Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
What UK CPI, RPI INFLATION Forecasts for General Election Result 2019 - 11th Dec 19
Gold ETF Holdings Surge… But Do They Actually Hold Gold? - 11th Dec 19
Gold, Silver Reversals, Lower Prices and Our Precious Profits - 11th Dec 19
Opinion Pollsters, YouGov MRP General Election 2019 Result Seats Forecast - 11th Dec 19
UK General Election Tory and Labour Marginal Seats Analysis, Implied Forecast 2019 - 11th Dec 19
UK General Election 2019 - Tory Seats Forecast Based on GDP Growth - 11th Dec 19
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19

Market Oracle FREE Newsletter

UK General Election Forecast 2019

China's Creative Accounting, Using Debt as an Instrument of Economic Growth

Economics / China Economy Oct 30, 2010 - 11:18 AM GMT

By: Ellen_Brown

Economics

Best Financial Markets Analysis ArticleChina may be as heavily in debt as we are.  It just has a different way of keeping its books -- which makes a high-profile political ad sponsored by Citizens Against Government Waste, a fiscally conservative think tank, particularly ironic.  Set in a lecture hall in China in 2030, the controversial ad shows a Chinese professor lecturing on the fall of empires: Greece, Rome, Great Britain, the United States . . . . 


"They all make the same mistakes," he says. "Turning their backs on the principles that made them great. America tried to spend and tax itself out of a great recession. Enormous so-called stimulus spending, massive changes to health care, government takeover of private industries, and crushing debt."

Of course, he says, because the Chinese owned the debt, they are now masters of the Americans.  The students laugh.  The ad concludes, "You can change the future. You have to."

James Fallows, writing in the Atlantic, remarks:

“The ad has the Chinese official saying that America collapsed because, in the midst of a recession, it relied on (a) government stimulus spending, (b) big changes in its health care systems, and (c) public intervention in major industries -- all of which of course, have been crucial parts of China's (successful) anti-recession policy.”

That is one anomaly.  Another is that China has managed to keep its debt remarkably low despite decades of massive government spending.  According to the IMF, China’s cumulative gross debt is only about 22% of 2010 GDP, compared to a U.S. gross debt that is 94% of 2010 GDP. 

What is China’s secret?  According to financial commentator Jim Jubak, it may just be “creative accounting” -- the sort of accounting for which Wall Street is notorious, in which debts are swept off the books and turned into “assets.”  China is able to pull this off because it does not owe its debts to foreign creditors.  The banks doing the funding are state-owned, and the state can write off its own debts. 

Jubak observes:

“China has a history of taking debt off its books and burying it, which should prompt us to poke and prod its numbers. If we go back to the last time China cooked the national books big time, during the Asian currency crisis of 1997, we can get an idea of where its debt might be hidden now.”

The majority of bank loans, says Jubak, went to state-owned companies -- about 70% of the total.  The collapse of China’s export trade following the crisis meant that its banks were suddenly sitting on billions in debts that were clearly never going to be paid.  But that was when China’s largest banks were trying to raise capital by selling stock in Hong Kong and New York, and no bank could go public with that much bad debt on its books.

The creative solution?  The Beijing government set up special-purpose asset management companies for the four largest state-owned banks, the equivalent of the “special purpose vehicles” designed by Wall Street to funnel real estate loans off U.S. bank books.  The Chinese entities ultimately bought $287 billion in bad loans from state-owned banks.  To pay for the loans, they issued bonds to the banks, on which they paid interest.  The state-owned banks thus got $287 billion in toxic debt off their books and turned the bad loans into an income stream from the bonds.  

Sound familiar?  Wall Street did the same thing in the 2008 bailout, with the U.S. government underwriting the deal.  The difference was that China’s largest banks were owned by the government, so the government rather than a private banking cartel got the benefit of the arrangement.  According to British economist Samah El-Shahat, writing in Al Jazeera in August 2009:

“China hasn’t allowed its banking sector to become so powerful, so influential, and so big that it can call the shots or highjack the bailout. In simple terms, the government preferred to answer to its people and put their interests first before that of any vested interest or group. And that is why Chinese banks are lending to the people and their businesses in record numbers.”

In the US and UK, by contrast:

“[B]anks have captured all the money from the taxpayers and the cheap money from quantitative easing from central banks. They are using it to shore up, and clean up their balance sheets rather than lend it to the people. The money has been hijacked by the banks, and our governments are doing absolutely nothing about that. In fact, they have been complicit in allowing this to happen.”

Today, Jubak continues, China's debt problem is the thousands of investment companies set up by local governments to borrow money from banks and lend it to local companies, a policy that has produced thousands of jobs but has left an off-balance-sheet debt overhang.  He cites economist Victor Shih, who says local-government investment companies had a total of $1.7 trillion in outstanding debt at the end of 2009, or about 35% of China's GDP.  Banks have extended $1.9 trillion in credit lines to local investment companies on top of that.  Collectively, the debt plus the credit lines come to $3.8 trillion.  That is about 75% of China's GDP, which is proportionately quite a bit smaller than U.S. GDP.  None of this is included in the IMF’s calculation of a gross-debt-to-GDP figure of 22%, says Shih.  If it were, the number would be closer to 100% of GDP.

Proportionately, then, China may be more heavily in debt than we are.  Yet it is still managing to invest heavily in infrastructure, local businesses and local jobs.  Its creative accounting scheme seems to be working for the Chinese.  It may be sleight of hand, but it was a necessary ploy to harmonize their economic realities with Western banking standards. 

For China to join the World Trade Organization in 2001, it had to revise its accounting methods to conform to Western requirements; but before it joined, it did not consider grants to its state-owned enterprises to be “non-performing loans.”  They were what the IMF calls “contingent grants.”  If they paid off, great; if they didn’t, they were written off.  There were no creditors demanding payment from the state-owned banks.  The creditor was the state; and the state, at least in theory, was the people.  In any case, the state owned the banks.  It was lending to itself, and it could write off its loans at will.  It was better to sweep the “NPLs” into “SPVs” than to cut back on services and impose heavier taxes on the people.  The Chinese government did cut back on services and raise taxes, to the detriment of the struggling masses, but not to the extent that would otherwise have been necessary to balance their books by Western standards.

While the rest of the world suffers from an unrelenting credit crunch, today China’s banks are on a lending binge.  The rush to make new loans is a direct response to the government’s economic stimulus policy, which emphasizes infrastructure and internal development.  The Chinese government was able to get its banks to open their lending windows when U.S. banks were being tight-fisted with their funds, because the government owns the banks.  The Chinese banking system has been partially privatized, but the government is still the controlling shareholder of the Big Four commercial banks, which were split off from the People’s Bank of China in the 1980s. 

We might take a lesson from the Chinese and put our own banks to work for the people, rather than making the people work for the banks.  We need to get our dollars out of Wall Street and back on Main Street, and we can do that only by breaking up Wall Street’s out-of-control private banking monopoly and returning control over money and credit to the people themselves.

We could also take a lesson from the Chinese and dispose of our debt with a little creative accounting: when the bonds come due, we could pay them with dollars issued by the Treasury, in the same way that the Federal Reserve has issued Federal Reserve Notes to save Wall Street with its “Quantitative Easing” program.  The mechanics of that process were revealed in a remarkable segment on National Public Radio on August 26, 2010, describing how a team of Fed employees bought $1.25 trillion in mortgage bonds beginning in late 2008. According to NPR:

"The Fed was able to spend so much money so quickly because it has a unique power: It can create money out of thin air, whenever it decides to do so. So . . . the mortgage team would decide to buy a bond, they'd push a button on the computer – ‘and voila, money is created.’”

If the Fed can do it to save the banks, the Treasury can do it to save the taxpayers.  In a paper presented at the American Monetary Institute in September 2010, Prof. Kaoru Yamaguchi showed with sophisticated mathematical models that if done right, paying off the federal debt with debt-free Treasury notes would have a beneficial stimulatory effect on the economy without inflating prices.  

The CAGW ad is correct: we have turned our backs on the principles that made us great.  But those principles are not rooted in “fiscal austerity.”  The abundance that made the American colonies great stemmed from a monetary system in which the government had the power to issue its own money – unlike today, when the only money the government issues are coins.  Dollar bills are issued by the Federal Reserve, a privately owned central bank; and the government has to borrow them like everyone else.  But as Thomas Edison famously said:

“If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. . . . It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold."

China’s government can direct its banks to advance credit in the national currency as needed, because it owns the banks.  Ironically, the Chinese evidently got that idea from us.  Sun Yat-sen was a great admirer of Abraham Lincoln, who avoided a crippling national debt by issuing debt-free Treasury notes during the Civil War; and Lincoln was following the lead of the American colonists, our forebears.  We need to reclaim our sovereign right to fund the common wealth without getting entangled in debt to foreign creditors, through the use of our own government-issued currency and publicly-owned banks.     

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.

Ellen Brown is a frequent contributor to Global Research.  Global Research Articles by Ellen Brown

© Copyright Ellen Brown , Global Research, 2010

Disclaimer: The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Centre for Research on Globalization. The contents of this article are of sole responsibility of the author(s). The Centre for Research on Globalization will not be responsible or liable for any inaccurate or incorrect statements contained in this article.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules