Say Hello to China's Brewing Financial Crisis

In the global economy these days, there are known unknowns, unknown unknowns, and then there's the Chinese credit market. 

On the heels of Federal Reserve Chairman Ben Bernanke's announcement Wednesday that the Fed is set to ease its program of large-scale bond purchases, global markets have been in turmoil, which has only been exacerbated by a sudden spike in the Shanghai interbank offer rate. That rate indicates the willingness of banks to lend to one another, and its surprising rise on Thursday has reinvigorated fears that the Chinese banking system is far more rickety than Beijing would like to let on.

The problem is that very little is known about just how much debt Chinese banks have taken on amid that country's infrastructure-fueled growth. This has resulted in fears that a massive credit bubble may be about to pop. If that's true, the results could be catastrophic. 

The questions regarding the health of the Chinese banking system turn on whether its financial institutions have taken on too much debt too quickly and whether a slight slowdown in the country's economy could prevent debtors from making good on their loans. Much of China's economic growth at the municipal level has been underwritten by rising real estate prices, and if the torrid growth of those prices begin to taper, bank collapses are not out of the question, a scenario not unlike the 2008 financial crisis in the United States.

Just have a look at this chart of the rate in question, the Shanghai Interbank Offer Rate, or SHIBOR, from Barclay's:

Charlene Chu, a senior China analyst at Fitch, has emerged as a leading Cassandra on the Chinese economy, and on Friday she released a report estimating that over the course of the last 10 days of June, Chinese banks will face nearly $250 billion in obligations related to wealth management products. The unwillingness of Chinese banks to lend to each other, she argues, may leave them struggling to meet those obligations. Chu estimates that these wealth management products may total as much as $2 trillion, and because they include short-term payouts may result in Chinese banks facing severe short-term capital shortfalls, a scenario that calls to mind the bankruptcy of Bear Stearns in 2008. Earlier this week, Chu released a report describing the Chinese credit bubble as unprecedented in world history. 

But the pressures on the Chinese economy are not occurring in isolation. Bernanke's decision to begin to scale back the Fed's massive stimulus program means that the global economy will soon be deprived of an enormous amount of liquidity. Following the Fed's so-called quantitative easing program, developing economies were flooded with cash, fueling recent economic booms in Brazil and Turkey. The program's end may herald a giant sucking noise of capital leaving these developing economies and returning to recovering Western economies. It should come as no surprise that both the Turkish and Brazilian markets were hammered this week.

This may spell bad news for Chinese banks. For years, skeptics of the Chinese economic growth miracle have argued that the country's municipalities have taken on enormous debt and placed it investment vehicles off the official books. As a result, no one really knows how much debt China has taken on in the process of achieving astounding economic growth rates over the past decade. Though Bernanke is stepping off the gas pedal because he believes the U.S. economy is finally beginning to recover, Chinese leaders are trying to figure out how to keep the economy growing, a problem with no obvious solution.

The news that China's banks may have grown reluctant to lend to each other only adds to the storm clouds on the horizon.

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The Public Health Trends Behind the Supreme Court's PEPFAR Decision

In striking down a law Thursday that required organizations with funding from the President's Emergency Plan for AIDS Relief to pledge opposition to prostitution, the Supreme Court ruled that the provision violated NGOs' First Amendment rights. The justices drew a distinction between a federal funding program that prevents organizations from working with prostitutes and one that requires participating partners to go on the record opposing prostitution. The latter, the court reasoned, violates the Constitution, while the former would probably be fine.

But the NGOs that brought the suit made a different argument -- that a law requiring them to oppose prostitution would make it more difficult to reach sex workers, a population particularly at risk for HIV/AIDS. Which raises a question: How have the restrictions baked into PEPFAR affected the ability of aid groups to reach sex workers and carry out the federal program's larger mission?

When PEPFAR was first put into place in 2003, Congress included two restrictions on how the money could be spent. First, no funds could "be used to promote or advocate the legalization or practice of prostitution or sex trafficking." Additionally, funding was prohibited "to any group or organization that does not have a policy explicitly opposing prostitution and sex trafficking," except for a select group of intergovernmental organizations. The latter restriction was struck down by the Supreme Court as an inappropriate infringement of First Amendement rights. The former restriction remains on the books.

In the most comprehensive examination of PEPFAR, a 2013 independent advisory panel found that the program has seen a great deal of success -- so much so, in fact, that George W. Bush may go down in history as the greatest humanitarian to ever occupy the Oval Office. But activists interviewed by the panel also made a compelling case that the restrictions have kept health workers from reaching at-risk sex workers -- especially since some of the most effective civil society groups working on these issues have been founded by former sex workers:

[T]here is concern that the restriction has meant that organizations created by sex workers themselves, that could be providing services and are uniquely positioned to access this population, have been excluded from PEPFAR's efforts, as have activities to limit the severity of criminal penalties for sex workers, penalties that can interfere with HIV-related services and outcomes. These efforts have been restricted even though their inclusion would not necessitate a direct link to promoting the legalization of prostitution. This exclusion is seen by a range of stakeholders in the global health community as impeding access to HIV services for sex workers and as a missed opportunity for PEPFAR to more effectively contribute to the HIV response in partner countries and to the reduction of HIV transmission.

Looking at the data, it is beyond dispute that sex workers should be front and center in efforts to combat HIV/AIDS. Just have a look below at the forest plot from the World Bank. It compares the incidence rate for the disease between the female sex workers and female non-sex workers in low- and middle-income countries. The numbers in the far-right column provide the ratio between the likelihood that a sex worker is infected with HIV and the likelihood that a non-sex worker is infected. The numbers show that the trend of sex workers being more at risk of contracting the disease holds across countries and continents.

PEPFAR's restrictions may hinder its ability to reach out to sex workers, but the program does deserve some credit for distributing funds fairly effectively. The chart below, which comes from the 2013 evaluation, shows how PEPFAR has allocated its funds per each person living with HIV, also known as PLHIV, in partner countries. As you can tell, money has generally gone to poorer countries with high levels of HIV/AIDS. And by comparing the countries in this chart to those on the chart above, you can see that  money has generally gone to countries with at-risk sex worker populations. What this doesn't capture, of course, is the extent to which that money is funneled into programs for sex workers once the cash is distributed in-country.

PEPFAR regularly comes under criticism for being too heavily colored by the political priorities of the Bush administration, particularly when it comes to the initiative's emphasis on abstinence-only sex education. But with Thursday's ruling, PEPFAR may fall more in line with the mission of the NGOs carrying out the efforts authorized by the program. "This policy requirement affected the ability to provide life-saving health services to vulnerable populations in the fight against HIV and AIDS and prevented us from speaking freely in the important debate over how best to prevent the spread of HIV and AIDS," Samuel A. Worthington, president and CEO of the NGO InterAction, said in a statement welcoming the decision.

It's not every day that a free-speech ruling has positive ramifications for the world's HIV/AIDS population.

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