China’s economy seems to be doing very well, despite the trade war on going with the United States. Indeed, the country has tripled its bonds in 2018.
It seems that the trend is on going, as local companies are pressuring banks to increase credits, which would make 2019 the new high.
While President Xi Jinping has focused on changing the “shadow-banking system” where credit decisions are made.
Experts think that this strategy might be toxic for the United States, as issuing too many bonds and offering them to America could surge interest rates, thus hindering the economy.
A distinct top 3 for companies
According to Bloomberg, 2019 should be “the biggest by far for defaults” in China’s $13 trillion bond market.
Companies defaulted almost $6 billion of domestic bonds since January, which represents 3.4 times the total for the same period of 2018 according to Bloomberg.
This pace is dramatically more intense than in 2016, where the first semester was the most intense bond. Bloomberg has ranked the companies who have defaulted on the most bonds so far this year.
A weapon against the U.S.
China’s economy has been exponentially growing since the early 2000s. As of 2019, the country owns $1.13 trillion in treasurys. According to the Treasurys and the Securities Industry and Financial Markets Association, this is less significant that the American debt – the United States has an outstanding $22 trillion.
China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.
— Hu Xijin 胡锡进 (@HuXijin_GT) May 13, 2019
However the Chinese debt represents about 17% of several securities held by foreign governments.
When it comes to the United States, China’s “holdings have fallen nearly 4% over the past 12 months even as total foreign government ownership of treasurys has increased by 2.6%”, according to CNBC.
“To me, that is the biggest worry. This is really the biggest weapon they have,” shared Sung Won Sohn, professor of economics at Loyola Marymount University to CNBC. “They need to do more to counter the United States. So if push comes to shove, that’s what they are going to resort to.”
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Yuan under surveillance
Analysts at Macquarie highlighted that “China’s policy-makers have plenty of policy tools to withstand the negative shock from the trade war, but the potential long-term cost is huge. Policy-makers have no choice but to maintain a stable economic backdrop amid the upcoming trade negotiations.”
Last week, tensions between the United States and China escalated as both countries increased their tariffs.
Diplomats hope that they hope that Presidents Donald Trump and Xi Jinping will meet at the upcoming G-20 summit in Japan. White House Economic Advisor Larry Kudlow, said the meeting was likely to happen, although not confirmed yet.