{"id":107792,"date":"2018-03-26T12:00:43","date_gmt":"2018-03-26T11:00:43","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=107792"},"modified":"2018-03-19T10:05:20","modified_gmt":"2018-03-19T10:05:20","slug":"funding-infrastructure-why-china-is-running-circles-around-america","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2018\/03\/funding-infrastructure-why-china-is-running-circles-around-america\/","title":{"rendered":"Funding Infrastructure: Why China Is Running Circles around America"},"content":{"rendered":"

27 Feb 2018 – <\/em>\u201cOne Belt, One Road,\u201d China\u2019s $1 trillion infrastructure initiative, is a massive undertaking of highways, pipelines, transmission lines, ports, power stations, fiber optics, and railroads connecting China to Central Asia, Europe and Africa. According to Dan Slane, a former advisor in President Trump\u2019s transition team, \u201cIt is the largest infrastructure project initiated by one nation in the history of the world and is designed to enable China to become the dominant economic power in the world.\u201d In a January 29th<\/sup> article titled \u201cTrump\u2019s Plan a Recipe for Failure, Former Infrastructure Advisor Says<\/a>,\u201d he added, \u201cIf we don\u2019t get our act together very soon, we should all be brushing up on our Mandarin.\u201d<\/p>\n

On Monday, February 12th<\/sup>, President Trump\u2019s own infrastructure initiative was finally unveiled. Perhaps to trump China\u2019s $1 trillion mega-project, the Administration has now upped the ante from $1 trillion to $1.5 trillion, or at least so the initiative is billed. But as Donald Cohen observes in The American Prospect<\/a>, it\u2019s really only $200 billion, the sole sum that is to come from federal funding; and it\u2019s not even that after factoring in the billions in tax cuts in infrastructure-related projects. The rest of the $1.5 trillion is to come from cities, states, and private investors; and since city and state coffers are depleted, that chiefly means private investors. The focus of the Administration\u2019s plan is on public-private partnerships, which as Slane notes are not suitable for many of the most critical infrastructure projects, since they lack the sort of ongoing funding stream such as a toll or fee that would attract private investors. Public-private partnerships also drive up costs compared to financing with municipal bonds.<\/p>\n

In any case, as Yves Smith observes<\/a>, private equity firms are not much interested in public assets; and to the extent that they are, they are more interested in privatizing existing infrastructure than in funding the new development that is at the heart of the president\u2019s plan. Moreover, local officials and local businessmen are now leery of privatization deals. They know the price of quick cash is to be bled dry with user charges and profit guarantees.<\/p>\n

The White House says its initiative is not a take-it-or-leave-it proposal but is the start of a negotiation, and that the president is \u201copen to new sources of funding.\u201d But no one in Congress seems to have a viable proposal. Perhaps it is time to look more closely at how China does it . . . .<\/p>\n

China\u2019s Secret Funding Source: The Deep Pocket of Its State-owned Banks<\/strong><\/p>\n

While American politicians argue endlessly about where to find the money, China has been forging full steam ahead with its mega-projects. A case in point is its 12,000 miles of high-speed rail, built in a mere decade while American politicians were still trying to fund much more modest rail projects. The money largely came from loans from China\u2019s state-owned banks<\/a>. The country\u2019s five largest banks are majority-owned by the central government<\/a>, and they lend principally to large, state-owned enterprises.<\/p>\n

Where do the banks get the money? Basically, they print it. Not directly. Not obviously. But as the Bank of England has acknowledged<\/a>, banks do not merely recycle existing deposits but actually create the money they lend by writing it into their borrowers\u2019 deposit accounts. Incoming deposits are needed to balance the books, but at some point these deposits originated in the deposit accounts of other banks; and since the Chinese government owns most of the country\u2019s banks, it can aim this funding fire hose at its most pressing national needs.<\/p>\n

China\u2019s central bank, the People\u2019s Bank of China, issues money for infrastructure in an even more direct way. It has turned to an innovative form of quantitative easing in which liquidity is directed not at propping up the biggest banks but at \u201csurgical strikes\u201d into the most productive sectors of the economy. Citigroup chief economist Willem Buiter calls this \u201cqualitative easing\u201d to distinguish it from the quantitative easing engaged in by Western central banks. According to a 2014 Wall Street Journal article<\/a>:<\/p>\n

In China\u2019s context, such so-called qualitative easing happens when the People\u2019s Bank of China adds riskier assets to its balance sheet \u2013 such as by relending to the agriculture sector and small businesses and offering cheap loans for low-return infrastructure projects \u2013 while maintaining a normal pace of balance-sheet expansion [loan creation]. . . .<\/em><\/p>\n

The purpose of China\u2019s qualitative easing is to provide affordable financing to select sectors, and it reflects Beijing\u2019s intention to dictate interest rates for some sectors, Citigroup\u2019s economists said. They added that while such a policy would also put inflationary pressure on the economy, the impact is less pronounced than the U.S.-style quantitative easing.<\/em><\/p><\/blockquote>\n

Among the targets of these surgical strikes with central bank financing is the One Belt, One Road initiative. According to a May 2015 article in Bloomberg<\/a>:<\/p>\n

Instead of turning the liquidity sprinkler on full-throttle for the whole garden, the PBOC is aiming its hose at specific parts. The latest innovations include plans to bolster the market for local government bonds and the recapitalisation of policy banks so they can boost lending to government-favoured projects. . . .<\/em><\/p>\n

Policymakers have sought to bolster credit for small and medium-sized enterprises, and borrowers supporting the goals of the communist leadership, such as the One Belt, One Road initiative developing infrastructure along China\u2019s old Silk Road trade routes.<\/em><\/p><\/blockquote>\n

\u201cNon-Performing Loans\u201d or \u201cHelicopter Money for Infrastructure\u201d?\u00a0Money That Need Not Be Repaid<\/strong><\/p>\n

Critics say China has a dangerously high debt-to-GDP ratio and a \u201cbad debt\u201d problem, meaning its banks have too many \u201cnon-performing\u201d loans. But according to financial research strategist Chen Zhao in a Harvard review called \u201cChina: A Bullish Case<\/a>,\u201d these factors are being misinterpreted and need not be cause for alarm. China has a high debt to GDP ratio because most Chinese businesses are funded through loans rather than through the stock market, as in the US; and China\u2019s banks are able to engage in massive lending because the Chinese chiefly save their money in banks rather than investing it in the stock market, providing the deposit base to back this extensive lending. As for China\u2019s public \u201cdebt,\u201d most of it is money created on bank balance sheets for economic stimulus. Zhao writes:<\/p>\n

During the 2008-09 financial crisis, the U.S. government deficit shot up to about 10 percent of GDP due to bail-out programs like the TARP. In contrast, the Chinese government deficit during that period didn\u2019t change much. However, Chinese bank loan growth shot up to 40 percent while loan growth in the U.S. collapsed. These contrasting pictures suggest that most of China\u2019s four trillion RMB stimulus package was carried out by its state-owned banks. . . . The so-called \u201cbad debt problem\u201d is effectively a consequence of Beijing\u2019s fiscal projects and thus should be treated as such.<\/em><\/p><\/blockquote>\n

China calls this government bank financing \u201clending\u201d rather than \u201cmoney printing,\u201d but the effect is very similar to what European central bankers are calling \u201chelicopter money\u201d for infrastructure<\/a> \u2013 central bank-generated money that does not need to be repaid. If the Chinese loans get repaid, great; but if they don\u2019t, it\u2019s not considered a problem. Like helicopter money, the non-performing loans merely leave extra money circulating in the marketplace, creating the extra \u201cdemand\u201d needed to fill the gap between GDP and consumer purchasing power, something that is particularly necessary in an economy that is contracting due to shrinking global markets following the 2008-09 crisis.<\/p>\n

In a December 2017 article in the Financial Times called \u201cStop Worrying about Chinese Debt, a Crisis Is Not Brewing<\/a>\u201d, Zhao expanded on these concepts, writing:<\/p>\n

[S]o-called credit risk in China is, in fact, sovereign risk. The Chinese government often relies on bank credit to finance government stimulus programmes. . . . China\u2019s sovereign risk is extremely low. Importantly, the balance sheets of the Chinese state-owned banks, the government and the People\u2019s Bank of China are all interconnected. Under these circumstances, a debt crisis in China is almost impossible.<\/em><\/p><\/blockquote>\n

Chinese state-owned banks are not going to need a Wall Street-style bailout from the government. They are<\/em> the government, and the Chinese government has a massive global account surplus. It is not going bankrupt any time soon.<\/p>\n

What about the risk of inflation? As noted by the Citigroup economists, Chinese-style \u201cqualitative easing\u201d is actually less inflationary than the bank-focused \u201cquantitative easing\u201d engaged in by Western central banks. And Western-style QE has barely succeeded in reaching the Fed\u2019s 2 percent inflation target. For 2017, the Chinese inflation rate<\/a> was a modest 1.8 percent.<\/p>\n

What to Do When Congress Won\u2019t Act<\/strong><\/p>\n

Rather than regarding China as a national security threat and putting our resources into rebuilding our military defenses, we might be further ahead studying its successful economic policies and adapting them to rebuilding our own crumbling roads and bridges before it is too late. The US government could set up a national infrastructure bank that lends just as China\u2019s big public banks do, or the Federal Reserve could do qualitative easing for infrastructure as the PBOC does. The main roadblock to those solutions seems to be political. They would kill the privatization cash cow of the vested interests calling the shots behind the scenes.<\/p>\n

What alternatives are left for cash-strapped state and local governments? Unlike the Fed, they cannot issue money directly; but they can establish their own banks. Fifty percent of the cost of infrastructure is financing, so having their own banks would allow them to cut the cost of infrastructure nearly in half<\/a>. The savings on infrastructure projects with an income stream could then be used to fund those critically necessary projects that lack an income stream.<\/p>\n

For a model, they can look to the century-old Bank of North Dakota (BND), currently the nation\u2019s only publicly-owned depository bank. The BND makes 2 percent loans<\/a> to local communities for infrastructure, far below the 12 percent average sought by private equity firms<\/a>. Yet as noted in a November 2014 Wall Street Journal article<\/a>, the BND is more profitable than Goldman Sachs and JPMorgan Chase. Before submitting to exploitation by public-private partnerships, state and local governments would do well to give the BND model further study.<\/p>\n

______________<\/p>\n

\"\"<\/a>Ellen Brown is an attorney, founder of the\u00a0<\/em>Public Banking Institute<\/a>, and author of twelve books including the best-selling\u00a0<\/em>Web of Debt<\/a>. Her latest book,\u00a0<\/em>The Public Bank Solution<\/a>, explores successful public banking models historically and globally. Her 300+ blog articles are at\u00a0EllenBrown.com<\/a>.<\/em><\/p>\n

 <\/p>\n

 <\/p>\n

Go to Original \u2013 ellenbrown.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

\u201cOne Belt, One Road,\u201d China\u2019s $1 trillion infrastructure initiative, is a massive undertaking of highways, pipelines, transmission lines, ports, power stations, fiber optics, and railroads connecting China to Central Asia, Europe and Africa. \u201cIt is the largest infrastructure project initiated by one nation in the history of the world and is designed to enable China to become the dominant economic power in the world.\u201d<\/p>\n","protected":false},"author":4,"featured_media":104717,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[180],"tags":[],"class_list":["post-107792","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-brics"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/107792","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=107792"}],"version-history":[{"count":0,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/107792\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media\/104717"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=107792"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=107792"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=107792"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}