How the coronavirus can bring Chinese debt to the global economy


Amid growing uncertainty over the coronavirus, one thing seems clear: China will report that its economy grew nearly 6% in 2020.

A sharp slowdown is the last thing Chinese leaders can afford. So expect tax engineers, city governments, central bank policymakers and statisticians in Beijing to do their utmost to make gross domestic product look as close to the target as possible. This year.

However, when temperatures drop and face masks come off, the global economy will face a China that is not as healthy and more systemically risky than ever. The most important figure is not 6%, but 34 trillion. This is the value of public and private debt in US dollars that China had in 2019. This bookend is useful because it marks the price of Beijing’s latest effort to beat economic gravity.

The 10 years between 2009 – just after the Wall Street crash – and 2019 saw humanity’s greatest stimulus campaigns. This explosion of multi-lane highways, international airports, stadiums, city halls, college campuses, five-star hotels and museums has kept growth above 6% and helped executives of the country to maintain their legitimacy.

But the coronavirus is loosening the rug from under Chinese policymakers in two ways. First, a slow and opaque response to an epidemic that circumvents pandemic status undermines their legacy. Second, it pierces the veil of economic inevitability that Beijing has dined on for many years.

Granted, short-sellers don’t tend to make a lot of money betting against China Inc. Yet the so-called Minsky moments — when credit-fueled booms go bad — happen whether you’re ready or not. . Here, think of Japan in the 1980s, Latin America, Asia, and Russia in the 1990s, and the United States in 2008. Policymakers cannot easily control the fallout when economies shrink. hit a wall.

This does not mean that China will collapse soon. The closed nature of its financial system indeed provides the Chinese government with a variety of unique buffers, including $3.2 trillion in foreign exchange reserves. However, there is no denying that the Chinese financial system will end 2020 on a weaker footing than it entered it.

With half a billion of its citizens in lockdown and supply chains in shock, China is unlikely to reach 6% this year. A better reading of the true state of Chinese growth will come from how major trading partners from Japan to South Korea to Australia.

China’s economy faces coronavirus risks from a weakened position after 18 months of trade war. To fight U.S. President Donald Trump’s tariffs, budget managers in Beijing and the People’s Bank of China have turned more to stimulus mode. This includes allowing regional governments to increase their borrowing.

Expect the same in 2020 as the outbreak in China hampers a number of growth drivers. When it comes to the fallout for the most populous nation, economists don’t know what they don’t know.

“The direct costs of shutting down the entire Chinese economy to contain the spread of Covid-19 are visible in empty streets and shuttered stores,” says analyst Thomas Gatley of Gavekal Research. “But the magnitude of the second-order impacts is much harder to see: How much of the economic damage caused by these closures will last even after businesses reopen?”

Gatley estimates that Chinese companies will collectively lose about $710 billion in cash flow in the first quarter. “Faced with this enormous pressure,” he says, “many companies will have no choice but to default or delay payment of their cash obligations to staff, banks and suppliers, and to reduce their investment plans this year”.

Even that, of course, could turn out to be optimistic. If so, the $1.7 trillion rout in US stocks in the first two days of this week could be a harbinger of things to come. This is the risk Trump overlooked when he threw sand at China’s export engine: how the economic trauma would boomerang in America’s direction.

Badly enough, China faces a potential health crisis. Worse still, he does so in a weakened position. Global investors have many reasons to worry. Thirty-four trillion, in fact.


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