Sunday, April 5, 2020

China Balance of Payments Deficit Risks Currency and Asset Crash

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China’s falling savings rate coupled with increasing government directed investment rate threatens a balance of payments crisis that could crash currency and asset values.

China became the “factory to the world” and built incredible infrastructure over the last three decades based on the strength of individual savers who remembered the hard times of the Great Famine of 1958–1962 that starved to death 30 million people.

The world savings rate as a percentage of gross domestic product has averaged at about 25 percent since 1990, allowing about a 24 percent of GDP world investment rate. In comparison, China’s savings rate went from 37.4 percent of GDP in 1990 to 52.4 percent in 2008, allowing its investment rate to spike from 34.4 percent to 43.2 percent of GDP, according to consultancy Enodo Economics that closely tracks China money flows.

But over the last decade, China’s savings rate fell 7.2 percent to 45.2 percent, while the investment rate rose 1.6 percent to 44.8 percent. The slightly positive net savings rate of $56 billion might be sustainable, but China also suffered capital flight of $500 billion in 2015, $675 billion in 2016, $380 billion in 2017, before dropping to $22 billion last year.

Chinese leader for life Xi Jinping was successful in shriveling capital flight by running a ferocious anti-corruption drive that has netted up to 2.5 million officials at various levels, from ranged from what he referred to as the elite “tigers,” to the ordinary “flies.”

About two-thirds of Chinese savings are held in interest-bearing deposits at banks that loan the money out according to the “policy” dictates of the Communist Party leaders. The policy focus is to support state-owned enterprises that despite only representing 5 percent of industrial enterprises, receive 65 percent of bank loans, control $10.4 trillion of assets and dominate about 85 percent of the high-profit industries such as finance, power, energy, telecommunications and defense manufacturing.

But the before-tax profitability of the “factory to the world” fell from…

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