China's Bubble
Trade Tensions Rise as China’s Economy Hits a Wall

China’s economy is in big trouble, Morgan Stanley’s Chief Global Strategist Ruchir Sharma writes in the NYT:

It will be difficult for any country to grow as rapidly as 6 percent, and all but impossible for China. Nevertheless, in an effort to exceed that target, Beijing is pumping debt into wasteful projects, and digging itself into a hole. The economy is now slowing and will decelerate further when the country is forced to reduce its debt burden, as inevitably it will be. The next step could be a deeper slowdown or even a financial crisis, which will have global repercussions because seven years of heavy stimulus have turned the world’s second largest economy into a bloated giant.

In Beijing, confidence has given way to a case of nerves. Local residents often sense trouble coming before foreign investors and are the first to flee before a crisis. Chinese moved a record $675 billion out of the country in 2015, some of it for purchases of foreign real estate. If China were eating America’s lunch, its people would not be rushing to buy safe-haven apartments in New York or San Francisco. Far from conspiring to cheapen its currency, as Mr. Trump charges, Beijing is struggling to keep the weakening renminbi from falling more, which would further erode local confidence and make a crisis more likely.

Sharma gives one of the best overviews of the economic history of the past several years we’ve seen, and you should read the whole thing. He concludes on an ominous note: “The sputtering global economy is one shock away from slipping into recession. In the postwar period, every previous global recession started with a downturn in the United States, but the next one is likely to begin with a shock in China.”

Even without a recession, China’s reluctance to shut down money-losing factories that are dumping heavily discounted excess production onto world markets is having a growing impact on international trade and on the political tone of China’s relations with other countries and international companies. Last week, U.S. Steel was green lighted to seek a ban on American imports of Chinese steel through a previously-unused sanctions provision known as Section 337. In Beijing on Monday, Treasury Secretary Jacob Lew called on China to curb production. The Associated Press:

“Excess capacity has a distorting and damaging effect on global markets,” Lew said in a statement at the start of the two-day meeting. “And implementing policies to substantially reduce production in a range of sectors suffering from overcapacity, including steel and aluminum, is critical to the function and stability of international markets.”

Beijing announced plans this year to slash the size of its state-owned steel and coal industries, costing millions of jobs. But plans for other bloated sectors including aluminum, glass and solar panels have yet to be announced.

Speaking at the event’s opening ceremony, Chinese President Xi Jinping promised action on reducing overcapacity but announced no new initiatives.

Given China’s track record, it’s doubtful that Beijing will in fact follow up on Xi’s promises. Meanwhile, workers and companies in other countries won’t put up with China’s behavior quietly, and the pressure in the U.S., Europe and elsewhere to hit back will continue to grow.

With lots of other stresses on the U.S.–China relationship, mostly arising from China’s determined push into the South China Sea, trade tension is the last thing the two countries need. But it looks as if that is where we are heading.

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