Is Trouble Brewing in China?

The Chinese authorities are behaving a bit strange. Previously, they’d make a statement or two on bitcoin and move on, but recently they’ve come across as relishing almost daily statements for now months to the point one has to wonder: what exactly are they afraid of?

Appear strong when you are weak, and few can doubt China’s overt attempts at propagandizing strength, but is this hiding something? Is the Chinese Communist Party (CCP) a bit on edge?

When Jack Ma delivered a speech in front of bankers behind closed doors late last year, he probably considered himself as the pioneer bringing innovation.

Unbeknown to him, however, he was touching on what probably keeps Xi Jinping up at night, the credit bubble.

“The efficiency of credit expansion has increasingly deteriorated, pointing to growing resource misallocation. In 2007-08, about RMB 6½ trillion of new credit was needed to raise nominal GDP by about RMB 5 trillion per year. In 2015-16, it took more than RMB 20 trillion in new credit for the same nominal GDP growth,” IMF said in a 2018 report.

China’s credit-to-GDP ratio has rocketed from 140% to 290% since 2008, crossing 300% in 2019. That’s the same year China had to bail out a number of small banks, with GDP growth falling to its lowest levels in decades.

For the first quarter of 2021, China claims a GDP growth of 18%, but it’s not clear anyone believes that specific GDP number with old comments by Premier Li Keqiang resurfacing to state China’s GDP numbers are man made.

Previously there was a clear downwards trajectory in growth, and one reason for that is because China has a higher total credit to the private non-financial sector than USA, with it standing at 222% of GDP for Q4 of 2020 for China, while for America it’s at 164%.

We can see for America it peaked in 2008 at 170% just as the financial crisis hit, while for China that’s when it took off, up from 110% to now 220% of GDP with total debt in China at $40 trillion, or 15% of global debt.

For a developing economy, with China’s GDP per capita at $8,405.18, this huge amount of debt in such a short time may well put hard breaks on any further economic growth.

Ma wanted to press the accelerator by reforming creditworthiness criteria through employing data mining analysis to go far beyond income in judging whether someone is lend-worthy.

CCP officials were horrified by this suggestion, scared too much credit might be extended, bursting the bubble stacked up in a house of cards.

Unless some other country follows Ma’s approach, we won’t have an A/B test, so we won’t know whether he might have saved the bureaucracy which appears to be interested more in closing any exit routes, rather than attempt a way out through innovation.

This fear of innovation has turned the Party towards oppression, comparable to the Soviets strictly controlling photocopiers when they were new out of fear information might spread in an uncontrollable manner.

Thus China has declared a war of sorts on financial technology because the CCP has no control over it and is scared it might give citizens the opportunity to escape the credit bubble, and in the process make it burst.

The downside of that is no lifesaving boats when the titanic sinks, and since this is a debt fueled growth for decades without one recession, you’d think at some point the music will stop.

The Chinese government however has room as itself is only 60% of the GDP in debt, but a burst might take decades to recover.

Hence they’re seemingly taking no chances, relishing any opportunity to slap yet another restriction on bitcoin, or to slap Jack Ma, but in the process they might be closing any air out of the bubble, so unintentionally accelerating its inflation.

Plenty however might say these predictions have been made for decades and nothing has come out of it, but China has grown for decades, and as long as there’s growth, you can keep up with debt.

Now they may have hit a peak, with that growth slowing down, and thus the debt burden is increasing, and at some point it becomes unmanageable due to mass defaults.

Something that clearly worries authorities there who obviously must know a lot more than we do, and thus they’re overreacting by banning Australian produce or by daily banning bitcoin or by slapping tech leaders like Jack Ma because they know they are in a fragile economic situation which can become a full blown financial crisis as that $40 trillion debt depends on very fast growth.

In such a situation you’d expect bitcoin’s appeal to increase in China despite CCP’s best attempt because once the bubble bursts, and obviously at some point it will, that’s the only escape they will have.