By: Andrew Moran
We typically imagine the Chinese entrepreneur crunching numbers, working around the clock to boost the economy, and repeating Communist propaganda about the West being the supreme devil. But we might have it wrong. Considering that the major source of funding for tens of thousands of companies in China originates from the central bank’s printing press, the reality could be businessmen and employees getting plastered on baijiu and beating each other to death with Pokémon cards during office hours. Think of it as the Eastern version of The Wolf of Wall Street.
The Three Rs
The People’s Bank of China (PBOC) recently announced that it would inject $126.35 billion into the financial system by cutting the reserve requirement ratio – the number of reserves that financial institutions are mandated to hold. This represents the seventh reduction to the RRR in the last 18 months, totaling $510 billion in net liquidity.
According to the central bank, the RRR will be lowered by 50 basis points for all commercial banks, effective September 16. Smaller institutions will be given one additional percentage point. The RRR for larger organizations will be dropped to 13%. PBOC officials are attempting to spur lending, economic activity, and financial support as the world’s second-largest economy continues to slump amid its trade war with the US.
In a statement, the bank assured markets that it will maintain a conservative monetary policy and will not flood the economy with stimulus. However, officials did say that they will increase counter-cyclical adjustments and extend immense volumes of liquidity when necessary.
Even prior to the trade war, the Chinese government had employed a series of measures to reverse the slump. Thanks to the dispute with the Americans, Beijing’s growth prospects are bearish, projected to fall to a 30-year low of 6.2% in the second quarter of 2019. Because of this, analysts anticipate the PBOC will impose another 50-basis-point RRR decrease. In addition, observers prognosticate that the central bank could cut at least one of its key policy interest rates later this month. This would be the first time since 2015.
The routine intervention and stimulus have ostensibly metastasized the economy into an addict, reliant on its next fix. So, can the Chinese economy survive without the state?
Every Yuan Needs Debt
In the last five years, China’s M2 money supply – a measurement of the money supply that includes cash, checking deposits, and liquid assets – has ballooned 120%. Since the country is being paralyzed by the trade spat and other negative trends that threaten its foundation, China is not showing any signs that it is ready to hit the pause button on money-printing. In fact, judging by previous remarks by PBOC heads, Beijing might rev it up even more, especially if the downturn intensifies.
But can China print to infinity? It may have to because seemingly every area of the economy counts on being propped up by the Communists through cash injections, stimulus projects, and bailouts.
This past summer, several interesting reports shone a negative light on the Asian juggernaut.
Fitch Ratings warned that Chinese banks might not have enough capital to lend out in the event of a steep slowdown. Analysts noted that banks’ earnings have only been enough to sustain mandated capital levels. It then makes sense as to why the PBOC is approving many RRR cuts: Beijing is depending on the quasi-private sector to resuscitate the economy through lending.
When it was discovered that the nation’s smaller banking outfits were running into trouble, China absorbed a handful of these entities and merged many of these weaker banks. But the problem may be much worse than the local media and the government are letting on. Nearly two dozen major organizations have not published up-to-date financial reports, causing consternation in the finance industry – at home and abroad.
There are nearly 200,000 state-owned enterprises (SOEs) within China, all receiving some sort of support from the government. Many cheered when it was reported that these government-sponsored businesses posted record profits, despite the trade war and economic hiccups. But they should hold the applause because this process is comparable to passing money from your left hand and giving it to your right and declaring you’re rich.
President Xi Jinping has promised that China is seeking free-market reforms and will open its economy to the rest of the world. But many skeptics say that it would be impossible for several reasons: There are too many SOEs, there has been too much debt incurred, and a significant portion of the money printed and given to state-run banks are earmarked to keep these indebted SOEs open – they are in a coma and running on life support.
Consider this February 2019 Bloomberg report:
“In 2018, private enterprises missed payments on more than 7 percent of bonds issued, HSBC estimates. As early as 2015, even state-owned companies counted themselves among the list of defaulters. And yet not a single local government-affiliated issuer has defaulted, ever.”
Liberty Nation recently reported a new study that found if borrowing were eliminated most of the developed economies in the world would see a negative gross domestic product (GDP) per capita. The analysis concluded that China would be one of the few states to see a gain in a borrowing-free universe, mainly because of its immense currency and gold reserves. But if the market is running mostly on debt, then wouldn’t the economy be wiped out, too?
This could explain why China has been on a gold-buying spree in the last few years, acquiring billions of dollars worth of the yellow metal as a hedge against volatility and perhaps its own inevitable demise.
The Long Con
Guo Wengui, an exiled Chinese billionaire who is the Asian version of Peter Schiff and considered a man of mystery by the Western press, sat down with US hedge fund manager Kyle Bass. Wengui explained that the Chinese economy is fake and that the Communists cheated the world, citing a litany of data and problems to support his claims.
Put simply, the Chinese economy is one giant Ponzi scheme that depends on new investors to cover the bad debt, mask its weakness, and con the rest of the world. The revenues derived from the Ponzi are used to launder money for the nation’s leaders and well-connected elite. This is what modern-day communism looks like; forget the proletariat, Karl Marx, and Stalin-esque facial hair. It is about utilizing the power of the state, with a modicum of the enterprise system, to generate enormous wealth.
Yet, no matter how interconnected everything is, the rules of basic economics and finance will always intervene to blow down the house. Are we witnessing the fall of the international finance order? It was only a matter of time before the fiat hegemonic experiment blew up in everyone’s face.
This was originally published on Liberty Nation
For those who might want to consider how bad things could really get, consider this thought experiment: Imagine that sometime in the last twenty years, an analyst at the Ministry of Finance of the People’s Republic of China approached their superior with this idea: How about we have China accumulate trillions in holdings of sovereign and similar risk-free debt securities, mostly American treasuries, and then do something which collapses the world economy. Then, China can use it hoard of bonds to buy up assets around the world at distress prices.
Assume the superior then takes that suggestion to the parent agency of the Ministry of Finance, which is the State Council of the People’s Republic of China. After some discussion, the State Council concludes that the analyst at the Ministry of Finance had an interesting idea. However, the negative consequences to China that could occur if the rest of the world thought that China had engineered a collapse of the world economy, made the idea too risky.
Now fast forward this thought experiment to 2019 and assume the State Council is trying to decide on how to respond to Trump’s trade war. They might decide to dust off the analysts’ idea to utilize their bonds to buy up assets around the world. All they would have to do was to pretend to be working toward an agreement, but never quite reach one. This would allow Trump and the United States to take the blame for the collapse of the world economy, that ensued.
That scenario may be far-fetched. A more likely outcome is that hundreds of years from now, Trump is only remembered as the president who started and lost a trade war. What would signal that Trump lost the trade war? That would be when China and much of the G20 countries enter into a comprehensive multinational trade agreement where the USA is excluded. Many foreign leaders detest that Trump has reneged on agreements signed by previous American presidents, such as the Iran nuclear deal. This is true even if some of them have some sympathy for some of Trump’s arguments.
China and many other countries remember that when China joined the WTO, it agreed to considerably harsher conditions than other developing countries. President Clinton and, then later, Bush forced China to accept changes in China’s economy and trading practices, before agreeing to allow China into the WTO, that were considerably stricter than were imposed on any other country previously or since. That Trump is essentially now trying to force new changes in China’s economy and trading practices irks many world leaders. That includes those world leaders whose view is that China’s development since it was admitted to the WTO in December 2001 suggests that some additional reforms by China are now appropriate.
A similar result, in terms of the isolation of America and subsequent reduction in American living standards, could occur if Trump withdraws from the World Trade Organization. Trump might quit the World Trade Organization in response the enormous financial penalties that will be imposed on America for the tariffs Trump has already imposed. Those tariffs constitute blatant violations of WTO regulations. Those cases, which have already been filed, are now slowly working their way through the World Trade Organization adjudication process. Included in the pending cases is the case just filed by China regarding the new additional tariffs that took effect on September 1, 2019..”.
https://seekingalpha.com/article/4290032