The woes of the Chinese economy such as the real estate bubble and public debt are increasingly revealed by the COVID-19 pandemic, making the CCP “thirsty” for cash. Observers think it is possible that the CCP deliberately crashed the yuan, but specifically for what purpose?
To enhance the picture of “economic prosperity” with less than two months to the 20th National Congress, the CCP is mobilizing capital to support infrastructure projects to boost growth for the economy. The CCP appears to be counting on global partners and foreign loans to revive its economy, but things are not going as smoothly as planned.
Asia’s largest bank says No to China
The Asian Development Bank (ADB) recently announced that it would stop extending loans to China beyond 2025. The news came as a shock to the CCP at a time when the economy is on the edge. The country is in dire need of more credit.
“We want to start discussions next year on whether China can end new loans from ADB,” ADB President Masatsugu Asakawa said in an interview.
The CCP’s zero COVID policy has caused quite a shock to the Chinese economy. In addition, disturbances in the Hong Kong Special Administrative Region and Xinjiang Autonomous Region have weakened investor confidence in these areas.
Despite once being one of the fastest growing and hottest economies in the world, China recorded growth of only 0.4% in the second quarter of 2022.
Moreover, the housing crisis and rising tensions due to the Taiwan conflict have pushed China to the brink of despair.
Instead of $9 billion between 2016 and 2020, ADB now intends to lend China $7.5 billion between 2021 and 2025. However, the bank may completely end lending to China after 2025.
Regardless of the size of the economy, credit loans are needed to support growth. China’s suspension from the ADB list, according to observers, may have ulterior motives.
Notably, the U.S. and Japan each hold a 15.6% stake, while China has a 6.4% stake in ADB. The U.S. and Japan are allies and do not support the idea of China’s growing influence.
The U.S. will defend Taiwan militarily if China attacks, while Japan is one of China’s biggest rivals with growing influence in the Indo-Pacific region.
It seems that the Quadrilateral Security Dialogue (QUAD) alliance of Australia, India, Japan, and the U.S. is poised to contain China.
It is possible that Asakawa – a Japanese civil servant, was influenced by the two largest shareholders in making the decision to cut off financial support to China at a time when the country needed it.
It is indeed a difficult time for the Chinese. The weak economy and the threat of war with the U.S. over Taiwan have caused anxiety in the Chinese population.
Moreover, the real estate bubble in China has reached its peak, and is showing signs of exploding.
So how does China escape?
Historically, the yuan has been used by the CCP as leverage to hedge against the risk of mounting debt burdens. The abuse of this tool is causing the yuan to fall to the point that observers say it could force the CCP to abandon its fixed exchange rate altogether.
China’s economy is heavily dependent on exports. By devaluing its currency, the Asian giant has lowered the price of its exports and gained a competitive advantage in the international market. A weaker currency also makes Chinese imports more expensive, thus boosting the production of domestic substitutes to support domestic companies.
As the yuan weakens against the dollar, China’s trade surplus soars again.
So why is a weaker yuan likely to be part of the CCP’s “solution”?
Since the pandemic, China’s trade surplus has soared, the trade surplus for all of 2021 has reached $ 676.2 billion, while the U.S. trade deficit has increased again. This is now a serious global imbalance.
The reason for this phenomenon is due to the different policies that the CCP and the U.S. pursued after the pandemic: While much of the U.S. government stimulus was aimed at supporting jobs and consumers, the CCP focused on export-oriented state-owned enterprises.
The cornerstone of China’s growth model since it joined the WTO in 2001 has been to orient its economy toward the export sector without harming the household sector.
Households have been indirectly supporting the export sector in various ways, such as artificially low deposit rates.
As a result, household consumption’s share of GDP fell to lows rarely seen in any country during this economic boom.
While globalization is still happening and while the CCP claims wages are still highly competitive, the bigger the profits of the export sector are, the more domestic consumption is going to be harmed and with the help of debt, GDP growth remains strong.
But now the household consumption sector is suffering on three fronts:
- Finance: Focusing only on state-owned enterprises
- Socially: Devastated by lockdown orders from COVID
- In residential areas: Debt piled up due to the drop in property prices
The losses now outweigh the gains in the export sector, leading to a weaker GDP.
Moreover, the trade imbalance is worsening on two fronts: Not only are exports rising, but imports are stagnating due to dwindling domestic demand.
That is causing great stress because the amount of foreign capital leaving China is increasing as global tensions increase. Capital outflows cause credit to shrink, exacerbating China’s growth slowdown.
Therefore, this is the decisive moment for the CCP to play its familiar card: allowing the yuan to weaken.
Is China deliberately knocking down the yuan?
This is what the CCP has been doing: depreciating the yuan, and cutting lending rates.
A weak yuan will make Chinese exports more competitive, reducing inflation or reducing capital inflows. But a weaker yuan makes imports to China more expensive, thus risking higher inflation. In addition, a weak currency poses the risk of investment capital “fleeing.” Thus, the size of China’s trade surplus now reflects how weak the economy is, not its strength.
China’s slowing economic growth is revealing an even bigger weakness: its debt burden.
The CCP has long faced the possibility of bankruptcy due to default. The rate of default on foreign bonds of Chinese enterprises is at a record high. The scale of overseas defaults of Chinese enterprises in 2022 exceeded $20 billion, it seems that all are real estate businesses. The ratio of private debt to GDP is the highest of all major economies in the Global Financial Centers Index (GFCI) ranking.
The situation is getting worse as real estate declines with the risk of a housing bubble burst, and foreign capital flees from this most populous market, leading to slower growth. Thus, a weaker currency is among the few options the CCP has to alleviate the disastrous consequences of the debt trap, by depreciating a fully fixed exchange rate and pursuing an independent and stable monetary policy.
However, the CCP allowing the yuan to weaken further or float freely poses many risks and has global implications.
For example, with Chinese goods becoming cheaper, many export-based small- and medium-sized economies could experience a drop in trade revenues. If these countries are indebted and heavily dependent on exports, their economies could suffer. For example, Vietnam, Bangladesh, and Indonesia are heavily dependent on their footwear and textile exports. These countries could suffer if China’s devaluation makes their goods cheaper on the global market.
China’s currency manipulation could also lead to the loss of millions of jobs in the U.S. and Europe. Analysts predict that the yuan will continue to depreciate, and it is all part of the CCP’s calculations.