Baoshang collapse threatens China's economy, may trigger central bank response

This twitter thread addresses the two currency system of China.

https://twitter.com/adamscrabble/status/1094717028009689089

I don't fully understand how China works as a country and economy:

* It is not a democracy.

* Citizens lack certain social freedoms that people in other developed countries take for granted.

* Properly speaking, it is not a capitalist system, as there is a lot of investment, including by state-owned enterprises, that seems uneconomic (extreme example: ghost cities).

* According to numerous media reports, its financial system has been plagued by bad loans for many years, so far without consequence (a quick Google search for "China bad loans" can verify it).

* Its national accounting figures (e.g., GDP) are reportedly "managed" (or less charitably, cooked) and therefore cannot be taken at face value.

* Its money supply, e.g., as measured by M2, appears to be much greater than levels that would be considered ludicrous in other developed economies.

It remains to be seen whether this latest "pinch" of liquidity in the banking system is the proverbial canary in the coal mine.

This was the first default in the interbank market so it broke the implicit credit guarantee in the interbank market. So this is a reform that is long overdue but they have to start from somewhere.

Could you please point to the entity whose collapse in the GFC Glass-Steagall would have prevented?

Cant speak for the others, but RBS wasn't a 'model' bank. RBS and Barclays were well known as the risker banks. I don't recall any concerns raised about Northern Rock, or the other ex building societies though. Maybe that's the interesting parallel here, the midsize banks aren't watched as closely and manage to drag down the too big to fail banks.

At one point, JP Morgan had more money (and power) than the US government, so that is not surprising.

> Given that there would be no growth in such an economy, there would also be no wealth creation.

No, because people still need to eat, consume electricity, consume entertainment, etc. So wealth is still created. If it's a no-growth economy, that wealth is consumed at the same rate it's created.

> So over time, the value of the money would deflate.

No, it would be constant (assuming no money creation by the central bank).

> If the Gini coefficient went to zero (ie equal wealth distribution), the need for money would effectively disappear.

No, you need money as a means of exchange and a store of wealth, just like now.

> So would banks.

No, because you need to store and transfer money.

> Gini coefficient went to zero (ie equal wealth distribution), the need for money would effectively disappear.

why would that be the case?

the need for money (and lending) should not disappear as long as there is any scarcity in any required goods.

This is a very important and socially desirable function that banks fulfil.

>I'd be willing to pay a fee to the bank to hold my money for me.

You are effectively doing this already (twice). Perhaps your bank charges you a yearly fee for the account in the likes of $10/year, but you're also "paying" by not investing the money yourself, of course, the bank has many lending opportunities that you have not so you might not be capable of doing so. But the point still stands.

They can't possibly do that with a bank account though? In the sense that a collapse would see you get cents in the dollar back, hopefully the taxpayer pays the rest if you are lucky.

You can pay them for a safe deposit box and they can properly _hold_ your money if you want, but that money won't be worth much in 30 years.

Unless I'm wrong and some banks provide a fully backed savings account? Doubt it would be worth the effort for them.

> Or they could take some fee off a debit card every time it's used.

They already do this. That's how payment cards work.