China calls this government bank financing "lending" rather than "money printing," but the effect is very similar to what European central bankers are calling "helicopter money" for infrastructure -- central bank-generated money that does not need to be repaid. If the Chinese loans get repaid, great; but if they don't, it's not considered a problem. Like helicopter money, the non-performing loans merely leave extra money circulating in the marketplace, creating the extra "demand" needed to fill the gap between GDP and consumer purchasing power, something that is particularly necessary in an economy that is contracting due to shrinking global markets following the 2008-09 crisis.
In a December 2017 article in the Financial Times called "Stop Worrying about Chinese Debt, a Crisis Is Not Brewing", Zhao expanded on these concepts, writing:
"[S]o-called credit risk in China is, in fact, sovereign risk. The Chinese government often relies on bank credit to finance government stimulus programmes. . . . China's sovereign risk is extremely low. Importantly, the balance sheets of the Chinese state-owned banks, the government and the People's Bank of China are all interconnected. Under these circumstances, a debt crisis in China is almost impossible."
Chinese state-owned banks are not going to need a Wall Street-style bailout from the government. They are the government, and the Chinese government has a massive global account surplus. It is not going bankrupt any time soon.
What about the risk of inflation? As noted by the Citigroup economists, Chinese-style "qualitative easing" is actually less inflationary than the bank-focused "quantitative easing" engaged in by Western central banks. And Western-style QE has barely succeeded in reaching the Fed's 2 percent inflation target. For 2017, the Chinese inflation rate was a modest 1.8 percent.
What to Do When Congress Won't Act
Rather than regarding China as a national security threat and putting our resources into rebuilding our military defenses, we might be further ahead studying its successful economic policies and adapting them to rebuilding our own crumbling roads and bridges before it is too late. The US government could set up a national infrastructure bank that lends just as China's big public banks do, or the Federal Reserve could do qualitative easing for infrastructure as the PBOC does. The main roadblock to those solutions seems to be political. They would kill the privatization cash cow of the vested interests calling the shots behind the scenes.
What alternatives are left for cash-strapped state and local governments? Unlike the Fed, they cannot issue money directly; but they can establish their own banks. Fifty percent of the cost of infrastructure is financing, so having their own banks would allow them to cut the cost of infrastructure nearly in half. The savings on infrastructure projects with an income stream could then be used to fund those critically necessary projects that lack an income stream.
For a model, they can look to the century-old Bank of North Dakota (BND), currently the nation's only publicly-owned depository bank. The BND makes 2 percent loans to local communities for infrastructure, far below the 12 percent average sought by private equity firms. Yet as noted in a November 2014 Wall Street Journal article, the BND is more profitable than Goldman Sachs and JPMorgan Chase. Before submitting to exploitation by public-private partnerships, state and local governments would do well to give the BND model further study.
This article was originally published on Truthdig.org.
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