China: An Economic Power or a black hole in the making?

Economic bubble called China!

China wants War with India (Part 10)

The total debt of China is 303% of it’s GDP as per Reuters which quoted International Institute of Finance. Thus in 2019 the total debt of China stood at 40 trillion USD which is equivalent to 15% of global debt. Imagine out of 192 countries, just one country owes over 1/6th of the global debt.

As per South China Morning Post this debt has risen to 317% in May 2020. Remember that this news paper is, like all media inside China, prints only what is suitable to Government. Now do a quick math and calculate what shall be servicing cost of this debt? It means the annual liability to pay interest even if no debt is repaid in a particular year. As per this link the rate of interest fixed by Reserve Bank of China is 2.72%

Please note that the countries, especially those whose currency is not pegged to dollar have to pay interest much higher than that is fixed by reserve Bank. Even USA whose Reserve Bank called Federal Reserve is presently at 0.25% yet it is forced to borrow money at six times that rate. Now Assuming that China has to service its debt at 4.5% per year, how much is yearly pay out?

For one trillion debt, the pay out is 45 billion dollars annually. Multiply it with forty and it comes to whopping 1800 billion dollars or 1.8 trillion dollars, each year. How is China is going to pay if it’s economy starts to shrink like it did in first quarter of 2020?

Foreign Exchange Reserve and Loans:

It is bragged around the town that China has largest foreign currency reserve of about three trillion USD. Very good. That makes it a rich country unless it has lent this money to SUA for it’s deficit financing as suggested in the above quoted South China News paper.

Actually China has ‘invested’ this money in One Belt One Road project or whatever is new name to that project. It is building roads, airports, seaports and what not in about 72 countries around the world. Sri Lanka and Pakistan just happen to be part of this debtor group. The total amount of loans disbursed is about 5 trillion dollars. So here also there is a deficit of 2 trillion. but bad news does not end there. Most of these loans have been given at high rate of interest upto 9% (in case of Pakistan) but none of these countries are in a position to pay back the loans. Almost all countries are requesting the China to defer the repayment. Situation has gone from bad to worst in 2020 after Covid-19 virus which has eaten into economy of the world and has hit worse to economy of these poor countries.

Banks are crumbling under debt so is economy:

Three banks of China are already in bankruptcy mode and retail investors have been restrained from withdrawing from large sums of money. This has happened in the province of Heibei. It is not very serious matter but it shows the fissures within. These Banks are the institutions which are exposed in the projects executed overseas and which are worth 5 trillion dollars and if the debt is not serviced, almost all banks would be in trouble because the Banks function on repayment of loans or payment of interest. No interest payment means no liquidity which means bankruptcy. See this report:

Comparative Picture:

It would be unfair not to give unfair picture. USA is has crossed 75% of GDP in terms of debt and is touching the danger line of debt trap. India has its total debt pegged between 60%to 70% and total foreign reserve at 500 billion dollars. A large part of this reserve has been re-invested in Yen and Bullion.

To fight a war it is not the foreign reserve but over all financial position of a country that counts. Actually China is bankrupt but so is the West. Yes the USA is on verge of Bankruptcy due to over spending on wars. Most of Europe except Germany is on verge of bankruptcy due to its socialist, election winning policies for past three decades.

USA has Oil and royalties from Oil as well as it’s war machines which it do not sell to China. What do China has except it’s cheap goods and mercantile trade which is always under profit margin stress? With global economy shrinking, can China make more money while selling less?

So who is going into a long drawn war with India?

[Read the Part one of this series here]

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