Wednesday, October 23rd, 2019 MST

China on the brink?

China has the world’s largest debt at $40 trillion from 30 years of deficit financing its industrial growth.  According to some analysts, China’s banks cannot withstand a downturn because it would expose trillions of dollars in bad debt. Now China is being prompted (Wall Street Journal) to return to stimulative policies because of slowing rates of inflation. China’s economic growth in 2018 was the slowest since 1990.

“The producer price index, a gauge of prices at the factory gate, edged up 0.1% in January, slowing from a 0.9% gain in December.  The consumer price index rose 1.7% in January from a year earlier, compared with a 1.9% in December.”

Among the projects that grew China’s economy to become the second largest in the world were the building of cities that today remain unoccupied.  One is a replica of Manhattan Island, another of the Pentagon (go figure!).  Throughout the country, huge apartment complexes stand empty.  Manufacturing facilities are under utilized.

China, of course, is a command economy, one that ignores the law of supply and demand.  Private capital is overrun by government projects.  As we know from the old Soviet Union, central planning is destined to fail, and when it does reverberations will be felt around the world.

China’s Hang Seng Index is down 16.5% from its early 2018 high, and that’s with a knee-jerk rally of 13% from the 25,000 mark in January when investors started speculating that the People’s Bank of China, their central bank, would follow standard Keynesian policies and again employ loose monetary policies.

However, Trump’s tariffs on Chinese goods have exacerbated things.  The United States is China’s biggest trading partner and if no trade resolution is reached, China’s exports will suffer immensely.

What happens in the world’s second largest economy cannot be ignored.  If China re-inflates, as the WSJ suggests, inflation will be felt around the world. If Trump’s tariffs are increased to 25%, as he says they will if no accord is reached in the current negotiations, China’s economy will suffer.  Either way, gold and silver will see higher prices.

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