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“Our million hearts beat as one,
Brave the enemy’s fire, March on!” “March of the Volunteers”, China’s national anthem

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OVERVIEW AND CONCLUSION

Although China’s era of miraculous economic growth has marched into history, the nation nevertheless achieved enviable real GDP increases in recent years. Benchmark predictions by numerous economic wizards regarding China’s economy remain rather sunny, especially in comparison with those for most other countries. In fact, most observers are fairly complacent about China’s current situation and future prospects. Faith in adequate global growth intertwines with belief that China’s expansion will continue to be substantial.

As the world has become more globalized and intertwined, China’s substantial economic expansion not only has boosted China’s international economic (financial, commercial, business) and political presence and power. It also has helped to ensure domestic political stability and protected the central role and authority of the Communist Party. The country’s leadership and other elites obviously desire and battle to protect such impressive accomplishments.

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However, China has a significant debt problem, and one that probably will worsen. Most China watchers nevertheless ignore or downplay this, with analysis and concerns banished to obscure articles, back pages, and fine print. China’s strong economy in the past five years probably derived substantially from a substantial expansion of its overall national debt. Will China’s government (and other areas of the economy) need to borrow more and more and go greater in debt in order to sustain “appropriate” GDP growth? Probably.

Yet the Chinese debt explosion, with totals at or moving toward high levels relative to GDP (particularly in the government and corporate sectors), endangers prospects for continued robust Chinese economic growth. Creditor (lending) confidence probably is not unlimited, especially in regard to segments of China’s corporate, banking, and local government arenas.

Moreover, very elevated debt is not just a Chinese phenomenon, but a worldwide one. The International Monetary Fund’s “Fiscal Monitor” (April 2018; Chapter 1) stated: “Global debt [public and nonfinancial private debt] is at historic highs, reaching the record peak of US$164trillion in 2016, equivalent to 225 percent of global GDP [current levels probably are higher]. The world is now 12 percent of GDP deeper in debt than the previous peak in 2009, with China as a driving force.” See also the Institute of International Finance’s perspective on the expanding global debt as a percentage of world GDP trend (July 2018). Public debt has played an important part in the leap in global indebtedness. China obviously is not an island isolated from other nations. So if international economic conditions weaken, perhaps partly encouraged by prior or prospective interest rate increases, it probably will become somewhat harder for many entities, both public and private, to raise cash.

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China’s glorious economic growth, and the related boom in its exports, has interconnected with increasing openness in international trade. Enthusiastic challenges to the free trade (globalization; multilateral) order and ideology, especially by the current American leadership (President Trump; “Make America Great Again!”), has raised concerns about trade wars and currency conflicts. The American Administration’s noisy criticism of China’s allegedly colossal (and supposedly unfair) trade surplus (at least in relation to the United States) and its willingness to impose tariffs on Chinese products has encouraged a rapid noteworthy depreciation in the Chinese renminbi relative to the US dollar in recent months.

Currency depreciation, not merely the running of large government deficits or tolerating (encouraging) jumps in corporate and household borrowing (and spending), is another strategy aimed at creating or sustaining adequate economic growth. Perhaps China’s currency depreciation relative to the US is to some extent a competitive plan designed to maintain its economic growth rate by ensuring continued substantial entry of its exports into the American marketplace. And the dollar/renminbi cross rate fascinates most marketplace observers in an environment excited by trade and currency war talk.

America of course is an important commercial counterparty for China. But it does not come close to capturing a majority of China’s overseas economic transactions. A review of China’s currency patterns and levels from a broad real effective exchange rate (“EER”) vantage point therefore offers superior enlightenment regarding the overall Chinese currency situation, and thereby its overall economic one.

The high level in China’s EER likely has tended to reduce exports and thus GDP growth to some extent from what they (all else equal) otherwise would have been. This consequently has tended to encourage China’s debt expansion as a means of achieving “sufficient” (official targets for) economic growth. Even allowing for the recent renminbi depreciation versus the US dollar, China’s EER remains rather lofty from the historical perspective. From China’s policy standpoint, its EER probably should depreciate even more than it has since its 2015 pinnacles in order to achieve desired economic growth and to handle its growing debt troubles.

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Not only do China’s debt predicament and the renminbi’s feebleness relative to the US dollar (and the need for the renminbi to slump further on an EER basis) warn of underlying weakness in and the probability of slower growth than generally forecast for the Chinese economy. The sharp fall in calendar 2018 in the Shanghai Composite Index (and other emerging stock marketplaces) and declines in key commodity benchmarks also signal subsiding (slowing) Chinese GDP growth. The gradual rise in US interest rates (ongoing Federal Reserve tightening; underline climbs in the Federal Funds rate and the 10 year US Treasury note), given the links across global marketplaces, also probably is starting to curtail economic growth around the globe. In any case, given China’s major role in the international economy, a slowdown in its output relative to levels anticipated (hoped for) by economic pundits and financial pilgrims likely will injure expansion elsewhere.

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China’s leadership probably is more fearful of inadequate economic growth than it publicly confesses. Why else has the country in the past few years further centralized political leadership and emphasized Communist Party control, embarked in well-publicized anti-corruption drives, and engaged in assorted territorial squabbles with its Asian neighbors? Such political programs suggest that real economic growth not only has slowed down (and perhaps to lower levels than official statistics indicate), but also probably eventually will ebb further than many high priests predict. A sharp deterioration in China’s GDP levels and prospects probably entails heightened internal political risks.

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China at a Crossroads- Economic and Political Danger Signs (8-5-18)