China Crushed By Debt

On the other hand, Chinese officials along with President Xi Jinping are trying to reduce shadow-banking system (financial intermediaries who provide services similar to traditional commercial banks but are not subject to traditional banking regulations). In effect, we come to a situation where commercial banks are reluctant to continue lending to companies with a poor financial conditions also, more restrictive regulations on shadow-banking make it impossible for these enterprises to borrow outside the banking system.

All these aforementioned factors translate into the economy state, and this one currently does not look bright.

Current situation of the Chinese economy

The Chinese economy is very much dependent on exports and production (they account together for over 40% of GDP). In December 2018, export experienced a real shock, dropping 20% in relation to the previous year (black line on the chart). In the following months, we have seen a recovery. In April, however, exports dropped again, this time by 2.7%. Major impact on this had the decline in exports to the U.S., which decreased in April by 13.1%.

On the other hand, import after 7.6% decline in March, increased by 4% in April. It should be noted that import from the U.S. have drastically dropped, by as much as 25.7%.

Another alarming signal can be data flow from the automotive sector. We pay attention to this for two reasons:

a) when we are dealing with economic slowdown and likely occurrence of the recession, the automotive sector is one of the firsts which shows greater weakness;

b) it is the largest automotive sector in the world.

The chart shows that car sales in China has been declining over the last several months. The worst month was December 2018 when sales dropped by almost 20%.

It should be emphasized that these weak economic data come in the period when the Bank of China and commercial banks facilitate credit access in various ways. Scale of this "support" for the economy in the first quarter of 2019 amounted to over 1 trillion dollars or 9% of Chinese GDP. This is more accurately illustrated by the following monthly chart showing value of funds which went to Chinese enterprises and households.

The upper part of the chart is shown in yuan, while the lower part in dollars. It is easy to see that the first quarter of 2019 was record in terms of funds pumped into the financial system. Therefore, there is nothing surprising in Chinese stock exchange growth by more than 30% over this period (green line), which is twice as much as in the U.S. (red line) and Germany (blue line).

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Gary Anderson 10 months ago Contributor's comment

Debt to purchasing power parity GDP is far lower. This analysis may prove to be flawed, just like Trump thinking he can win a tariff war is flawed.