China: Trump's First Crisis?

Tyler Durden's picture

Submitted by John Paul Smith via GovernmentsAndMarkets.com,

There is a growing possibility that China will be at the epicentre of President-elect Trump’s first crisis, triggered by concerns over the potential impact of protectionist measures on China’s trade surplus, which currently supports the increasingly fragile financing chains supporting corporate debt that the IMF estimates at around 155% of GDP.

Trump’s pledges to impose tariffs of up to 45% on Chinese manufactured goods threatens to drive a significant uptick in the amount of capital flight from the renminbi, while the prospect of measures to change the US tax system to encourage companies to repatriate cash to the are already pulling the dollar higher.

At this point the likelihood of Trump actually delivering on his protectionist rhetoric is secondary to the psychological impact on resident corporate and household savers of any potential threat to the current uneasy equilibrium within the Chinese economy.

The situation could quickly become much more acute than the one faced by the FOMC earlier this year, when the Fed appears to have backed off raising rates primarily due to concerns about China, so that President Trump will have to make a decision whether to clarify his intentions towards China and possibly repudiate his key campaign pledge at a relatively early stage of his presidency.

The consequences of his not doing so could be to precipitate an economic and financial crisis within China, that would obviously have major adverse consequences for the regional and global economies and also some potentially very serious implications for geopolitical stability.

In brief, our longstanding bearish view on China has rested on the governance factors at both a central and local government level that have led to massive cost factor subsidies driving overcapacity across a broad range of industries.

This has resulted in very high levels of debt which are being financed from an increasing range of institutions and instruments, most recently the city and county banks and shadow financing instruments, all of which are lack transparency even by Chinese standards.

No-one disputes any more that an increasing amount of financing is being used to service and roll over existing loans and that higher write-offs are not keeping pace with the flow of doubtful loans. The financing structures that surround the overcapacity industries are increasingly fragile especially on a regional level; Chinese enterprises are simply too interconnected to fail.

Over the course of 2016, there have been some indications of a visible improvement in both the macro-economic and corporate numbers, as well as some of the more physical and therefore reliable indications of activity such as power production and freight journeys.

This has, however, been a function of the massive monetary and fiscal stimulus beginning in the second half of 2015, to head off a potential crisis in response to the plunge in the onshore equity market.

Despite this apparent stabilisation, some of the more important underlying corporate indicators which we monitor, in particular the continuing rise in working capital ratios and debt relative to operating cashflow across a range of major industries (ex-capital goods), have not shown any real improvement, indicating a real vulnerability to further deterioration when the government and PBoC take their respective feet off the fiscal and monetary accelerators.

Moreover, even if the authorities do prove reluctant to ease for fear of the consequences, the psychological impact of the possibility of severe protectionist measures on the trade surplus will likely drive an increase in capital flight which will of itself have a tightening effect, especially as the PBoC will continue to intervene to keep what has so far been a relatively orderly renminbi depreciation from becoming a crisis inducing market riot.

The key point here is that all significant corporate and household savers will be well aware of the underlying fragility of much of the industrial base and accompanying financing structures.

The perception that the trade surplus could fall by a significant amount, together with a growing belief in a stronger dollar, is likely to be the catalyst for those Chinese who are in a position to export capital, to rush for the exits. Capital exports were relatively high in the latter part of 2015, running at an estimated $100bn plus in the fourth quarter. The level this year has been considerably smaller, but nevertheless appears to have been increasing to figures in excess of $50bn in both September and October.

Moreover, no-one really knows what constitutes an adequate level of reserves given the opaque nature of the PBoC balance sheet.

Some commentators aver that reserves can fall well below $2trn without imposing any undue pressure, while others suggest that $3bn is critical in practical as well as psychological terms.

In any event, I suspect that we are about to find out the sustainable level over the coming months and possibly sooner than that.

The relationship between the US and China is increasingly symbiotic in terms of monetary as well as trade policy.

We suggested at the end of 2015 that the somewhat parochial Fed watching community was greatly underestimating the extent to which the then dismal prospects for emerging economies and in particular China, would constrain the willingness of the Fed to raise rates. This scenario then played out over the first quarter, although I never anticipated the extent to which the ensuing dash for yield, together with China’s efforts, would drive up emerging markets. If there is a repeat of the situation in January, but in even more acute circumstances, then President Trump would quickly be faced with an immediate dilemma.

Should he effectively repudiate his major policy, namely to impose protectionist measures on China to save US jobs, or should he just let the market take its course which could have important geopolitical as well as financial consequences, as it is difficult to anticipate how an economically humiliated China under Xi Jinping might react?

So the defining moment of Trump’s entire presidency may well occur at a very early stage and in the absence of any meaningful political experience and to make matters worse the stakes could not be higher. I have no idea how he might react.

The very limited indications of his style of government so far suggest that he may take advice and row back on his rhetoric.

Most informed commentators rightly point out that the complexity of the global supply chain means that any shift towards substantive protectionist measures will inflict enormous damage on US companies and consumers. On the other hand few would deny that the massive cost factor subsidies for Chinese producers of a very broad range of industrial goods have completely transformed the economic of some key global industries.

Still, the mere fact of the Fed not raising rates will not be enough to assuage the markets as it was in the first quarter of this year.

Trump’s campaign rhetoric will have had the effect of putting him on the spot immediately in a situation where there are frankly no easy answers.

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Yen Cross's picture

 Hop Sing can fix it.

   Bonanza~

manofthenorth's picture

I think that no matter who starts the ball rolling the whole world will suffer the unavoidable consequences of the central bank shit show that IS 100% baked into the cake already. I have to assume it a foregone conclusion that Trump is going to get the blame for the big unwind that has to happen sooner or later. Why would the globalists not want the "outsider" to take the blame so they can come to the rescue AGAIN. It would have the added benefit of the proles never electing another boss from outside the club.

It looks like India is sure having fun with their CBs latest adventure !

JamesBond's picture

So American's should continue to allow themselves to get butt fucked to save the asses of some communist chicoms?  Seriously?? 

 

 

jb

RaceToTheBottom's picture

Trump should give Walmart 5 tax free years if they move all chinese imports to those supplied from the US.

Déjà view's picture

Remove China from Most Favored Nation Status!

https://www.thebalance.com/most-favored-nation-status-3305840

Why has China not been removed years ago? Never any mention of this...I get it....Corp. 'dirty laundry' is off limits.

The Saint's picture
The Saint (not verified) Déjà view Nov 15, 2016 12:29 AM

F 'em.  Let China sink to the bottom of the South China Sea.  They would do the same to us given the chance.

 

MalteseFalcon's picture

The China / 3rd world / emerging markets game is coming to a close.

If the global economy is shrinking, then we need to move a chunk of it back home to offset the shrinkage.

What's that?

You want to cry "Smoot Hawley?"

I'll just bet you are in debt up to your eyeballs and invested in the emerging markets game.

Sucks to be you.

RaceToTheBottom's picture

Why the hostility?

People picking on you because of your small penis?

Don't worry, you can always buy a kickass car.....

DEMIZEN's picture

I don't see any shallow passages crossing this stream.  Trump peeps will continue to QE into oblivion and trickle it on big biz while deregulating it at the same time.  More loot for banksters and corporate monkey. Banks will preach the same and sit on their constipated asses until every cul de sac looks like Bangalore septic tank.

Then I guess, growth can begin again.

Tarjan's picture

Here is the tell: reinstate Glass-Steagall per the RNC platform. If not, the banksters win and we are fucked.

~

DEMIZEN's picture

I don't see any shallow passages crossing this stream.  Trump peeps will continue to QE into oblivion and trickle it on big biz while deregulating it at the same time.  More loot for banksters and corporate monkey. Banks will preach the same and sit on their constipated asses until every cul de sac looks like Bangalore septic tank.

Then I guess, growth can begin again.

DEMIZEN's picture

I don't see any shallow passages crossing this stream.  Trump peeps will continue to QE into oblivion and trickle it on big biz while deregulating it at the same time.  More loot for banksters and corporate monkey. Banks will preach the same and sit on their constipated asses until every cul de sac looks like Bangalore septic tank.

Then I guess, growth can begin again.

DEMIZEN's picture

I don't see any shallow passages crossing this stream.  Trump peeps will continue to QE into oblivion and trickle it on big biz while deregulating it at the same time.  More loot for banksters and corporate monkey. Banks will preach the same and sit on their constipated asses until every cul de sac looks like Bangalore septic tank.

Then I guess, growth can begin again.

DEMIZEN's picture

I don't see any shallow passages crossing this stream.  Trump peeps will continue to QE into oblivion and trickle it on big biz while deregulating it at the same time.  More loot for banksters and corporate monkey. Banks will preach the same and sit on their constipated asses until every cul de sac looks like Bangalore septic tank.

Then I guess, growth can begin again.

DEMIZEN's picture

I don't see any shallow passages crossing this stream.  Trump peeps will continue to QE into oblivion and trickle it on big biz while deregulating it at the same time.  More loot for banksters and corporate monkey. Banks will preach the same and sit on their constipated asses until every cul de sac looks like Bangalore septic tank.

Then I guess, the growth can begin again.

Arnold's picture

Practice your newly acquired computer skills at Huffpo.

They will be more appreciative.

DEMIZEN's picture

fuck ill figure. this one should look better

webmatex's picture

You hit the reset button.

zeronetwork's picture

Trump is not a politician. He is street-smart. most probably he will kick ass all these Soros goons. Because these crooks think they are smart. All their plans and strategies will disappear the moment trump's first punch on their face.

max2205's picture

Prob retest election night lows 

Herodotus's picture

He needs to declare the protest financiers terrorists and round them up and put them in Guantanamo.

strannick's picture

So it's Americas obligation to maintain a trade deficit with China for the good of the world? Globalist crap..

Oldwood's picture

The plan is to crash the WORLD economy BEFORE Trump can take office while still blaming HIM for it.

They are already doing it...have been for months, blaming Trump for "talking down" the economy and predicting his election would be economic disaster. Soros is and has been spending big money...for a long time, to do this. A trump victory gives them everything they need. Riots, lawsuits, Electoral challenges, dead silence from Hillary and Obama.....meanwhile the press is nearly silent about all of these simmering pots on the back burner. President-elect Trump.....Inauguration plans.....things going forward as normal.

Also note that while the election was close...and unpredicted, the popular vote went to Hillary. Many of us greatly suspected that the election was rigged, that the votes were predetermined and only doubted our fears once we saw trump won. But WHAT IF THEY WERE PREDETERMINED? What if the results WERE RIGGED? An "official" win that has grounds for doubt...a popular vote and all polls predicting Hillary creates plenty of popular ground support for protest.

All while we are watching the wall street icons talking down the economy....because of Trump or course.

We can have a dramatic upsurge in VIOLENT protests, simultaneous with a major world wide market crash, all piled on an as of yet sworn in Trump. It presents a crisis that DEMANDS some extra-constitutional, unprecedented executive and congressional action that would suspend the handover to Trump. It provides the needed crisis to subvert our constitution while diverting ALL blame onto Trump....a man that both the democrat AND republican establishment HATES. They have always been faced with the problem of crashing the economy while being positioned to take control while also not being blamed for it.

This is PERFECT

maybe I'm crazy....and maybe not...

nailgunner44's picture

Nobody believes the popular vote went to Hillary, not even you. Just stop. Go ahead and try to justify how that would be possible though. I'd be curious to see that.

New England Patriot's picture

Let the market sort it out. 

StreetObserver's picture

President Trump...Congratulations.  Please know that my friends and I who voted for you are going to unleash a tidal wave of spending---all the years of not spending one cent in the Obama administration--is going to happen starting February first after your inauguration.

You are inheriting a complete and utter mess and they will try and blame you for it. At least we can do our part to pump up consumer discretionary spending once you are in office.

nationstates's picture

Or Obama's last crisis ? Since he is about to take his last jaunt aboard Airforce One, Peru is so nice this time of year.

813kml's picture

King Putt's last crisis will be figuring out how many kilos of blow he can cram into AF1 for the return trip.

Seasmoke's picture

And still no one. Nowhere. Wants to use Gold as a strategy.

Kaiser Sousa's picture

dude will u ever see the fucking forests for the trees...

stop being like fucking Johnny Fontaine...

https://www.youtube.com/watch?feature=player_detailpage&v=idP5-vtkhBE#t=41

Seasmoke's picture

You want me to put a horses head in Janet Yellens bed ??

alter_'s picture

LOL If China thinks making threats to someone like Trump is actually going to work in their favor, then they really are in a state of denial and just asking for punishment just like the left wing mainstream media. They had better start kissing up immediately, because there is noone pulling Trumps strings and the guy is easily provoked.

1980XLS's picture

People not being able to buy Walmart shit , they don't have the money for, nor do not need?

Crisis? What crisis? 

gregga777's picture

Chinese companies like Apple don't have any loyalty to America and America owes them ZERO loyalty. None of the greedy and extremely short-sighted capitalists ever asked American workers whether they wanted their jobs exported to China, India, Vietnam, Bangladesh, etc. Don't expect us to get upset when President Trump slaps tariffs on products made by foreign companies like Apple.

Yog Soggoth's picture

A tarriff is a tax and only increases the cost of the product. The importer/exporter then simply pads that cost on down the line. In the end run the guy working really hard to buy the product gets to pay for this and still has to pay taxes to his own country. True capitalism is supply and demand with tight border control and a currency controlled by an elected council available to constant revue.  

Inzidious's picture

Yeah. True. But wait.. why do we buy Chinese crap again?? Oh yeah. Because it's dirty ass cheap and it's buy one get 10 free at Walmart. Will they raise prices to compensate? Maybe. to be honest I'm kinda curious to see how we (the general consumers) handle it, especially when it's mostly for stupid crap we really didn't need.

MalteseFalcon's picture

Trump will give these "global" companies like Ford a carrot: tax-reduced repatriation of profits.

The stick?

"Gather up your executives and their families and your headquarters and move it all out of America."

They can live outside of protection by the US military.

Basically outlaws.

Maybe they'll move somewhere cool and Libertarian like Singapore.

 

joego1's picture

So many black swans and so little time.

northern vigor's picture

Often a strong leader doesn't have to do anything other than threaten to do something...The monkeys start to behave on their own.

But Trump could make an example of someone soon in his term, like Reagan did to the air control union. 

 

MalteseFalcon's picture

Trump has already confronted Ford executives at the Detroit Economic Club.

laomei's picture

This isn't a crisis at all. Tell China to fuck off. If they don't buy our corn, they'll starve to death. If they buy corn from elsewhere, then there will still be a market demand for our corn.  If they stop buying our airplanes and iphones then i guess we just dont let boeing build that factory in china and apple will get incentive to drop all china manufacturing.

Wilcox1's picture

We have already won with President Donald Trump against 11 jumping. There is no way a top-down command economy can dictate to our somewhat decentralized market version. All we have to do is hold our position. They are going to have to turn around and face their people. We are done with the labor arbitrage and product dumping.

MaxThrust's picture

If China collapses this will be a big deal for the world economy. The blame though is China's. They set the rules.

NobodyNowhere's picture

The crisis can only be delayed, at the cost of mounting US debt, not prevented.  But the oligarchs will use it to undercut Trump.  Short term bitter medicine now or long term surgery later.  

MalteseFalcon's picture

Gonna have to deal with "debt".

Scuba Steve's picture

All Trump needs to do is be pre-emptive of the free-fall and take the explanation to the people ...

The people believe him and trust him at this point.

jmo.

mary mary's picture

Anyone who doesn't think Trump has already thought this through hasn't been listening.

Don Sunset's picture

China should focus on the recycling business.  We can bury them with junk by returning all the crap they've been selling us for years.