China further tightens economic control, but the West can't really complain

An exclusive Reuters report has China unveiling a plan to effectively nationalize its zombie firms that threaten to cannibalize the economy, by allowing commercial banks - read: the giant state lenders - to swap non-performing loans to such firms for ownership stakes in them, i.e. a debt-for-equity swap.

While this isn't terribly good news for China's transition to a market-based system, it's perfectly in line with the central government's clear goal of acquiring more direct control of everyday real economic activity throughout the vast country. It would represent the most dramatic example yet of the central government - i.e. the central bank and its main constituent banks like the traditional "Big 4" of ICBC, ABC, BOC and CCB - to seize the reins of real economic management from local governments and state firms.

A month ago, I posted that China won't crash so long as it remains a communist dictatorship. In the then original CNBC report of hedge fund manager Kyle Bass warning of China's coming banking implosion, even Bass himself admitted (my emphasis):

"China's [banking] system is even more precarious when we realize that, even at the biggest banks, loans are not made to borrowers based on their ability to repay," he wrote. "Instead, loan decisions are political decisions made by the state."

There, a Westerner ironically points out the ultimate bedrock of Chinese stability as if it were a guarantee of instability. As I pointed out in my post (my present emhpasis):

But like so many other Western experts, Mr. Bass clearly misunderstands China: it's an Asian autocracy, not a Western democracy. Those who consider him a prophet for forecasting the US subprime mortgage crisis in 2007 are quickly countered by those who point out how badly his prediction that Japanese bonds would meltdown in 2010 turned out. There's good reason to believe that on China, his Asian misinterpretation will be repeated, rather than his Western prescience. If Japan is an Oriental command-and-control system that defies the logic of Western markets, China is far more so.

Today's news would appear to confirm such an assessment.

Business Insider, however, notes that authoritarian China is actually following the Western playbook: its republication of the Reuters report is titled, "China is preparing to let its banks do something the West has been doing for years", a clear reference to the government and especially central bank intervention that supposedly "free market" Western economies have come to rely on since the financial crisis.

While it's likely that China's bailouts will ultimately far exceed anything in the West, it's still somewhat amusing that Beijing can still claim to be following its more "market-friendly" peers.