The Key Trigger of This Inflation Is the Shareholding Reform and IPO of the Big Four State-Owned Banks

Everyone is talking about inflation now. In this young lady's September 13th post "Raising Interest Rates Under Current Conditions Will Repeat Past Mistakes, Falling Into the Same Predicament as 1993-94, and Ultimately Plunge the Chinese Economy Into a Great Depression," I stated: "The pressures within the domestic economic system that superficially resemble rising interest rates are actually caused by structural, systemic deficiencies. Raising rates would actually exacerbate the harm of these structural, systemic deficiencies." These structural, systemic deficiencies are very structural and systemic. This young lady is not in the habit of writing long articles, so today I will only discuss one of them: the shareholding reform and IPO of the Big Four state-owned banks.

In recent years, the Big Four state-owned banks have been working on shareholding reform and IPO preparation. Because their bad debts are too large, even after offloading them to entities like Huarong and Great Wall, they still cannot meet IPO requirements, because listing requires meeting non-performing loan ratios. The NPL ratio is roughly bad debts divided by total loans. Since there is no good way to reduce the numerator quickly, the only option is to inflate the denominator, which would bring the NPL ratio down and meet listing requirements. Therefore, starting last year, the Big Four banks dramatically increased their lending, channeling it into hot sectors like real estate and automobiles as well as many basic and upstream industries. This constituted a major trigger for the current inflation. From this, one can also see many subtle and complex characteristics of China's current financial policy.

Since the post "Raising Interest Rates Under Current Conditions Will Repeat Past Mistakes, Falling Into the Same Predicament as 1993-94, and Ultimately Plunge the Chinese Economy Into a Great Depression" remains highly relevant, this young lady re-posts it below, partly to pad the word count and partly to reach a wider audience.

Raising Interest Rates Under Current Conditions Will Repeat Past Mistakes, Falling Into the Same Predicament as 1993-94, and Ultimately Plunge the Chinese Economy Into a Great Depression

Recently, the clamor for raising interest rates has grown louder and louder, with even the Americans joining the chorus -- surpassing last year's cacophony demanding RMB appreciation. Of course, among the chorus are confused fools, but also those harboring malicious intent.

Anyone with some understanding of the Chinese economy knows that the past couple of years superficially resembled 1991-92, and starting last year it began to look like 1993-94. In economics, ten years is a very important cycle. A ten-year cycle is perfectly normal -- if one cannot even foresee this, one has no business discussing economics. The question is not whether the current cycle is real -- that is beyond doubt. The key is to discuss how to differentiate between different economic environments and thereby avoid needlessly repeating the mistakes of 1993-94.

In a certain sense, it was the Asian Financial Crisis that helped the Chinese economy escape the predicament of 1993-94. Before that, everything was chaos. And all of it was caused by a certain crude economic policy: large-scale, sudden credit tightening, aggressive rate hikes plus those ridiculous "subsidy rates," and so on. If people forget the pain once the scar heals and think they can muddle through again on a stroke of good luck, the outcome will be extremely grim.

Moreover, this time the market environment is even more treacherous. There are nearly 100 billion USD in speculative hot money that has seeped in over the past few years to bet on RMB appreciation. The current clamor for rate hikes is not without their proxies' involvement. Once rates are raised, pressure for RMB appreciation will surge, while the costs for offshore speculative capital would be greatly reduced -- a godsend for them, making them even more brazen.

The only thing rate-hike advocates can point to are dubious claims about "overheated investment" and "inflation." But everyone knows the current price rises are entirely structural and cyclical. As for overheated investment, it has even less to do with interest rates -- everyone knows China's investment system is completely different from the West's. Reining in the government's own blind investment is infinitely more important than any rate hike.

Once rates are raised, the only beneficiaries will be offshore speculative hot money, while the harm to the Chinese economy will be immense with zero benefit. Once rates go up, the rising rate cycle will extend for a very long time. Underground hot money in the private sector will go on a frenzy of profiteering, and inflation will replay the madness of 1993-94, with those laughable "subsidy rates" probably making a comeback. Once rates rise, enterprises in downstream consumer goods and export products will be devastated, and the unfinished buildings left over from 1993-94 will gain many new companions to rot alongside. Once rates are raised under current conditions, it will needlessly repeat past mistakes, fall into the same predicament as 1993-94, and ultimately plunge the Chinese economy into a great depression, exhausting the healthy upward structural momentum of the Chinese economy.

So does China have theoretical support for not raising rates? Of course it does. In fact, at the national level, the most important factors in economics are currency value and the base interest rate. Precisely because the RMB has had appreciation pressure against the USD in recent years, this gives the RMB the fundamental conditions to keep its base interest rate stable at low levels. This is what differs from the economic fundamentals of 1993-94, is China's greatest current economic advantage, and is what the US, EU, and Japan are most jealous and afraid of deep down. Even if the USD raises rates, the RMB need not follow, because this seesaw has sufficient range to allow America to raise rates without affecting the Chinese economy -- unless America raises rates to 50% per annum, only then would China need to consider hiking. As for the pressures within the domestic economic system that superficially resemble rising interest rates, they are actually caused by structural, systemic deficiencies. Raising rates would actually exacerbate the harm of these structural, systemic deficiencies.

In short, the only thing the Chinese government needs to focus on right now is accelerating economic structural adjustment under a stable currency and interest rate environment. It absolutely must not be confused by short-term economic fluctuations and by some fools or those with ulterior motives, and thereby needlessly fall into a predicament.