faults is blasphemy. This chapter will present a theory of why democracies with universal suffrage and well-developed political institutions will tend to eventual bankruptcy and default and why lenders in particular will be at risk.
My reasoning will draw, in part, on many thinkers, including those as diverse as James Madison, the Father of the American Constitution, and Hyman Minsky, whose financial instability hypothesis has come from obscurity to receive much attention in recent years. I want to be clear. This book is not advocating alternatives to democracy. Like Winston Churchill—who famously said Churchill said many things that democracy was the worst form of government devised, except for all the others—I am not suggesting a better idea.
Default, an Expanded Definition In its strict legal sense, default means the failure to perform a legal obligation specified in a contract or by law. Countries have. But the text of this book uses the word default in the broader sense of a sovereign government failing to meet any formal promise or obligation. In the sense used in this book, a default could be: 1. A legal default under the legal system of the borrowing country or a recognized international legal system such as that of the United States. A situation where a loan can only be repaid or serviced with the assistance of bailout money coming from an external entity like the International Monetary Fund IMF.
A reneging on promised entitlements, including those for medical or pensions for retirees. This type of default will actually be good for investors. Unless of course they are also recipients. Call it a benign default. A default by inflation whereby a defaulting country prints money and destroys the value of its currency, which happens to be the currency in which it has incurred the obligation.
Financial repression whereby a sovereign nation takes measures that essentially confiscate money from its financial system via excess reserve requirements on its banks, interest rate caps on savers, and prohibitions on investments outside the home country. All these types of defaults are on the horizon for advanced countries, with the exception that countries that can borrow in their own currency e. This type of default reduces tax burdens. If investors are also relying on one or more government programs that are being defaulted on, then as beneficiaries they will feel some pain.
And often. According to Carmen Reinhart and Kenneth Rogoff in their now classic work. Many countries at one time or another have been repeat offenders i. He is active in various Hong Kong-based angel investor groups that provide seed funding to Asian-based tech and healthcare companies. He has been writing books with his co-author Jim Mellon since they first joined forces to write Wake Up! Survive and Prosper in the Coming Economic Turmoil, published at the end of Professor Allen Chan is renowned scientist and entrepreneur in biotechnology industry.
He has pioneered the development of noninvasive approaches for prenatal testing and cancer detection based on the analysis circulating DNA in blood plasma, and is an inventor of over 40 patent families. In , over 4 million noninvasive prenatal tests for Down syndrome were performed using the technology invented by Allen. The two companies focus on Noninvasive prenatal testing and noninvasive diagnosis of cancers through plasma nucleic acids analysis, respectively.
He served as founding director of the two companies. He also served as the chairman of the board of directors of Cirina Hong Kong , a subsidiary of Cirina, to oversee the launching of the cancer screening service in Hong Kong. The merged entity is one of the most valuable companies in the field of liquid biopsy. Through the screening of over 20, asymptomatic participants, he demonstrated that the detection of cancer-derived plasma Epstein-Barr virus DNA could lead to the identification of nasopharyngeal carcinoma at significantly earlier stages compared with patients without undergoing screening.
This work was selected as one of the ten notable article published in New England Journal of Medicine in because this study demonstrates that plasma DNA analysis is sensitive enough to detect very early cancer. This approach can potentially be applied for the screening of virtually all types of cancers through DNA sequencing. In her current role, she mainly focuses on investments in early to growth stage startups in the fintech, Insurtech and healthtech space. Before this, Ms. Chen was an investment banker for more than a decade, having worked at Merrill Lynch and Barclays, mostly in the US, focused on capital markets and advisory transactions.
Focused on healthtech and blockchain, Bonnie leads Startups' operations from HK. She is a chartered CFA and holds a double major B. He also works with the Government and other stakeholders to develop the recently launched territory-wide Electronic Health Record Sharing System in Hong Kong. NT is active in the informatics research and education communities, and is a frequent speaker at international conferences.
Kenneth J. Chu Programs Director of Biorna Quantics. He has sub-specialties are in sports medicine, pediatrics, and gastroenterology. Ken has further education in advanced clinical nutrition, attending workshops and courses from around the world. After moving to Hong Kong 7 years ago, Ken continues his work in naturopathic medicine. He has served in the public health care system of Hong Kong for more than 30 years.
His current duties are to assist and support the Secretary for Food and Health in the setting of policy objectives and priorities on agriculture, fisheries, food safety, veterinary public health, environmental hygiene, medical and health, and related implementation issues, handling Legislative Council business and strengthening the working relationship with Legislative Council, and engaging and liaising with all stakeholders to explain and solicit support for government policies and decisions. Ildar Fazulyanov is a serial entrepreneur with over 20 years of experience in healthcare, fintech and venture capital.
He founded Well, Inc. Ildar has managed all aspects of running a successful healthcare business, including accounting, business development, Medicare licensing, recruiting clinicians, sales, marketing and HIPPA compliance. He worked for DB Alex. Brown and was part of a launch of DB Advisors from an internal trading desk to multibillion dollar hedge fund.
Since he has been an active angel investor in the USA, China, and Hong Kong with interests primarily in advertising technology, clean energy, and education. Chris is a founding member of Giinseng, an organisation for the promotion and advancement of impact investing in early stage businesses that create a social or environmental impact in greater China.
He received a bachelor in physics with honours from Case Western Reserve University. Darryl G. Glover, Pharm. He has been a frontline provider, manager, and worked internationally as head of marketing, COO, and CEO for a biochromatography company. He has co-founded and served as COO for two tech startups focused on healthcare and general recruiting. Hanif is the founder and CEO of Sinophi Healthcare, a company which invests in and manages hospitals in China, focusing on public general hospitals and selected specialty hospitals.
Sinophi brings to hospitals in China international hospital expertise and technology, and builds partnerships with leading UK and international healthcare service and product partners. Earlier in his career, Hanif qualified as a doctor and practiced in the UK. She started LeadinHealth to bridge the gap and ensure that user-centred, outcomes oriented, digitally driven care could be accessible and affordable to the people.
Xin Yun brings deep clinical knowledge and broad experience in helping corporates and organisations in enhancing the health and wellbeing of employees through a holistic wellness approach. Her key specialisations are in the areas of technical consultation on organisational wellness, as well as design and delivery of bespoke wellness and chronic disease management programmes.
Her company - LeadinHealth is committed to build effective wellness culture, by creating a new model that uses digital technology, service design, business planning and community networks to deliver wellness and preventive care. She has recently launched the proprietary mobile application called Walnut Wellness in delivering quality care and health education. Her passion lies in developing and testing new models, listening and delivering the best outcomes for clients. Michelle is a healthtech and insurtech consultant. She is a member of the Galen Growth Asia platform, an active network of healthcare and insurance ecosystem founders and stakeholders.
Samson has over 20 years of experience in TMET sector. This detection method is non-invasive and cheaper, faster and more accurate than any products currently in the market. Her research interest is developing sensitive detection assays for disease biomarkers employing fluorescence microscopy and nanotechnology. He holds a PhD in mechanical engineering from the University of Technology in Vienna, focusing in his research on novel applications in medical imaging processing and artificial intelligence.
Before founding ImageBiopsy Lab in , Richard has spent more than 10 years working for international healthcare companies in Europe, the US and Asia. In these roles, Richard was responsible for engineering, product development and business development projects. At ImageBiopsy Lab, Richard and his team are now aiming to challenge the Status Quo of X-ray based orthopedic assessments applying a proprietary framework of artificial intelligence algorithms.
Proteina's technology is a protein-protein interaction profiling going beyond the current gene diagnostics.