|Rapid Growth Slowing - Now What? (Click To Enlarge)|
While the Chinese have made progress in diversifying their economy, the country still relies heavily on making and exporting toys, clothes, car parts and other goods to the United States and elsewhere. Within months the United States trade conflict could escalate as another $200 billion in Chinese goods get targeted with tariffs. The IMF has warned that growing trade tensions between America and the rest of the world could shave as much as 0.5% off growth by 2020, costing the global economy 430 billion dollars. While the Washington based organization made a concerted effort to spin this off as a rebuke of President Trump by saying the U.S. would find itself particularly vulnerable "as the focus of global retaliation" and could suffer most as a relatively higher share of its exports are taxes in global markets many economists see China taking the brunt of the pain.
|Shadow Banking Is In Collapse|
Still of greater concern than just tariffs the figures we are seeing warn of problems in many areas of China's economy and indicate that massive debt is taking a toll on growth as money is siphoned away from investment to service past obligations. Chinese stocks are in bear market territory and the currency is weakening. The answer to Chin's problems will most likely not come from the World Trade Organization where Beijing has filed a complaint about a batch of levies by America in response to alleged violations of intellectual property or a new round of money flooding into its banking system. The fear is more credit while juicing growth and ramping up spending on big projects like highways and airports but could undermine efforts to break the country’s addiction to borrowing.
The latest news is that the Yuan is again sliding and in offshore trading has reached the lowest level since July 12, 2017. This was in response to the PBOC weakening its fix on the onshore yuan below 6.7 for the first time since the the start of the yuan drop in June and Beijing launching a quasi-QE, in which the central bank announced the introduction of incentives that will boost the liquidity of commercial banks, helping them to expand lending and increase investment in bonds issued by corporate and other entities. It will do so by using monetary policy instruments such as its medium-term loan facility (MLF). Many currency traders view this as an indication China is comfortable with a gradual depreciation of the yuan going forward. It must be noted that the yuan has fallen more than 4% in the past month making it the worst performer among 31 major currencies.
This somewhat sneaky way of adding liquidity into the system through the banks rather than directly by the central follows a record collapse or decline in shadow banking. The fact is that for years growth in China has been fueled by its government expanding the money supply and debt. This has distorted markets across the world. It is even responsible for causing housing prices to soar in many parts of Canada. This is why it is so baffling that many economists have chosen to ignore or given a pass to the ramifications of China's policies as they affect the big picture. This has accelerated since the global financial crisis of 2008, China's local governments and state-owned companies borrowed heavily to build cities and roads, invest in businesses and bolster financial markets. The spending spree resulted in a domestic debt hangover, particularly among some of the country's bloated and inefficient state-owned companies. This has created an unstable situation that continues to fester.