Is China in trouble?

in #finance5 years ago

China used to have foreign reserves of $3.99 trillion in 2014, but this has dropped to $2.98 trillion last month, which is a drop of a trillion in just two years. If they continue like this the entire reserve will be gone by 2019.

image source

China appears to be repatriating the money to counter the capital flows coming out of China and prevent the yuan from crashing.

China may also have a budget crisis

Officially China's budget deficit is 3.8% of GDP, not great but not a huge problem either. But analysts believe that the official stats are understating the reality. The Economist reports that the IMF has started adding up local-government financing vehicles and also land sales to produce an "augmented deficit".

That gives us the following chart:

image source

According to the IMF, the true budget deficit is over 10%, and China has been in trouble for a number of years. The money they have been repatriating from their foreign exchange reserves has been used to plug the gap.

But what happens when they run out of money? Or if President Trump makes good on his threat and slaps a tariff on them?

China is already struggling to earn it's way out of it's problems

Chinese exports decreased 6.1% in the year to December 2016. Because Europe hasn't fully recovered from the financial crash, they arn't buying as much stuff from China. And American corporations have either been onshoring their operations back to the USA, or moving them to Mexico, as the Chinese have been stealing intellectual property and corporations believe they are better off located in NAFTA countries where there is intellectual property protection. In addition, other countries like Vietnam, Bangladesh and places in Africa are looking to build manufacturing centres and are luring businesses attracted by their costs which are lower than China's.

What happens if China goes bust?

Western Banks are exposed to China but have started to reduce their Chinese holdings. See the following chart:

image source

But the holdings are still large enough to damage western banks. If China blows, there will be a world economic crisis.


No. China is not in trouble. It has frequently declared its intention to move to an internally driven model, and to be less dependent on exports. This, combined with the evident intentions of the Trump administration to forcibly devalue the dollar, and evidence that the U.K. intends to do the same. Suggests that a reduction in foreign currency reserves is a wise movement on the part of the Chinese government. Expect to see a strengthening of the Yuan Renmimbi, and its move to a major traded currency over the next two years.

If everything was fine in China, then private sector Chinese would be reinvesting their money at home. When people are confident, they always reinvest in their home territory.

Instead there has been a tsunami of money trying to flee China before it collapses. It has gotten so bad that govts around the world have taken action to stop Chinese buyers from distorting local property markets. I did an article about it a few months ago:

Previous government policy was export based. It takes time for the market to adapt. Current planning is to encourage internal growth, and a happier and wealthier populace. If money was fleeing China there would be evidence in the exchange balance. Am I to understand that you believe than in the past 20 years money has been fleeing America. The huge foreign debt of the US by conventional economic theory is best dealt with by defaulting, or through an inflationary policy. An inflationary policy at the level of the 1970's is politically sustainable under the guise of bringing jobs home, and the creation of artificial barriers to trade, such as make the Mexicans pay for a wall, and similar arguments. The Trump administration's stated policy is to erect protectionist barriers. It would be foolish for any foreign government to hold US debt in the long term. It makes sense for the Chinese to buy foreign assets while the US dollar retains some relatively high exchange value.

Good evaluation. Wat d you think about the Americas by the way, anything that stands out to you , I think it would be difficult for the US to recover and repay their debts , but then again , people might find value as you've said. Can't figure that out I'm not much of a economist , mostly just watching the show.

So all those buildings and ghost towns are free for grabs , if they don't get their economy together they will see a return of the shortages, so far china is really strong in manufacturing, 70% of the phones are probably made there , it's true their business have been moved to neighboring countries , but they have improved their infrastructure, if only they didn't bank so much on factories and did less currency speculation so trust in them wouldn't go down.

Still they are a booming economy and many businesses are located there.