Thursday, February 6, 2014

Size Doesn't Matter

(Porn is on the next blog. Here only China and other boring stuff)
Many pictures during the last weeks showing the size of Chinese Trusts and Wealth Management Products are very small compared to assets, GDP, deposits, etc. (See below a neat one, from BCA).
True, chances of banking crisis is small in China. But, as I see, bankruptcy is a signal that projects have negative rate of return. Suppose there was overaccumulation of capital and many prices were distorted (interest rates, exchange rate, commodities, pollution). Now, as prices get corrected, many previous investments become unprofitable, and the economy shows a much lower productivity. As a result, GDP drops.
I guess my point is that, even without a banking crisis, broad based trust funds problems indicate Chinese GDP could face a severe slow down.

3 comments:

  1. Fk, se as novas reformas da China melhorarem as instituições econômicas então a produtividade cresce e logo o estoque ideal de capital por trabalhador também cresce. Me parece que pode-se desarmar a bomba através de reformas econômicas e politicas que aumentem a produtividade.

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  2. your logic is perfect. but I think overinvestment is so big that it will take too long for a productivity catch up

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  3. Great point FK. I think China situation is a bigger version of brazilian PND II without the problem of foreign debt.

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