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China’s property crash is becoming more dangerous by the day - The Telegraph - 17.08.23

The country’s ticking time bomb economy is nearing the point of detonation says Ambrose Evans-Pritchard.

China’s financial system is one step away from a full-blown crisis. Unless radical action is taken to stem contagion through the shadow banks and halt the contractionary slide in demand, China risks tipping into a classic liquidity trap.

Cai Fang, a rate-setter at the central bank, has called for a $550bn blast of helicopter money – or high-powered QE injected into the veins of the economy – in order to stop a deflationary psychology taking hold as frightened households retrench.

“The most urgent imperative now is to stimulate consumer spending. It is necessary to use all reasonable, legal, and economically viable channels to put money into people’s pockets,” he wrote on China Finance 40, the opinion forum of the elite.

This increasingly feels like the make-or-break moment faced by the US Treasury in 2008 after Lehman Brothers collapsed, or faced by the eurozone in 2012 when the doom-loop threatened to engulf Italy and Spain.

America and Europe acted in time, after a string of errors.

It is far from clear that Xi Jinping has recognised the destructive mechanisms at work in China, or that economists in the West are alert to the global dangers through multiple channels of transmission, starting with an exchange rate shock.

The yuan has fallen to a sixteen-year low against the dollar. The East Asian currency bloc is falling in tandem, pushing the euro trade-weighted index to a record high.

The effect is to bludgeon a eurozone economy already in a deep industrial recession. The cheaper the yuan, the greater the tsunami of Chinese electric vehicles, machinery, or wind turbines, heading for Europe.

Westerners emerged from the pandemic with windfall savings, thanks to furlough schemes.

The Chinese endured draconian lockdowns for three years with far less support. The damage has undermined the finances of millions of small family businesses. A large chunk of the population has slashed spending in order to rebuild depleted savings.

It is the immediate reason why the post-pandemic rebound has already fizzled and why the economy has tipped into deflation.

The article ends with these words:

Unlike Japan, it has angered the West and must now contend with strategic reshoring and a hi-tech blockade.

Joe Biden calls China’s economy a “ticking time bomb”.

My presumption is that Xi Jinping will not let it detonate on his watch. At some point he will blink and take drastic action to shore up the property market and the shadow banks, putting off the day of reckoning for another cycle.

If he does not, the global financial system is in for a dangerous denouement this winter.

For the full six page article with more charts, please click on this pdf file or click on the link to the Telegraph below:

China’s property crash is becoming more dangerous by the day - by Ambrose Evans-Pritchard
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