Monday, July 29, 2013

The Soviet Setup is Now the China Setup

Levan Shanidze emails:

As a follow up to your post about China in EPJ.

In China, the scale of graft is beyond a comprehension of economists and strategists, be it a system corrupt sell side or buy side.

Talking about lower efficiency of incremental debt or incremental stimulus is one thing but grasping the actual mechanics of what goes on is another.

I grew up in former Soviet Union, and lived through "Perestroika" and what followed, and what followed was a setup that is very similar to China setup.

To get some basic understanding a good read is McMafia by Misha Glenny, the part about Eastern Europe.

The most lucrative trade of 90's Soviet period was obtaining a bank loan (there were only state banks). Which was easy as long as you paid bank manager 20% straight in the pocket. It was up to you what you did with the 80%.

Fast forward to today's China. Special investment financing vehicle and state bank loan architecture has been in place for a long time and not just since 2008. As you can imagine such vehicles are predominantly used to skim a little bit off the top. Operator gets rich, lender gets rich, party official gets rich.

2008-2009 RMB 4trn stimulus is the payday system the operators were waiting for, a once in a lifetime chance.

A Chinese builder is building a ghost city. He knows very well nobody is coming to live there for years, if ever. Local government officials also know. Everybody knows. Hell, even foreigners figured it out, and you have to be dumb to think that Chinese didn't know this first. Now when you build city like this you may fit out couple of buildings for a show, and make the center look ok from the outside. That is about 50% of your written expenditure, may be less. The rest is just gone in the pocket. This example can apply to almost any other business in China.

Forget the P/E multiple, large amount of balance sheets are not worth what is being written on them even on cost basis (ignore deterioration caused by time).

The above is just what humans do when central bank credit and cash is easy.

No comments:

Post a Comment