The anti-bailout China, sort of10 September, 2012, 13:53. Posted by Zarathustra
It is often not easy to differentiate between what you think a government should do and what a government will do, especially when you are not deliberately trying to distinguish the two. As a result, many have been calling government massive stimulus in China, without realising that they are merely hoping for stimulus themselves (or perhaps some have other ulterior motives to be bullish, that we are not going to discuss here).
Any forecasts on the Chinese economy will depend on what the government will do. The government should be able to generate GDP growth at costs, at least theoretically speaking, but the firepower that is required this time will be greater than last, in our view. Also, we have maintained for months now that the government is reluctant to put in massive stimulus. It has to be stressed that the massive stimulus after 2008/09 crisis has been widely regarded as a mistake within China, and there is a case to be made that some within the central government has the same view as well.
Wu Xiaoling, the former deputy governor of People’s Bank of China and current Dean of PBC School of Finance at Tsinghua University (previously the People’s Bank of China own graduate school), spoke at a conference on rating agencies in China yesterday. The full speech can be read here [in Chinese] (via Sina). In her speech, she stressed the importance of having historical data for proper rating of securities. One part was particularly interesting. She said:
The key to the development of rating agencies in China is not about the size of the market, but the tolerance of failure. Without historical data of failures and defaults, rating agencies cannot build adequate models to assess risks of default… Since we cleaned up the financial market in 1992, we have tolerated no defaults in the bond market… In order for Chinese financial market to advance more quickly, we should tolerate failures in the financial markets. Only this can the market nurture more sophisticated investors, and only this can China produce a proper credit rating system…
Of course, she is a formerPBOC deputy governor, not current one, so this is by no means a suggestion that the government or PBOC will be more than happy to see unprofitable companies to go bankrupt and default on their debts. However, it is interesting to note the anti-bailout and pro-austerity sentiment within China. Or at the very least, anti-stimulus.