Did President Donald Trump break China? It was supposed to be a century that belonged to the world’s second-largest economy, but dreams of global economic domination have been dashed quicker than former Texas Congressman Beto O’Rourke’s presidential aspirations. While fault lines were already forming in Beijing before Trump arrived on the scene, it is interesting that China’s demise has been exacerbated on his watch. Is this the untimely end for China, or will the Chinese remember wei ji (crisis and opportunity) and make China great again?
Crunching the Numbers
China’s gross domestic product (GDP) keeps worsening with each passing quarter. During the July-September period, the economy expanded at a worse-than-expected 6% clip – the slowest it has been in 30 years. Since then, analysts and investors have kept a close eye on every datum coming out of Beijing.
September numbers were bearish. Exports tumbled 3.2%, vehicle sales dropped 5.2%, industrial profits declined 2.1%, and the manufacturing purchasing managers’ index (PMI) clocked in at 49.3 – anything below 50 indicates a contraction. The only positive figures were retail sales and industrial output, which climbed 7.8% and 5.8%, respectively.
Consumers are showing signs of curtailing their spending, unemployment is on the rise, and inflation is rearing its ugly head. Is the nation facing stagflation? All the ingredients are there, but it might be too early to make a declaration. We do know that zombies are roaming the marketplace.
Then there were reports of runs on several major Chinese banks as well as more than 100 corporate defaults across the country. A Ponzi scheme is continuing to be uncovered by both domestic and foreign players. It is a disaster unfolding in real-time.
Despite assurances from the White House that the first phase of the U.S.-China trade agreement will be signed, traders are rightfully skeptical; how many times have talks been on and off for the last 18 months? The skepticism was heightened when an administration official told the press that the first phase likely would not be signed this month, during the Asia-Pacific Economic Cooperation (APEC) summit in Chile, though he did note that it would eventually be agreed upon.
Even if the two sides signed a comprehensive agreement, the damage to Beijing has already been done. While the U.S. has borne the brunt of a trade dispute, China’s weaknesses have been identified. The yuan, for instance, has slipped below the crucial seven threshold and Goldman Sachs forecasts it will fall in November to 7.2 against the U.S. dollar, which could lead to a serious spike in capital outflows.
Walk Before You Crawl
How is China responding? Over the last couple of years, it has tried everything to stave off the inevitable decay of its national economy. Although it has spent hundreds of billions of dollars to stimulate and spur growth, Beijing’s efforts have so far been in vain. Nothing is working.
The People’s Bank of China (PBOC) has repeatedly lowered the reserve requirement ratio (RRR) – the number of reserves that financial institutions are mandated to hold – and is expected to cut it again. The central government has attempted through subsidies, investments, and tax breaks to resuscitate many troubled industries. The jury is still out on whether these will turn out to be profitable ventures.
Earlier this year, Beijing announced across-the-board tax cuts and a greater emphasis on the private sector, rather than government intervention. However, as Liberty Nation has documented, the private and public sectors go hand in hand because of the vast number of state-owned enterprises (SOEs) and well-connected companies that can easily get a bailout or become nationalized – like the financial institutions that were recently absorbed by the state.
While China did attempt to rein in its debt and spending at the beginning of 2018, the leadership did not foresee how long the trade war would last. As a result, total debt rose to 300% of GDP and the M2 money supply surged 8.4% in September. The laws of economics and finance will eventually send China crashing down to earth. The country is adding to its gold reserves as it seemingly prepares for the worst.
Hour of Doom
China is at a point now that if it coughs, then the global economy – particularly the U.S. economy – contracts influenza. If Beijing slips into the abyss, it could take the rest of the world with it as the country is propping up so many markets. For example, China possesses $1.2 trillion in Treasurys; imagine what it would look like if it sold off U.S. debt and flooded the bond market with these securities. It would be ugly. Its influence in Africa has been well documented, too.
So, is China’s hour of doom nigh? With or without a trade agreement, Pandora’s box has been opened for the entire planet to see. If it is not obvious by now, Beijing maintains one of the greatest Ponzi schemes in history – even greater than Social Security in the U.S. President Trump’s trade war has mainly consisted of shooting the U.S. in the face, but this Kamikaze mission has at least resulted in peeking behind the curtain and seeing just how fragile China is. As William Shakespeare wrote, “the truth will out.”