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Trump's Trade War May Spark a Chinese Debt Crisis
h/t Gates of ViennaThere’s no chance China will cut its trade surplus with the U.S. in response to President Donald Trump’s tariff threats. For starters, Washington has made no specific demand to which Beijing can respond. But its efforts may have an unexpected side effect: a debt crisis in China. The 25 percent additional tariffs on exports of machinery and electronics looked, at first blush, like a stealth tax on offshoring. The focus on categories like semiconductors and nuclear components, in which U.S.-owned manufacturers in China are strong, recalled Trump’s 2016 promise to tax "any business that leaves our country." It seems, though, that offshoring wasn’t the target after all. Now, with the imposition of new tariffs on low-value exports that mostly involve Asian value chains, the simple fact of selling cheap products that the U.S. buys has become the problem. Either way, the administration appears set on shrinking its current-account deficit (which, at a moderate 2.4 percent of GDP, is far lower than the 6 percent clocked in 2006-7) just as the Federal Reserve raises interest rates. Distress has already been registered in China. On July 13, the yuan (also known as the renminbi) hit 6.725 to the dollar, the weakest in a year and 5 percent lower than at the end of May. Such a move is nothing earth-shaking for less controlled currencies. But a stable renminbi is a key plank in the leadership’s promise to its people, and the exchange rate is tightly managed by the central bank. ...The Ponzi economy has been sustained by cheap dollars coming in through legitimate or illegitimate channels, and the problem now is that structural surpluses are disappearing and there is less "hot" money from the U.S. seeking yield. When dollars enter, the central bank buys them and issues renminbi. If it has to issue more than is justified by the amount of inflows, it creates inflation, and inflation, which has toppled or almost toppled governments from the Ming dynasty to Tiananmen, is the third rail of Chinese politics. ...Until now, China has managed to keep its huge raft of nonperforming debt afloat thanks to capital inflows, as successive waves of quantitative easing pushed dollars into the world. A tighter dollar would seem to make the bursting of China’s credit bubble an inevitability. When that happens, the renminbi will have to depreciate sharply. This will have a deflationary impact on the world. It will also lead to a decline in China’s share of global GDP, dramatically reduce the nation’s demand for commodities, and diminish its role on the international political stage. ... Posted by: g(r)omgoru 2018-07-20 |
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