It’s not infrastructure development itself but the way it’s paid for that’s unsustainable. Normally infrastructure financing is stretched out over many years and repaid with tax receipts. In China it’s financed by debt with short maturities repaid with land sales.
China’s debt and fixed asset inefficiency problems are payments mismatch problems, not saturated market problems. That important distinction will get missed if the only thing you look at is aggregate accounting balances and not specific economic mechanics.
@michaelxpettis But in general asset lifetime value to debt maturity mismatches don’t typically resolve themselves automatically and have been observed in many cases of market failure, so it’s a bit odd to see that being hand-waved at so casually.
@michaelxpettis Ultimately you can’t answer structural mismatch without addressing payment mechanics. That’s what needs to change, and that component of problem is where we get into politics of local govt fiscal transition. Which again reinforces point that issue isn’t the infrastructure itself.
@michaelxpettis If land value is saturated of course payment using land will become inefficient. That doesn’t mean other parts of economy that derive value from infrastructure can’t cover costs. Not coincidentally long maturity bonds and tax burdens are small for China’s level of development.
@michaelxpettis All of these points to payments mismatch for infrastructure, not saturation. These are financial system dislocation problems, especially in terms of financing time horizons, not oversupply issues.
@Advo_D There’s no question something is being overproduced/overpriced relative to its exchange value for other kinds of activities. But infrastructure is being paid with the thing that’s overproduced. It is not the thing being overproduced itself.
@Advo_D And this dynamic is *inherent* to asset bubbles, especially commodity based one. Do we say that labor is the thing in excess when an asset bubble financing the rest of the economy implodes and takes out financing for all sorts of other activities? No.
@Advo_D Another way to understand how payment mismatch causes debt inefficiency is to look at a simple case model. if you make X income and take a loan 5x that with repayment in 1 year for something (like education) that you know will be over it’s lifetime be worth 10x that loan,
@Advo_D Is your present 5:1 indebtedness a reflection of the fact that the thing you bought with the loan won’t increase your lifetime earnings? No. This is why looking only at present payment costs does not automatically tell you the long term value of the investment.
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