Cushioning China's Credit Crash

Cushioning China's Credit Crash

From: Dean Dela Paz

For many who live in the West or, like us, float at the fringes of the South China Sea where a big, bad and bullying neighbor is intent on dominating more than just the seas and the sea lanes but also the fragile economies of developing nations any news that on the surface paints China in a bad light is by all means welcome. 

Many wish China ill. It's wrong but it's understandable. Never mind that a falling renminbi might mean increased interest rates all around as other currencies follow suit and costs of debt take flight. And never mind still that an increase in debt costs for Chinese households might result to manufacturing shutdowns elsewhere. As one of the world's largest populations decide to buy less, where will production surpluses go? 

Note also how major catastrophic floods and snow storms that inundate large Chinese farming and working communities force equity and currency exchanges in Asia south. Both in 2008 and again in 2011 an environmental cataclysm had forced the Chinese exchanges down and these in turn spread an equity epidemic from the Yellow River to the Hudson. 

On the matter of currencies which we've been tracking the renminbi still remains among the top three currencies most used in international trade and today it is still the second most employed in financial transactions. From equities to currencies the impact of a fall in the former and a devaluation in the latter might initially sting the Chinese but would eventually have global epidemic repercussions.

But the negativity felt towards China by the bigoted Sino-phobic is more passionate than intelligent and what long-deserved comeuppance might befall China in any form might soothe hurt feelings all around but actually does nothing to make things better.

In the partisan primaries in the United States as well as in their current general elections, the China question remains among the top five contentious  election issues with the crux centering on both the never-ending currency war between the renminbi and the dollar as well as on the highly emotionally charged issues of exported labor and even exported manufacturing as bosomy Barbie is assembled in China and so is G.I. Joe, America's fighting man.

China bashing is understandable, even justified given the manner by which this neighboring behemoth treats not only its next door neighbors but economies deeply entangled with it. 

Hating bullies is natural. Who can deny that there might have been a glint of glee when the Bank for International Settlements (BIS) recently called China's attention to its bloated debts hinting even, and not too subtly, that an imminent credit crash was in the near horizon?

Most analysts agree that if indeed the Chinese credit crash comes it will come after five more years of a continuous growth slowdown which in the case of China is growth that ranges from 4% to somewhere above 6%. While these seem stellar from the perspective of current growth rates in the Philippines and even more so when compared with GDP growth rates in the United States, this is considered a virtual recession for an economy like China’s - one highly dependent on exports that are one-dimensionally fueled by debt.

Tracking the Chinese economy we can hardly dispute that indeed its credit crunch will come to a head by 2020 following continuous slowdowns in GDP growth. The BIS however fears that there will be what economists call a “hard landing” – a stage in an economic cycle where an economy rapidly sinks from slow growth to flat growth precipitating a recession. That judgement is from a Western perspective and that, unfortunately, may discount several factors that have always operated not only within the Chinese economy but in most of the Asian economies that were long predicted to fall like dominoes but never did.

Allow us a skinny on some intrinsic Chinese cushions that may indeed soften a hard landing.

One, China’s financial system is comprised largely of state-owned banks or financial institutions that are heavily influenced by the Chinese government. These banks and financial institutions are in turn propped up by Chinese depositors where on the liability side of their balance sheet the effective creditors are the Chinese themselves while on the asset side the debts are to government-owned manufacturing enterprises and Chinese households. 

Unlike financial collapses elsewhere, the unique composition of assets and liabilities in the Chinese financial system does not lend to a collapse in confidence as naturally occurs in other economies headed for a hard landing.

Two, given the composition of the Chinese debt and the nature of its creditors, the debt, while increasingly heavy and debilitating, is by and large internal and is thus not prone to poison pill sanctions imposed by hostile economies or external financial institutions.

Stemming from the nature of the Chinese financial system, the Chinese government holds in its hands the instrumentalities of sanctions. It is unlikely to punish both creditors and debtors beyond what these can bear.

Finally there are cultural cushions that may soften a hard landing emanating from a long history of a government that is not only extremely strong-willed and in control but also a populace traditionally resilient of even the most debilitating challenges. Combined, what we have in China is a characteristically resilient population under a characteristically strong government that can weather even the worst credit crashes.