Thanks for your response. I’m wondering if you saw the IMF commentary here:

http://blog-imfdirect.imf.org/2009/11/08/asia%e2%80%99s-corporate-saving-mystery/

China gets mixed marks in this.

In the plus column is the admirable job of rolling out its new exchange modeled after the NASDAQ last month that is aimed at small and innovative companies and government decrees that banks should be loaning money based on credit worthiness. We also have a new bankruptcy law on the books.

While in the minus column we are fighting against the local protectionism and nepotism that protects inefficient factories and the “neibu” or internal policy of many local governments that will not allow companies to declare bankruptcy in their district despite the new law.

Jay Boyle

I guess where I agree with you, and disagree with you, is that (1) yes, he is more focused on the misallocation of resources, but (2) I think he sees savings as a the misallocation.

To our second point, I would like to see more on where the money invested on overcapacity came from. Was it savings, or was it stimulus money made available to these companies. I do not deny that poor investments were made, but it would be important to know if the money blown was their own… or from a loan that they would never be asked to repay.

R

As far as I can tell, Anderson believes that the model itself (consumption should drive economies) is fundamentally sound, but that the actions/ policies of China essentially undermined the model. A point, that if I believed his model to be sound I would also see. However, through that theory we must also believe that savings are bad, or at the very least that the levels of savings should be “responsible”.

I do not read Anderson this way. It seems to me that he is not saying that savings are bad, but rather that they should be used for constructive purposes. Misallocation of capital by business is not an uniquely Chinese problem. Indeed, his suggestion to move corporate savings to households reminds me of Benjamin Graham’s efforts in the great depression.

The “problem” may simply be that the Chinese populace demands industrial job creation which exceeds the rate at which industrialization can proceed. Is the management of an SOE steel company really going to forgo new capacity while they have cash and officials demanding more jobs?

What he is proposing shares the common thread of removing assets from areas that are pursuing misallocation of resources.