Why China is really attacking Australia
David James |
27 April 2021
A recent program on Four Corners showed how China’s trade policy is devastating many of Australia’s primary industries, including barley, wine, beef and crayfish. This is being interpreted as a political attack, which it may well be. But there is also a strong financial reason for what is happening.
The problem can be summed up in one statistic. China’s M2, or internal money supply (renminbi, the country’s domestic currency) is about two and a half times China’s GDP. GDP is a measure of the transactions that occur in an economy. M2 is a measure of the money printed to enable those transactions. So how can the money printed for the economy’s transactions be more than twice the actual transactions?
It is an extraordinary exercise in money printing. The extra money is necessary for banks and other financial institutes to hide their bad loans: a giant Ponzi scheme. What started out as a Band-Aid solution but has become a crutch that’s indispensable to the stability of the financial system. As analyst Kyle Bass points out China spends about 30 per cent of its economy “building things”, like empty cities, that do not make an adequate return on capital.
Most of this problem is sealed off inside the domestic system, but it starkly changes China’s trade equation. China desperately needs to maintain its foreign exchange reserves to support its external currency, the yuan, because its internal currency, the renminbi, is being debauched.
That means restricting the outflows of such hard currency, which translates into stopping imports, especially from Australia, a country China can attack without too much political blowback.
The change can be seen in the behaviour of the China Development Bank (CDB), the Chinese policy bank. As Dinny McMahon, author of China’s Great Wall of Debt comments: “It was the tip of the spear when it came into funding Belt and Road – even before it was called the Belt and Road initiative. President Xi Jinping announced the new policy in 2013 and the CDB was already shovelling huge amounts of funds out the door to fund infrastructure globally.”
The CDB’s allocation of foreign currency loans peaked in 2016 and has declined since because the Chinese government started worrying about its foreign exchange reserves. From mid-2015 to mid-2016, its foreign exchange reserves declined by about $US1 trillion, leaving $US3.2 trillion, much of which was not especially liquid. The brakes were put on, including stopping foreign corporations repatriating either working capital or profits for over three years because that means losing foreign exchange. Unsurprisingly, those foreign corporations are starting to leave.
China must have strong foreign exchange reserves to buy essential raw materials. It consumes about half the world’s iron ore. Only 15 per cent of its land mass is arable land, of which about a fifth is too polluted to use. It heavily depends on energy imports.
The country is consequently caught in a vice. It no longer has an edge on cheap labour costs and global corporations are becoming increasingly wary of investing there because of the difficulty of getting money out.
China may solve its internal money printing problems, possibly by forgiving the bank’s debt (the banks are state owned). But it must cut back on trade to quarantine its internal problems off from its external trading power. That is bad news for Australian farmers.