Confucianism and Trade Imbalances

The enlightened dictatorship of money

Posts Tagged ‘current accounts

Ponzi economies

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I’ve been reading news reports a lot recently about Chinese banks lending money to companies in various sectors, just so they can stay alive long enough to pay back their previous loans.

I’ve had various reactions to that.  Throwing good money after bad; the cover-up’s worse than the crime; can we really trust Chinese capitalization data knowing that some of that money is being wasted; and how does anyone think that’s a good idea, given that the reasons these companies are going bankrupt because of powerful long-term trends (like severe oversupply), not some short term blip?

The response that Western readers will identify with the most, I expect, is this one: it’s a Ponzi scheme.  There are many variants (for convenience, I’m lumping in pyramid schemes as well) but the basic essence of a Ponzi scheme is to take capital as income.  These bankrupt companies are consuming bank capital to pay their basic expenses, not to make forward-looking investments.  For some reason, the banks are willingly entering into this arrangement.

This mixing of accounts is something I’ve encountered a lot, in various forms.  I a friend working in a tech startup, who told me, “people in my company don’t work too hard.  It’s not like a tech startup in Silicon Valley.  We just got a capital infusion, and we don’t really have to worry about anything until about two years from now.”  Even in a company that should be innovative sales-driven, it is the boss who is feared, not the customers.

This mixing of accounts can even be seen in legal terms.  I have been learning more about company setup in China, and one of the (many) strange facts I’ve discovered is that wholly foreign-owned enterprises (WFOEs) sometimes pay tax on capital infusions as if they were income.

These are unrelated examples – and I hardly know as much as I really should to be to write this post – but I feel sort of confident in saying that Chinese accounting doesn’t employ the firewall between the current and capital account (in national accounting terms; or expenses and capitalization) as in the US and Europe.  This firewall is the most important reason that accounting exists in the first place.  Ironically, this situation is the opposite when we’re talking about national accounting.  China keeps very close track of current and capital accounts, and some old regulations even required companies to use separate bank accounts for these two accounts.  So, I guess the conclusion to draw here is that Chinese collectivism doesn’t just mean looking out for those less fortunate, but is rather a very literal accounting principle.  Its lack of use for individual company accounting may help explain, if not excuse, its behavior towards various accountants recently.

Now, having gotten this far, I may as well talk about China’s partner in crime, the US. Richard Perry, in his failed presidential bid, controversially called Social Security a “Ponzi scheme.” It is true, but not in the way he meant it: it is true because Social Security savings, represented by government debt, are simply being “spent,” rather than “invested” in infrastructure and other long-term projects.  China also invests in those same government bonds, because it assumes that any country would balance their economy from a top-down perspective.  The US, meanwhile, buys Chinese products under the assumption that their suppliers are geared towards making a profit.  And we end up with a very big culture clash.


Written by Maofucious

October 17, 2012 at 10:23 PM

Human factors blindness

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James Fallows’ new book China Airborne has been receiving high praise from unusual suspects, including Tyler Cowen (a micro- guy with no particular interest in China, who said it was one of his favorite books this year), and The Peking Duck, who declared upfront that “few topics could bore me as much as avionics and the aerospace industry” before praising it highly.  So I really need to get a hold of a copy – but in any case, I already have a few comments based on a portion quoted in The Peking Duck’s review.

but [China] lacks the “soft” ingredients necessary for a fully functioning, world-leading aerospace establishment. These include standards that apply consistently across the country rather than depending on the whim and favor of local potentates. Or smooth, quick coordination among civil, military and commercial organizations.

These “soft” ingredients are a huge part of air safety.  About a decade ago, Korean Airways was on the verge of going bust because of air safety concerns, before experiencing major improvements.  These concerns were largely of the “soft” variety, and particularly relating to Asian culture: copilots would not speak up to pilots’ mistakes; former military pilots were promoted unfairly; expat pilots were treated poorly.  The leap from an organization that meets expectations most of the time and on that never makes a mistake – as airlines are expected to do – is largely based on culture, not technology.

In February, a flight going into Haikou was forced to divert due to weather.  Long story short, it received a runaround from three airports before landing in Shenzhen with only a few minutes’ worth of fuel left.  A Chinese media account of the story from last week notes that the Shenzhen airport communicated with the plane using non-standard language, causing a misunderstanding that caused it to first attempt another landing in Guangzhou (which was also rejected due to weather).  It also notes that the airport staff would be dealt with “severely,” with no further explanation of the exact communication problem.  This example illustrates how important it is to be unambiguously clear when you have a ticking time bomb-type of situation.  And the Chinese (or Asian) educational system, with its fixation on multiple choice tests, does not really teach communication very well.  (For all you English teachers out there, don’t let you students convince you that they have writing skills in their native language – just not English!)

I don’t want to say any more about this particular situation, not being an expert.  In general, however, I note a blindness in Asian cultures towards human problems (beyond simple punishment), and a fixation on technological solutions.  This attitude can be seen in Japan, towards Fukishima; in China, towards the Great Leap Forward Famine, and in countless other situations.  One situation that I learned about last week in a lecture from an NGO working in North Korea is that they see their food situation as their number one priority, and fuel as second.  The NGO wants to move them towards mechanized agriculture, which requires – fuel.  But they can’t get the North Korean bureaucrats to see the problems as being connected in any way, and they won’t sway from the above language.  Most other types of Asians can at least see how technical factors can often relate to each other, but even then the human factors seem to go over their head.

The implications of this mindset go far beyond air safety.  In fact, this forms the basis for an almost stupidly simple way to explain Asian trade imbalances: whereas increasing supply is a technological problem, getting people to spend more and increase demand is a human problem, and thus more difficult for them recognize and solve.  It can get more complicated from there, but that’s the core.

Written by Maofucious

June 28, 2012 at 12:08 AM