China Syndrome

China is entering a self-inflicted economic & climate meltdown that risks becoming one of the worst in the world.

I’m going to give Donald Trump a break today, even though this is his first big day in court over his latest major indictment in a string of many so we can get back to economics.

China’s economy is burning up, but not in a good way. Xi’s hellish kingdom is continuing to demonstrate that neither its yuan nor Russia’s ruble have any serious chance of supplanting the dollar anytime soon in their battle to end US financial hegemony. China’s national bank was just forced to go into stimulus mode, lowering interest rates, which will cause the yuan to fall even more, relative to the strong US dollar.

The People’s Bank of China has little choice but to damage the value of the yuan further than it already has because of how severely China’s Xiro-Covid lockdown polices — the worst in the world — devastated its people with longterm economic destruction, forcing the nation into heavy-duty stimulus mode. This is entirely self-imposed financial ruin from a virus China created and the response to that virus its government created.

President Xi’s options for saving his nation from the destruction brought by his policies are already limited by crumbling financial stability and soaring debt levels those policies handed to numerous government entities. Lower interest will help manage the debt, but local governments that are now in debt over their eyeballs and facing default are in no place to take on additional debt. So, Xi’s stimulus may not get much bang for his buck, other than helping keep local governments out of default awhile longer.

The same can be said for any hope of re-stimulating China’s already long over-stimulated property sector because it overbuilt on cheap money. Lower cost of debt may save zombie developers from default, but it will not entice them to build more properties that a high number of unemployed people and high number of declining businesses have no desire or ability to rent or buy. China — not long ago a low-debt nation running government surpluses — has now caught itself in a debt trap where its high debt ratio means stimulus by reduction of interest rates is falling off the diminishing-returns end of the curve.

So, in today’s headlines, we also read that one of China’s largest hedge funds is pulling its bets out of the real-estate market, even as rates drop, because real-estate stocks have been badly hurting it after it bet on a major real-estate surge to follow China’s reopening of its economy. The surge never happened, and the hedge fund doesn’t believe government support will make any meaningful difference.

It is no surprise, then, that China’s moribund stock market barely cast an almost lifeless glance at the new stimulus program this morning. As Bloomberg reports,

Business and consumer confidence remains weak, households are reluctant to borrow, inflation is near zero and exports are contracting as the global economy slows.

“Everyone from the public to policymakers in Beijing has realized that the economic recovery is facing grave pressure now,” Lu said. “The risk of an economic double-dip is rising. Cutting interest rates alone won’t be enough.”

Really, the more the PBoC reduces interest and to whatever extent that does increase borrowing, it only makes China’s situation worse for the future. So, while, the US dollar may be put out to pasture someday; at least, it is not lying on its side panting inside the glue factory as the yuan is doing.

China’s troubles are not likely to be helped this summer by its listing as one of the top-most drought-stricken nations in the world. (“Drought-stricken” referring to how much impact the nation is likely to feel from being drier than normal, not total dryness like some Saharan nations that are always dry as their normal state of being.) Rice, China’s staple food, remember, requires swamps. Swamps and drought don’t get along.

It doesn’t help that 80-90% of China’s groundwater is already unfit for consumption as well as 50% of its polluted river water, which is also unfit for agriculture. As with its debt load, its pollution load from decades of arrogant communist development, which refused to accept the limits of nature, leaves it with very little redundancy in sources or resiliency toward additional losses.

This is also a major electrical problem for China’s economy, and it’s not just in diminished hydro. Even dirty coal power goes down if you don’t have enough water to turn to steam. Likewise nuclear, which not only needs water for steam turbines, but also needs water for cooling stored radioactive rods.

The United States and Europe face similar drought problems, but China and India are rated as being hit the worst.

The ruble has also been on a longterm decline, losing the advantage it gained when it was shut out of nearly all trade. (It is easy to maintain the high value of a currency when almost none of it is selling. How do you even find a real market value for it when it is not trading against other currencies because it is locked out of trade? In essence, when rubles are wiped out of most markets, tradable rubles become scarce, driving up the value of the few that can be found and traded. Nevertheless, the ruble has been falling for many months now and has returned to being lower than it was before the war and sanctions against the ruble began.

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