For those readers who have been following my blog – you know that I am pessimistic about the future of the global economy going forward.
In fact – my warnings last year – have been of a perfect storm – centering on the U.S. Federal Reserve Funds rate – and the huge global debt load – currently standing at USD152 trillion.
As I have stated previously – all central banks are enjoying the Japanese experience – and are now caught in the Japanese Syndrome of lower rates – higher government and nongovernmental debt – deflation.
The Japanese have experienced this for more than 25 years – but all central banks chose to ignore this fact.
While the U.S. Federal Reserve rate is low – the global debt situation will increase – as borrowed monies are not being spent on productive goods – due to the global trade decline the situation will get worse.
When countries need to stimulate the economy – under the Keynesian policies relied upon – from where can they borrow to increase their debts – at lower rates?
The U.S. and Western economies are not stable – debt laden and now reliant on the negative or low interest rates.
One ‘black swan’ event will cripple all economies – wildfire – contagion – distrust in the powers that control the monies.
In prior articles on China ‘Ad Nauseam’ – I have been at pains to point out – that the central government and the People’s Bank of China (PBOC) – are juggling the transition of the Chinese economy – from an export based – to a consumer based economy.
After every debt fueled growth phase throughout history – a recession is inevitable – in China’s case a depression – not dissimilar to the Great Depression in the U.S. – 1930’s style.
Further – the Chinese economic figures advised by their National Bureau of Statistics – are just plain wrong – manipulated – when compared to energy indicators – and then one has the value of the Yuan – what the PBOC needs is for the Yuan – to be lower than its trading partners – to export deflation and incite inflation internally.
The recent release of Chinese macroeconomic data – had the Q3 2016 – GDP numbers – showing that for a third consecutive quarter the pace of economic expansion was – at 6.7% – in line with the midpoint of the Chinese government’s growth target – so the situation ‘looks’ stable.
Stable – uncannily so – in fact very skeptical from my point of view – so when one drills down into the data – the Q3 GDP data was assisted by new yuan loans provided by the Chinese banks – which rose to CNY 1220 billion in September of 2016 – compared to the previous month’s lending of CNY 948.7 billion and way above market expectations of CNY 1000 billion.
This is important in that Year-on-year new yuan loans increased 16.2 percent and outstanding yuan loans went up 13 percent.
Total social financing – which is a broader credit measure increased to CNY 1.72 trillion.
Banks Balance Sheet in China averaged 588.61 CNY Billion from 2004 until 2016 – reaching an all time high of 2510 CNY Billion in January of 2016 – and a record low of -32.10 CNY Billion in July of 2005.
Banks Balance Sheet data in China – being reported by the PBOC.
Now Year on Year – the figure equates to debt created of USD4.5 trillion – more than any other country.
Mind you the debt is far higher – let us say double this debt – as these are the official Bank figures – and does not include the secondary finance by consumers and construction companies – which has sustained and added to the real estate bubble.
When one looks at the headline figures – this ‘stability’ is consistent with the PBOC requirements to entice investors and a strengthening economic activity would serve their interests to alleviate concern that the “uncanny stability” in the official GDP data is masking a serious underlying growth deceleration in China.
Growth deceleration – as the increase of debt does little to impact the long range growth – it is short lived – as espoused by Henry Hazlett – see later – and shown by the way of a graph from Goldman Sachs (this graph by the way was from a story in 2015 on an entirely different matter – the results however are the same irrespective of the country).
One should note that the Chinese debt creation has short term benefits for commodity exporters – in particular it should be noted that Australia’s economy is growing at an annual rate of 3.3% – it is among the highest in the developed world – allowing a continuous 25 years of growth – without a recession.
Exports to China have played a key role in enabling the Australian economy to continue growing – even during the financial crisis in 2008 – when many other countries faltered and are still suffering the aftermath.
Australian Growth has remained robust – despite a slump in commodities prices over the past five years.
One should bear in mind that – should China – whose consolidated Debt/GDP is now at or above 300% – feel it necessary to slow down its debt creation – not just Australia – but the rest of the world will feel the consequences.
The key in China – is not consumer debt – nor the Banks – both can be tolerated by the central bureaucracy and be rolled forward – aided and assisted by a tear-away housing market.
So the debt creation has assisted the GDP – no doubt it is the infrastructure spending – the Silk Road through to Europe – however the future ability of the accumulated losses on Banks balance sheets cannot be allocated to the Government – or rather the consumers – as it will stifle consumer demand – the essence of the path to increase consumer spending as a far greater percentage of GDP.
Debt constrains growth.
The problem with deferring debt – is the maintenance of that debt on the balance sheet – at a huge cost in interest and charges – which increases exponentially over time – and when one looks at the latest GDP figures – and the 13 percent increase to established loans – one wonders whether this debt was created to cover interest costs.
This debt is a political problem for the ruling party and the PBOC – for the government to take on this debt – it is considered by the writer to be a death knell to the consumer – as the affects will be to stifle demand.
Tough decisions ahead – problem is though globally – the postponement is just creating a bigger headache for global economies – with the value of the USD rising – thereby increasing the debt stockpile all central banks are holding.
So that then leads to the value of the Yuan in relation to the USD – this has declined and will continue to do so – the Chinese have the currency in the International Monetary Fund basket of currencies – they have achieved the status required.
There is no need for the PBOC to support the currency – therefore international perspective is important – this – with the ‘uncannily stable’ GDP figures – are not assisting the Yuan in the short term – the gloss of the skew of quarterly data released by the Chinese National Bureau of Statistics – has no doubt dimmed on further review.
Do not get me wrong – the current Yuan devaluations are being welcomed by the PBOC – they do not have to manipulate the value down – the market is doing this for them – they do not have to intervene – spend monies in supporting value now that the currency is in the IMF SDR basket of currencies.
The problem is for the main Chinese trading partners – an unwelcome transfer of deflation – requiring a similar currency devaluation by manipulating interest rates.
Time will tell – in the meantime China is no doubt enjoying the mute response from the major trading partners on this subject.