The secrets to China’s success.
Success in a nutshell..
Free ride militarily courtesy of US Navy protecting their sea lanes.
Free ride on $150 billion a year federal spending on US science R & D that is more or less open source.
Low cost access to biggest financial markets, via most favored nation trading status.
$400 billion trade surplus.
China is a giant financial house of cards that reminds me of those Dutch hippies who live on house boats. They leech like vampires into the power lines and get free electricity. In the same way, China taps into the amazing machine of US finance to get much lower cost of capital but doesn’t do the level of GAAP accounting and transparency.
To curb this leeching, the Dutch government inspects and cuts off these vampire power line taps on the regular and now the US Federal Government is looking to do the same to China and cutting the lines of finance.
This may not seem like a big deal.
There are 150,000 majority Chinese government owned firms and China can throw infinite money at these, as long as its for China operations.
Shadow banking has grown so fast that China has something like 350% debt to GDP. Government loans is at about 4% interest. Shadow banks are at 10% interest. They are about 50/50 so this comes to an average rate of 7% on that 350%.
So China has to grow at 3.5 x 7% or 24.5% a year just to make the debt service OR just refinance the debt OR start experiencing defaults.
As far as I can tell, about 50-80% of loans in China are simply to service old debt, not to do new and productive things.
What is more shocking, but perhaps not surprising..73% of China’s GDP has been from real estate, but China’s working age population peaked two or three years ago and is shrinking by 4-5 million people a year. Meanwhile, China has excess homes and apartments enough to house 200 million people. You only have to search for "Chinese ghost towns" to get an idea of the excess.
Emigration is 64 times immigration and immigrants do not get citizenship, so they have fewer rights, so they are reluctant to buy homes and set up businesses.
A big portion of those bad loans that keep being rolled over were to build apartment buildings that no one will ever live in and are not worth what is owed on them.
China needs fresh outside money to keep going, but if it can’t get it via the US capital markets, it’s going to have to open up its own financial markets more to foreigners.
The vice is starting to turn.