1/- This very good article cites Guo Shuqing, chairman of the CBIRC, as saying “The reform of small and medium-sized banks is key to improving the soundness and stability of the overall financial system.” It goes on to say: “The warning by Guo, who is... https://www.scmp.com/economy/china-economy/article/3097229/chinas-top-bank-regulator-sees-surge-bad-loans-straining?utm_source=Twitter&utm_medium=share_widget&utm_campaign=3097229

2/- also the Communist Party secretary at the People’s Bank of China, came at a time when many of the country’s small banks are facing a moment of reckoning after years of undisciplined balance sheet expansion, as well as instances of fraud and corruption.”

Guo Shuqing is...

3/- right, of course, but what he doesn’t say is that much of China’s growth in the past 10-15 years depends precisely on "years of undisciplined balance sheet expansion.” For nearly a decade I've argued that the banking system will inevitably get more and more mired in...

4/- bad debt because you cannot fix the problem in the banks unless you are also willing to give up the economic activity funded by their undisciplined expansion. Non-productive investment funded by banks probably accounts for roughly half the economic activity of the...

5/- past several years, and it is why their balance sheets are in such terrible state.

The irony is that later in the article, “Guo added that Chinese banks are now being told to enhance their support of small businesses. In addition, he said he will encourage banks to...

6/- invest more in corporate bonds.” The banks, in other words, must continue to play their traditional role of funding non-productive economic activity to generate high growth rates.