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Swimming Naked in China. With the Chinese government tightening credit, the massive leakage from the formal banking sector into the ‘shadow system’ ultimately risks sinking the country’s financial system.

Swimming Naked in China

For quite some time, analysts of China have been puzzled by a strange phenomenon: the country’s public and financial institutions are decidedly subpar by any international standard, but its economic growth rate is anything but. This puzzle can only be explained by two conclusions: either China has been fudging its growth data, or Chinese institutions aren’t as bad as outsiders commonly think. There is, however, a third possibility. During the peak of the credit bubble in the United States, bankers on Wall Street had a popular saying: “When the tide is high, nobody knows you are swimming naked.”

What this aphorism means is that apparent economic prosperity can cover up many dubious if not outright shady practices that eventually lead to financial calamities. China's Real Estate Bubble May Have Just Popped. Snapshot Financing the Middle Kingdom's recent building boom has been expensive: Estimates put local government debt alone at between $800 billion and $2 trillion, or around 13 to 36 percent of GDP.

China's Real Estate Bubble May Have Just Popped

If the real estate bubble pops, financial and social crises will follow. Condos under construction in Guangzhou. (Photo: Slices of Light / flickr) For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred -- that is, until now.

Shanghai homeowners are hardly the only ones getting nervous. What makes the future look particularly bleak is the lack of escape routes. "The Future of China’s Growth" by Justin Yifu Lin. Exit from comment view mode.

"The Future of China’s Growth" by Justin Yifu Lin

Click to hide this space BEIJING – The slowdown of China’s economy has captured the headlines in recent weeks. Whether it is a permanent or temporary adjustment, the Chinese authorities have much work to do in laying the groundwork for strong economic performance in the medium and long term. Despite extraordinary growth since the start of its transition to a market economy in 1979, China is facing serious challenges simultaneously: rising inequality, large and growing levels of environmental degradation, stubborn external imbalances, and an aging society.

Fortunately, China’s 12th Five-Year Plan (2011-2015) recognizes the need to deepen market-oriented reform, change the country’s development model, and focus on the quality of growth, structural reforms, and social inclusion to overcome the rural-urban divide and stem the rise in income inequality. The report is the result of a longstanding China-World Bank partnership. "China Adjusts" by Jeffrey Frankel. Exit from comment view mode.

"China Adjusts" by Jeffrey Frankel

Click to hide this space BAHRAIN – China watchers are waiting to see whether the country has engineered a soft landing, cooling down an overheating economy and achieving a more sustainable rate of growth, or whether Asia’s dragon will crash to earth, as others in the neighborhood have before it. But some, particularly American politicians in this presidential election year, focus on only one thing: China’s trade balance. True, not long ago the renminbi was substantially undervalued, and China’s trade surpluses were very large. That situation is changing. China’s trade surplus peaked at $300 billion in 2008, and has been declining ever since. The change can be measured by real exchange-rate appreciation, which consists partly in nominal renminbi appreciation against the dollar, and partly in Chinese inflation.

The natural price-adjustment process was delayed. As costs rise in China’s coastal provinces, several types of adjustment are taking place. "China’s Stability Gambit" by Stephen S. Roach. Exit from comment view mode.

"China’s Stability Gambit" by Stephen S. Roach

Click to hide this space BEIJING – The first principle that I learned when I started focusing on China in the late 1990’s is that nothing is more important to the Chinese than stability – whether economic, social, or political. Given centuries of turmoil in China, today’s leaders will do everything in their power to preserve stability. Whenever I have doubts about a potential Chinese policy shift, I examine the options through the stability lens. It has worked like a charm. Stability was on everyone’s mind at the annual China Development Forum (CDF) held March 17-20 in Beijing. The formal sessions played out predictably, placing great emphasis on the coming structural transformation of China’s growth model – a colossal shift from the all-powerful export- and investment-led growth of the past 32 years to a more consumer-led dynamic. Many of the other themes flowed from this general conclusion.

Bo personified that risk. From ‘Made in China’ to ‘Bought in China’ - Ideas. Viewpoint: China, the 'leading dragon' of the world economy. 24 November 2011Last updated at 00:30 By Justin Yifu Lin Chief economist, World Bank Justin Yifu Lin's new book is called "Demystifying the Chinese Economy" Whether we are on the verge of an "Asian Century" or not, one thing is clear: there has already been a dramatic shift in the geographic centre of the global economy.

Viewpoint: China, the 'leading dragon' of the world economy

China is now front and centre, and its role as a leading dragon can be beneficial for growth prospects for the world economy. The world desperately needs engines of growth right now, and fortunately - with continued strong and pragmatic economic policy making - China can provide that impetus. China is now the world's second biggest economy and the largest exporter of goods, with 9.6% of the global share, followed by Germany, the United States and Japan. China's foreign reserves, which now exceed $3 trillion, are the largest in the world. Continue reading the main story “Start Quote End Quote The 'advantage of backwardness' The challenges China's growing reach.

"Greece-Proofing China" by Yu Yongding. Exit from comment view mode.

"Greece-Proofing China" by Yu Yongding

Click to hide this space BEIJING – Despite repeated assurances by European Union leaders, after more than two years, there is still no light at the end of Europe’s debt-crisis tunnel. Recently, the president of the European Commission, José Manuel Barroso, referring to a possible Greek exit from the eurozone, told the European Parliament that there is no “Plan B.” Barroso’s statement was meant to be reassuring. But, after so many disappointments, China cannot accept at face value the assurances of European politicians, which even they themselves do not know whether they can redeem.

Indeed, it is increasingly likely that Greece will renege on its bailout obligations. For starters, Chinese officials should be under no illusion that the country will be immune to financial contagion. In fact, China already experienced the impact of deleveraging late last year, when the European financial system seemed on the brink of collapse. China Credit Squeeze Prompts Suicides, Violence. Hours after a creditor and his gang of tattooed thugs hustled Zhong Maojin into a coffee shop in Wenzhou, he says he wouldn’t yield to their demands.

China Credit Squeeze Prompts Suicides, Violence

They wanted to take over one of the pharmacies in a chain he’d built by borrowing from private lenders. Instead, he made an offer of traditional retribution in this eastern Chinese city, known for loan sharks who have sometimes meted out violence to bad debtors. “If you like, you can cut off one of my fingers instead,” Zhong, 42, says he told them. Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said. He’d borrowed 30 million yuan ($4.7 million) at interest rates as high as 7 percent a month to expand the business.

At least 90 bosses in similar situations to Zhong have fled the city since April, and two killed themselves, according to Zhou Dewen, head of a small business association in Wenzhou. ‘Huge Pressure’ The measures have done little to help Zhong, he says. ‘Tip of Iceberg’ Network of Lenders. Another Asian Wake-Up Call - Stephen S. Roach. Exit from comment view mode.

Another Asian Wake-Up Call - Stephen S. Roach

Click to hide this space NEW HAVEN – For the second time in three years, global economic recovery is at risk. In 2008, it was all about the subprime crisis made in America. Today, it is the sovereign-debt crisis made in Europe. The alarm bells should be ringing loud and clear across Asia – an export-led region that cannot afford to ignore repeated shocks to its two largest sources of external demand.

Indeed, both of these shocks will have long-lasting repercussions. Never before has America, the world’s biggest consumer, been so weak for so long. A comparable outcome is likely in Europe. Moreover, with fiscal austerity likely to restrain aggregate demand in the years ahead, and with capital-short banks likely to curtail lending – a serious problem for Europe’s bank-centric system of credit intermediation – a pan-European recession seems inevitable. It is difficult to see how Asia can remain an oasis of prosperity in such a tough global climate.

Demystifying the Chinese Economy - Justin Yifu Lin. Exit from comment view mode.

Demystifying the Chinese Economy - Justin Yifu Lin

Click to hide this space WASHINGTON, DC – China had an advanced and prosperous civilization for millennia until the eighteenth century, but then degenerated into a very poor country for 150 years. Now it has resurged to become the world’s most dynamic economy since launching its transition to a market economy in 1979. What drove these fateful changes? In my recent book Demystifying the Chinese Economy, I argue that, for any country at any time, the foundation for sustained growth is technological innovation.

The Industrial Revolution accelerated the pace of Western progress by replacing experience-based technological innovation with controlled experiments conducted by scientists and engineers in laboratories. China failed to undergo a similar shift, owing primarily to its civil-service examination system, which emphasized the memorization of Confucian classics and provided little incentive for elites to learn mathematics and science. Asia in the Year of the Dragon - Haruhiko Kuroda. Exit from comment view mode. Click to hide this space MANILA – This is the year of the “Black Water Dragon,” an astrological cycle that indicates change, but with a measure of calm, sensibility, and prudence.

The people and governments of Asia certainly hope that this proves to be the case, but uncertainties – from within and without the region – are growing rapidly. Developing Asia has performed relatively well over the past two years. It led the world out of the 2008-2009 “Great Recession,” recording 9% average economic growth in 2010 and solidifying that recovery by laying the basis for a more moderate – and, one hopes, sustainable –pace of economic expansion. The biggest economic risk to the region is that Europe hits a financial tripwire and plummets into a deep recession, or that the US recovery stagnates during this election year. If the eurozone crisis leads to a sovereign default, contagion could spread to the rest of the world.

Growing inequality is not just an Asian issue. Rattling the Renminbi - Yu Yongding. Exit from comment view mode. Click to hide this space BEIJING – From July 2005 until this past December, China’s renminbi (RMB) appreciated steadily. But then the RMB fell unexpectedly, hitting the bottom of the daily trading band set by the Peoples’ Bank of China (PBoC) for 11 sessions in a row.

Though the RMB has since returned to its previous trajectory of slow appreciation, the episode may have signaled a permanent change in the pattern of the exchange rate’s movement. As long as China was running a trade surplus and receiving net inflows of foreign direct investment, the RMB remained under upward pressure. There were two reasons for this. So why, if China was still running a decent current-account surplus and a long-term capital surplus, did the RMB suddenly depreciate, forcing the PBoC to intervene (though not very vigorously) to prevent it from falling further? We see neither reaction. But, in contrast to the CNY, the CNH is a free market. Why Capital Flows Uphill - Keyu Jin. Exit from comment view mode. Click to hide this space LONDON – At first, it seems difficult to grasp: global capital is flowing from poor to rich countries. Emerging-market countries run current-account surpluses, while advanced economies have deficits. One would expect fast-growing, capital-scarce (and young) developing countries to be importing capital from the rest of world to finance consumption and investment.

So, why are they sending capital to richer countries, instead? China is a case in point. And China is not alone. Many observers believe that these global imbalances reflect developing economies’ financial integration, coupled with underdevelopment of domestic financial markets. While plausible, this argument suggests that, as financial markets improve over time in developing countries, the global imbalances are bound to shrink. A crucial dimension of globalization has been trade liberalization.

The China Bears’ Feeble Growl - Yu Yongding. Exit from comment view mode. Click to hide this space BEIJING – In recent months, bearish sentiment about the Chinese economy has surged, owing largely to three conjectures. First, China’s housing market is on the brink of collapse. Second, China’s fiscal position will worsen rapidly because of massive local government debt. And, third, the collapse of underground credit networks in bustling cities such as Wenzhou will lead to a broad financial crisis across the country. In fact, despite its problems, China’s economy remains in good condition – at least so far.

Since the twenty-first century began, skyrocketing housing prices in China, except for a short respite during the global financial crisis, have caused serious social discontent. But the fall in housing prices is unlikely to turn into a rout, because real demand for houses will remain strong after speculative demand is driven from the market. Meanwhile, local government debts are a relatively new phenomenon. The Future of the Yuan. According to a growing chorus of pundits and economists, China -- already the world’s most prolific exporter, largest sovereign creditor, and second-largest economy -- will someday soon provide the world’s reserve currency. According to this view, just as the dollar dethroned the British pound in the interwar years, so the yuan will soon displace the dollar, striking a blow to U.S. interests.

As the economist Arvind Subramanian recently wrote, the yuan “could become the premier reserve currency by the end of this decade, or early next decade.” This view has gained traction as Chinese leaders have launched a concerted effort to internationalize the yuan. During the G-20 summit in November 2008, at the height of the financial crisis, Chinese president Hu Jintao called for “a new international financial order that is fair, just, inclusive, and orderly.”

To continue reading, please log in. Don't have an account? Register Register now to get three articles each month. Have an account? Is China's Economy Crumbling? "China’s Growing Growth Risks" by Yao Yang. The Impoverished “Asian Century” - Chandran Nair. The End of the Con. "China’s Slow Road" by Shujie Yao. 5 Signs of the Chinese Economic Apocalypse - By Trefor Moss. What Is Financial Reform in China?