China has accumulated a large hidden debt that can no longer be ignored, neither inside nor outside the country, warns an economic analyst.
Fraser Howie, author of several books on the Chinese financial system, warned on a CNBC program that China has accumulated a huge debt that puts the world’s second largest economy in a very delicate position.
“China is very much past the tipping point where the debt simply no longer can be ignored. The cost of servicing the debt … simply distracts from almost everything else,” Howie said.
According to Howie, the China’s total debt, including that of businesses, households and the state, has already reached 303% of its GDP in the first quarter of this year, according to the Institute of International Finance (IIF) report released by Reuters.
The IIF notes that China’s economic growth slowed to 6.2% in the second quarter, its weakest pace in at least 27 years.
Analysts warn of the serious danger of economic recession that threatens the Chinese economy derived from the debt in dollars, which according to South China Morning Post, rose to $3 trillion at the end of 2018.
“China’s US$3 trillion dollar debt makes it especially vulnerable because of tightening US dollar liquidity, a weakening yuan and the ongoing US-China trade war,” explained Kevin Lai, chief economist for Asia excluding Japan at Japanese investment bank and securities brokerage Daiwa Capital Markets to the South China Morning Post.
Chinese debt levels have been increasing exponentially over the last decade, with borrowing having quadrupled in the last seven years, notes Bloomberg, although it accepts that the opacity of the Chinese communist regime does not provide reliable figures.
The Asian country, amid an intense trade war with the United States, must try to reduce its indebtedness without intensifying the economic slowdown, something that is at the top of the agenda of communist leader Xi Jinping.
According to Reuters, the People’s Bank of China launched a reform of its interest rates on Saturday Aug. 17, in order to reduce the cost of borrowing for companies and support the economy.
Most analysts still expect the central bank will cut banks’ reserve requirement ratios (RRR) further in coming months, in addition to the six reductions already made since early 2018.
However, sources have told Reuters that more aggressive action such as interest rate cuts are a last resort, as it could fuel a sharper build-up in debt.
“The Chinese economy is clearly slowing, there are a lot of headwinds, there’re companies leaving China. China’s becoming a much harder investment case for a number of reasons,” Howei told CNBC.
During President Bill Clinton’s administration, China joined the World Trade Organization (WTO) in 2001, which allowed it to spearhead rapid economic growth that helped it expand its influence around the world.
However, the Chinese Communist Party (CCP) has not respected the commercial, financial, and competition rules of the international market: its market is tremendously hermetic for foreign companies and domestic companies are firmly controlled by the Chinese communist regime.
Chinese companies are mostly state-owned or state-controlled, so it is suspected that their commercial expansion strategies do not respond to purely commercial criteria of economic benefits but to the global political and economic strategy of the CCP.
In addition, these companies are heavily subsidized by the state, which minimizes production costs by being able to sell at prices that Western companies cannot compete with, something that the president of the United States, Donald Trump, has denounced on many occasions.
The working conditions of Chinese workers are close to slavery and, in fact, it is known that a very important part of manufacturing work in China is carried out by prisoners of conscience who are illegally held in labor camps, as several human rights organizations have denounced.
Moreover, monetary policy instruments, such as the Central Bank of China, manipulate the value of its currency, the yuan, in a completely artificial way to accommodate the regime’s financial strategy.
In this context, the official GDP growth statistics provided by the Chinese regime are also unreliable and it is claimed that they are in fact heavily manipulated.
“In the Chinese-type market economy system in which finance and investment are controlled by the Communist Party, it is easy to manipulate GDP growth rates that usually depend on the market supply-demand relationship,” Hideo Tamura of Japan Forward explained.
Regarding China’s dizzying GDP growth, Tamura said most of the increase is in the form of concrete and steel structures. “These are nonperforming bubble assets that do not generate profit. Instead, a Great Wall of Debt bubble has been built throughout China,” he said.
All these factors have made up a gigantic hybrid anti-free market structure under a cover of mercantilism that hides extreme communist protectionism with the sole aim of overthrowing the current world’s first power, the United States, to extend its [communist] model to the rest of the world, as Michael Pillsbury explained in his book “The Hundred-Year Marathon.”
However, this fragile structure is beginning to deteriorate under the pressure that the United States, led by President Donald Trump, is exerting for all these irregularities.