Trade War Is Hiding China's Big Problems

By Panos Mourdoukoutas


The ongoing US-China trade war is a distraction from China’s big problems: the blowing of multiple bubbles and the country’s soaring debt, which will eventually kill economic growth.
It happened in Japan in the 1980s. 

And it’s happening in China nowadays.
The trade war is one of China’s problem that dominates social media these days.

 It’s blamed for the slow-down in the country’s economic growth, since its economy continues to rely on exports. 

And it has crippled the ability of its technology companies to compete in global markets.
But it isn’t China’s only problem. 

The country’s manufacturers have come up with ways to minimize its impact, as evidenced by recent export data. 

And it will be solved once the US and China find a formula to save face and appease nationalist sentiment on both ends.
One of China’s other big problems , however, is the multiple bubbles that are still blowing in all directions. 

Like the property bubble—the soaring home prices that makes landlords rich, while it shatters young people’s dreams of starting a family, as discussed in a previous piece here.
New Home Prices 2015-19

Unlike the trade war, that’s a long-term problem. 

Low marriage rates are followed by low birth rates and a shrinking labor force, as the country strives to compete with labor-rich countries like Vietnam, Sri Lanka, the Philippines and Bangladesh—to mention but a few.
Then there’s the unfavorable “dependency rates” — too few workers, who will have to support too many retirees.
And there’s the impact on consumer spending, which could hurt the country’s bet to shift from an investment driven to a consumption driven economy.
Japan encountered these problems over three lost decades, even after it settled its trade disputes with the US back in the 1980s.

China experience many more.
Meanwhile, there’s the infrastructure investment bubble at home and abroad, as discussed in a previous piece here. 

At home infrastructure investments have provided fuel for China’s robust growth. 

Abroad infrastructure investments have served its ambition to control the South China Sea and secure a waterway all the way to the Middle East oil and Africa’s riches.
While some of these projects are well designed to serve the needs of the local community, others serve no need other than the ambitions of local bureaucrats to foster economic growth.
The trouble is that these projects aren’t economically viable. 

They generate incomes and jobs while they last (multiplier effect), but nothing beyond that—no accelerator effect, as economists would say.
That’s why this sort of growth isn’t sustainable. 

The former Soviet Union tried that in the 1950s, and it didn’t work. 

Nigeria tried that in the 1960s; Japan tried that in the 1990s, and it didn’t work in either of those cases.
That’s why bubbles burst -- and leave behind tons of debt.
Which is another of China’s other big problems.
How much is China’s debt? 

Officially , it is a small number: 47.60%. 

Unofficially, it’s hard to figure it out. 

Because banks are owned by the government, and give loans to government-owned contractors, and the government owned mining operations and steel manufacturers. 

The government is both the lender and the borrower -- one branch of the government lends money to another branch of government, as described in a previous piece here.
But there are some unofficial estimates. 

Like one from the Institute of International Finance (IIF) last year, which placed China’s debt to GDP at 300%!
Worse, the government’s role as both lender and borrower concentrates rather than disperses credit risks. 

And that creates the potential of a systemic collapse.
Like the Greek crisis so explicitly demonstrated.
Meanwhile, the dual role of government conflicts and contradicts with a third role -- that of a regulator, setting rules for lenders and borrowers. 

And it complicates creditor bailouts in the case of financial crisis, as the Greek crisis has demonstrated in the current decade.

Pseudologia Fantastica Sinica*

Don't believe China's lies
Pascal-Emmanuel Gobry

Xi Jinping has a message for you: He is the grown-up in the room, and he only means well.
Don't believe a word of it.
Over the weekend, China organized what it calls the "Belt and Road Forum," a gathering of 30 countries. 

During his speech, Xi pledged money to the One Belt One Road initiative, an infrastructure project involving countries across Europe, Asia, and Africa. 

He also urged countries to join hands with him in pursuit of globalization.
As is the case with most international forums, this was mostly a PR exercise. 

But PR matters in international relations, and the entire affair was essentially a subtweet of one man: Donald J. Trump.
Here's the picture of China that Xi is hoping his stunt will paint:
While America's economy is stagnating under Trump, China is a new rising economic superpower. While America bombs left and right, China doesn't mean any harm to anyone (unless "provoked," of course), and is pledging $100 billion for development banks. 

While America retreats from globalization under Trump, China stands for an open, friendly world, extolling the benefits of free trade. 

While America's leader is erratic, unpredictable, and nationalistic, China's leader is a boring technocrat who only wants boring technocrat things like economic growth and development.
Of course, this is all balderdash.
America's economy could be doing much better, but it's not doing too badly, either. 

More to the point, it's still the most phenomenally productive economy on Earth, whose poorest states are richer than Germany and Sweden. 

Meanwhile, far from an economic superpower, China might as well be split into two countries that are increasingly at odds: an advanced country of 50 to 100 million people yoked to a dirt-poor country of one billion and change. 

While China has undeniably had some real growth, most of that is built on unsustainable bubbles — stock market bubbles, credit bubbles, real estate bubbles, and government-driven make-work elephant projects. 

America has historically been the world's economic engine; whatever else you may say about China, it is nowhere near a position to replace it in that role.
Meanwhile, China's concept of "peaceful rise," whereby China claims that even though its power is increasing, it doesn't intend to use it to aggravate anybody, would be met with bitter laughter in surrounding states. 

Consider its aggressive recent power grab in the South China Sea, which flies in the face of international law. 

And China claims it wants to be the good kid in the class when it comes to international institutions? I don't think so.
And on trade, while China and the United States seem to be at opposite ends, the reality is that they're the same: preaching one thing and doing something else. 

Under Donald Trump, the U.S. talks about reining in free trade, but has thus far done almost nothing of the sort. 

Meanwhile, while Xi talks a good game about free trade, China does anything but practice it. 

It engages in stringent capital controls, curtails foreign investment in its economy, and engages in massive subsidization of its export sector, from currency manipulation to soft loans to exporters from government and government-linked banks. 

Whatever the merits of free trade versus protectionism in the abstract, it cannot be said that China truly engages in free trade.

Finally, while it's true that America's leader is irrational and clownish, and China's isn't, Xi is very much a nationalist.

He has concentrated power under himself to an extent unseen since Mao, as compared to previous Chinese leaders who, while vested with autocratic powers, tended to rule more by consensus and involving the country's various stakeholders in decision-making. 

More to the point, it has been his decision for China to engage in brinksmanship in its near abroad, and he has set up a nationalistic personality cult through state propaganda that is also a throwback to China's totalitarian past.
The point is this: Whatever the problems with Trump, and whatever you think about China, don't believe the hype. 

In terms of PR, Trump is the perfect foil for China, an opportunity to suggest that America is decadent and chaotic while China's technocratic authoritarians are patiently winning the future. 

And many in the West believe this story. 

But it's not real.

* Pseudologia fantastica sinica = Chinese pathological lying = Chinese mythomania