The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Fake Argument

11/10/2019

The President has been arguing that China needs a trade deal more than the U.S. needs a deal.  He correctly pointed that that China’s external debt has increased dramatically from $1.3 trillion to $2.0 trillion in only three years.  That is not a “fake fact” but can be misinterpreted.  However, because most financial crises begin with external national debt, we must first evaluate if risk to the global financial system has increased, due to the growth of China’s national debt.

My conclusion is that China’s debt poses only minor risk to the global financial system.  First of all, China’s $2 trillion debt can be compared to $6 trillion each for Germany and for France, $8 trillion for the U.K.   China’s GDP is greater than all of those and has a lower ratio.  As a percentage of GDP, China’s external debt is only 14%.  Before their financial crises, Thailand and Indonesia had ratios of 50%.

While the U.K. is the biggest Western lender to China, it is only 3% of total bank assets, which is a little high.  Less than one percent of U.S. bank assets have been loaned to China.  For reference, mortgage-backed-securities were only 4% of U.S. bank assets in 2007, which was enough to partially cause the global financial crisis.

China can hurt the world economically but with a low probability of causing a financial crisis.  Of course, this assumes that the derivatives on Chinese debt are held in strong hands, which appears to be the case.  China has recently moved to liberalize their banks, by letting them write-off bad loans, instead of bailing out the borrowers.  They are even allowing bankruptcy courts to function.  All this is a good thing.  They’re making progress.

I suspect China is telling their citizens that the U.S. needs a trade deal more than they do, because China’s $2.0 trillion debt is only a tenth of U.S. debt at $20 trillion.

 

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