Because a trade war with the United States is likely to be a boom for China's $ 14 trillion debt economy.
Nearly 20% of Chinese exports to the United States. If a trade war between the United States and China becomes a reality, China's GDP growth will fall by at least 0.5% and the rate of decline may increase with the warming of the war. China's GDP surged more than 300% from 160% in the previous decade. And the world's second-largest economy is now facing a "red alert" on a bubble of financial debt waiting for a chance to explode.
The debt bubble nears
So far this year, the US-China trade war has not yet happened, and the threats, "mutations" between the two leading world powers are also settling down. On April 18, the Chinese Ministry of Commerce imposed a tax of up to 178.6 percent of the total order value on boron, a grain used to produce alcohol and biofuels from US exports. to China.
Beijing calls this "anti-dumping duty" because the preliminary investigation concludes that US companies have dumped the product in the Chinese market, unfair competition damaging production. and domestic business. Meanwhile, President Trump's threat of imposing a $ 150 billion tax on all imports from China from solar panels to cars remains unchanged.
If the real trade war occurs, China's economic growth prospects will likely suffer no less. For the past few years, Beijing has begun to adjust its economy, changing its growth structure towards relying more on domestic consumption, but still exporting billions of dollars of goods and services each year. In 2017, China's exports to the United States reached $ 506 billion, or 20 percent of China's total exports. Meanwhile, the United States only sold $ 130 billion worth of goods to the Chinese.
In January, the International Monetary Fund (IMF) forecast that China's economic growth will increase by 6.6% in 2018, but may now fall by at least 0.5% if tariffs above is applicable. And it could be slower if the global trade war is really warming up. China's economic growth may be diminished, partly as a result of a reliance on domestic spending that is steadily rising, but this is not the underlying cause of the nation's "gnawing" of GDP. .
In just a few years, China's debt has soared to more than 300% from 160% a decade ago, prompting many, including Chinese officials, to start worrying about the financial debt bubble. adjoining.
"If you look at traditional indicators like debt-to-GDP, or debt-to-GDP ratio, it's going to continue to grow over time," says David Dollar, senior analyst at David Dollar. Brooking Research Institute in China warns.
Why is it so bad? After the recession, the country has spent thousands of billions on infrastructure projects, rescued many banks, including unregulated banks and the banking system, and at the same time The company borrows money to pay off debts. According to Xiaoming, chairman of Huarong, one of China's largest asset managers, total non-performing loans could reach a record $ 476 billion by 2020.
Ineffective loans are loans from banks or banks for businesses or individuals that have not been paid or paid interest free. The risk came when these loans were never returned, banks began to lose money, economics professor at the Rotman School of Management in Toronto - Peter Pauly analysis.
Many of these loans were made to finance infrastructure projects - factors that helped the Chinese economy "grow hotly" between 2008 and 2011. In this period, the increase China's GDP growth ranged from 9.5% to 10.5%, but clearly, growth was paid at a price that was not cheap.
"With this leap, China's infrastructure has improved a lot, but after that investment has been made through a poor financial-monetary system," he said. Pauly analyzed. It is a way of reviving underdeveloped areas and using excessive financial leverage as a result of uncontrolled processes.
Greater financial crisis
The problem of ineffective lending can be worse than people think, GS. Said Peter Pauly. Beijing is dealing with an underdeveloped banking sector with very few regulations to oversee this critical area, at least compared to the United States. "To reform the whole system and deal with bad debts has been a tremendous challenge for the government," he said.
What is the biggest problem? The $ 20,000 billion underground banking system is almost impossible to control. In fact, the value of ineffective loans has tIt is even worse because no one knows exactly what is going on inside this underground banking system. "Nobody knows who owes what, with whom, or how much," says Professor. Pauly said. "Just when it really went bankrupt, things started to collapse."
The underground banking system is probably the most troubling financial problem in decades. Pauly said it was even worse than the financial crisis that prompted the US financial crisis in 2007.
Louis Lau, Group Director of Brandes Investment Partners, said that many non-bank organizations have sponsored dangerous infrastructure projects such as copper and coal mines or inefficient constructions. , using many new financial instruments unmatched.
Traditional banks have also sold their bad loans to these non-bank institutions, which then molded them into new types of products for sale to consumers and can also be returned. banks.
Having too many uncontrolled asset management products is a "huge risk" for the economy. Louis Lau said. If these loans are not repaid, banks may start bankruptcy while one of the local governments will benefit from these loans.
Finally, China has gone too far in boosting its economy after the recession. "The global crisis was a big shock to Beijing and they reacted very quickly by investing too much in infrastructure, but the economy has overcome the crisis," said David Dollar. Investments are not sufficient to cover expenses.
If Chinese banks start to "break down", it will certainly make the market panic. However, most of these debts are in the hands of Chinese credit institutions, so it is difficult to see the banking crisis in the country the same way they have seen in Greece or Spain.
China has also begun to reform its weaknesses in the banking industry. One of the things that the government has asked banks is to stop providing guaranteed investments. Prior to that, many banks actively guaranteed or obliged the government to guarantee the holders of these investments when the guarantees were not met - and it was also the cause of the outstanding debt. Balance Sheet, GS. Louis Lau analysis.
Trade war pressure
Meanwhile, even if China can prevent a crisis, the remedies are equally bad, greatly affecting growth. GS. Louis Lau points out that, historically, countries with high debt burdens have finally managed to slow down their growth. The problem - China's trade war and China's combined GDP problems may cause growth to fall faster than previously thought.
Given the current situation, if US tariffs on China are still at threat, there would be no devastating impact on the world economy. Compared to before, this economy has declined dependence on exports, "the United States has calculated this wrong," Dollar specialist said. And it can avoid US tariffs by exporting goods to other countries, GS. Added Pauly.
However, if the US decides to impose a high tax on all imports from China, China's economic growth may slow down in another way. At that time, the problem - trade war and financial instability will make the world's second-largest economy grow no faster.
"If growth slows to 2%, that would be a real crisis," said David Dollar. Whatever the case, the problems that make investors worry are never a good thing. Even if the world's second largest economy can save itself, internal problems should not be overlooked.
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