Top 6 Chinese Stories from Rio 2016

After a few weeks of thinly veiled nationalism, another Olympics is in the books, and what an Olympics it was! From beginning to end, Rio 2016 didn’t disappoint.  The world reeled from fear of Zika. Olympic boxing cemented itself as a beacon of international corruption for a new generation. Phelps won, again- and again. Ryan Lochte did – well, I’m sure you know.

However, in all of the Olympic noise, it is easy to miss the trial, tribulation, and success of the world’s second largest economy- China. Fear not, dear reader for I am here to give you the top 6 Chinese stories from Rio 2016.  Grab a coffee – perhaps tea is more appropriate – and relax; the emotional spectrum from the Chinese Olympic camp is wide.



#6 – China’s First Gold via  张梦雪 (Zhang Mengxue)

China is obsessed with gold medals, so that is why Miss Zhang Mengxue’s gold medal, China’s first of Rio, starts our list at number six. It is hard for those outside of Chinese to appreciate China’s lust for gold medals, only gold medals. Chinese celebrities of all types were out in force this year to tell their country to appreciate silver and bronze medalists. Here is internet superstar Papi Jiang on the topic:

papi jiang-olympics

She goes as far as to say that non medalist *insert gasp* deserve praise and national appreciation. However, a collective 1.37 billion sighs of relief reverberated through China when the first gold medal was captured. There were two additional bonuses. First, miss Zhang was not expected to medal, which created a perfect narrative for the success hungry country. Second and most importantly came this picture quickly turned meme:

IMG_2635  “你再说一句试试” roughly translates to “I dare you to speak.” For giving China the first gold and creating an iconic photo miss Zhang comes in at number 6 on our list.

#5 – Drugs, disappointment, common cold, and Sun Yang (孙杨)

Sun Yang is a freestyle swimming specialist. He is well known for his Olympic record in the 400 meter freestyle and his world record in the 1500 meter freestyle. He’s also known for a few other things: allegedly harassing female swimmers, referring to himself as ‘the King,’ and testing positive for a banned substance, Trimetazidine.

Sun Yang, despite all of the negative stories (facts?), is a national treasure in China, and his picture is everywhere. This Olympics changed Sun Yang from a national treasure to a symbol of nationalism, violent nationalism, and it starts from our friends-turned- enemies-down south. Of course, I am talking about Australia.

Mack Horton is an Australian swimmer. He is also a swimmer that doesn’t appreciate competing against those who test positive for banned substances. Horton was asked how he felt about doping violators Sun Yang and South Korean Park Tae-Hwan competing at the Games, and responded: “I don’t have time or respect for drug cheats.”

This prompted an entirely reasonable, well articulated series of points from the Global Times (it is worth a read).  To be against Sun was to be distinctly anti-China. What was surprising to some was the scope and ferocity to which this notion caught on in China. Mack Horton is a racist who hates Chinese people; in fact, Australians in general are second class. This is NOT an uncommon opinion.

Mack Horton is now among the most hated men in China. In fact, I cannot think of a more disliked person.

Sun Yang, ‘the king’ of the 1500 meter freestyle, came down with a cold. So after he lost in the 400 meter to Mack Horton and cried, he didn’t make the 1500 meter finals, his best race.

Sun’s disappointing medal haul,  ESPN headlines with Mack Horton, and disturbingly nationalistic support grant him the number 5 spot in our list.


Frankly, this was a disappointing Olympics for China. In the 2008 Beijing Olympics, China dominated the gold medal count collecting 51 golds. China went from topping the medal count in 2008 to placing second in medals in London 2012. Not only did China lose the overall medal count in London, they collected 8 less of the extremely coveted medals than the United States.

How was China’s medal count in Rio? China earned 26 gold medals, almost half of their 2008 performance. This puts them third in the medal column behind Great Britain with its whopping population of 61,000,000.

Here is China’s medal count over time.


With friction in the South China sea, a slowing economy, political contradictions, and a war of words with Olympians from other countries, China needed a win. The situation was prime for China to show up in Rio and shut the world up.  The numbers simply did not meet national expectation.

This is a good place to talk about my biggest personal disappointment:

Zhang Guowei

Zhang is my favorite Chinese Olympian. He might be my favorite Olympian of any country. I had the pleasure to watch him place second in the 2015 high jump world championship here in Beijing. The crowd in the Bird’s Nest only had eyes for him. No one could compete with the showmanship of Zhang. Don’t buy the hype? Watch these gifs and try not to smile. I dare you.


He placed 2nd in the world championship in 2015 and only qualified in the top 25 in Rio. He was a favorite to medal. I hope he has continued success in the future.


#3 – The Proposal

This one might be too easy as it instantly attracted international headlines, but it is worth mentioning. No. It is above mentioning; it is worth the number three spot on our list.

He Zi (何姿) was minding her own business, collecting a silver medal for the three meter spring board, when Qin Kai ( 秦凯), a bronze medalist, proposed to her.



The proposal on the medal stand ensured plenty of cameras were around to grab pictures.

As an aside, it is nice to see such a simple and human moment at the Olympics. It is very easy to think of these young adults or kids as symbols of countries, people to pin national hopes on. What a beautiful way to remember the true scope of it all.

#2 –  Fu Yuanhui (傅园慧)

I really struggled with the top two stories. However, every story can’t be a top story, so that is why the incredible Fu Yuanhui is gifted our number two spot. Let’s start with a picture. Can you guess which is her?


It is sometimes easy to forget that China is a communist country. Official statements from the government have their own dialect- 客套话。 客套话 is the bureaucratic, robot like language of China, and it is often devoid of any meaning. That is why the smiling and unfettered emotion of one woman, Fu Yuanhui, took China by storm.

It all started with an interview.  The link I provided shows her interview and some basic translations, and it will make your day better. This interview is iconic. Her reaction is now a meme for online marketing everywhere.

Wechat (微信), the popular communication app in China, has a series of emoji’s for her.


Countless companies now use her reaction as a marketing tool. Don’t believe me?

Her reactions are on Wechat. Her reactions are advertisements for private equity. Her reactions are EVERYWHERE. As another aside 12.5 gives me a different emotional response: incredulous disbelief.

“So, the number two story goes to a woman with an adorable interview? Got it. Seems straight forward.” Oh no, imaginary viewer used to advance my story line, that’s not all.

She admitted she swam while on her period. Many people rightfully applaud her confidence to talk about the taboo topic. Even more Chinese men probably responded with, “hey, what is that anyway?”

Sexual education in China is growing, but is largely- um, what’s a nice way to say this- nonexistent. From banning dating in schools to wide spread misconceptions about health, sexual education or even basic anatomy knowledge is lacking. For Fu Yuanhui to compete while on her period and then openly discuss it is courageous. To do it as a Chinese woman in the public eye is paving roads.

For her iconic interview, wide smile, entertaining medal ceremonies, and not shying about female anatomy to a country that so often does, Fu Yuanhui, the Chinese swimmer who is now a social media darling, earns the number two spot on our list.

#1 – Volleyball

First, congratulations for making it this far. Second, here is a brain busting thought exercise: what Olympic sports other than swimming does China typically excel at? I’ll give you a few minutes to get a pen or perhaps call Alex Trebek.

Ok, what did you come up with?  Ping Pong? Badminton? These are sports that western countries are more likely to call ‘sport-like-event-that-is-not-really-a-full-fledged-sport.’  There is indeed a stereotype of Asian countries excelling at repetitive sports, diving and swimming for example. The stereotype extends to sports with small playing balls. Chinese people know this stereotype. They know it well.


“In China, ” Zheng Wang, author of Never Forget National Humiliation writes, “history is religion.” Xi Jinping has outlined, in an unbelievably vague way mind you, the Chinese dream. It is a dream based on ‘rejuvenation.’ China is obsessed with its history, and it largely based on two ideas. First, China is the oldest and greatest civilization in the world. Second, for more than one hundred years, China suffered national humiliation and was figuratively and literally raped by imperialism.

Currently, the communist party’s source of legitimacy is rejuvenating the country to its former and rightful place atop the world, a world which has done everything it can to hurt China. Zheng Wang’s book has an entire chapter devoted to Olympic politics. In 1959, a table tennis player named Rang Guotuan became the country’s first world champion in any sport. Mao Zedong praised the victory as a ‘spiritual nuclear weapon.’

Their history and national identity involves being a professional victim on the way to regain former glory. Silver medals are nothing. We want gold. We want gold in everything. China was the pinnacle of civilization. Of course we should receive gold in every sport.

It is this concept that is key to understand why the Chinese women’s volleyball team deserves the number one spot on our list: nationalism and national identities.

China beat the world at a sport it wasn’t ‘supposed’ to win. China is good at sports with small playing balls.  Volleyball has a large playing ball. So how in the face of dwindling medal counts did China further it’s national identity?   Winning at a new sport. Being the best at a sport that breaks a stereotype. Moving from humiliation to mythical greatness.

For their highly publicized win and for helping rejuvenate China, the Chinese women’s volleyball team and their gold medal deserves the number one spot on our list.


The Future of Global Institutions

International arbitration at The Hague recently ruled against China’s south sea claims. In other news, I’ve decided to issue a ruling against my neighbors for their encroaching garbage system- system is a generous word to describe a trash pile outside your front door. I have yet to decide the exact pecuniary punishment or how it will be enforced.

Does anyone really care about what the International Court of Justice has to say? I, for one, certainly do not.  Did anyone at any point in time think that The Hague ruling would resolve the situation?

*Persons who answered in the affirmative are highly encouraged to email the writer what hallucinogens they take.

The biggest result of the ruling has been to increase nationalism and establish an ‘us versus them’ dialogue in China. I just can’t help but think that it all feels so 1930’s.

South China Sea

(中国一点都不能少: This is China, not one bit less)

In no way is globalization ending or receding, however it is worth considering the efficiency of our current global institutions which were built after WWII.  For example, the World Trade Organization is far from useless, but the WTO is increasingly taking a back seat to bilateral and multilateral trade deals.  Whether it is the political boxing that has characterized the TPP or China’s freeze on Philippine bananas, current global institutions seem unfit and too archaic to be a place to resolve disputes for countries that need it most.


If these facilities cannot resolve disputes, what good are they? Furthermore, these institutions hardly seem able to enforce global standards. Even writing the phrase ‘global standards’ feels disingenuous.

So what we are left with is individual countries pursuing common ambitions via closed door policy making.  It is all extremely reminiscent of The Great Game.  Which country isn’t ‘pivoting’ to Asia now?  Even Asian countries are pivoting towards Asia. Which Asian country isn’t trying to create the new silk road?  Perhaps more poignant to my topic today, which pivoting country is using post WWII global institutions to further their goals? We have to look no further than China’s Asian Infrastructure Investment Bank to get an answer. Globalization’s frontier is working bilaterally or creating new institutions.

We, a rather ambiguous term for the world, have already done this. It was not long ago that globalization’s frontier; then defined as North America, Europe, and Japan; was characterized by extreme nationalism, increasing international capital flows, and no official channels in which to resolve disputes. So it should be no surprise to see the same nationalism and economic conflict rising in the new frontier.

In the same way that emerging countries that have defaulted on their debt repayment obligations in the past are more likely to default again in the future than are non-defaulters, globalization’s frontier players (emerging countries) are less likely to use post WWII global institutions. In short, global institutions on the frontier are not wanted and toothless. This is why The Hague’s ruling is so eye roll inducing.

It took two world wars and economic collapse to create our current institutions, but now their rulings seem like a grandfather scolding an inattentive pre-teen.  He is just too old. He just doesn’t get me. 

Worse yet, global institutions have done an incredibly poor job at predicting the future and aligning expectations with the public. Looking at political frustration in developed countries or economic stagnation in developing ones, it’s easy to understand an unwillingness to play via old rules.

The lack of organization is disconcerting.  It all feels so 1930’s.



Over or Under: The Current and Future Value of the RMB

This article by George Magnus gives an outstanding overview of the Chinese economy and predicts a devaluation in the RMB. Today I would like to tell you why he is wrong in predicting a devaluation. The RMB is, in fact, undervalued.

The over valued consensus

The over valued consensus is quite easy to explain. Chinese growth is dependent on creating large amounts of debt. Those with capital, rich people, are increasingly worried about how that debt will be paid. Due to their concerns, capital is fleeing China. This creates a positive feedback loop for capital outflows. Because so much money is leaving China, there is more supply of RMB than demand.

Why the over valued consensus is wrong

Capital flight is part of the cycle China has created. Rapid increases in debt cause capital flight. People are scared of the economic system that got them rich, however the economic fundamentals of that system are unchanged. That economic system is built upon transferring wealth from savers and consumers to investments and producers.

It was not that long ago that the graph below was enough evidence to convince the world that the RMB was undervalued.

china-current-account-to-gdp (1)

This is China’s large current account surplus. It is this graph that convinces me the RMB is undervalued.

The Chinese growth model dictates an undervalued currency. The same growth model dictates more savings than investment. These cannot change. The current capital flight is also a necessary part of the growth model (see my previous post about cycles), however it can be controlled. The current account surplus isn’t going anyway, however the capital account deficit can be controlled or manipulated. Controlling the capital account is a political decision; it is a political decision well within possibility.


So, there is a current account surplus and a capital account deficit. Why do I think the current account is more serious in regard to the value of the RMB aside from political ability to control the capital account?

fixed asset investment

I believe that investment will no longer be able to sustain economic growth. This graph is similar to the Battle of the Bulge. The Chinese government is throwing their weight into propping of investment, but ‘miracle’ growth from high investments and financial repression is over. Only government backed investment is keeping growth rates stable. I believe that this is a greater immediate disaster than China’s capital account deficit.


George Magnus gave a prediction of the RMB devaluing to 7:1 by the end of the year. My prediction is a little different. I believe that Chinese investment levels will drop by the end of the year, and Chinese savings rates will not change. Thusly, China’s current account surplus will rise.

I believe that this time next year, China will run an increasingly large trade surplus with the world. I believe this trade surplus will grab international attention and be received poorly. The current account surplus will put upward pressure on the RMB.

Step one of my prediction is a rise in China’s current account surplus. Look for it to rise over 3%. Step two involves international backlash. The main party would be the United States. Look for the United States to start mentioning key phrases such as “currency manipulator” during and after the election.

I’m not alone

A Chinese devaluation is increasingly popular to read about. The battle between the capital and  current accounts is interesting to watch. Money is steadily leaving China, however outflows are slowing in volume. I’m not alone in predicting a stronger RMB. Consider this graph that I took moments before publishing this blog post (taken from Christopher Balding’s blog).

swap price

If swap prices are now predicting a stronger RMB, it is worth considering the points I have brought up. A weak RMB was always fundamental to the Chinese growth model.  Capital outflows will have a hard time reversing what has been in place for so many years.

So, what is a cycle anyway?

I recently read this excellent article from the FT. In regard to our dialogue today, this is the important part:

“The free movement of capital will lead to an optimal allocation of resources and the   integration of open, competitive and efficient European financial markets and             services. It will also help maintain “responsible” macro-economic policy and can foster growth through finance and knowledge transfers (direct investment).”

European Commission

“There is now a growing recognition that the short term nature and inherent volatility of global capital flows are problematic.”

– Christine Lagarde

Surely, only one of these statements must be correct… right?

What is a cycle?

Credit moves in cycles. Let’s start with some simple examples.

Between 1500 and 1800, France abrogated it’s debt eight times. During this time French monarchs had a habit of executing major domestic creditors. Creditors lent money to the French crown, and when favorable conditions changed debt was forgiven. In the beginning money is lent. In the end debt is forgiven and a head is lost.

This is not an extreme example. The US occupation of Haiti beginning in 1915 was rationalized as necessary to collect debt.

Why do we have these cycles?

Why did domestic creditors issue money to the French crown if they risked losing their head? The same reason that people would trust Mozambique to repay a $850 million tuna bond. In finance or economics we refer to this as ‘searching for yields,’ and leftists often refer to this as ‘greed.’

This is nothing new. Between 1822-1825, Latin American states raised more than 20 million pounds. London, in a search for higher yields, caught silver fever.

This increase in credit leads to increases in debt. If history is any indication, the increase in debt often proves to be unstable, and countries are forced to restructure their debt. From 1826- 1828 Buenos Aires, Chile, Greater Columbia, and Peru defaulted on their external debt. London’s silver fever was for naught.

If you would like to know more about the history of debt and credit cycles I highly recommend This Time is Different, which I am paraphrasing in today’s post.

Friction in the world’s cycle

The opening quotes from the European Commission and Christine Lagarde are not mutually exclusive. Instead, they provide the dominant ideology at their point in the credit cycle. So Ms. Lagarde’s comments highlight  the prevailing mood of the world: there is great political fragility in our current version of globalization.

This political fragility comes in many forms: reassertion of national identities as a response to global immigration, rejection of centrist political parties, and general distrust of federal and international institutions. In the same way that the European Union refuses to acknowledge its immigration woes, fighting a cycle causing enough distrust to cause Britain to leave the EU, China is refusing to admit its unsustainable reliance on increasing rapid credit growth and debt. China is fighting the credit cycle.

The same cycle that is showing political fragility in the rise of Donald Trump is causing large capital outflows in China. High debt levels can adversely affect growth any time there is uncertainty about how debt servicing costs will be paid. Intelligent actors will do what is necessary to protect themselves and their assets from bearing the costs of debt. This is happening now.

Money is leaving China, and what it wants is safety and security. Pre-communist China defaulted in 1921 and 1939 on its external debt. It then relied on domestic debt to fund its political needs; domestic debt grew exponentially. Although China was able to fight the cycle in order to fight the Japanese, someone is going to pay that money. Someone, just like the French creditors pre 1800, is going to lose money and maybe a head.

The most well connected and wealthy in China are not stupid. They want to move their capital before the cycle leaves their wealth exposed. Any company not prepared to accept this new environment won’t survive the changing cycle.



Experiencing the Star of Outlook English Competition

I recently had the opportunity to be a judge for the Star of Outlook English Competition which is organized by CCTV. I had the privilege to be a judge for the National Semifinals where the ten finalist will appear on national television through CCTV. Here are some of the things I took away.


1.) The location was mind blowing. The competition was held at 九华山庄 (jiuhua international).  This is a large hotel complex set around 80 hot springs. The entire complex is big, really big. Here are some numbers from their website (all, of course, in Chinese)

The hotel boasts 1745 rooms for guests and 230,000 square meters of “exhibition space.” The complex has the second largest conference hall in China, totaling 40,000 square meters. There are different buildings that include various luxury shops.

The location left me with two impressions, first being the staggering size and second being  lack of life. Let me expand on the latter.

Although the complex had many visitors due to the English competition, facilities were far, very far from being utilized. The rooms smelled like old cigarettes, and the white paint was turning yellow. There was water damage on every floor I went to, albeit I stayed in one building. The exhibition space was large and clean, but the rooms and facilities for living felt old and un-cared for. The business model is clear upon spending a few hours walking around. This is a money losing product of an SOE that is meant to provide other SOEs a facility to have comically over sized conferences. Thusly, all amenities and characteristics that foreigners commonly associate with a large hotel/ hot spring complex are lacking. People were present, although far from filling the vast space, but the decay of rooms and empty shops  emitted a sense of foreboding.

In short, it is a great place to hold a meeting. It is an awful place for relaxing.


2.) I judged children ranging from 10 to 12.  Our group of judges, pictures below, was tasked to judge the English level of 278 contestants. We had to whittle this number to ten. It was incredibly difficult. The total amount of contestants nation-wide this year was 7 million, so all of the national semifinalists were extremely gifted. Many of these students lived abroad and were fluent in English.  There were a total of four rounds where students had to introduce themselves and answer various questions


As the competition is held by CCTV and the winning contestants appear on TV, much of the judging is less about English and more about personality and confidence.  For example, there were dozens of students who built various robots. The robots usually operated by voice command, iPad, or  visual cues. My childhood Legos truly seem inadequate. I have no doubt that the ‘robotics’ contestants will grow up to be highly successful, however my CCTV rubric had no love to give to introverts. Confidence and personality were more important than English ability.

We eventually decided on a list of twenty students for the final round. From these twenty we would go on to choose the ten finalist. Here is the list:


The Star of Outlook English Competition is huge. Seven million students throughout China compete to be on TV to showcase their talents. Isn’t it interesting then that such a large percentage of the finalist came from two cities: Shenzhen (red) and Beijing (blue). I am including Beijing as a formality. Of the final fifty students, close to half were from Shenzhen.

Childrenresults1With the slow down in China, a lot of media has been discussing the various distinctions between cities and their different virtues. There have been a few well written pieces discussing Shenzhen, and it was encouraging to see such social capital. Anecdotally, all judges for all age groups coined some phrase to describe contestants from Shenzhen. They far exceeded their peers.

3.) I saw a copy of this year’s SAT.

Because of the size of the event, various representatives of the education industry setup shop. Many of the vendors sold ways to cheat on the 高考 (gaokao) and SAT.

If you have WeChat, you can view examples of SAT cheating products here. On an unrelated note, why bother putting a water mark on pirated information?

The prices for cheating were cheap. Copies of this year’s SAT were being sold for roughly 1,000RMB. You could also pay a company to take the test in your name for roughly 15,000RMB.  It was eye opening to see. It is crucial to understand that cheating is not a ‘bad’ thing in China. If you are smart enough to trick or game the system, you are worthy of success. Successful cheating is evidence of being intellectually superior to someone else.

This article details sophisticated cheating by Chinese students. However, I hope readers can understand that cheating here is exponentially more common and less complex. Lastly, the United States College Board needs to take this seriously. I now have no idea how universities differentiate Chinese scores when cheating seems so prevalent. Our rule sets and standards are so different.

I can only imagine the amount of fraud and ethical grey (black?) areas in other industries.Seeing such blatant, industrial scale cheating was new to me. Welcome to China.

4.)  I would like to finish by saying that I feel privileged to have had this experience. The teens and kids were gifted, and the overall experience certainly broadened my horizons. It was a blast to work with the professional staff at CCTV. I hope I can do it again next year.

Traveling in Yunnan : 大理 (Dali) and 双廊 (Shuanglang)


When traveling in Yunnan there are two must have stops: Dali (大理) and Lijiang (丽江). Today I will skip my financial monologue to tell you  about 大理, and why you should not go there.

Forgive my gimmicky sounding second sentence and hear me out. Erhai (洱海) is beautiful and worth visiting, however staying in 大理 or 大理古城 (Dali Old Town) is not where you want to be. Today I want to tell you to reside two hours from 大理 in 双廊 (Shuanglang)

Why is 双廊 better than 大理古城?

The company

Pop quiz dear reader: Which of these streets would you rather explore?

Here, I will give you another shot.

OK, this is your last chance:

If you’ve ever been on vacation and thought, “god, I wish this place was just packed with more people.” 大理古城  is the perfect place for you! 大理古城 is the same over priced tourist trap that you can find in most cities in China.  Don’t be fooled by the overcast sky in the three pictures of 双廊 (all, of course, on the right). It offers the same amenities with no crowds.

I can’t emphasize how much of a tourist trap 大理古城 is. Don’t misunderstand, it is worth seeing for a day. It is mindless fun; however, it should not be your main attraction. The pace is fast and the people working there want nothing more than to take your money. Consider this woman in Shuanglang:


She certainly isn’t selling produce out of the goodness of her heart, however she and the hawkers of Shuanglang were so fun, so comfortable, so relaxed. People in Dali were very nice, but people in Shuanglang seemed like they were on permanent vacation. The difference in hawking manners was tangible.

Why is 双廊 better than 大理古城?

The food

This is the easiest point to make. The food in 双廊 was, for lack of a better word, awesome. Really awesome. Picking a restaurant in both cities is incredibly easy. Most restaurants arrange their food outside.

Picking breakfast, lunch, and dinner amounted to saying, “oh, that looks delicious.” The food was always mind blowing in Shuanglang.

Yunnan is famous for mushrooms. Order them every chance you get. I was also enamored with the shellfish, eating a clam at least every meal. The food in Dali was good, but the food in Shuanglang was some of the best I’v ever had. I did not order “slutty soup,” but this menu gives a good idea as to food pricing in 双廊- cheap.  IMG_1634


Why is 双廊 better than 大理古城?

The view

The view anywhere on Erhai is beautiful. Dali Old Town is certainly pretty, but the focus of the beauty is the architecture. Shuanglang is much more quiet and focuses on surrounding area. The view in Dali Old Town looks something akin to this:


This is the best photo I took of the scenery surrounding the town, because, as previously mentioned, the scenery is mostly focused on the architecture of the town. Contrast this with any of the small villages surrounding Erhai:


The conclusion is simple. Stay in Shuanglang for a few days. Rent a moped for 50元 for a whole day and go explore. You won’t regret it.

Increasing Credit and Headless Flowers

This post is going to be a large amalgamation of recent data. Bear with me.

The Current Growth Rate

China is growing at 6.7%. How is a country with rising debt burdens and low consumption managing to increase growth? China is increasing credit to prop failing businesses, exacerbating the imbalances inherit in its economic growth model.

In Q1, increases in total credit increased to CNY7.5tn, up 58% year on year and equivalent to 46.5% of nominal GDP. Credit growth in March accelerated to 15.8% year on year. Wei Yao from SocGen also wrote:

Considering also the record swap amount of CNY776bn local government debt into local government bonds, total credit to the non-financial sector actually increased nearly CNY3tn last month. The strength in non-bank credit came first and foremost from the corporate bond market. Net issuance there was a record CNY695bn in March.

Because consumption cannot adequately assuage local government’s need for growth, the federal government is pumping money into fixed assets and the least productive sectors of the economy.

The Least Productive

Before detailing who is benefiting from this stimulus as a sign of its inability to be continued, it is worth summarizing Chinese growth and common misconceptions. The Chinese economy benefited from extremely high growth rates, because credit flooded the economy. When China was underdeveloped this was a great thing, however it eventually led to over investment. Wealth from savers and consumers subsidized growth for fixed assets and producers through financial repression. Consider the loan to deposit ratios and SOE shares in selected provinces during the beginning of high investment/ growth period.


Loan to Deposit Ratio

Provinces                 1988          1993

Top 3

Jilin                              1.9          1.9

Inner Mongolia        1.5          1.6

Heilongjiang             1.6           1.5

Bottom 3

Fujian                         1.2            1.0

Zhejiang                    1.2             .9

Guandong                  1.3             .8


SOE percentage shares (1993)

       Industrial Output Value         Industrial Employment

Top 3

Jilin                              75                         100

Inner Mongolia        82                         70

Heilongjiang              83                        71

Bottom 3

Fujian                           40                        42

Zhejiang                       31                        28

Guandong                    34                        32



Private industry, the most productive part of the economy, subsidized state directed investment. Much of this investment went into sectors that relied on high credit growth, commodities- more on this later.

This is important because much of this money went into poor areas. Heilongjiang is not a bastion of free enterprise and productive economic assets. Indeed these poorer areas that received state directed investment and had loose credit controls are in outright recession. This is in spite of the fact that capital stock for this area is relatively low. You can read more about China’s capital stock here, however I can provide a quick summary of Chinese economic discussion, particularly China’s capital stock ratio, in 2012.  Many people thought that China wasn’t over invested because its capital stock ratio was lower than the United States. Put another way, “They didn’t spend too much because they haven’t completed their spending plan!”

The least productive parts of the Chinese economy are receiving this Q1 stimulus. Look at the following graphs from Christopher Balding (you can download the original PDF here):

Balding capacity LNG operating rates by province

I hope you can take a minute to look at his full PDF. It is interesting to note how low operating rates are, and it is equally interesting to note to that during a time of rising debt and low operating rates, increased credit is causing a sizeable uptick in Chinese PMI- as seen below.



I am in no way faulting the party. Read this post from FT Alphaville to see the stress the federal government must be under. Rural provinces are int recession- see charts below:



The conclusion is this: the Chinese economy, particularly the inefficient rural provinces that ‘benefited’ from financial repression and loose credit, are struggling. To keep social balance the central government loosened credit. Although this may increase headline data, it only worsens the imbalances inherit in the  Chinese growth model.


Final Note

I work in 国贸(Guomao) in Beijing.  Guomao is meticulously groomed; every season has new flowers and trees. The flower beds were updated last week. The flower beds now look like this (please excuse my poor phone camera quality):

I’m sure it’s a sign, but I can’t put it together: something about selfie fodder and wasted money.




Beijing isn’t grey today.