China. Or Chaynaar, as the 45th President of the United States of America prefers.
As Donald Trump’s political fortunes continue to unravel in Washington, with political scandal jostling with diplomatic intrigue and internal bickering for headlines, a more immediate problem is bubbling away to our immediate north.
It’s always difficult to get a clear handle on the Chinese economy.
Official reporting generally is pre-determined, offering little more than an opaque view into the inner workings of one of the world’s great economic conundrums; a centralised Communist government overseeing a capitalist economy.
But in the past week, there have been some concerning signals emanating from Beijing that all may not be well and that its latest attempt to extract itself from a looming debt crisis has done more harm than good — not for the first time.
How did it come to this?
A decade ago, China saved capitalism from itself. As the global economy lurched towards a precipice, it was the sole engine of global economic growth, fired up with a huge increase in debt and investment.
Those excesses, and the difficulty in curbing them, continue to cause concern. For several years, there have been concerns and debates about whether China will have a “hard landing” or whether it can orchestrate an orderly slowdown.
A hard landing, though widely discounted, would be catastrophic for the global economy. Even a mild slowdown, however, will hit Australia hard.
As the nation that benefitted the most from the China stimulus, and with our economy now dominated by trade with China, any hiccups from Beijing will rattle our economy.
That’s the price for becoming China’s quarry.
Economic miracle or debt bomb?
Mr Trump promised to name China a currency manipulator as one of his first acts as President, arguing that its artificially weak currency, the renminbi, had undermined the US economy’s competitiveness and stolen American jobs.
There’s one major flaw in that argument — it’s totally wrong. For the past two years, China has been desperately trying to boost its currency, to stop cash flowing out of the country.
Trouble has been brewing in China for some time. There was the great stock market bubble of 2015, when prices doubled in little more than a year before popping in spectacular style.
Millions of small investors piled on board the boom, which briefly became a source of national pride, before it all unravelled.
Commodity prices have gyrated wildly, plummeting in 2015 before surging last year and into the early months of this year.
Now there is another sharp reversal. Property prices have soared off the charts and cash has been flooding out of the country in search of safe havens, notably in real estate in countries such as Australia.
Debt lies at the heart of China’s economic problems. Its debt to GDP ratio stands at an eye-watering 277 per cent. Greece by contrast, long dismissed as an economic basket case, looks positively sober at just 179 per cent.
Such comparisons often are dismissed by those who argue Beijing’s $US3 trillion ($4 trillion) of foreign currency reserves are more than ample to cover any monetary crisis. But that is well below the $US4 trillion ($5.3 trillion) peak, notched up almost three years ago.
Since June 2014, it has been churning through those reserves at a rapid clip as it desperately tries to prop up its currency.
It’s worth bearing in mind that no nation has ever emerged from such a debt-fuelled growth binge in such a short space of time without a serious lift in bad debts, and a deep recession — certainly not America.
A history of policy backflips
In the past two years, there have been a series of flip-flops and policy reversals over how best to engineer an economic transition in China, to elevate it to a first world economy and avoid a catastrophic meltdown.
Amid great fanfare, the leadership announced two years ago that China no longer would rely on investment and infrastructure spending for growth, that it instead would become more consumer-oriented.
As the stimulus was withdrawn and credit tightened, the economy began to sink. Commodity prices tanked. By mid-2015, when it was clear that it would take more than an official proclamation to turn China into a nation of consumers, panicked authorities again hit the stimulus button to rev up growth.
All that did was to delay the inevitable and deliver a reprieve to a banking system that rapidly is moving beyond Beijing’s control.
Just as in the west in the lead up to the financial crisis, China’s huge debt expansion has spawned a financial sector determined to push the boundaries into ever more exotic products that no longer are attached to real assets.
China’s shadow banks
Chinese authorities have become alarmed over the scale of the country’s “shadow banking system” and what is euphemistically known as “wealth management products” that are used to hide losses on everything from import and export trades to dud loans.
Moody’s last year estimated the shadow banking system had grown to more than 80 per cent of GDP, worth more than $US9 trillion ($12 trillion).
In February, when new banking regulator Guo Shuqing was appointed, tough new lending standards were imposed across the banking sector in an effort to curb the excesses and to limit the growth of debt.
Interest rates rose sharply, credit growth stalled and then shrank. But the tighter lending standards had an unintended consequence. Lenders and borrowers went deeper underground as shadow banking gathered pace.
Last week’s policy reversal
Then a week ago, the official position quietly but suddenly reversed.
Frightened by the prospect of a sudden slowdown, with manufacturing waning, the People’s Bank of China lurched again towards a pro-growth policy.
As Moody’s pointed out a fortnight ago, smaller banks had begun to struggle under the weight of the draconian new measures, exposing their vulnerability.
Where lending growth and debt had been deemed public problem number one until a week ago, it now appears that has been overtaken by a policy designed to prevent financial risks spreading through the system. The medicine was harming the patient.
How does this affect us?
As the world’s second biggest economy, China’s slowdown will ripple through the global economy — but nowhere will the affect be greater felt than Australia.
More than 35 per cent of our export trade is with China, the bulk of it in iron ore, leaving us horribly exposed to any kind of conniption in the Chinese economy. As a nation, we now rub shoulders with the likes of the Central African Republic when it comes to trade reliance.
It’s a situation that clearly has the Reserve Bank governor Philip Lowe concerned.
In a recent speech, the RBA boss noted the difficulties China is experiencing right now, particularly in its efforts to stem the flow of capital out of the country.
It might improve the situation in the short run, he said, as short term controls can improve financial stability and reduce the risk of financial market upheaval.
“But there is a balance to be struck here, as tightening up controls runs counter to the long run goal,” Mr Lowe said.
It could also exacerbate a vulnerable domestic economy, by allowing too much money to circulate at home.
“Ultimately, balancing these competing risks is a difficult task,” he added.
More stimulus may deliver us yet another reprieve — but it merely is delaying the inevitable and, at some stage, our over-reliance on China will come back to bite us.
By Ian Verrender