This article contains commentary which reflects the author's opinion
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Outlook for US better than for China
The lock down enacted to curb the spread of the coronavirus has caused one of the worst economic crises since The Great Depression. Faced with this level of catastrophe, governments around the world have no choice but to enact stimulus measures. This increase in debt and government spending, and reduction in government revenue will keep the economy from collapsing in the short-term. Like many short-term measures it will be damaging, in the long-term. Recovery possibly might take years or even decades.
US debt is mounting and recovery will be long and difficult. However the US has many advantages over China, and will most likely have a smoother recovery. China’s economy is very much dependent on manufacturing, which they are now losing for a variety of reasons. Their alleged pandemic to secure a better economic position may have backfired if true.
Loss of Exports
- Chinese manufacturing and exports are in decline because of a general decrease in demand from the rest of the world, which is suffering from coronavirus lock down.
- Between 40-50% of China’s exports are done by foreign companies, like Apple, manufacturing in China and shipping to the US and other foreign trade partners. Now, US and Japan are going to be providing cash payments to their companies to leave China. South Korea has also said it will take similar measures for certain key electronics manufacturers. India is offering cheap and easy access to land, as well as other incentives to companies that wish to relocate from China.
- In 2019, US trade tariffs had already driven the Chinese economy to its lowest economic growth in decades. If China does not meet the terms of the phase-one trade deal, the tariffs will be put back in place.
- Pharmaceutical and medical exports have been key to keeping Chinese factories open during the pandemic. The US government is taking steps to shift critical manufacturing back to the US, including medical and pharmaceutical.
Human Rights Sanctions
- The US – Hong Kong Democracy and Human Rights Act, which has already been passed by both houses and been signed into law is about to be implemented. This nullifies any advantages of shipping or investing through Hong Kong.
- The Uyghur Human Rights Policy Act of 2019 has passed both houses and will now be presented to the President to sign. If enacted into law, the US will sanction China for human rights abuses in Xinjiang. This will include black listing both firms and individuals associated with repression against the Uighur and other Muslim minorities.
- Independent of the Uighur Human Rights Act, on a case-by-case basis, the US is increasingly black-listing Chinese companies guilty of human rights abuses. In May, 33 firms were added to the black list.
- Legislation has passed the Senate, which will delist hundreds of Chinese companies, from US exchanges, which do not comply with audit and transparency regulations.
General Economic Outlook and Unemployment
- China finished 2019 with public debt in excess of 300% of GDP and record numbers of non-performing and at-risk loans carried on the books of state-owned banks. This year, the government is urging the banks to extend further credit to SOEs to keep the economy open. Local governments have been authorized to issue bonds. The Central government is also cutting taxes, forgiving or extending credit, and forgiving rents on state-owned properties. This means China government has less money coming in and more going out.
- The official unemployment rate in China is about 6%, but this number excludes migrant workers. It is estimated that over 80 million migrants are unemployed.
Foreign Trade and Investment
- China runs a trade surplus with most of its trading partners. As public opinion turns against China, and as there is more pressure in other countries to re-shore manufacturing or to decouple from China, countries cutting ties with China have less to lose economically than it has.
- China has spent and loaned hundreds of billions investing in the Belt and Road Initiative (BRI) in countries around the world. Most of these countries cannot make their loan payments and China now lacks the investment capital to complete many of the projects, and these projects will only generate revenues after they are completed.
US Currency and Bond Advantage
- The US can print US dollars. It is not the best long-term strategy to take, but is a way of supporting the economy in the short run. China cannot print US dollars.
- The US can raise nearly unlimited capital by issuing sovereign debt, US dollar denominated bonds, on global markets. China cannot raise a great deal of money on world bond markets by issuing bonds. Foreign investors do not want to hold the RMB/Yuan denominated sovereign debt of the communist party of China. During times of crisis, such as the current pandemic, the US dollar increases in value, while the Yuan falls. This is because countries around the world see the dollar and US dollar sovereign debt as a safe haven for their money.
- Because China cannot sell Yuan-denominated sovereign debt on world markets, in 2019, they issued about half a billion dollars in US dollar denominated bonds. This year, $120 Billion in interest payments are coming due, and they must be paid in US dollars. As the pandemic drives down the value of the Yuan, China is faced with having to use cheap Yuan to purchase expensive dollars, to make interest payments.
- The US is considering ways of removing, piercing or bypassing China’s sovereign immunity, so that the country can be sued for coronavirus damages, in the trillions. Some American lawsuits have already been filed, directed at the Communist Party of China which, even under current law, does not have immunity.
- Similar lawsuits are being discussed in other countries as well. Germany’s leading newspaper, Bild, has published a letter to Xi Jinping, claiming that China owes the German people 1.4 billion Euro in damages. The International Council of Jurists (ICJ) and All India Bar Association (AIBA) have filed a complaint in the United Nations Human Rights Council seeking Coronavirus reparations from China. Additionally, Nigerian lawyers have prepared a $200 billion lawsuit against China. It is expected that if the US successfully sues China and recovers damages, it will open a deluge of suits against China, from around the world, coupled with nationalization of Chinese assets held abroad or cancellation of debt to China.