If you have converted some Chinese Yuan from US Dollars and hoped for high yields in the past years, you may wonder, why you have lost so much when it is exchanged back today.
In the past few years, many of us have been speculating the next great depression would happen in China. So what is the trigger of the Chinese great depression? It is their own currency, the Chinese Yuan.
China Has Printed Way A Lot More Fiat Money Than US
The money supply of United States has increased by around 86%, or less than doubled, under the previous quantitative easing (QE) policy, and we have already believed the money supply of United States has inflated a lot. Yet, the money supply expansion in China has been much more explosive than that of the United States.
Over the past 10 years, the money supply of China has increased by 4 times, from 40 trillion Yuan to a whopping 160 trillion Yuan. So which country has issued more bank notes, and which currency has lost more intrinsic value? The answer is obvious.
Real GDP Lagged Behind The Growth of Money Supply, Led to Asset Price Bubbles
The percentage increase of gross domestic product (GDP) in China, has been declined from double digits to less than 7% over the past 10 years, and the cumulative growth was about 121%. So if we compare with the expansion of Yuan, which was at around 4 times, what is the implication?
The Chinese government had to quadruple the supply of Yuan in order to double the real GDP.
A lot of Chinese Yuan has been issued recklessly and it is unable to be traced. You may also wonder where have those Yuan been. The first destinations are the stock market and property market, and then, the Yuan will inflate the prices of all consumables in the country.
Although the inflation of China over the past 10 years looks unexpectedly mild at the first glance, only several percentage points, or even as low as 1–2%, it is tricky because the figures have excluded the property prices. If you take a deeper look into its property market, the residential property price index in China has been increased sharply from 85.5 to 124.7 over the past 10 years, despite all the suppression measures in various areas such as Beijing, Shanghai, Guangzhou, Hainan etc. The Chinese property market has been red hot although the government tried to control the prices.
In 2015, Chinese stock market crashed, the Shanghai Composite Index dropped from 5,000 to 3,000 in less than 2 months. When the Chinese property market bubble bursts, it will be much more severe. This is because purchasing a property is a huge investment and usually requires a mortgage. If the Chinese property market crashed, more people will be adversely affected than in the stock market.
Massive National Capital Outflow
The crashes of Chinese stock and property market will eventually bring the devaluation of Yuan as the real economic growth is far behind the asset prices.
Moreover, many Chinese citizens have been selling their Chinese Yuan on hand and exchanging into foreign currencies such as US Dollars and HK Dollars, lead to a vast national capital outflow.
There are various channels to transfer funds offshore. For example, plenty of high net worth individuals in China has come to Hong Kong and purchased large amounts of insurance policies in the past few years, and some of them tried to set up fake investment companies through agents in Hong Kong, or even counterfeit trade finance invoices and bills, in order to bypass the official scrutiny and remit funds.
In recent months, a new occupation has emerged due to this need, which is called “financial ant”. They literally carry their clients’ Yuan and bring the cash from Mainland China to Hong Kong physically. With all these hot money from China, the prices of goods and properties in Hong Kong are inevitably skyrocketed.
To slow down this massive capital outflow, the Chinese government has been tightened up its own foreign currency control policies gradually. It also forced to support the exchange rate of Yuan at the cost of its own national foreign reserve. Chinese foreign reserve has been rebounded at the level of USD 3 trillion, however, this level is not sufficient to support the current inflated money supply. Over the past 10 years, the supply of Yuan backed by Chinese foreign reserve has declined from 28% to only 12%. The money supply expansion has caused a large inadequacy of foreign reserve, at the same time the economic growth is sluggish.
Can China Contract Its Money Supply?
So to solve this potential crisis, China may have to contract its money supply. But is this solution possible? Under the current situation, it is probably too hard for China.
This is because China is suffering from severe debt problems. For example, the non-financial corporate debts of China to its GDP has already exceeded 250%. So when there is no fresh liquidity by issuing new money supply, a lot of corporate loans cannot get a rollover when they approach maturity. In other words, all the corporate loans in China are subject to default. This capital chain rupture will paralyze the entire production of Chinese corporations.
The latest trade war between the United States and China is the trigger of the Chinese financial crisis. The US government aims to demolish the “Made in China 2025” strategic plan through a trade dispute and impose sanctions on all high technology imports to China as well as the exports of related products.
The productivity of China is stagnant and the only way to stimulate the economy is by new money supply. However, the same measure will become less effective as people are gradually losing confidence in Chinese Yuan. The credit of Yuan has been decaying and it will eventually collapse.
So will the great depression in China happen in tomorrow, next month or next year? Let us keep an eye on and stay tuned.
Sources of figures in this article include the US Federal Reserve, Bank for International Settlements, PBoC, SAFE and National Bureau of Statistics of China.