I've long been a defender of the Chinese economy and a critic of those who say China is facing a credit or debt crisis. I have explained many times, correctly, that China is a sovereign currency-issuing nation that spends in its own currency, and the state banks in China are functionally nothing more than fiscal agents of the government.
Therefore, their ability to lend in yuan is without limit and loan losses are the equivalent of deficit spending here in the United States: It's a fiscal transfer to the economy. China is completely capable of doing that to infinity if it wanted to, and while there might be other consequences like inflation, China is not hindered by any need to "obtain funds" to merely credit bank accounts with yuan or keep the loans flowing.
It's the same as saying the U.S. has no risk of insolvency because it spends in its own currency and all our debts are denominated in our own currency -- the dollar -- which we have the monopoly power to issue. The only "promise" or liability that the government makes is that it promises to accept its own currency for the payment of taxes, and that is a liability or promise that it can always keep.
While that fact alone should make it clear that the United States, or China for that matter, can never be forced into an involuntary bankruptcy, both nations can, however, decide to default voluntarily. Indeed, in the United States we come close to this every few years when it comes time to raise the debt ceiling. The debt ceiling is an anachronism that should have been done away with a long time ago; however, we still stupidly have it and it's used, politically, to extract concessions from one side or the other, usually spending cuts or tax cuts for the wealthy or corporations.
The point being, we can default on our own accord and so can China if it is motivated by seemingly expedient politics or something like the belief in some dangerous or misguided ideology.
That's why when I read an article the other day about a recent speech given by Chinese President Xi Jinping and how he plans to crack down on China's lending-fueled economic growth, it got me a little concerned.
Xi could easily fall prey to many of the false beliefs of the prevailing Western economic mainstream, for example. They've been beating the drum about excessive Chinese debt and credit bubbles for a long time and now Xi might be falling for all their fearmongering. That could lead him to embark on an aggressive campaign of debt reduction that would be the equivalent of hard-core fiscal austerity. If so, it would send China into an economic tailspin, collapse commodity prices worldwide and plunge the global economy into a deep recession.
I am a little concerned. However, I have been reading and rereading the article to try to understand the gist of what he is saying, and while I am no expert in Chinese communication (the Chinese famously are not direct in their messages), it seems to me that the inner meaning of the speech was meant more as a mission to further Xi's battle against internal corruption, which has been one of his main thrusts and is rife in China.
If Xi is looking to target corruption and shut down overproducing and failed industries, then that is a different story. That has bullish implications for commodity prices as well as for the Chinese economy in the long run. However, if it is truly about "reducing debt," then Xi has indeed drunk the Kool-Aid of the out-of-paradigm debt doomsday crowd and the "austerians," and that's not good.
Luckily, we can see the numbers. No, there is no Daily Treasury Statement equivalent that China releases each afternoon like we have here in the U.S., but there are monthly published figures that report China loan data that are put out by the People's Bank of China. At least we can follow those. That will tell us the story.
I would add that there is another reason why I am not overly worried about China enacting austerity via a dramatic slowdown in lending. That's because the Chinese leadership knows it must keep growth elevated or risk massive popular discontent. It doesn't want that. On the other hand, it's still disappointing to see another regime fall prey to the misguided views of the Western economic mainstream. It's only wrought disaster everywhere it's been applied.
