Hidden debts in Beijing
China has increased its money supply further. Last week, the People’s Bank of China (PBOC), the country’s central bank, cut its reserve requirement by 0.5 percent. The PBOC had been reluctant to lower the reserve requirement because of the credit bubble. But the decision is circumstantial evidence that its manufacturing sector is suffering. It could also be a response to the quantitative easing in the eurozone.
Whatever the reason, China has decided to boost its growth through debt. It is a familiar tactic. From 2007 to the end of last year, China’s gross domestic product expanded by $7 trillion. In the same period, public and private debt grew by $21 trillion. For every dollar increase in gross domestic product, debt grew by $3. The Financial Times (FT) has warned that China may eventually face a debt crisis.
Until now, China has remained solid, as if laughing at the FT’s warning. A credit rating executive at the Industrial and Commercial Bank of China (ICBC), the nation’s biggest commercial bank, said recently that the FT is like the boy who cried wolf. “Most of China’s debt is domestic, and the foreign debt is about $900 billion as of last year. It is only 23 percent of the $3.89 trillion of foreign exchange reserves,” the FT report said.
But it turned out that there are debts that ICBC executives were not aware of. Recently, a Bloomberg analysis of Western investment banks revealed that China has hidden foreign debt of $1.1 trillion. It is 12 percent of last year’s GDP and 28 percent of its foreign exchange reserve.
How does China owe so much? It is a result of quantitative easing in the United States and the U.S. dollar trade. But it does not come from foreign hedge funds. It is money that Chinese exporters brought in. They borrowed cheap dollars by discounting export credit in the Hong Kong financial market. They played the trick by exchanging dollars into yuan in Shanghai’s shadowy financial market. The inflow of funds and the loan process were outside the Chinese government’s control.
The hidden foreign debt came from the difference in interest rates in the United States and China and the strength of the yuan. So the money flow will reverse when the U.S. interest rate goes up. International finance specialist and UC Berkeley Prof. Barry Eichengreen said that dollar carry trade does not give other countries a chance to react.
Considering China’s enormous foreign exchange reserve, a foreign currency crisis may be unlikely. But as the dollar carry trade fund leaves China, the Chinese economy may suffer from a credit crunch. It would be the beginning of a debt crisis. The curse of the Financial Times that China has laughed off could become a reality.
The author is the deputy international business news editor of the JoongAng Ilbo.
JoongAng Ilbo, Feb. 9, Page 34
by KANG NAM-KYU
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