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China's Unprecedented Proactive Bubble-Bursting

In their relentless pursuit of mediocrity, they put themselves under the feet of various interest groups. The whole set of socioeconomic policy gradually degenerated into an incoherent mess, solely reactive, never proactive. This is a primary cause (without going philosophical) for the current mess in local government debt, out-of-control shadow banking, massive capital misallocation, housing bubble, rampant overt corruption, and the dilemma of persistent inflation coupled with slower economic growth and higher currency exchange rate.

The new leadership has shown some encouraging signs of sensible, proactive leadership, at least in the socioeconomic field, as opposed to reactive management, with the strong inaction by PBoC being the latest. While hard data are hard to come by, most people in China I'm in contact with see no sign of the non-financial sectors being affected much. There may be some defaults, especially in the financial trust segment. To that I say, good riddance. The end of the Ponzi scheme is long overdue. But the pundits crying local government default obviously do not understand the Chinese system. Yes, some local government heads will roll (again, long overdue), but their debt (there's no municipal bond in China, only some special purpose bonds, and most debt is in the form of loans) will not be allowed to default.

Here's a story illustrating how the outside world sees a storm while those inside go around not noticing anything. Over the weekend, the credit/debit card system of Industrial and Commerce Bank of China stopped working. Then Monday morning the transfer and payment system of Bank of China stopped working. Both are among the Big Four banks in China. Both failures were conveniently attributed to technical glitches. I thought both coming right on the heels of inter-banking panic and U.S.-China spat over Snowden, the risk of these not being coincidental had to be considered. I tweeted on Sina ( Sina Corppration (SINA - Get Report)) Weibo, a Chinese equivalent of Twitter, that people should get some cash for potential temporary emergencies. I was laughed out of the weibosphere.

China is slowing down, no doubt about that. Part of it is due to the reality of falling external demand. Another part is by design of the new leadership. They finally abandoned the farcical, simplistic goal of GDP growth. They are cracking down on false statistical reporting such as local GDP and increasing export/import value by running truck back and forth across the Shenzhen import/export trade zone (not even with a courtesy visit to Hong Kong).
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