What if China coughs? — Rais Hussin

SEPTEMBER 17 — China is different. That’s the mantra most Sinophiles repeat with religious zeal. Chinese banks can grow their way out of bad debts; the Renminbi (RMB) can be supported solely by domestic demand, the PetroYuan will challenge the Petrodollar, and many other financial myths. Over the last 20 years these pundits have gathered many sheep to their growing flock. But, in the end, the sad truth is that all sheep must face the knife.

We may be approaching a speed-bump in China’s economic “miracle”, thanks in no small part to the world’s greatest reality star playing a central role as its nemesis.

The one international convention Trump has blown up that can be said to be tactical and not just bombastic is his push-back on unfettered Chinese economic expansion. His “trade war” has tested the key anomalies which have resulted in an unprecedented bubble that China may soon have to reckon with.

For the last 20 years the US attitude to China was to turn a “blind-eye” and allow it ample competitive advantages. Both Bush and Obama maintained a consistent policy which facilitated the manufacturing-based export miracle that underpinned the China growth story.

During this time China expanded its economy to a dollar equivalent of US$12-13 trillion, versus US’ US$21 trillion juggernaut. Meanwhile, the Chinese have issued some US$23 trillion of RMB with only 1 per cent of global settlements, versus the US$19 trillion US dollar free-float as the world’s de facto means of exchange.

This has created a capital surplus bubble of mind boggling proportions. It makes quantitative easing by the Fed after the 2008 Global Financial Crisis (GFC) seem like chump change. If capital controls were lifted today, the Chinese currency would surely nose-dive, the only question being just how steeply.

Bad debts in the US are approximately 2.6 per cent of bank deposits but in China the official figure is 9 per cent if you believe — and you shouldn’t — whatever the Communists Party of China (CPC) officials publish; the real Non Performing Liam (NPL) numbers are undoubtedly higher. Amongst the top Chinese Banks there is very little transparency about this figure, which is why global financial institutions have purposely restricted their exposure domestically in China.

What we do know is that there are few takers of Renminbi outside China and initiatives such as Belt and Road are expressly designed to utilise surplus RMB in boondoggle mega-projects where Chinese State-owned Engineering, Procurement Construction (EPC) companies lend and spend funds in a closed loop. Indeed, there are no other big financial markets for RMB-denominated debt anywhere else.

Despite its best efforts, China is forced to buy its key resources such as oil, steel, copper etc in US dollars. With the Yuan at a 12 year low and the trade war costing China some US$200 billion in tariff-driven inflated costs, this is a painfully pinching position despite China’s US$2 trillion in reserves.

The fact is that China realised long back that it needed to wage “Unrestricted Warfare” to reverse its “Century of Humiliation” by the West. This is based on a strategy penned by two Chinese professors Qiao Liang and Wang Xiangsui In 1999 and followed to the letter since then. In it they acknowledge that they can only challenge US hegemony by informational and economic means, not militarily.

The Chinese “reef islands” in the South China Sea are one way to get on equal footing, by trying to eventually control the South China through which most of the their (and the world’s) goods are transported. Once again Trump is pushing back on this in a way Bush and Obama never did, and whether he stays in office or not (or, rather, whether he agrees to leave), US policy on this point is not likely to soften.

Leaving any political implications aside - this commentary is solely meant to be economic in scope - it’s clear that the convergence of growing anomalies in China’s export-led growth “miracle” will have to reconcile sooner or later, and the unrest in Hong Kong, though not existentially threatening to its Leadership, has unearthed deep-seated challenges which will only be exacerbated by any economic downturn.

From our perspective, while the trade wars have once again replaced China with the US as Malaysia’s largest trading partner, the implications of a correction in China will surely have global implications. The saying goes that when America sneezes, the world catches a cold. Today, if China coughs, we will all get the flu. Are we prepared?

* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.

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