Will China Central Bank’s Debt Bomb Blow Up the Yuan?

How long before the world admits the truth about China, its unparalleled debt crisis?

A woman counts Chinese yuan bills worth thousands of dollars in Vancouver, Canada, on Oct. 27, 2015. (Benjamin Chasteen/The Epoch Times)
By James Gorrie

Commentary

On Aug. 5, the U.S. Treasury declared China a currency manipulator for allowing its currency, the yuan or renminbi, to fall below the 7:1 value exchange against the U.S. dollar.

And if certain trends continue, that may be just the beginning of China’s currency woes.

The Two Chinas

China’s currency manipulation isn’t really the overriding concern.

It’s the regime’s continued manipulation of the outside world’s financial system, and maintaining the facade of economic legitimacy, that’s the regime’s real challenge. That’s because, like the yuan itself, there are actually two Chinas. There is the external China and the internal China that the Chinese Communist Party (CCP) doesn’t want the world to see.

Briefly, the external China is the global leader in manufacturing and the power behind the highly ambitious One Belt, One Road initiative. It’s also the China that’s expanding its military power in the South China Sea by building military bases on man-made islands. It’s also the China that boasts before the world in Davos and other globalist watering holes just how brilliant the CCP is in having created this modern China from scratch in only 40 years, after 30 years of deprivation.

The internal China is, in brief, fragile and growing more so by the day. It’s built by fraud, corruption, deceit, and oppression on a scale unimaginable to most outsiders. This China is brittle because the foundation upon which it stands is based on a series of lies.

One of those foundational lies is the Chinese financial system, if you can call it that. The short version is that tremendous amounts of debt continue to be issued by the People’s Bank of China (PBOC) to fund a variety of “economic” activity such as:

  • politically favored projects that will keep people employed for a time, but add little if any value to the economy;
  • loans to state-owned enterprises (SOEs) whose capital has just been stolen by the CCP, making a once-profitable enterprise an insolvent one;
  • rolling over SOE debt into new loans.

China’s Delicate Yuan Balancing Act

The upshot is that the PBOC is much more of a political institution than a financial one, run by the CCP. By virtue of the debt it holds, the PBOC virtually owns China, which means the CCP owns China. No surprise there, of course, but it does explain why so many CCP members are multimillionaires and billionaires.

The surprise is the amount of debt—or assets, if one prefers—that the PBOC holds. Steve Bannon, former chief strategist to President Donald Trump, put the estimated number in an interview with Real Vision Finance at near $50 trillion. What’s more, $45 trillion of that was taken on from 2008 and later, and today, it takes $3 of debt to produce $1 of growth. Furthermore, only a relatively small portion of the loans are ever called.

When default is in sight, the debt is simply rolled over into a larger loan. All of this is accomplished by the PBOC simply printing more money. By comparison, the American banking system has $19 trillion in assets on its balance sheet, roughly equivalent to the United States’ annual GDP.

At the same time, the PBOC holds only about $3.2 trillion in foreign reserves. And yet it arbitrarily sets the yuan exchange rate by a basket of global currencies, with a 2 percent band of daily depreciation allowed. One can see why China prefers to let the yuan devalue (and likely more sooner than later) rather than tap its foreign exchange reserves to support it.

That’s an unwinnable strategy, especially since China’s GDP is only an estimated $14 trillion. Those GDP figures, by the way, are grossly inflated. It’s a political figure used to legitimize the rule of the CCP, not an economic one. A more accurate assessment via electricity usage would be 30 percent below the reported number, putting China’s real GDP less than $10 trillion.

As Economy Falls, the Yuan Will, Too

Furthermore, China’s growth rate is the worst in 27 years. In response, the PBOC has made borrowing even cheaper to stimulate growth. But with the trade war, companies leaving China, and consumer spending waning, it’s not at all certain that the lower lending costs will boost growth.

Another big factor in the China contraction is the rapidly evolving manufacturing supply chain. Both U.S. and European manufacturing jobs are leaving China in droves. A 2019 QIMA survey of manufacturers shows that 80 percent of U.S. respondents and 67 percent of European ones plan to leave China. The reality is that this critical move away from China by U.S. and European firms will more than likely be ongoing and permanent for the foreseeable future.

Plus, while consumer spending was 75 percent of the economy in 2018, now, nearly 80 percent of Chinese consumers prefer to save rather than spend. Plunging car sales confirm that reality, falling in 2018 for the first time in 20 years, and worsening in 2019. To make matters worse, food prices have risen 9.1 percent over the past year, posing a potential trigger for massive civil unrest.

As the Chinese economy continues to deteriorate, so too will the yuan’s real and perceived value. The PBOC is trying to keep up appearances, vis-à-vis its currency and its economy, by preventing the truth of the situation from infecting the perception of the yuan in global markets. At the same time, it needs to devalue the yuan to increase global demand for Chinese goods, but can’t do it too fast or too far, for fear of triggering a devaluation freefall.

Who Wants Yuan in Their Wallet?

Both of these scenarios are already in play, at least to some degree. But both will likely worsen sooner than later, as China finds itself in a losing situation on both fronts.

China has played the West for fools for decades. Companies invested, shared technology (or had it stolen), trained and educated China’s workforce, and made fantastic profits from China’s cheap labor.

Like the Native Americans who sold Manhattan Island for a chest of worthless baubles, we’ve sold China our treasures for the promise of open access to the vast Chinese market. But we now know that the promise of market access is as empty as their 60 million apartments and dozens of ghost cities where nobody lives.

But those days are now behind us.

Unlike the United States and Europe, China lacks a legitimate legal system, a legitimate economy, and, therefore, economic sustainability. Let that reality sink in for a moment. Sooner than later, those facts will matter to everybody, and then nobody will ever want to hold the yuan.

It will never become a global reserve currency, and the CCP’s dreams of global dominance will be over as the world wakes up and sees the real China.

James Gorrie is a writer and a speaker based in Southern California. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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