Empty Towers on Debt Mountains: China’s Vulnerability

Until now, China has managed to keep its huge raft of nonperforming debt afloat thanks to capital inflows, as successive waves of quantitative easing pushed dollars into the world. A tighter dollar would seem to make the bursting of China’s credit bubble an inevitability. When that happens, the renminbi will have to depreciate sharply… It will … lead to a decline in China’s share of global GDP, dramatically reduce the nation’s demand for commodities, and diminish its role on the international political stage. __ BQ

Cataclysmic Effect of Tariffs on China’s Economic Structure

US President Trump’s proposed tariffs on Chinese-made goods will have the effect of reducing US dollar flow into the Chinese economy.

  • Fewer purchases of Chinese goods will be made in dollars.
  • Investment (in dollars) by American companies in China will decline.

In their current highly-leveraged state, many of China’s important economic entities (banks, local governments, state-owned enterprises etc.) cannot survive a significant and sustained loss of income from the world’s largest importer. Trump’s tariffs — if fully implemented — will have the effect of bringing China’s debt to a crisis.

The chorus of anxiety about debt is reaching a crescendo, with daily press reports on governments that can’t pay their employees or meet pension obligations. Property prices are tumbling in some cities and frozen in others whose governments have placed a finger in the dyke by halting transactions.

That the massive burden of debt will drag the economy into recession is as obvious as the empty towers that rise on every landscape. Precise estimates are difficult, since the government’s dedication to the optics of invincibility induces financial institutions to push debt into alternate, opaque channels. But on any metric, the amount of new lending each year grows faster than the economy, and the interest newly owed exceeds the incremental rise in GDP. In other words, the whole economy is a Ponzi scheme. __ BloombergQuint

Trade Interventions and Tariffs — Not What You Think

We are seeing a mass insanity in the media in reaction to President Trump’s proposed trade intervention policies. We often hear claims such as “in a trade war everybody loses” and such obvious nonsense. In the real world that cliche has been put to the lie multiple times.

The idea that all countries lose in a trade war is unintelligible. This cannot possibly be true, not just because there is overwhelming historical evidence that countries have benefitted from trade intervention but also because the claim is logically impossible. Whether countries benefit or lose from trade intervention depends on the underlying institutions that mediate trade and capital flows, the extent of existing trade and capital flow imbalances, and the types of intervention employed.

… There are often cases in which mercantilist or interventionist policies in one country create trade and capital flow imbalances that must be absorbed by another country, usually in the form of unwanted trade deficits. According to both economic and trade logic, large deficits or surpluses cannot persist over many years unless significant policy distortions keep them in place. This is because trade imbalances alter economic conditions, especially monetary conditions, in ways that automatically cause them to be reversed.

In other words, to the extent that imbalances have persisted for many years, or even decades, they must be sustained by policy distortions in either the surplus or the deficit country. In such cases, if a country is forced to absorb the distortions generated by another country, and it implements trade intervention policies aimed at reversing the effects of these distortions, these policies benefit both the first country and the global economy, although usually at the expense of the country where the distortions originated.

This has become an especially important argument in recent years. Distortions in the distribution of domestic income in several countries (most importantly, in China, Germany, and Japan) have led to huge savings imbalances, which are automatically absorbed by countries that have deep, flexible, and completely open capital markets with strong legal and governance institutions (mainly the United States and, to a lesser extent, the UK and other so-called Anglo-Saxon economies). The result has been that the former countries have run large, persistent surpluses for decades, while the latter have run large, persistent deficits. Policies among the trade-deficit countries aimed at reversing these imbalances can be justified as economically efficient and to the benefit of the deficit countries. __ Michael Pettis

The article linked above is somewhat dense and semi-technical, but what the excerpt above is saying is that countries such as China, Germany, and Japan have been using trade policy to take advantage of the open policies of countries such as the US and the UK for many decades. In such cases the threat of tariffs — or the actual institution of a “tit for tat” set of trade policies — can be justified by the more open countries.

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The Lady Doth Protest Too Much

Both the cries of indignant protest by China and the EU, and the wails of woe by the mainstream media, are largely meant to influence public sentiment and sway the ignorant and gullible.


The US is unique in its low levels of dependence on foreign imports and exports as a percent of overall GDP. This makes the US somewhat less vulnerable to trade retaliation from export-dependent nations such as China and Germany.

Importantly, a significant portion of US exports and imports involve trade with Canada, and Mexico.

It is unclear how far the “trade reset” under President Trump will move things away from the current status quo. But Mr. Trump certainly has valid reasons for wanting to shake things up. Under the Bretton Woods agreement, the US has carried the burden of international trade — at great expense. In the interest of international stability, the US has tolerated many trade transgressions against it, as well as spending massive amounts of funding to provide military protection for allies, and to provide military protection of global trade routes to the benefit of friend and foe alike.

Back to the Effect of New Trade Policies on China

China is particularly vulnerable to a re-equilibration of trade with the US. Particularly if the US tightens security against Chinese theft of industrial and military secrets, and begins to more closely scrutinise Chinese imports in terms of consumer safety and covert criminal activities.

Many analysts point out that the Chinese government owns everything, including the banks, and can just issue renminbi to infinity to keep the economy solvent. The flaw in that argument is China’s role in the global economy: It’s the world’s biggest exporter and second-biggest importer. The currency acts as the interface between the domestic and international economies, and its value is a matter of supply and demand.

The Ponzi economy has been sustained by cheap dollars coming in through legitimate or illegitimate channels, and the problem now is that structural surpluses are disappearing and there is less “hot” money from the U.S. seeking yield. When dollars enter, the central bank buys them and issues renminbi. If it has to issue more than is justified by the amount of inflows, it creates inflation, and inflation, which has toppled or almost toppled governments from the Ming dynasty to Tiananmen, is the third rail of Chinese politics.
__ BQ

China is living in a rapidly expanding bubble, courtesy of large numbers of chump investors and trading partners in Europe and the Anglosphere. In such a parasitic relationship, tit for tatt tariffs and other equalising trade policies seem among the mildest and most justifiable strategies.

More:

Apple Bends Over, Begs to be Buggered

Credit Suisse has China Concerns

Another scandal in Chinese pharmaceutical safety

Check Out “The China Hustle”

The China Hustle documentary reveals how business is too often done in China — especially when foreign investors are involved. Netflix has been streaming the full video, and clever surfers can find it available elsewhere. For those who want to understand how tragically an investment “opportunity” can contrast with the public relations presentation, let this documentary open your eyes. The trailer is below:

The documentary “The China Hustle,” which premiered recently at the Toronto International Film Festival, shows how hundreds of Chinese companies listed on North American stock exchanges can cause billions of losses to investors due to lack of proper oversight.

These Chinese firms enter the U.S. stock market through reverse takeovers with American companies and report revenues and assets that have no base in reality, thus inflating the companies’ stock value. __ https://www.theepochtimes.com/china-hustle-a-horror-story-about-chinese-firms-listed-on-north-american-stock-exchanges_2298943.html

More:

The unraveling described below may throw a wrench in Xi’s “OBOR Take Over the World” project.

http://www.atimes.com/chinas-new-woes-unravel-xis-personality-cult/

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