China’s Dirty Debt Bomb
The U.S.-China trade war continues to dominate the headlines.
In fact, the two nations just agreed to revisit trade talks in Washington in early October.
As such, I want to take a step back and talk to you about China.
To understand what’s coming, it’s crucial you read this article.
The common narrative today is that China is vying to be the world’s next great super power. And China’s leadership has made it clear that they seek to dethrone the U.S. as the dominant world power.
On the surface, their plan appears to be working. The Chinese economy is now the second largest in the world.
But the common narrative is one gigantic lie. China is putting on a strong face to hide the fact that they are much closer to a crisis than most realize…
Let’s start with China’s economy.
The Truth is Told Behind Closed Doors
China’s economic data is total fiction. This is widely known at the top of the political pyramid… but may come as a shock to the average person.
Indeed, this is an open secret in Chinese government.
Former First Vice Premiere of China, Li Keqiang, even admitted to the U.S. ambassador to China that ALL Chinese data – outside of electricity consumption, railroad cargo, and bank lending – is for “reference only.” In other words, the data are “made up.”
Keqiang made this admission back in 2007… over 10 years ago.
That means that China has been “cooking the books” for decades, overstating growth and understating the risks to their economy/ financial system.
Based on some research, China’s economy is currently growing by 2% at best…
And some estimates have China already in a formal recession.
That’s just the start. China’s also been understating its debt problems.
How China Hides Its Real Debt Load
Everyone likes to point out that the U.S. has too much debt. In reality, China is in MUCH worse shape… it’s just better at hiding it.
Remember, China is fundamentally a command economy – an economy in which production, investment, prices, and incomes are all determined by the government.
As such, the government owns most of the large companies in China, called State Owned Enterprises (SOEs). China uses these to hide its debt loads…
Because SOEs are technically companies – not the government itself – China doesn’t have to report their debt loads in its official debt data.
POOF! Suddenly China’s official debt numbers are much lower!
But before you get too comfortable, China’s debt games extend even further than that.
You see, the bulk of China’s debts are in its unregulated Shadow Banking Sector…
Shadow Banking: The Murky World of Unregulated Debts
The phrase “Shadow Banking” sounds like something out of a Harry Potter novel. But the term really just refers to banking that’s “totally unregulated, and therefor rife with systemic risk.”
Obviously Shadow Banking is easier to say!
Getting your hands on China’s Shadow Banking data is extremely difficult. However, China’s Central Bank does publish an annual report that provides some details on this stuff.
According to China’s Financial Stability Report for 2018, the country has added $50 TRILLION in new financial assets (DEBT) to its financial system in the last FOUR years.
Consider that China’s entire economy is only $12 trillion. So based on the report, it expanded its debt load by 400% of its GDP… in FOUR YEARS TIME.
Oh, and nearly all of this debt (78%) was in SHADOW financial assets – assets that are completely unregulated with the WORST underwriting standards.
Now you can begin to understand why our President is playing “hard ball” with China during the trade negotiations. He understands that China is actually in much worse shape than the official data suggests.
For good measure, there is one other indicator confirming this…
Chart Flashes Danger for the Chinese Markets
One look at the stock markets will tell you that the Chinese stock market isn’t as strong as the official data would have you believe.
Since the trade negotiations began in March 2018, the U.S. stock market (orange line) has held up relatively well. The Chinese stock market (dark blue line) has dropped dramatically.
While it remains unclear how the Trade Deal will be resolved, one thing is clear: China is in a weaker position than the U.S.
As always, we’ll continue to monitor this situation as it unfolds…
Editor, Money & Crisis