Much of the preceding article THE HOW OF FISCAL ARMAGEDDON:Part I was concerned with the mechanisms of fiscal collapse in the West. Implicit was what the trigger for this might be. A major political or fiscal crisis in the EU or a sudden collapse of the Chinese financial systems, may be two of the more likely triggers. In this article we will explore the current ‘house of cards’ that is the Chinese Financial system.
China is a statistical ‘out-lyer’ when it comes to industrialisation. The sheer size and pace of what has happened in just the past 20 years dwarfs all preceding industrialisation models. China initial near term industrialisation is a hundred times as large as any new industrialisation model we have seen previously, and it has happened in a hundredth the time. Buried in the rise and rise of this remarkable industrial behemoth however are deep systemic flaws, that have the potential of bringing down the whole Chinese enterprise, and along with it the world economy. It is not a case of if the Chinese economic ‘bubble economy’ will burst, it is matter of when that will happen. But first let us explore what is really going on inside the Chinese economy.
Almost a mirror of what is happening in parts of the West, China is also suffering from:-
- Over-investment in houses and infrastructure resulting in price inflated housing ‘bubble’
- The use of make-work schemes financed by trade balances that just can’t keep up as the deficit financed Western economies rein in Chinese imports
- The ongoing ‘ticking-timebomb’ that is the Chinese economy, kept afloat by massive six monthly doses of Quantitive Easing (QE) or (resorting to the monetary printing press). Given the current state of the economy, this Chinese fiscal time-bomb must explode eventually
- Rapidly shrinking Chinese foreign exchange reserves. A year ago Chinese Foreign Currency reserves stood at 3.2 trillion US dollars. That masks the required USD 2.4 trillion held as a guarantee against China’s massive debt, leaving just USD 0.8 trillion available to support the Chinese currency. China is burning through that foreign currency buffer at over $400 billion a year, in fiscal support schemes. By 2017 China’s foreign currency reserves will be drained.
- A Chinese debt mountain of over USD 16 trillion that has underpinned the make work excesses, of bridges to nowhere, ghost cities and useless and unproductive infrastructure projects.
- Few in the West report on a strange Chinese economic ‘custom’ of forcing short term compulsory saving, that is forced on productive labour. For unskilled and semi-skilled labour up to 20% of wages are withheld by the factories and Provincial governments. The Professional salaried can have up to 80% of their salaries withheld annually. The money forms the foundation of an investment fund that forms the basis of central government largess to Provincial governments, so they can fund their part of the Five Year Plan. The seized cash is returned, (well mostly, unless a comrade has not toed the party line) during Chinese New Year. Central planning causes much of the confiscated cash plus Central government’s aded QE funds, to be wasted on make work schemes to maintain low unemployment and stifle civil unrest. Much of the funding goes on capital works that NEVER make anything. The stories of ‘ghost cities’ are real. Sometimes buildings and infrastructure are built some without wiring or plumbing. They are then torn down and another building begins in their place. There is no shortage of rubble hard fill in China. Suggestions are that up to 40% of Chinese enterprise is made up of these civic make work schemes. Chinese GDP is a meaningless term, even more so that Western measures of GDP. Gigantic losses are ‘stored’ in special ‘debt banks’ and then magically vanished at the press of a keyboard. Such is the management of the Chinese world of QE. This cannot go on for much longer before there is a reckoning. The Chinese know it. the West knows it, but the prospects of such a return to reality is far too frightening to Keynesian economists, so they just ignore it.
- The bankrupt state of Chinese State owned enterprises is spread right across the whole Chinese economy. Again for social reasons and to keep a restive population quiescent, most State enterprises are unproductive and unprofitable, and exist only as employment make work schemes. By Western accounting standards these enterprises are bankrupt and are ‘trading whilst insolvent’. This massive political culture of economic smoke and mirrors masks the truth about the Chinese economic miracle. Xi’s ‘compact’ with the Chinese workforce, requires ‘Liberty’ to be denied for the guarantee of ‘Growth’ to be maintained. For that compact to hold requires constant growth. Something that is seemingly impossible long term with the Chinese economy. Something has to give. The only other option is increasingly authoritarianism and outright oppression. This may be the underlying reason for Xi’s increasingly authoritarianism crackdowns and a return to the ‘Cult of the Leader’, last seen in the days of Mao.
China apart, the Western nations who are overly exposed to a potential Chinese economic collapse include the US, the EU and the commodity suppliers to the Chinese economic ‘miracle’ like Australia. The realities of the ongoing Japanese QE, such as the recent 4.6 trillion Yen stimulus package, the US deficit sliding up past $20 trillion with no sign of slowing or reversing, and the report that the UK administration has now officially abandoned any attempt to balance the budget by 2020, bodes ill for the world’s economic fortunes.
Chinese financial collapse appears the more likely candidate to trigger a global economic meltdown. The only real question is when.