China has a bigger problem than the trade war - a 'mountain of debt'

Discussion in 'The War Room' started by Neph, Aug 8, 2018.

  1. Neph

    Neph Purple Belt

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    http://www.abc.net.au/news/2018-08-...war-is-massive-debt-a-bigger-problem/10055192
    [​IMG]

    It's been a few weeks since Donald Trump fired the opening salvo in a trade war with China, slapping tariffs on a range of Chinese-made goods.

    Beijing retaliated with tariffs of its own — and since then, the rhetoric on both sides has been unrepentant.

    Much of the focus has been on nervous financial markets, and how the war could affect the fortunes of US farmers and manufacturers — but how do things look from China's side?

    Is the trade war the biggest threat to China's economy, or does the country have more pressing problems — like its massive debt?

    Dinny McMahon, who spent a decade covering China for the Wall Street Journal, says while Beijing obviously isn't welcoming the trade war, it's also unlikely to be crippled by it.

    That's because China's economy is no longer driven by exports.

    "In 2007, net exports contributed about 9 per cent to China's GDP. Last year we were down to 2 per cent," McMahon says.

    "Exports aren't the be all and end all for the Chinese economy, as they once were."

    On top of that, he says, the US only accounted for about 19 per cent of China's exports last year.

    "So the ... trade conflict with China isn't perhaps the bludgeon that Donald Trump believes that it is, and certainly once would have been," McMahon says.

    The big problem for China, he says, is that the trade war isn't happening in isolation.

    Massive debt and ghost cities
    China is also dealing with a "mountain of debt" racked up at a massive pace over the past decade, as it raced to catch up with the "rich world".

    "Since 2008 China has been on this massive debt-fuelled binge," McMahon says.

    "It has been fuelled by debt at every step of the way, to a point where now Chinese debt levels are in excess of those in the United States."

    The biggest problem isn't the overall levels of debt, McMahon says, but the pace at which it's been accumulated.

    He says that around a decade ago, China's debt levels were about 160 per cent of the size of its GDP.

    "Now it's somewhere between 280 and 300 per cent," he says.

    When other countries have accumulated debt that quickly, they have "almost invariably experienced a financial crisis", McMahon says.

    "That's like the United States before the sub-prime crisis, or Thailand before the Asian financial crisis," he says.

    A lot of the money China borrowed from state banks was invested in infrastructure. Some of the construction was useful, but the non-stop building boom also created 'ghost cities'.

    [​IMG]
    PHOTO: A ghost city in Baodi District, about 110 kilometres from Beijing. It has around 3,000 completed villas but the occupancy rate is just 10 per cent. (Getty: VCG)

    It's worth reading the full article to get an idea of the kind of trouble China might be headed into. Australia is probably going to feel the shockwave of any kind of crash in China with how resource heavy our economy is. This is an interesting addition:

    What could come next in the trade war?
    So what could China's next move in the trade war be?

    Ratcheting up its own tariffs could be one option.

    "But the big problem here is that China exports to the United States far more than the United States exports to China," McMahon says.

    "So Donald Trump can keep saying we are going to impose more and more tariffs, and China will hit its limits of what it can impose tariffs on before the US gets to its upper limit."
     
    salamander, ElKarlo, Bald1 and 3 others like this.
  2. Last Samurai

    Last Samurai Gold Belt

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    some economists expect them to devalue their currency.

    https://dailyreckoning.com/prepare-for-a-chinese-maxi-devaluation/
     
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  3. Neph

    Neph Purple Belt

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    I'm not sure how viable it is given how freely floated their currency really is nowadays. It is a huge strain on an economy to peg an economy and can come with a lot of opportunity costs (ie: huge cash reserves).

    In addition as quoted below the exports market is down to 2% of the Chinese economy, and it is the exports markets (and tourism) that flourish with lower currency value. I don't know if it's as viable as it was in the past.

     
  4. Hognoxious

    Hognoxious But you can call me Johnny Mac

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    I am sure that Trump is ramping up pressure on China because of this debt to get them to come to the table and make a trade deal. This would be the "Art of the Deal"
     
  5. snakedafunky

    snakedafunky Red Belt

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    Why don't they just lower taxes on the rich so that the money will eventually trickle down and create more tax revenue?
    Seems like an easy fix to me.
     
  6. Headkicktoleg

    Headkicktoleg Steel Belt

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    I think flooding their country with refugees would work better in this situation
     
  7. babycart

    babycart currently in the Land of Demons

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    For China, an uncontrollable rich man is a dangerous rich man.
     
  8. snakedafunky

    snakedafunky Red Belt

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    <mma4>
     
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  9. Rational Poster

    Rational Poster War Room Messiah Yellow Card

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    I've been saying this all over the forum.

    Chinese investment ghost towns are going to wipe people out all over the world.
     
    SleepyBoy and covenant like this.
  10. horc00

    horc00 Brown Belt

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  11. horc00

    horc00 Brown Belt

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    The rich Chinese already pays way lower tax than they actually should. Tax evasion is pretty much the accepted norm in China.
     
  12. WTF2008

    WTF2008 Yellow Card Yellow Card

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    Wait.... it's Trump's fault.
    He did it and....Russia.
     
  13. horc00

    horc00 Brown Belt

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    Any uncontrollable rich man in China can and will be reigned in by Xi. That's pretty much what's been going on with his "anti-corruption" sweep. No rich man in China can get to where he is without buying favors from politicians or government-linked corps. They just have to pray that they don't piss Xi off.

    How so? Just curious.
     
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  14. covenant

    covenant Black Belt

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    errr your german. have those syrian doctors saved germany yet ?
     
  15. Rational Poster

    Rational Poster War Room Messiah Yellow Card

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    They're investment properties built with the idea that they would be occupied and the investors would recoup the costs of construction.

    We're talking about thousands of million dollar villas with no occupants that are already falling apart.
     
  16. SleepyBoy

    SleepyBoy Silver Belt

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    China's economy is a house of cards.

    And add that China has terrible record of massive civil wars and you can see that things aren't too Rosey with China.
     
  17. SleepyBoy

    SleepyBoy Silver Belt

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    BTW we know China is going to collapse/fragment. We're counting on it and it will be interesting to see how our debt China holds is handled.
     

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