The Debt Bubble Could Burst in China First in 2022

The Last Futurist enjoys thinking about possible macro economic futures. The American Fed could actually push China to the brink. This is because of how inter-connected the world economy actually is in 2021.

To finance its large and growing budget deficit, the US government has had to issue increasingly large amounts of Treasury bonds. In addition, the Federal Reserve had bought large amounts of those bonds to inject liquidity into the market – the so-called quantitative easing – with the additional cash rapidly pushing up the prices of stocks and other financial assets to levels far beyond those justified by economic fundamentals.

The consequences of U.S. quantitative easing could actually provide a recipe for doom that begins in China, some time in 2022.

China is by far in 2021 the center of consumerism and capitalism. Years of shadow banking, mafia state capitalism and the pressure to grow could have terrible consequences. China’s fiscal policy has extreme risks in the 2021-2023 period, depending on what the NPC decides to do.

China’s National People’s Congress (NPC), the country’s legislature, and the Chinese People’s Political Consultative Conference (CPPCC), the country’s top political advisory body, prepare for the start of their annual gatherings this week (our March break).

China could be a victim of its own grandiose ambition. Chinese President Xi Jinping said last November that it was possible to double the country’s gross domestic product by 2035. When you aim for things like this, you take risks and risks around corporate debt and zombie companies in 2021 are a huge liability.

Remember how the debt macro cycle usually ends in history? It’s an event that’s rarer than a pandemic. But it is a pandemic for economic systems. Remember, the International Monetary Fund projection that the aggregate government debt of advanced economies accounted for 123.9 per cent of their collective gross domestic product in 2020, breaking the previous historical high recorded at the end of World War II.

If a debt crisis were to occur, it would likely start in China in 2022 or even late 2021. American stimulus could ramp up global inflation and it could trigger a debt crisis. The U.S. is really okay with this, since it believes it would recover on top.

The US House of Representatives voted early on Saturday morning to approve the Biden administration’s US$1.9 trillion pandemic relief package, which includes direct aid to small business and US $1,400 cheques to middle class Americans. This could be a strategy to out-play China that will win the race to put its fiat currency into a digital blockchain based entity as the most likely future reserve currency by 2032.

What we know is that in the recovery from the pandemic, the financial system as we know it could begin to break down. Once the pandemic has been brought under control and the [global] economy begins to recover, fiscal and monetary policies will make a turn that will impact global financial stability and the economic growth of various countries. Absurd U.S. stimulus and quantitative easing will actually hurt the developing world and China the most.

China does not excel in rule of law and financial regulation thus making a corporate debt and zombie business apocalypse more likely to occur there, where a growth at all costs capitalism mindset makes them a prime victim target for their own greed.

Here’s what we know. Debt among state firms in China grew from 130 per cent of GDP in 2019 to a record high of more than 142 per cent last year, according to the Institute of International Finance. China’s high debt ratio makes it challenging to shift away from an economic growth model driven by state investment and infrastructure.

Any misstep in China could snowball to the entire world. Our global economy is totally interconnected as the pandemic has shown, (ironically) perhaps outside of Taiwan where a chip company is impacting the chip shortages.

China wasn’t just greedy, it has been somewhat suicidal in fiscal policy since the Great Recession of 2008. China conducted an expansionary fiscal policy for 11 consecutive years from 2009, resulting in a continuous rise in the fiscal deficit and an explosion in the size of the nation’s debt.

If a debt crisis does not occur in China in the early 2020s, it will surpass the U.S. as the world’s largest economy around 2026. This is also because of how poorly the U.S. has handled the pandemic. There’s only a 28% chance it will occur, but if it does, there is a 68% chance it begins in China.

China’s fiscal spending increased 2.8 per cent in 2020 from a year earlier, while its revenue fell 3.9 per cent, the first annual decline since 1976, according to data released by the Ministry of Finance in January. It’s inevitable as it is dire, the debt sustainability of most Chinese provinces and cities would become even more worrisome in the 2021-2025 period as the size of local debt continues to rise.