Regarding distant disasters and imminent troubles
As the first tide of the Covid-19 pandemic began to fade, and the second is just renewing vast expanses – one nation after another, ignoring WHO’s recommendations, began to actively promote the idea of rapid economic recovery through the rapid lifting of quarantine restrictions. God knows where such confidence comes from.
According to media reports, the catalyst for the process was the existing myth of stabilizing the Chinese economy in the shortest possible time. As they say, the Celestial was able to get rid of the pandemic. So it will be easier to recover when you give up quarantine webs because of the Chinese experience. This cannot but cause outrage among Sinologists, given the imposition of martial law in Beijing and a number of other regions. Most experts believe that the fabrication of the relatively rapid recovery of the Chinese economy is the result of perfect foreign propaganda. And, even if the global crisis of 2008 only in passing affected China (2-3 percentage points), the sharp decline in exports, as a result, led to multibillion-dollar losses in many companies and collapsed the rapidly growing Chinese stock market.
As a measure of support, the Chinese government used financial incentives developed by the so-called "Shanghai" group, whose protege is President Xi Jianping. About $ 600 billion (around 13% of then-GDP) was pumped into the economy. The money was distributed through state-owned banks. Different regions and industries received different amounts of support, depending on their proximity to the Shanghai people. It is worth recalling the fierce competition between two groups within the CCP Central Committee: the Shanghai-led "Shanghai", which also includes former and current leaders of the People's Bank of China, and former Chinese President Jiang Zemin, whose reputation is directly linked to technology "Shadow banking". His successor and main opponent, Hu Jintao, created his own FIG. After Jiang's resignation, Hu initiated an investigation into allegations of Shanghai involvement in shadow schemes. Although, by decision of a special closed Plenum of the CPC Central Committee, the case was put on hold. Xi Jianping is a student and follower of Jian Zemin's economic strategy. The creature of FIG Hu Jintao is the Prime Minister of China Liu Keqian. Ex-chairman Hu, even after his resignation, continues to actively oppose the spread of shadow banking.
The forces of both groups are equal. And if the "Shanghai" are trying to actively influence the financial and credit policy of China, their opponents are closely monitoring every step vis-à-vis. Maybe that's why experts attribute the failures in the Chinese economy, including their ineffective fight against the so-called "bubbles".
Experts in the Chinese economy are immediately reminded of the situation of corporate default in the state-owned industrial sector of the economy. Thus, in 2011, the state-owned corporation Baoding Tianwei, a division of the holding company China South Industries Group Corp., owned by the central government, issued bonds worth $ 242 million at 5.7%. The payment deadline was set for April 2016. Interest payments of $ 13.8 million were due on April 21, 2016. However, the debt-to-assets ratio increased rapidly in 2014: the company lost about $ 1.6 billion a year, mainly due to the launch of new alternative energy companies. At the end of 2014, overdue payments amounted to $ 300 million. In March 2015, the Chinese rating organization China LianHe Credit Rating Co. downgraded Baoding Tianwei from BB to BBB due to its inability to guarantee debt payments, a direct consequence of the lack of state support.
It should be noted that Baoding Tianwei was among the most stable state corporations until mid-2014. Its bankruptcy was caused by the decline in the competitiveness of the corporate gross product for non-conventional energy. Importers (primarily American) refused to buy Chinese solar panels. There was an oversupply of the market, which was combined with labor, which became more expensive, and the refusal of the National Bank to refinance. This led to the events that marked the beginning of the financial collapse. Until then – and in China, defaults on domestic liabilities were declared only by private companies – state-owned Chinese vertically integrated firms were considered so reliable that insurers virtually did not check the corporate background. The risks were considered minimal, as by the end of 2014 the state took on guarantees of return on investment and repayment of state corporate capital debts.
However, after the beginning of a new phase of reforms marked by the XVIII Congress of the CCP, when the growth of economic "bubbles" became critical, it was decided to limit the access of the private sector and small and medium-sized businesses to cheap loans. And to stimulate purchasing power – to increase the level of wages in state-owned enterprises. The result has been an even greater dependence of the Chinese economy on shadow banking due to rising domestic debt. And the increase in wages has, in turn, led to a rise in price of Chinese labor. In general, the innovations have led to a decrease in the competitiveness of Chinese GDP, the flight of investment, the transfer of trade and production chains to countries with cheaper productive forces. And also – to a significant overstocking of the Chinese market with products of its own production.
What happened to Baoding Tianwei was the first harbinger of a storm that the Chinese leadership could not quench for 5 years in a row, amid economic instability and critical volatility in financial markets. Hopes that the introduction of market mechanisms will lead to economic recovery – have failed. The market is almost non-existent in the conditions of systematic use of directive methods of leadership and management. Even the use of free labor by millions of prisoners in labor re-education camps does not save the situation.
First, the Ministry of Finance of the People's Republic of China and the People's Bank were unable to assess the real situation, as the main statistics are left to the regions. Secondly, no one revoked the directives of the congresses. And in them for the same 2019 growth to 6,7% is planned (later the task was adjusted to 6,1%). However, if you look at the regional reporting, most regions managed to show growth of only 2 - 3%, and some – by 0 - 0.5%. Experts close to the World Bank Group believe that these indicators should be divided by at least 1.5 - 2.
The situation in China is quite controversial. First, against the background of extreme polarization of income within the country. Thus, according to the annual report of Credit Suisse, the share of 6% of the total Chinese population in 2019 accounted for 10% of world welfare. This is 0.1% more than in the United States. At the same time, China accounts for only 4.4 million people with more than $ 1 million in capital. While in the US this figure is 4.2 times higher than in China.
In our opinion, this gap is due to the flight of investors. And, not only foreign, but, first of all, domestic. The change of residence is also accompanied by the transfer of trade and production chains. And then – all the ensuing consequences, in the form of loss of part of tax revenues and fiscal payments. At the same time, the volume of internal corporate defaults is increasing. Thus, according to the international credit agency Fitch, in the first three quarters of 2019, 44 corporate issuers (1% of the total) defaulted on domestic bonds. 89% of them are the largest private companies or private companies with partial state participation. The total amount of defaults in 2019 amounted to more than 15.3 billion dollars, while in 2018 the default on bonds amounted to 11.33 billion dollars.
At the same time, the reliability of these figures is questionable by some experts. They point out that in the first half of 2019, 35 Chinese corporate issuers defaulted on interest payments or principal, totaling $ 7.9 billion. As the crisis deepened, the growth of default could not decrease. In reality, much more than 1% of Chinese large companies went bankrupt during this period.
However, there are other statistics that strongly contradict the official: Fitch noted that Chinese companies have set a record for the number of defaults on bonds denominated in yuan. The share of issuers that declared inability to pay debts was 4.9%. This is 0.6% more than the maximum of 2014.
A little earlier, in the October 2019 report, the agency indicated. that the increase in the number of defaults is due to the strengthening of the government's monetary policy, which has led to a decrease in the availability of credit and, consequently, the ability to refinance debt. US experts have previously noted that the number of defaults is not just growing. They affect more and more companies in more and more sectors. Especially in knowledge-intensive industries – such as pharmaceuticals, IT - technology, artificial intelligence, unconventional energy, etc .. For example, most often cite the default at the end of the first half of 2019, the Chinese industrial conglomerate Jinggong Group, which led to a whole chain of related bankruptcies.
In addition, in the first quarter of 2020, Chinese companies defaulted on domestic bonds worth $ 5.8 billion. (According to official data, we do not know the real volume). If you compare the amounts, the number of bankrupt corporations may be underestimated by 3 times. And this affects the perception of other macroeconomic indicators of China, in general, and the financial system in particular. One of the main problems of the Chinese financial sector is shadow banking, which we have repeatedly mentioned in previous studies.
What is the essence of this phenomenon? In the reach of cheap loans for small and medium businesses. Low-interest loans are received primarily by certain state corporations, banks and insurance companies. They, in turn, put credit into circulation, providing them to smaller borrowers – regional administrations, regional corporations, medium and small businesses. Borrowed funds coming to the state corporate and banking sectors are re-credited through non-bank intermediaries. Moreover, the activities of these organizations are already becoming an official indicator of the National Bank of China. And it's not just about refinancing borrowed funds, but the funds of inviolable reserve funds are put into circulation. That is, a pyramid is being built, the failure of one of the links of which will lead to the collapse of the entire economy as a whole.
To this should be added the galloping inflation of consumer prices and deflation at the level of producers, most of whom are increasingly faced with the prospect of inability to service debt. This prompted the Chinese Foreign Ministry-controlled Global Times to declare publicly that "corporate debt is too high and interest rates are too high." The People's Bank of China echoed the experience of the G7 central banks, which lowered interest rates to zero in an attempt to sustain economic growth and reduce the cost of servicing debt accumulated by government, corporations and consumers.
At the end of the first half of 2019, China's total national debt, which includes liabilities of the corporate sector, households and governments at all levels, reached 306% of GDP. In 2009, the amount was 200% of GDP, and in 1999 - 130% of GDP. However, in our opinion, it is worth paying attention not to the growth of debt, but to the efficiency of its use. That is, to compare debt growth and GDP: so, if before 2007 the debt was 1.2 times faster than GDP, then in the last decade this discrepancy has increased 3 times. In 13 years, debt has grown by $ 25 trillion and the economy by only $ 7.6 trillion. dollars. Thus, each new dollar borrowed produces 33 cents of the corresponding GDP plus 20 cents - interest on loans.
The functioning of the Chinese economy requires new loans, of which only a small part goes to gross output. It is also worth noting another skew in the structure of Chinese public debt: about three-quarters of it is corporate capital. And about the same three-quarters of total borrowing comes from domestic Chinese lenders. This, firstly, contradicts the world practice, where the leading states are credited from outside. Secondly, it makes the Chinese financial and credit system extremely vulnerable. Especially in the conditions of mass corporate default, which threatens a general crisis and destruction. Even more dangerous is the weak management of public debt, especially its growth rate.
How to divide a blanket?
Long before COVID-19, the Chinese leadership faced a dilemma: either to keep the speculative investor by raising the refinancing rate, or to stimulate the domestic consumer and lower the rate sharply, thus activating purchasing power. This was done by the US Federal Reserve, the Bank of Japan, and the European Central Bank in 2008 and 2020 to mitigate the effects of the crisis, which pumped more than $ 10 trillion into major markets for major reserve currency issuers in 10 years.
Prior to the pandemic, in mid-2019, the Chinese regulator, fearing default of the entire manufacturing sector of the economy, lowered the basic interest rate 1Y Loan Prime Rate (LPR) – the rate on loans for 1 year to first-class borrowers – from 4.31% in July – to 4 , 15% per annum in November 2019. Then, in November 2019, the cost of borrowing decreased for all transactions. However, this had little effect on the stabilization of the yuan, as the inclusion of the printing press and the increase in money supply reduced the yuan's foreign exchange reserves. At the end of September 2019, this figure was 10.9%, ie at least for the last 20 years. This led to a sharp drop in demand for the national currency as an instrument of savings within countries, and greatly intensified the flight of investors.
Let's take a look at the dynamics of operations of non-financial organizations actively involved in shadow banking. On the website of the People's Bank of China, they are marked in the section "errors and omissions in the balance of payments." From January to July 2019, $ 131 billion (an average of $ 65 billion per quarter) disappeared or was withdrawn from China. This is 1.6 times higher than the average level of the largest outflows that occurred in 2015-16 (about $ 80 billion in six months). From July to August 2019, the "shadow" outflow increased slightly and amounted to 67 billion dollars.
The structure of Chinese export-import allows us to draw the following conclusions:
· The main Chinese importers are Asian countries. This is due to the low cost of delivery.
· The largest European importer-exporter is Germany, which explains the special nature of relations between the two countries, as well as between the ruling parties
· Relative to the United States - the share of Chinese exports in mutual trade in monetary terms - 3.06 times higher than the share of American.
And this once again confirms that a trade war between the two countries is inevitable. To prevent it, parity in the balance is necessary. That is, we are talking about increasing the share of American exports to China. In the current economic situation, China will not dare to do so. It is much cheaper for Chinese interest groups to finance the election campaign of opponents of the incumbent president, who will then become tough lobbyists for China (tough lobbying in the election campaign involves funding a candidate or party in exchange for strict compliance with sponsors). As a result, the world's leading financial and analytical centers are extremely confused about the forecasts – until the results of the US elections – 2020, the finish of which is highly dependent on China's development indicators.
The publication of data for the first four months of May this year showed a record decline in financial and economic indicators. For example, United Overseas Bank (UOB) revised its forecast from 5.3% to 4.1%, the lowest level since 1990. Further – more: UBS revised its forecast for the second quarter of 2020 from 2% growth compared to the previous quarter - to negative, and UOB - from 2.9% to - 3.4%. Barclays forecasts a reduction of 8%. Even less optimistic or more realistic are US sources who point out that the fall in China's trade balance suggests less support for national economic growth, and this impact may be more negative than expected.
"The worst is yet to be seen in the flight of exporters and supply chains," warned Larry Hu, China's chief economist at Macquarie Capital, China's largest export driver. According to experts from the insurance company Euler Hermes, "China will lose 108 billion US dollars in exports of consumer goods, 72 billion US dollars on travel and travel, 10 billion US dollars in transportation services. As a result, the total loss of its exports will be 190 billion US dollars. Against this background, the leading publications of the CCP Central Committee were forced to admit that if China's GDP growth falls below 6% in a year, and if the global epidemic is not brought under control, China will find it extremely difficult to maintain 4% or 5% growth. Accordingly, we will have to abandon the main direction of China's domestic policy, marked by the XIX Congress of the CCP – the achievement of a society of moderate prosperity. For post-Soviet debtors and European loan applicants, this practically means China's renunciation of its role as a global creditor.
Against this background, the world's leading experts predicted an increase in social protests, especially in rebellious autonomies, such as XUAR or Hong Kong. But what kind of wave of protest can we talk about, if according to various data published in the party and opposition Chinese press, the number of citizens under various controls is from 470 to 500 million people.
In previous studies, we have shown that the UK and Portugal have legal implications for a return to the status quo of Hong Kong, Taiwan and Macau, as, for example, the agreement between the UK and China to transfer Hong Kong to Chinese jurisdiction was signed in violation of current legislation. – no local referendum or plebiscite was held to publicly certify the consent of the local population to return to the embrace of mainland China. And if so – the previous agreement may be considered meager.
Researchers of our foundation also came to the conclusion that in the current crisis, the Chinese President will not back down on Hong Kong, but, on the contrary, will not wait until the end of the 17-year term, when the peninsula should finally join the mainland. The protests will be suppressed. One can predict a rather harsh m / n reaction to this, up to the imposition of anti-Chinese sanctions. And this will again hit the economy of the Celestial Empire. This is confirmed by the UNTrade list of countries to which Chinese exports go. In second place is Hong Kong as an independent state.
How will the heart calm down?
Now a few words about what way out of the situation is seen by those who make decisions in China.
Until the beginning of the pandemic, the Shanghai people, led by Xi, saw him in several guises. First, through the implementation of the well-known infrastructure project "Belt - Road". Second, the ionization of partner economies. Third, the creation of new financial instruments to attract external borrowing, ostensibly for the now fashionable Sustainable Development.
Why is the Chinese leader betting on these projects?
The answer seems to be on the surface. Thanks to the Belt-Road project, China, if implemented, gains control for a small price not only over vast territories but also over the respective nation states. This is the first. Second, for China, this construction will cost ridiculous money. Cheap and (or) free labor of prisoners from labor re-education camps is used on Chinese territory. After all, the rebellious XUAR (East Turkestan), a once independent state donated by Mao Zedong to Stalin, is a key infrastructure hub for the project. And European officials would be more demanding and not so fond of Chinese promises - who knows whether there would be a dispute now about the extremely expensive price for the IMF issue. Especially against the background of China's project partners running around the world in search of protection and protection, and China-controlled international organizations are cracking at the seams - especially after the active application of the policy of "debt diplomacy" to former friends. When, for participation in construction, China does not lend real money to developing countries - this was stated in the relevant documents criticizing the IMF. However, China offers forgiveness of a certain part of the national debt to partners. In addition, there are guarantees of creating new jobs for Chinese citizens and ensuring the supply of raw materials, equipment and materials from China.
The second strategic direction for China is to bring huge masses of the falling yuan to these partner economies. This may slightly strengthen the stability of the Chinese currency and slow down the printing of new banknotes. The question is what to do with third world countries that consider the role of a means of payment – more stable currencies? ..
The third solution is an equally lucrative project for China – the introduction of green financial instruments such as the Green Exchange and Green Bonding, the ultimate beneficiary of which is the same China. But the culmination of the success of Chinese "green" diplomacy can be considered the adoption by the European Union of the so-called. The Green Deal, behind which, again, are Chinese interests. For example, in the supply of equipment for "green" energy (all the same solar panels and wind farms), which has significant support and understanding among the IMF leadership.
It is also worth mentioning that the largest Chinese importer from the EU for decades is Germany. The CDU-CSU ruling bloc has long and close ties with the Chinese leadership. And the chairman of the European Commission is the former Minister of Defense of Germany, a representative of the CDU Ursula von der Leyen. At the same time, Germany was one of the main lobbyists for the Green Deal.
And now let's turn to the events of October 2019, when the IMF, through its chairman Kristalina Georgieva, stated that the world economy had entered a period of deep recession, similar to the Great Depression of 1932-1939. . Six months earlier, the new president of the World Bank Group, David Malpass, in his speech after his appointment in April 2019, announced a new policy of the Bank towards China, as well as changes in the policy of distribution of IMF loans. Note that as a shareholder in the IMF, China does not have sufficient influence in the World Bank. The latter is traditionally headed by a US representative. The aforementioned Mr. Malpass is a protege of Trump. Even during his election, the new head of the group stated that in order to increase the efficiency of the use of shareholders' funds, it is necessary to arrange an audit of existing programs, to verify the feasibility of lending. And also - IMF programs, where China is the largest borrower. That is, at the expense of servicing these loans, there is virtually all IMF staff. One of the first was the Belt-Path lending programs and projects related to green finance.
What are the World Bank and the IMF as the main financial structural units of the UN? The World Bank is a specialized agency of the United Nations, whose shareholders are 188 member states of the United Nations.
The number of votes held by member countries depends on their share in the bank's capital, which in turn is determined by the corresponding percentage in the world economy. These shareholders are represented by the Board of Governors, the highest decision-making body that determines the bank's policy. The Board of Governors meets once a year, during joint annual meetings of the Board of Governors of the World Bank Group and the IMF. Specific powers to manage the Bank in the period between meetings of the Board of Governors were transferred to 25 executive directors.
The Executive Directors form the Board of Directors, which is headed by the President of the Bank. The Board of Directors consists of five executive directors representing the Member States with the largest stakes: the United States, Japan, Germany, France and the United Kingdom. The remaining 20 CEOs represent groups of countries. The Board of Directors carries out the general management of the bank's work, including being responsible for approving all loans and making other decisions that affect the bank's activities: approving loans and guarantees, developing country assistance strategies, making decisions on long-term borrowings and other financial issues. .
In turn, the IMF – like the World Bank – is a specialized UN agency, whose members are 189 UN member states.
The main function of the IMF is to provide short- and medium-term loans with a balance of payments deficit of the nation state. Unlike the World Bank, the IMF focuses on short-term crises. The World Bank lends only to poor countries, and the IMF can lend to any of its member countries that lacks foreign currency to cover short-term financial obligations. The highest governing body of the IMF is the Board of Governors, in which each member country is represented by the governor and his deputy, the finance ministers and / or central bank governors.
The authorized capital of the IMF is formed by contributions from member countries, each of which usually pays about 25% of its quota in SDRs (Special Drawing Rights) or in the currency of other members, and the remaining 75% – in its national currency, based on the size of quotas , votes are distributed among member countries in the governing bodies of the IMF. The current quota calculation formula is the weighted average of GDP (50%), openness (30%), economic variability (15%) and international reserves (4%). This ratio is influenced by the weighted average exchange rate and the purchasing power of the currency. Judging by the criteria of the formula, it can be assumed that China's share in the IMF's governing or executive bodies will be significantly reduced.
In the current situation, the so-called PRC is essential for the financing of its infrastructure projects to remain in the status quo. After all, not only the recovery of the Chinese economy depends on this, but also the personnel of the current leadership of China, including the Politburo of the CPC Central Committee.
The IMF's Executive Board, which sets policy and is responsible for most decisions, consists of 24 executive directors. Directors are appointed by the eight countries with the largest quotas in the Fund: the United States, Japan, Germany, France, the United Kingdom, and China. Russia and Saudi Arabia. The remaining 176 countries are organized into 16 groups, each of which elects an executive director. The largest number of votes in the IMF (as of June 16, 2006]) are held by: the United States - 17.08% (16.407% - 2011); Germany - 5.99%; Japan - 6.13% (6.46% - 2011); Great Britain - 4.95%; France - 4.95%; Saudi Arabia - 3.22%; China— 2.94% (6.394% - 2011); Russia - 2.74%. The share of 15 EU member states - 30.3%, 29 member states of the Organization for Economic Cooperation and Development, have a total of 35% of votes in the IMF. It should be borne in mind that despite the fact that the World Bank and the IMF interact on a parity basis, and the World Bank can become a shareholder only through membership in the IMF, as well as the fact that China has significantly increased its quota - American interests prevail in both organizations.
Moreover, in order to approve a loan to a Fund participant, a country visit must be carried out, which must result in the preparation of a report to be approved by the bank. That is, with a negative conclusion of the bank, it is impossible to get a loan. Moreover, we are talking not only about the World Bank. The Chinese are not members of the WB Board of Directors. However, representatives of Chinese opponents are members of the bank's executive bodies and have significant quotas in the IMF.
There are few opportunities for China to solve its own problems: first, to rely on its main situational lobbyist – the aforementioned Kristalin Georgiev, the most ardent opponent of the Trump team. Plus try to negotiate with other players – owners of large quotas. Thus, China will be able to achieve a maximum of 17 - 20 votes – at the expense of Germany, France, Russia, Britain (under great question) – no more. Or another option: try to negotiate with groups of countries. For example, with the Organization for Economic Cooperation and Development. But the Chinese need to work hard, because a qualified majority of the countries of the existing groups have to vote. However, confidence in the reliability of Chinese promises is low. And opponents of China also do not sit idly by. Especially when the efforts of China are supported by such authoritative players as Germany and France. However, under this scenario, the Chinese side will have to make huge concessions to many players. And there is no guarantee that these concessions will not provoke a new storm inside China, which threatens to turn into a hurricane.