China, as we know, has been ambitious ever since it decided to introduce reforms and started working for its GDP in 1978. So how did China become a superpower? What was its banking system and why is it in a crisis? Why China is there a Chinese debt bubble? And what are the foreign policies affecting its decisions? Let's begin the banter and discuss the disputed and controversies of "The Chinese Economy".
How did the Chinese economy grow?- The socialist market economy(SME) is the economic system and model of economic development employed in the People's Republic of China. China's GDP is $14.40 Trillion as of 2019. So how did China reach this Milestone and what helped it to grow at such a rapid growth rate? After its 5 Year Plans in 1979, China launched several economic reforms. The central government initiated price and ownership incentives for farmers, which enabled them to sell a portion of their crops on the free market. Also, the government established four special economic zones along the coast for "attracting foreign investment, boosting exports, and importing high technology products" into China. Additional reforms, which followed in stages, sought to decentralize economic policymaking in several sectors, especially trade. Economic control of various enterprises was given to provincial and local governments, which were generally allowed to operate and compete on free-market principles, rather than under the direction and guidance of state planning."Trade liberalization" was also a major key to China’s economic success which increased FDI inflows. From 1979 to 2018, China’s annual "real GDP averaged 9.5%". Coastal regions and cities were designated as open cities and development zones, which allowed them to experiment with free-market reforms and to offer tax and trade incentives to attract foreign investment. So we can see the major reasons were its increased supply making products cheap and efficient production it allowed a positive trade balance, along with High Capital Investments and due to all these factors, it could produce all that the other economies cannot and had to ultimately rely on the Chinese products thus increasing its exports and reducing its imports substantially thus making it a global powerhouse by improving its trade balances.
China's Banking System- As we have been seeing, China's economy has grown dynamically in the last decades and its institutions have become modernized. Economic institutions have also gained more independence. But still, China's Banking System remains the "Largest Banking System" of this world and even with rapidly changing Chinese Economy still, its Banking sector is controlled by the state. The percentage share of assets held by state-owned commercial banks (including the five large state-owned banks), the three government policy banks, and joint-stock commercial banks (where government entities are a major stockholder), together accounted for 68.5% of total bank assets in China. Foreign participation in China’s banking system is relatively small, accounting for 1.6% of total bank assets. SOEs are believed to receive preferential credit treatment by government banks, while private firms must often pay higher interest rates or obtain credit elsewhere. These are the top banks in the Chinese economies and even though all have gone through an IPO all are largely state-controlled. This allows the government to use these banks according to their wish and command and no worries of any interference from any private owner and owing to China's communist mentality it focuses on using these banks to generate more and more revenue for the state-owned enterprises(SOE) which work as the State wishes and even work for completing state projects and plans as it is doing for the BRI initiative by Giving Big loans and credits for these projects. A big success is due to the saving habits of the Chinese where they save 50% of their income which is either invested in stocks or the state-owned Banks thus giving them more money to function again which would not have been possible if Private Banks existed.
What is the Banking Crisis and Chinese Debt?- As the BRI progresses so does China's Loan to the developing nations( like Africa and South East Asia) and so does its expenditure. But China is spending more than what it has and it has been since 2008. China has a debt of $35 Trillion as of April 2019 and it all started in 2008 when a Stimulus Package of 4 Trillion RMB was used to Uplift the economy. This increased the GDP from 6.8% to 10.8%, the plan focused on Building Roads and industries for production. But the lending never stopped after that even this year. It gave a stimulus package to boost the slowdown due to trade wars. Debts ranging from Corporate Debt, Household debt, Government Debt and foreign debt ( $2.05 T) which totalled 317% of its GDP as of May 2020. China's Debt is mainly due to lending by state-owned banks (accounting 80% of the total debt) to the State-owned enterprises and another part of its debts are "Hidden debts" (including Local Government Debts). These debts include Foreign investors including wealth managers, mutual funds, family offices and hedge funds held 2.19 trillion yuan (US$308 billion) worth of Chinese bonds in 2019. China has been accused of manipulating its growth numbers and giving falsified information, and lack of transparency does not let out the true figures of its hidden debt. The reason why banks are suffering is that the loans they gave have defaulted as the competition is so intense due to the excess supply that not only just Foreign companies, even Chinese companies are going bankrupt and out of business thus defaulting on these loans and ultimately reducing the assets for the bank and overall loss. Thus Banks have a load of Bad debts. This lack of money with banks forces them to take loans from the state and foreign Banks. Monetization of Debt is what China wanted but it can not do that. If it wanted to print 35 trillion $ worth of RMB, it will lead to Hyperinflation and fiat money or simply devaluation of Chinese Currency, or if it goes ahead with simply writing off these bad debts and closing off industries the banks will have lesser capital to operate with and people with be unhappy leading to civil unrest. China has debt denominated in its own currency and thus the global value of yuan will also be affected if banks lose power or bad debts are written off $1.5 T dollar-denominated debt but has no dollars or very few of them to repay it. So its struggle is to get these dollars to repay them is causing a further burden on the banking system as companies acquire credits to pay off these debts which makes the entire system more vulnerable. The PBOC can hand out dollars but has a mere $18 Billion in cash and rest in US treasury bonds and China no swap line with the fed. so it will be interesting to see how it turns out for china and to what extents can PBOC go. (To know about each topic visit https://www.scmp.com/comment/opinion/article/3044148/chinas-banking-debt-crisis-ticking-time-bomb-must-be-defused-urgent)
One thing which we can establish so far is that China is not as flourishing as it looks from the outside. It has been accused of currency manipulation and lying about its growth stating it has a growth rate of 6-7% when its energy use was 1% only. And many times it has done this to play with behavioural financing behaviour of investors. Seeing the worse growth rate in its history, loading up of NPAs and lesser and lesser money for the banks, along with trillions of dollars of debt and US dollar squeeze( https://www.daytrading.com/dollar-squeeze) is putting the PBOC treasury under pressure as more and more demand for dollars for repayment of debts and using it as a safe haven during this pandemic. So overall we can say that China might face the problems of a negative growth rate, unemployment, bankruptcy and economy failure if this continues and China does not show transparency soon.