What Chinese Debt Default Means for America’s Economy

America’s debt has been racking up new trillion-dollar debts since before last November’s elections. But the world’s biggest trouble spot is in China. As with debt defaults in America, stock and bond markets are…

What Chinese Debt Default Means for America’s Economy

America’s debt has been racking up new trillion-dollar debts since before last November’s elections. But the world’s biggest trouble spot is in China. As with debt defaults in America, stock and bond markets are betting China will default.

On Sunday, China Evergrande, a real estate giant based in Guangzhou, China, forked over 7.84 billion yuan ($1.17 billion) in principal and interest on a bond it sold last September, after a dispute with the investment bank that syndicated the bond. Its company, now known as Evergrande Real Estate, defaulted on part of its borrowing last month.

After such an event it is almost impossible to predict the consequences.

Next week China’s national auditor will officially declare that the economy met the nominal growth target set for 2017. If the data look strong, that may reassure financial markets — or panic them.

Xi Jinping, China’s president, also sets the target for the economic growth rate. The economy has grown at an annual rate of around 6.8 percent since 2013. Given growth and adjustments to the growth rate, some economists think China’s growth may exceed its real target this year.

China’s stock market, mostly taken as a bellwether for economic health, has been going up and down since 2016. It is in a bubble after soaring almost 2,000 percent since the start of last year. To anyone short of funds, China is the place to be. But after so much bubbling, the bubble might burst. If it does, world capital flows will find other places to invest.

To explain the Chinese government’s policies and actions, I quote three Chinese scholars, Ming Haifeng and Kim Ting, of the UK and Singapore universities respectively, and Mohamed Al Sood, a China economist at Abu Dhabi’s Masdar Institute.

Hefeng calls the current boom “one of China’s most extraordinary events in the last 100 years.”

China’s equity market is no longer only for the rich. A third of the population has bought shares because it became perceived as a good investment, selling financial product at high fees. Until this year it was seen as an efficient, risk-free financial instrument.

When the bubble burst, their stock holdings were down 40 percent. Their holdings of financial products ran up by 25 percent.

On the real economy, those three scholars say, China has shifted from owning debt-ridden foreign assets to increasing its investment in the United States. Last year, the American economy generated more than $1 trillion in capital flows — the highest percentage of foreign direct investment into America since 2001. Chinese investments in the United States, both direct and through American companies, have been rising sharply since 2013.

One reason Chinese government investment is booming is because its household debt burden is climbing rapidly. The urban migration from rural areas has led to increasingly greater stock of consumer debts. Chinese governments now worry that an overstimulated economy could lead to very large amounts of credit defaults that could be disruptive.

That is the backdrop for China’s junk bond market. The global junk bond market has expanded by about $3 trillion in the last five years, to $4.5 trillion. Of that, China has about a third.

China Evergrande is one of these investment companies. That’s why it defaulted.

China is a fairly open economy, unlike America. But the likelihood that ordinary citizens are going to sink into debt on the same scale as China is slim.

Lumping national economies together as one makes mistakes; comparing America and China is a big one. Perhaps in the next few years, after the big stimulus planned to sustain growth, we will be able to compare these two countries with the same accuracy. Until then, keep your money under your mattress.

William Pesek is a Bloomberg Opinion columnist covering global economics.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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