CHINA, LIVING IN A BUBBLE
Early this week and just returning from the Easter holidays, I received a grateful surprise on my mobile phone, when looking at the screen I was able to see a jumping alert from Bloomberg, advising of the new Chinese growth data, of an increase of 6.8% over the first quarter of the year. But all sweets have something chemical in them, and China’s growth wouldn’t be less. China has been implementing its economic growth over the years, and especially at the start of this one with newly renovated infrastructure plans, and inflation in the real estate market, which caused worries on several financial analysts studying global economics lately. China holds its back on a non-ending stimulus paid off by debt, which has been generated by the explosive deficit Chinese have. China needs to centre its reforms on ending up with this bubble and reducing the risk of its economic growth, following and completing a transition from an authoritarian, communist and intervened market to a free- market or mixed economic system, being able to compete globally against powers as the USA or the European Union. China's biggest sector, being manufacturing and the industrial building has generated its greatest profits since the recession epoch, but promoted by enormous governmental subsidies, reinforcing the inefficiency and extra costs introduced by this industry in the last years, shifting the manufacturing industry towards Taiwan or India. China’s exports decreased in the past two years, and markets have reacted skeptically to this news, many investors being terrified by Donald Trump promises of signaling China as a currency manipulator and rising tariffs of over 40% for Chinese products… or at least that was said in the campaign. So, with these views on the horizon, what are China’s possibilities of a stable and sustainable growth?
China, as is well known by the majority of us is a one-party dictatorship, which surprisingly has opened its doors to free market and globalization in the few last years, looking for stable economic growth, trying to restrain credit growth in the post-crisis period. Public expenditure in China is still an uncover mystery, as several economists have analysed its perspective, but a country like this one, with a wobbly and variable production model, can easily change its levels of expenditure over GDP easily; being only 31.32% over the last year (yes! Lower than many European countries…), living in a socialist-communist state. But when everything seemed to be calmed and restructured for better commercial relations with a much more open China… there came Trump. The President of the USA wanted to impose 45% tariffs on Chinese goods and services imported in America, and he adopted a tough attitude towards China’s currency devaluation. I’m firmly convinced that this was one of his surrealistic and childish campaign slogans, which afterwards he won’t accomplish to approve, or at least is what many of us how, as Trump should know that introducing this brutal tariff into the American economy would make Chinese components and materials furthermore more expensive for American enterprises, generating cost-push inflation in the immediate term. But don’t blame Trump for that, as one of the worst presidents if not the worst in the history of the US (Barack Obama) rose tolls for Chinese trade up to 35%, and no, it wasn’t for social purposes. As we have mentioned before, China could even be labelled a currency manipulator by the American government in the next few years (which I totally agree, after seeing the effects the Yuan devaluation had on the overall economy last year), which even though is a fair and thought solution, is not the acutest one in terms of business interests. We should note that during the last six months China has been clearing its expansionary policy and has stopped devaluating its currency to begin rising its interest rates to consequently weak up the nearly death Yuan. Obviously if the USA implemented this measure they won’t be able to trade freely within the WTO or negotiate multilaterally with European countries, as restricting trade for monetary schemes is against the rules enforced by the WTO after its foundation.
Another cause of concern in relation to China are the famous American debt reserves the Asiatic country has. We should actually be loyal to the truth, and see how Chinese holds on foreign exchange reserves have decreased from 41 billion USD to 3.01 trillion USD from 2016 to 2017, according to data provided by the University of Harvard. The fact of dollar being the new gold and its revaluations through time with expectations of further many more increases in value (due to projected hikes in interest rates by the FED) will cause many emerging economies to shrink into American debt, including the Chinese, even though not being considered by many anymore as emerging market. According also to American estimations as ones done in a paper of J.P. Morgan, imply that American debt hold by the Chinese would be absorbed by American markets completely in just three weeks, causing its value and yield to rise.
But as always, the greatest problem has been caused by government interventionism into the market, creating the famous SOEs (State Owned Enterprises), being one of the biggest generators of deficit in the Chinese economy. SOEs are companies fully managed and paid off by the government to provide the people supposedly with basic and essential services, while deficit numbers grow at an increasingly rapid pace, while Chinese deficit numbers for 2016 were -281.895 million USD. To solve the problem the Chinese government should promote reforms to break down the massive state structure to prevent overloading the economy and introducing excess competition in the market when being financed by subsidies and restricting real growth and increments in purchasing power by real firms without competitive advantages, as in the case of SOEs, provided by public funding. The Central Bank of the Republic of China should start increasing interest rates as well as the FED does to transform its currency into a competitive one and start portraying their exports on quality and real added value instead on poor prices, caused by a devalued currency and not even by market forces. Chinese enterprises should also be focused in reducing excess of supply and overcapacity of production in industries as infrastructures or construction as well as extraction of raw materials as iron or coal. Putting forward these political reforms in China will be difficult, of course, but we never imagined the Chinese president defending at the World Economic Forum, market freedom and free trade in contrast to the new protectionist wave coming from the US. If China doesn’t want to slow its growth pace and desires building it upon stable and efficient, as always, freedom is the solution.