China Is Cutting A Path Forward Through The Turbulence

One Belt One Road Is China's Path Forward

China is busy cutting a path forward even as much of the world is in economic turmoil. Despite economic problems popping up in countries across the world, China is hellbent on pursuing its goal of galvanizing itself as the leading global power. Not waiting to resolve trade issues with America, China is busy turning economic lemons into lemonade. One example of China reaching out can be seen in its courting of Europe. The Asian Times reports the European Union and China, after a series of meetings, came up with an important joint statement. It outlined agreement on three quite sensitive fronts and paves the way for a complex, wide-ranging EU-China investment deal to be signed “by the end of next year. Remember to put this in context, this comes at a time when the Germany government has just cut its 2019 GDP forecast to 0.5% and the Euro-zone economy is slowing.

The statement was signed by Chinese Premier Li Keqiang, European Commission President Jean-Claude Juncker and head of the European Council, Donald Tusk. It is already being described as "the real deal" and a departure from antics such as the endless Brexit saga. In the article I refer to, the writer notes, the joint statement reads like a rose garden, it states: “The high level of ambition will be reflected in substantially improved market access [and] the elimination of discriminatory requirements and practices affecting foreign investors.” Better yet, there were no accusations of “unfair” trade hurled at Beijing. It appears that Brussels and Beijing seem to be finally engaging in building some sort of synergy between the One Belt One Road (OBOR) Initiative and something only Eurocrats know actually exists but is outlined in the EU Connecting Europe and Asia project report.

The new president of the World Bank, David Malpass claimed recently there is too much debt floating around the world and China is a big reason why. While his view could be written off as totally political, this is not the first indication that China has gone, shall we say, over the top in creating new credit. Last year the IMF has warned China of the risk having to do with increasing China's debt by agreeing to loans which could prove economically explosive. More and more of the debt over the last year has been related to and intricately interwoven into China's far-reaching and encompassing OBOR initiative. Malpass said, “There are challenges facing the world in terms of how do you have transparent projects that are high quality, where the debt is transparent. China moved so fast that in some part of the world there is just too much debt.” 

China's Debt/GDP Ratio Is Well Above 300%

China is faced with pushing forward and financing OBOR with its economy having a huge debt/GDP ratio already well above 300% according to the Institute of International Finance. Christine Lagarde head of the IMF has in the past raised these concerns and also made it clear that Beijing was fully “aware” of the potential potholes associated around such a massive undertaking as OBOR and underwriting its funding. The cost of the planned network connecting China with 68 countries and 4.4 billion people across Asia, Africa, the Middle East, and Europe in a labyrinth of multi-trillion-dollar transportation, energy, and telecommunications infrastructure projects may total as much as 8 trillion U.S. dollars.

Now Airborn The C919 Will Be A Major Player

Articles have appeared on this site over the years arguing that China is not our friend and its economy is predatory by nature. One such article explored how China was ramping up its fledgling aviation industry and how when it hits its stride we can expect cutthroat competition. The article warns that COMAC (Commercial Aircraft Corp. of China) claims its new twin-engine, narrow-body design of the C919 is superior to the Boeing 737  the best-selling jetliner in the world, and the Airbus A320. COMAC also says it can bring the C919 in at a price lower than the $50 million range that Boeing and Airbus charge for each of their planes. With China's experience of building cities from scratch, why build just one factory when you can build twenty? This means we should not expect this industry to grow organically but to be driven forward by an aggressive government with a mission. When China's aviation industry takes flight over the next decade America should expect to say goodbye to a big chunk of its exports in this field.

Chinese-Bullet-Trains On Display

Another dealt with the company formed in the merger of China’s two largest companies involved in the production of railway locomotives, bullet trains, passenger trains, and metro vehicles. It pointed out that no effort was made to deny the impetus for the merger of China CNR Corp and CSR Corp in 2015 was the quest for a deeper push into overseas markets. Since the merger, it has been able to win by a wide margin nine-figure contracts, such as the supply of metro cars to Boston and LA. It should also be noted that CRRC recently formed a consortium with Bombardier that allows it to compete for the renewal of the New York subways where it appears they are currently in the lead to win the contract that should amount to around $1.5 billion dollars.

A third article focused on America's trade deficit with Mexico. When following the money it becomes clear that money from the United States huge trade deficit with Mexico eventually ends up in China.  When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash, however, a bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route and each year the numbers are huge. North Americans are sending somewhere around 523 billion dollars a year to Asia.

Emboldened by this influx of wealth China has played fast and loose with creating and loaning out new funds. At a conference organized by the IMF and the People’s Bank of China, Christine Lagarde warned about debt and talked about how problematic increases in debt can potentially limit other spending as debt service rises, This can create serious balance of payment challenges. OBOR to move forward has to provide the financing for infrastructure that many countries desperately want and need but will they be able to repay the loans in coming years? Lagarde reminded the Beijing conference that, “In countries where public debt is already high, careful management of financing terms is critical.”

The Center for Global Development, a Washington-based think tank, has highlighted in a report entitled Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective, the underlined the problems of extending credit to poor or unstable countries. It has pointed out that as many as 23 countries could be prone to “debt distress.” This group includes Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan which were rated in the “high risk” category. Past high-profile horror stories associated with China’s overseas ventures add to overall concern and the fact Pakistan was flagged in the report as “by far the largest country at high risk” is sobering. The real question is whether OBOR will become a massive expensive bridge to nowhere?

While China has lent trillions of dollars to countries, however, the motivation behind these loans must be questioned. Circling back to Malpass, it should be noted he has also criticized China for taking low-cost loans from the World Bank despite being the second largest economy in the world, China even surpassed the bank’s income threshold for low-cost loans in 2016. Malpass has also been critical of China’s lending in conjunction with funding its OBOR infrastructure initiative claiming these loans can saddle weaker countries with “excessive debt and low-quality projects.” Regardless until now the size of China's monetary expansion has caused Chinese stocks to moved higher and brought China back from the abyss but for how long it will work is questionable.

Bloomberg has pointed out that much of this year's rally in bonds and stocks is related to the PBOC re-opening the tap and flooding the market with liquidity. Stated another way, global markets have soared due to the unprecedented injections of credit and endless fiscal and monetary pumping by the Chinese. Considering the total amount of debt that exists in the world, far too much has been made over the fact China owns $1.12 trillion in U.S. Treasury's, an amount confirmed by data from the Treasury Department. The wild games these clowns are busy playing with the financial system by borrowing from one country, creating new credit, and pouring money into massive boondoggles is destined to end in grief.