Author Topic: Forget the Trade War. China Is Already in Crisis  (Read 1810 times)


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Forget the Trade War. China Is Already in Crisis
« on: January 21, 2019, 11:35:14 PM »
Forget the Trade War. China Is Already in Crisis

Even if the second-largest economy resolves the current slowdown, it will remain mired in a debt-driven slump.
By Michael Schuman

Once again, the world’s investors are turning their worried gaze toward China. And for good reason. Economic growth in the third quarter sank to 6.5 percent, the slowest pace since the depths of the global financial crisis in 2009.

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Tariffs on Chinese exports to the U.S. imposed by President Donald Trump are starting to pinch the country’s factories. A steep and unexpected plunge in imports in December signaled just how sharply the economy is decelerating. That’s led Beijing to turn the volume down on its bravado and negotiate with Washington to defuse the conflict.

A trade pact, if it happens, may soothe investors, and perhaps even juice economic growth—at least temporarily. But it won’t bring an end to China’s woes.

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What goes widely unnoticed is that China is already in crisis. No, it’s not the sort of hold-on-for-dear-life collapse the U.S. had in 2008 or the surprising, ferocious meltdowns the Asian Tiger economies experienced in 1997. Nonetheless, it’s a crisis, complete with gutted banks, bankrupt companies, and state bailouts. Since the Chinese distinguish their model of state capitalism as “socialism with Chinese characteristics,” let’s call this a “financial crisis with Chinese attributes.”

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What would likely have laid other emerging markets low was just another day’s work for China’s powerful mandarins. The government organized a stock bailout and clamped down on capital outflows. Crisis averted.

That approach is representative of Beijing’s overall strategy toward its debt problem. The government—obsessed with social stability—isn’t allowing the debt bomb to detonate. But the financial crisis with Chinese attributes is inflicting the same damage on the economy anyway.

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China is dealing with another feature of a financial crisis: capital flight. Because of strict controls, money can’t gush out as it probably would under a less restrictive regime.

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« Last Edit: January 21, 2019, 11:47:57 PM by adroth »