So what is the trigger of the Chinese great depression?
It is their own currency, Chinese Yuan.
Hi Everybody, here is Michael from Sago.
If you have converted some Chinese Yuan from HK Dollars and hoped for high yields in the past years,
you will wonder,
why you have lost so much when it is converted back today.
In the past few years, all of us have been talking the next great depression would happen in China.
So what is the of the Chinese great depression?
It is their own currency, Chinese Yuan.
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 United States.
Over the past 10 years, the money supply of China
has increased by 4 times, from 40 trillion Chinese Yuan to a whopping 160 trillion Chinese Yuan.
So which country has issued more bank notes,
and which currency has lost more intrinsic value?
The answer is obvious.
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 Chinese Yuan money supply,
which was at around 4 times,
what is the implication?
The Chinese government had to quadruple the Yuan money supply
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 Chinese Yuan been.
The most common destinations are
stock market and property market,
as well as inflating the prices of all consumables within the country.
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%.
However, it is tricky because the figures have excluded the property prices.
Ironically,
if you take a deeper look into its property market,
the property price in China has been increased by 45% 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.
The crashes of Chinese stock and property market
will eventually bring the devaluation of Chinese 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 HK Dollars and US Dollars, lead to a vast national capital outflow.
There are various channels to transfer funds offshore.
For example, plenty high net worth individuals in China
has come to Hong Kong and purchased large amount of insurance policies in the past few years,
and some of them tried to setup 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' Chinese 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 tighten up
its own foreign currency control policies gradually.
It also forced to support the exchange rate of Chinese Yuan
at the cost of its own national foreign reserve.
One of the main functions of foreign reserve
is to prevent a country's domestic currency fluctuates drastically.
Chinese foreign reserve
has been rebounded at the level of USD 3 trillion.
However, is this level sufficient to support the current inflated money supply?
Over the past 10 years, the ratio of Chinese foreign reserve to money supply
has declined from 28% to only 11-12%.
The money supply expansion has caused a large inadequacy of foreign reserve,
at the same time the economic growth is sluggish.
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 rupture of capital chain
will paralyze the entire production of Chinese corporations.
The latest trade war between 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 on Chinese Yuan.
The credit of Chinese Yuan has been decaying and it will eventually collapse.
Will it be tomorrow, next month or next year?
Stay tuned!
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