China/CNY: Take it to the limit - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, suggests that the overall trend in Chinese debt is still moving towards the level at which a full-blown crisis would be expected at some point in the future.

Key Quotes

“Official bodies, such as the IMF and BIS, have warned starkly about that risk, and we’ve mentioned it regularly since 2013 too. If shadow-banking debt is higher than it seems, then the faster we might get to that worst-case scenario. However, the second thing to consider is that China may have already decided that it must continue on this path anyway. After all, the policy direction is shifting towards central-bank backed fiscal policy even in the OECD. China simply appears to be front-running that shift with a form of Japanese stimulus/tacit Helicopter Money. Dare we ask, might Trumpism look the same eventually?”

“Even so, our third point is that there is still no such thing as a completely free lunch. Where a government controls its own currency it can  --and historically often has-- make the central bank monetize fiscal deficits, or support off-balance-sheet spending to the same effect, to build roads, bridges, schools, and hospitals (as well as armies, navies, and air forces); and it can use the same technique to pay salaries.” 

“The problem is that ultimately, unless spent judiciously this can --and historically has-- end up in hyperinflation. For example, think of Weimar Germany, or Zimbabwe, or Argentina and Venezuela. As such, China’s current stimulus could hypothetically run until that broad-based inflation appears, and CNY collapses. Yet, for now, such inflation still seems absent, so China can “Take it to the limit one more time”, it seems. And so it is.”