China, like the U.S., is Monetarily Sovereign. It never can run short of its own sovereign currency, the renminbi. Keep that fundamental fact in mind as you read excerpts from the following article:
China’s dim prospects turn disastrous
By Diane Francis
Russia’s terrible war generates headlines, but China’s growing debt crisis is mostly ignored. And yet, it will have profound negative effects on the global economy.
In just three generations, Beijing built a middle class bigger than America’s entire population. But now Chinese many face ruination.
China’s domestic real estate bubble, due to deregulation, is so gargantuan that much of its middle class has been damaged.
So far, the article refers to private sector debt. The private sector (people, banks, businesses) is not Monetarily Sovereign. Those elements can run short of money.
However, the Chinese government has the power to service any private sector debt should it wish to prevent private sector insolvency.
A massive mortgage revolt is underway, and as banks fail, protests grow. Today, 50 million empty or unfinished units bought on “spec” in hundreds of urban areas may never be completed or paid for, equivalent to one-third of all housing units in the United States.
Should China wish to end the mortgage revolt, it simply could pay some percentage of the mortgages — as with Biden’s student loan support.
Similarly, China could support or nationalize troubled banks to keep them solvent.
Besides that, Beijing itself is owed $1 trillion by struggling governments around the world that cannot afford to pay back loans for Belt and Road Initiative project,
Being Monetarily Sovereign, China does not need to receive payment on loans made in renminbi. If the loans were made in U.S. dollars or some other currency, China has the power to buy those currencies with renminbis.
The problem with that approach is that depending on the size of the exchange, it could create chaos in currency markets.
The result of this domestic and foreign borrowing is that this year China’s debt is expected to reach the equivalent of 275 percent of its GDP due to massive borrowing and economic slowdown. The United States, by comparison, is expected this year to reach a debt level of 98 percent of its GDP.
The debt/GDP ratio is meaningless. Japan’s debt/GDP ratio is 266%, and the nation’s economy is vibrant and is nowhere near collapse.
The result of the property bubble is unusual defiance by Chinese people toward their authoritarian government. Unrest has grown because real estate speculation has been widespread for years, and most Chinese consider property ownership as a way to get ahead and secure an adequate retirement income.
But years of unbridled speculation has led to ever-increasing prices and overbuilding by aggressive developers, and now there is a glut, collapse in prices and widespread social discontent.
There is a glut of housing so housing prices are low. This is a problem for sellers, not buyers, that if it were deemed serious, easily could be solved by the central government. For example, levy a tax on future construction and sales.
Unrest spreads by word of mouth, which is a dangerous development in a country of 1.4 billion people, where putting deposits and owning several condos had become commonplace.
Essentially, China is a debt disaster in terms of foreign and domestic borrowing.
In rare acts of defiance, Chinese gather in public to object to the situation, and millions are refusing to repay loans on their unfinished apartments.This massive mortgage boycott movement began in early July and has now spread to 100 cities, involving 320 massive property development projects and many banks.
Recently, China’s Politburo issued a statement assuring property buyers that the government would help cash-starved developers finish such projects and that $44 billion would be dispensed to prop up their companies and their banks.
But this is a paltry amount, and millions of Chinese buyers need financial relief or else they will be left in the lurch.
And there is a solution to the problem. The Monetarily Sovereign Chinese government has the infinite ability to “prop up” developers, banks, and buyers. A large, Monetarily Sovereign nation has the ability to solve any money-related problem.
“China’s real estate slump has sucked in both banks and provincial governments, threatening a bigger impact on the world’s second-largest economy,” reports Nikkei Asia.
“Defaults have soared over the past 12 months. Real estate has been a key driver of the Chinese economy in the last two decades.
Real estate and related activities now account for around 29 percent of gross domestic product, up from less than 10 percent at the end of the 1990s.”
The first crack appeared when Evergrande Group stopped paying its debts or finishing projects. It had obtained free land from politicians in smaller urban centers and mortgage financing from local banks, then convinced people to snap up multiple units in the belief that demand and prices would never drop.
If it wished, the Chinese government could bail out every borrower and lender.
Now China must bail out lower levels of government because they depended on revenue from these land sales to provide education, health care, retirement benefits and other social services to their communities.
Their hardship means that services will be chopped, which could turn investor calamity into widespread national unrest.
There is no need to “chop services” for lack of money. The Chinese government could provide the needed money.
Clearly, China’s living standards have already suffered, given that one-quarter of its economy and more than 70 percent of household wealth is tied up in real estate that has dropped in value.
A Wall Street Journal op-ed headlined “Xi Tries to Ride a Real-Estate Tiger, and We All May Get Mauled” concluded that this “places the entire Chinese economic miracle model at risk” and cautions that “global financial markets, central banks and democratic leaders should brace for turbulence.”
Not only does China have the unlimited ability to create its money, but it also has the unlimited ability to create its money rules.
In “The Genius of the Board Game, Monopoly,” we described how money-making and rule-making ability can affect the game.
Players can change the game at will. They can begin the game by giving each player any amount of Monopoly money they choose.
When any players are on the verge of bankruptcy, the other players can lengthen the game by changing the rules to provide money to the troubled players.
The players arbitrarily can change the price of properties, houses, and hotels. They can increase or decrease taxes. They can change the traditional “$200 for passing ‘Go’” to any number they choose. They can charge for property sales. They can do anything.
The Chinese government has the same powers. It can bail out anyone, reward anyone, and penalize anyone. Like Monopoly players, the Chinese are omnipotent when dealing with domestic financial matters.
Then there is the Belt and Road Initiative debacle. Bloomberg reported that 19 emerging economies (such as Sri Lanka, Lebanon, El Salvador and Pakistan) are virtually bust due to huge indebtedness to China as a result of unaffordable, ambitious infrastructure projects.
These loans were granted without concern for credit ratings or the ability to repay and accused of being politically motivated “debt traps.”
But these have become China’s “debt traps,” and now protests and pushbacks take place in these countries against Beijing. China must forgive loans, restructure them or walk away and let more Sri Lankan-style collapses occur.
China forgiving loans would cost China nothing. It has infinite renminbi. Forgiving those loans might be a brilliant foreign policy strategy.
China’s immediate past has been truly impressive. It has lifted itself out of abject poverty.
But given Xi’s economic mismanagement, combined with his loyalty to Putin, who is the sworn enemy of all his Western customers, China’s future looks not only dim but potentially disastrous.
These are all money problems. China’s future might look “dim” and “disastrous” if it were not Monetarily Sovereign. But it has absolute, total control of its money.
One is reminded of the bleating and moaning about Social Security’s and Medicare’s fake impending insolvency, and insolvency that easily could be prevented by U.S. federal money creation.
Diane Francis is a non-resident senior fellow at the Atlantic Council in Washington at its Eurasia Center. She is editor at large at National Post in Canada, a columnist with Kyiv Post, author of 10 books and specializes in geopolitics, white-collar crime, technology and business. She writes a newsletter about America twice weekly on Substack.
If Diane Francis understood Monetary Sovereignty, she would have written a much different article.
Rodger Malcolm Mitchell
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