China is quietly quaking in its boots
Is China on the brink of a crisis similar to the one suffered last year by Argentina, due to a defective balance of payments? In such a situation, China would see itself short on dollars, unable to support its own currency! As for many other sovereign nations, the Yuan is built on its country’s foreign currency reserves that get heavily invested in US Treasury Bonds. These assets at the disposal of China’s central bank, and that indeed figure on its balance sheet, are essential to it not only so that it can intervene if needs be and to raise or lower the Yuan, but also to bail out its national banking system. It’s in this respect that the customs barriers put in place by the Trump team are directly threatening China because the fall in its exports to the US is about to cause an economic slowdown much worse than initially thought, which will naturally constrict the supply of dollars to the Chinese. It’s the whole fabric of Chinese banking and finance that has therefore been weakened, and that has nearly ground to a halt from the point of its stocks in American currency, because the decrease of dollars flowing in is concomitant with the acceleration of capital flowing out of the country. After having burned through 1 trillion dollars between 2014 and 2017 to defend their currency, the Chinese can nevertheless still boast of being the richest country in terms of cash reserves with their 3.1 trillion currently in stock. The conditions are however unfavourable for them because these reserves have been eaten away, from nearly 50% of their GDP in 2010 to less than 30% in 2019, while the country’s foreign debt last year reached a final unprecedented peak at 2 trillion dollars.
China’s immense vulnerability is easy to understand: the State is the lultimate holder of all debt created by national companies that are hence the de facto property of the Government, and that therefore enjoy the guarantee of public funds and preferential treatment. Because of this, Chinese companies’ debt is breaking world records as it exceeds 150% of the country’s GDP, compared to 100% for Japanese companies and a little over 70% for American companies. In such a situation, China’s cash reserves, that are admittedly enormous, are nothing more than smoke and mirrors because they will evidently prove to be insufficient to support the Yuan, to save a hyper-indebted banking sector, and to keep afloat national companies that are in dire need of regular injections doled out by the State. In other words, the Yuan’s apparent stability these last few weeks is nothing more than an illusion because, slowly but surely, the authorities are imposing ever more draconian measures when a company or an individual tries to send money outside the country. In practice, all transactions over $3,000 to go abroad are scrutinised and discouraged, when they are quite plainly not prohibited. This extreme surveillance demonstrates a certain anxiety within the Chinese executive, that is admittedly difficult to understand with regard to its gigantic central bank reserves, but compatible with the supply of American currency that is declining at a dangerous rate due to the tariff measures that are being gradually imposed by the Trump administration.
The ramping-up of the trade war is therefore not good news for China, whose Yuan already seems to be overvalued in light of the highly damaging effects reverberating throughout its foreign trade, growth and monetary policy. China – but also its sphere of influence encompassing Taiwan, South Korea, Malaysia and more – will be the first victims of the current escalating tensions.