pull down to refresh
107 sats \ 13 replies \ @Undisciplined 12 Oct \ on: Developing nations rack up $3.9 bln in net debt payments to China a year econ
Being net debtors isn't inherently a problem
RMB-denominated
The debt itself isn't a problem, but how it's denominated is.
The debt is owed to the entity that creates the currency. The only way these countries can continue to get RMB to service the debt is if the lender allows it via monetary policy.
China has to perpetually issue new debt in order for old debts to be serviced, else the principal + interest is delationary and there's not enough RMB to satisfy all outstanding debt. That would put it where the US has been historically, with the US having to go into debt itself and weaken it's currency (brrrr) to stave off global default on USD denominated loans. The Triffin Dilemma, US goes into hock to keep others out of hock.
The difference being that China may not sacrifice itself domestically so that foreign countries can service their debts. Any (rational) unwillingness for them to do that is a kill-switch on these loans, all they have to do is allow things to tighten up naturally and the ponzi collapses = china defacto owns all the assets.
Possibly that their buyup of gold is to collateralize the RMB and debtors could effectively service the loans with gold, but that would still require new RMB to be created against increases in gold reserves.
reply
Thanks, that gave me some food for thought, as I did not analyse via this angle previously.
Promising to pay back a certain amount of currency in future always creates new demand for that currency as the borrower has to earn the currency (or print it, which is not the case for foreign borrowers).
US having to go into debt itself and weaken it's currency
Would you say the Plaza accord is a vindication of this theory? This certainly puts the accord in perspective.
China may not sacrifice itself domestically so that foreign countries can service their debts.
That is a very difficult decision to make. If China lets the debtors default, then it will inevitably mean some domestic defaults on their banking institutions as well, which (as per some estimates) is way more leveraged than wall street. There already are reports of people queueing up at ATMs occasionally. I do not think they will be happy to receive a token of some rail route running in Indonesia or Africa in lieu of their deposit. So China has to loosen its monetary policy not to bailout the Indonesians, but to prevent its own people from revolting.
Even if Indonesia (as an example) defaults, they can, theoretically, say a subtle Fuck You to China and refuse to handover the rail tracks or whatever. I mean it's a physical asset (not a bank account held in Hong Kong). China is unlikely to launch a military invasion to claim it. And if Indonesia does it, then the US, European central bank etc. will be happy to parade it as a victory against Chinese oppression, ready to extend their own loan/grant or whatever, all it will take is a high level visit of some foreign ministers.
In fact, conspiracy theorists suggest China's overseas expansion of its Keynesian initiatives (borrow and build, irrespective of real demand) is a desperation when the CCP is only slowly realising the impacts of overbuilding domestically (and trying to cover it via stimulus, as usual). So to China, it is almost a necessity to find new suckers (read subprime borrowers previously rejected by even IMF).
reply
Yea, if nothing else the Plaza accord tells us that exchange rates and trade deficits are fictional. Nixon floating the currency in 71 was because fugazi forex was looting the gold, since then it's everything else getting looted.
There's probably other hooks into these deals China makes like trade policy that might make the cost worth it to them, there's undoubtedly a currency war happening as the tariffs illustrate so it could be a simple matter of creating RMB demand at all costs to stave off a larger margin call.
reply
reply
Still dependent on their policy because fiat is a ponzi.
Some countries may be able to service their debt with trade surpluses in RMB, but that comes at the expense of others if the overall supply of RMB remains flat.
If China wants a given project more than the natural resources you can trade to service the debt, your only recourse is default.
reply
Oh I don't think that can be negated with any fiat scheme where you take debt from the issuer denominated in their currency.
It's easy resources for China. You print RMB and you get resources for basically air. It's the US cold war playbook, except the Chinese are (obv.) not "protecting" you against communism, but against "exploitation". While exploiting you, but that's not in the foot notes.
reply
The difference is that the Chinese government directs capital - whereas in the US for decades capital has directed the government.
The Chinese CCP elite are 80% composed of engineers- building an empire.
USA today is composed of real estate tycoon- game show host raconteur and corporate lobbyists/lawyers.
The CCP knows if it fails to improve the Chinese economy it will be removed (probably brutally) and humiliated. Heavens Mandate.
US politicians serve their corporate sponsors and walk away unharmed to go on lucrative speaking tours while the other side picks up the baton of power and continues to serve the same self serving parasitic corporate lobbyists. Crony Capitalism.
Crony Capitalist Democracy is thus, counter intuitively, less accountable and less functional than Heavens Mandate Autocracy.
China can only do this because China offers the best prices for manufactured goods it exports and for the commodities it imports.
China today operates a growing trade surplus above one trillion USD annually.
Just like once the USA did...but USA has now had 50 years of chronic trade (and fiscal) deficits.
Thus today nearly all nations have a trade deficit with China and must fund it somehow.
Now China is the global leader in infrastructure construction - Chinese engineers are building the infrastructure developing nations need from the oilfeilds of Iraq to the ports and railways of Latin America, Asia and Africa.
China is even constructing the first new nuclear power station to be built in the once Great Britain.
Trade and engineering build Chinas economic power and trade war victory.
USAs legacy advantage declines as its financialised economy is incapable of building real world goods and assets.
China has beaten the west at its own game- capitalism- by combining astute government strategy and capital allocation with the power and wealth creation potential of private enterprise.
With every empire in history it has been the same.
The wealth of nations is built upon the combined quality and force of government and private enterprise.
reply
trade surplus
Your fiat brain is showing.
reply
Calling people names does not constitute a contest of ideas.
Your inability to credibly refute any of my points is showing.
reply
Bad bot, regenerate
reply
Calling people names does not constitute a contest of ideas.
Your inability to credibly refute any of my points is showing.
reply