China needs to create 25 million jobs a year, every year, to keep people working and to keep China’s Communists in power. That became a huge problem when Western economies collapsed in 2008, bringing an end to China’s export-driven growth — they simply ran out of new buyers for cheap widgets.
No problem! Stimulus! Beijing re-directed billions of investment dollars to building cities without any residents, airports without any airplanes, high-speed trains without any passengers, soccer stadiums without any teams, and ports without any ships.
Fortunately, we have WaPo’s Brad Plumer and asset manager Patrick Chovanec to explain everything in clear, simple language:
BP: So why do banks and other lenders keep pouring money into these projects? It sounds like lenders don’t care if they invest in projects that don’t pan out.
PC: Here’s one concrete example. The way many investments take place and are rolled out is through private loan management vehicles, which will often promise 12 percent returns or higher on assets. When people go to the bank to buy these products, they think, hey, this can’t fail. The implication is that the state-run bank or government will stand behind these instruments. This belief is widespread. That leads to an incredibly distorted investment market, where no one’s looking carefully at the risk. Too much investment is based on the perception that the government is the guarantor of everything.
Sound familiar?
I don’t think I’ve ever said this before about anything at WaPo’s WonkBlog, but in this one case you’ll want to read the whole thing.
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