How a debt crisis in China becomes a currency crisis — and then a Cold War

[Free Vulcan]

There are different rules for investors in China. These rules primarily result from the strong interrelationships between the state and the private sector.

While China has comes a long way from the full-blown command economy that Mao Zedong bequeathed to his people on his death, the current Chinese economy still retains a high degree of state involvement.

Private investors in China have come to rely on a level of involvement in many ways — in particular, they count on the willingness and ability of the Chinese state to prevent large private-sector debt defaults. While such bailouts have become more prevalent in the developed world, they have not created a belief, quite yet, that the state ultimately underwrites all private-sector debt liabilities.

In China, however, a belief that the state will underwrite such debts is pervasive. The argument goes that material debt defaults will destabilize the Chinese financial system and economic stability and, with them, possibly political stability. These are not risks that the Chinese Communist Party (CCP) has been willing to take in the post-Mao era. Therefore, the argument goes, investors in China can largely ignore the excessively high debt levels, particularly in the Chinese corporate sector, in the belief that the form of financial crisis that we are familiar with in the developed world is not possible in China.

This fundamental belief is now being challenged.

https://www.thestar.com/business/opinion/2021/10/06/how-a-debt-crisis-in-china-becomes-a-currency-crisis-and-then-a-cold-war.html

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What is not often stated is that China is as bad if not worse off financially than the US.

What is not even being contemplated is that dictatorships that find themselves in that situation will often invade other nations as a distraction and as a way to shore up their own poor
finances.

I fully expect that China will do some territory grabbing on the short term horizon.