What if China coughs?

If capital controls were lifted today, the Chinese currency would surely nose-dive.

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Published by Malaysiakini & Malay Mail, images from Malaysiakini.

China is different. That’s the mantra most Sinophiles repeat with religious zeal.

Chinese 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.

We 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.

His “trade war” has tested the key anomalies which have resulted in an unprecedented bubble that China may soon have to reckon with.

For 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 story.

During this time, China expanded its economy to a dollar equivalent of US$12-13 trillion, versus the US’ US$21 trillion juggernaut.

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.

Bad 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 loop.

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.

With 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.

The fact is that China realised long ago that it needed to wage an “unrestricted warfare” to reverse its “century of humiliation” by the West.

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.

Leaving any 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.


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莱斯福贤是EMIR Research的总裁兼首席执行官,EMIR Research是一个独立的智囊团,专注于根据严格的研究提出战略政策建议。

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