{"id":393932,"date":"2010-03-05T11:49:00","date_gmt":"2010-03-05T16:49:00","guid":{"rendered":"http:\/\/www.businessinsider.com\/jp-morgan-chinas-financial-system-wont-explode-because-it-has-sovereign-guarantees-2010-3"},"modified":"2010-03-05T11:49:00","modified_gmt":"2010-03-05T16:49:00","slug":"deep-down-the-biggest-threat-to-china-isnt-property-or-bad-loans-it-is-simply-unemployment","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/393932","title":{"rendered":"Deep Down The Biggest Threat To China Isn’t Property Or Bad Loans, It Is Simply Unemployment"},"content":{"rendered":"

\"China<\/p>\n

JP Morgan’s Jing Ulrich has issued a harsh criticism of China collapse warnings in a recent note.<\/p>\n

Basically, she believes China’s property market today is far less of a risk than America’s was before, due to the fact that most Chinese carry less debt than Americans. Thus they can weather a downturn more easily. Chinese banks also don’t have the subprime problem that American ones did.<\/p>\n

Still, aren’t Chinese banks suspected of having other kinds of debt problems, such as toxic loans given out to Chinese industries?<\/p>\n

Yes, but many of these loans have sovereign guarantees, she says:<\/p>\n

Jing Ulrich via The Curious Capitalist:<\/a><\/p>\n

We share many of the concerns about flawed incentives and overheating in the Chinese property market – but even if property prices were to undergo a correction, this would not trigger the type of economic and financial devastation that might arise in an over-leveraged economy.<\/p>\n

…<\/p>\n

Chinese bank loans for public sector investment projects carry implicit or explicit sovereign guarantees, and are thus almost akin to a bond issuance for a public works project<\/strong>… Looking ahead, while certain local administrations might struggle to service debt, the magnitude of public sector debt risks do not appear as severe as some have suggested.<\/p>\n

Michael Schuman at The Curious Capitalist replies:<\/p>\n

If local governments struggle to pay their debts, someone else has to, and the solution could be akin to a bank bailout by the central government. Perhaps such developments (if they ever happen) won’t spark a major crisis, but they do have a cost, and they could dampen investor sentiment, both at home and abroad, and that’s not good for the Chinese economy.<\/p>\n

Yet he’s being too easy here.<\/p>\n

The main problem is that any sort of Chinese financial crisis, even if it were less dramatic than that of America recently, would lead to job losses<\/strong> in China… and China’s system of government can’t handle job losses very well, because the government’s remaining legitimacy (since it ditched its original communist ideals) lies in economic growth alone.<\/p>\n

No growth = no legitimacy.<\/p>\n

The U.S. and Europe are having a hard enough time managing the social pressures caused by unemployment right now. And they at least have social release valves via their political systems. China doesn’t have this luxury.<\/p>\n

Thus while a major China slow-down might not result in an insolvent financial system, or a property crisis of the scale just seen in the U.S., even a mild contraction of Chinese GDP (or even simply low growth, according to some) would lead to masses of people in need of employment — which means it could easily lead to riots.<\/p>\n

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