China has replaced the USA as the focus of too much debt compared to its gross domestic product. In the last five years Chinese debt levels have accelerated as its economy has slowed. In short, what will $28 Trillion more debt do to China’s economy? Business Insider writes about China debt to GDP.
China’s total debt is about $28 trillion, larger than that of the United States or Germany.
Now the Chinese economy is slowing. But China hasn’t stopped adding more debt. About five years ago, Chinese debt levels began accelerating far faster than GDP was growing. In other words, as time goes by China adds more debt and becomes less and less able to pay it off.
A good portion of Chinese debt is in state owned enterprises or local government. The general consensus was that this debt was China’s problem and would affect anyone or anything else. However that has changed.
Yesterday the Chinese government again began buying stocks to prop up its plummeting stock market. No one thinks that is sustainable. And my colleague Linette Lopez noted yesterday that there is a capital-flight “doomsday scenario” being floated by BAML which suggests that China only has about a year to a year and a half of currency reserves on hand if it needs to defend a run against the yuan.
China’s debt is not just going to disappear by printing money as a lot of China’s business debt is denominated in dollars. So, what will $28 Trillion more debt do to China’s economy?
There Goes the Yuan
The Communist managers of China’s “managed capitalism” have enjoyed support of the Chinese people because of decades of economic growth. That growth threatens to come to an end and rather than deal with secondary social unrest as factories close and people lose their jobs, China is stimulating its economy at the expense of its currency. Bloomberg Business writes about the People’s Bank of China cutting its reserve ratio.
China’s latest easing move signals that shoring up growth is the government’s top priority even if doing so further weakens the yuan or adds to leverage that threatens the longer-term health of the world’s second-biggest economy.
The People’s Bank of China said Monday that it’s cutting the amount of cash the nation’s lenders must lock away. The move marked the first time in four months that the central bank has used one of its traditional monetary-easing tools, despite mounting signs of a weaker economy and a stock market in near-freefall.
The action came days before Premier Li Keqiang is expected to set the bar lower for gross domestic product with a 2016 target expansion range of 6.5 percent to 7 percent, compared with last year’s goal of around 7 percent. The renewed focus on growth could be at the expense of any effort to rein in ever-increasing debt: Chinese banks extended a record amount of new loans in January. Meantime, the yuan is down 3.6 percent against the dollar since October.
In short what $28 Trillion more debt is doing to the Chinese economy is causing more debt, slower growth and a cheaper Chinse currency. The rest of the world will enjoy cheaper Chinese products at the expense of a trade war among low cost producers! Read more in our article, Will Capital Flight Kill the Chinese Economic Miracle.