China is different. That’s the mantra most Sinophiles repeat with religious zeal.
banks can grow their way out of bad debts; the renminbi (RMB) can be
supported solely by domestic demand, the petroyuan will challenge the
petrodollar, and many other financial myths.
Over the last 20
years, these pundits have gathered many sheep to their growing flock.
But, in the end, the sad truth is that all sheep must face the knife.
may be approaching a speed bump in China’s economic “miracle”, thanks
in no small part to the world’s greatest reality star playing a central
role as its nemesis.
The one international convention Trump has
blown up that can be said to be tactical and not just bombastic is his
push-back on unfettered Chinese economic expansion.
war” has tested the key anomalies which have resulted in an
unprecedented bubble that China may soon have to reckon with.
the last 20 years, the US attitude to China was to turn a “blind eye”
and allow it ample competitive advantages. Both George W Bush and Barack
Obama maintained a consistent policy which facilitated the
manufacturing-based export miracle that underpinned the China growth
During this time, China expanded its economy to a dollar
equivalent of US$12-13 trillion, versus the US’ US$21 trillion
Meanwhile, the Chinese issued some US$23 trillion of
RMB with only one percent of global settlements, versus the US$19
trillion US dollar free-float as the world’s de facto means of exchange.
This has created a capital surplus bubble of mind-boggling proportions.
It makes quantitative easing by the US Federal Reserve after the 2008 global financial crisis seems like chump change.
If capital controls were lifted today, the Chinese currency would surely nose-dive, the only question being just how steeply.
debts in the US are approximately 2.6 percent of bank deposits, but in
China, the official figure is nine percent if you believe – and you
shouldn’t – whatever the Communist Party officials publish; the real
Non-Performing Loan numbers are undoubtedly higher.
Among the top
Chinese banks, there is very little transparency about this figure,
which is why global financial institutions have purposely restricted
their exposure domestically in China.
What we do know is that
there are few takers of the renminbi outside China, and initiatives such
as the Belt and Road project are expressly designed to utilise surplus
renminbi in mega-projects where Chinese state-owned engineering,
procurement and construction companies lend and spend funds in a closed
Indeed, there are no other big financial markets for renminbi-denominated debt anywhere else.
Despite its best efforts, China is forced to buy its key resources such as oil, steel, and copper in US dollars.
the yuan at a 12-year low and the trade war costing China some US$200
billion in tariff-driven inflated costs, this is a painfully pinching
position despite China’s US$2 trillion in reserves.
fact is that China realised long ago that it needed to wage an
“unrestricted warfare” to reverse its “century of humiliation” by the
This is based on a strategy penned by two Chinese
professors, Qiao Liang and Wang Xiangsui, in 1999 and has been followed
to the letter since then.
In the strategy, the two professors
acknowledge that they can only challenge US hegemony by informational
and economic means, not militarily.
The Chinese “reef islands” in
the South China Sea are one way to get on equal footing, by trying to
eventually control the sea through which most of their (and the world’s)
goods are transported.
Once again, US President Donald Trump is
pushing back on this in a way Bush and Obama never did, and whether he
stays in office or not (or, rather, whether he agrees to leave), US
policy on this point is not likely to soften.
political implications aside – this commentary is solely meant to be
economic in scope – it’s clear that the convergence of growing anomalies
in China’s export-led “growth miracle” will have to reconcile sooner or
later, and the unrest in Hong Kong, though not existentially
threatening to its leadership, has unearthed deep-seated challenges
which will only be exacerbated by any economic downturn.
From our perspective, while the trade wars have once again replaced China with the US as Malaysia’s largest trading partner, the implications of a correction in China will surely have global implications.
The saying goes that when America sneezes, the world catches a cold. Today, if China coughs, we will all get the flu. Are we prepared?
Dr. Rais Hussin is President & CEO of EMIR Research, an independent think tank focused on strategic policy recommendations based upon rigorous research.