The G-20 countries don’t know how to get rid of excess debt

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The G-20 countries don’t know how to get rid of excess debt

 

4 Sep 2016 13:13:29

Страны G-20 не знают, как избавиться от избыточного долга

 

Inclusive growth, clean energy, intensive trade and the transition from short-term crisis management to long-term planning — the official goal of the G-20 summit this year in Hangzhou, China.

It would be great if the leaders of the largest economies in the world, when they meet on 4-5 September, could just forget about the pressing economic issues and focus on future prosperity.

“China’s leadership directs the discussion to make it easier for the G-20, the transition from the short-term management during the financial crisis to prospects for long-term development,” said UN Secretary-General ban Ki-moon, Chinese journalists in new York on 26 August, in accordance with Xinhua.

But in reality appear large friction, especially in relation to the country-host of the summit. In addition to the very complicated geopolitical situation in the South China sea, China is facing economic crisis at home.

Neither the West nor China do not know how to deal with overcapacity and debt problems in China, not destroying the world trade and globalization in General, not to mention promoting inclusive growth and development of clean energy.

“China is angry almost all in the moment,” said a Western diplomat in Beijing The Fiscal Times. — It’s a minefield for China”.

Global effect

Despite the relatively closed financial system, China’s economic growth of many countries, such as Brazil and Australia, depends on huge consumption in China. Other countries such as the United States, not too dependent on the inflow of Chinese capital, but used to trade us Treasury bonds and real estate new York over cheap Chinese goods.

Ideally the West would like to encourage China to reform and restructure the economy with the production of exports and investment in infrastructure to a more service and consumption driven economy.

A large part of the trade deficit of Europe and the United States with China would be reduced.

“The necessary structural reforms will make China the largest consumer market in the world. Any other economy that will benefit,” wrote independent economist Andy Xie in the South China Morning Post.

However, Chinese leaders and state media have repeatedly stressed that they do not set such a goal. “My government resists the temptations of quantitative easing and competitive devaluation of currencies. Instead, we choose structural reform,” quoted Xinhua Premier Li Keqiang, who said that the country has no alternative plan.

Chinese leader XI Jinping reiterated the importance of reforms at the meeting of the Central leading group for deepening reforms. “The country needs to pay more attention to the reform of the economic system and improve the basic mechanisms that support this major upgrade,” says the statement published by the group.

However, China has not completed the reforms that will lead to shocks, and local authorities will not be able to cope with the disturbances. Up to 6 million people will lose their jobs because of the program balancing, and the official unemployment rate may reach 12.9 percent, according to a report by research firm Fathom Consulting.

For example, in Hebei province had to reduce production capacity to 18.4 million tonnes of steel in 2016, and by the end of July reduced to only 1.9 million tons, according to Goldman Sachs.

The economies of Australia, Brazil, Russia and South Africa are major exporters of raw materials slows down because of Chinese imports fell, the decline was 14.2% in 2015, according to the world trade organization. In 2015, the world imports of goods declined by 12.4%, while world exports declined by 13.5%.

The collapse of world trade occurred before China started to implement its objectives of reducing overcapacity, liberalisation of capital transactions and the introduction of the fluctuating exchange rate.

China tried to buy time by investing in infrastructure at the expense of state companies and local authorities, while private companies have admitted defeat.

The problem of debt

The Chinese government also encouraged the banks to encourage delinquent companies to default, but instead to extend loans or to exchange their debt for a stake in the assets.

The real question facing the West and China, how much effort will have to make in the short term to achieve the goals of China’s reforms and rebalancing of the consumer economy.

“To avoid a financial crisis that will end badly for China and the world, the government should tighten budget constraints, to allow some firms to fail to recognize losses in the financial system and recapitalize the banks if necessary. … History shows that it makes sense to help affected workers and communities and not try to support firms that have no chances of success” — says the article published by the Brookings institution.

However, the proposed funds in the long term would be good for China and the world, will not work without disrupting the global financial system in the short term.

Billionaire investor Jim Rogers said in an interview with Real Vision TV: “of course, I would like to see strengthening of the market all over the world, including in China. If this happens, we will probably see more fluctuations in the value of currency.”

That sounds innocent, will bring even more devastating consequences for world trade and the global financial system. If China wants to realize the losses that it incurred during the 15 years of inefficient use of capital, it will have to recapitalize the banks by $3 trillion.

It is impossible to do without Central Bank intervention, Li Keqiang wanted to avoid. On the other hand, the Chinese will try to transfer even more money abroad to protect the purchasing power of its currency.

In 2015 China lost $676 billion due to capital outflows, mainly because the residents and the company would like to diversify their savings, most of which are stored in the Chinese banking system.

If China restructured its corporate debt and spent the recapitalization of banks on a massive scale, the yuan is devalued not less than 20%, according to most experts.

The collapse of trade

Since China is a major player with exports and imports of goods and services by $4 trillion in 2015, a 20 percent devaluation of the Chinese currency will destroy the current pricing mechanism for importers and exporters is assured destruction.

“This is the end. The Euro will not, its just not in this scenario. All caught up. The world would be when China will be a 20 percent devaluation. Its share in world trade has never been higher. It’s like destroy the world production,” said Vision TV Hugh Hendry, General Manager of Eclectica Asset Management Real.

For China, a net importer of food, the devaluation will make life for the vast majority of the population is even more expensive, causing social unrest at the peak of unemployment.

Thus, China will be damned if they do, and if you don’t do too. Even the West will not contribute to a quick and painful devaluation and will not be able to offer many alternatives.

Another option that you may discuss behind closed doors at the G-20, is a Japanese script. China will not be able to realize bad debts, will support zombie companies and prevent the outflow of capital abroad, of abandoning his ambitious program of reforms.

China, the West and Japan, one and the same problem of excess debt and no feasible way to get rid of it. But, hiding the real problems, the G-20 already admit defeat in finding a solution to this problem.

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