Book a time with our expert.<\/a><\/figcaption><\/figure>\n <\/p>\n
TN:<\/strong> This has been a 20-year transition, right? It’s not something they started two years ago. They’ve been trying to do this for, like, 20 years, right?<\/p>\n <\/p>\n
MN:<\/strong> They’ve been trying to do this, say ten years. But let’s see, consumption as a percentage of GDP is around 38%. When in the US, it’s around 70%. It’s very hard to get that number higher. And given that all the wealth or most of the wealth by Chinese people, is linked directly or indirectly to real estate, you understand that this is a chicken and egg problem. If you try to stop one problem, you’ll create the other problem.<\/p>\n <\/p>\n
TN:<\/strong> Sure.<\/p>\n <\/p>\n
MN:<\/strong> So there are these problems right now in China. I think China will be forced to reverse course again. I don’t think you can afford to create a real estate crisis. I don’t think there would be a world contagion, by the way. But I think it could create a spillover effect with other real estate entities. Evergrande, the size was around 300 billion. It’s actually the biggest one. So we’ve seen the biggest one. And the thing is this could spill over to the whole industry.<\/p>\n <\/p>\n
Now, what’s the problem here, besides that? The problem is that China has been trying to convince banks and actually all the regions to stop giving loans, which are unproductive. Now, because GDP in China is an input number and not an output number like it’s in the Western countries, whatever the number the government sets, that’s what everyone tries to achieve and they can achieve it by giving more money.<\/p>\n
<\/p>\n
TN:<\/strong> I just want to stop you there because I don’t think that point is well understood. When you say GDP is an input number in China and it’s an output number everywhere else. I’ve been trying to make this point for years to people, and you say… Help me understand, when you say it’s an input number. What do you mean in simple terms?<\/p>\n <\/p>\n
MN:<\/strong> In simple terms is the government wants 7% growth, so everyone will do the best they can to achieve that 7% growth, no matter what. So it means if I’m a bank or if I’m a region in China and I need to do more, I need to produce more growth. I’ll give out loans, which could be unproductive.<\/p>\n <\/p>\n
What do I mean? If I build a bridge, this is the most common example. If I build a bridge, when I build a bridge, this is counted in the GDP growth. Now, if I destroy the bridge, that is not deducted by the GDP. Right? If I rebuild the bridge, it’s added again. So in theory, you could make one bridge, build it, destroy it, build it, destroy it. And you would only have growth. So when China wants an input number, it will create bridges. The bridges could be, as we say, the usual “bridges to nowhere.” The famous quote. Or it could be bridges, which are useful. So all these unproductive debt went mostly to properties. And that’s why we see all these vacancies and all these ghost towns around China which actually were built and this was added in the GDP growth numbers. But then no one went to live there and the towns are there, and now they have to bring them down.<\/p>\n
<\/p>\n
TN:<\/strong> Right. Now, you’re famous for kind of calculating for every say CNY spent by the Chinese government, it results in X amount of GDP, right? There used to be a multiplier effect to CNY spent and GDP. But you started seeing as that was diluted. So when you last calculated that, what was that number? For every say Chinese Yuan spent how much GDP was created?<\/p>\n![\"China](\"https:\/\/www.completeintel.com\/wp-content\/uploads\/2021\/10\/2021-10-21-08.59.01.jpg\")
<\/strong><\/p>\n <\/p>\n
MN:<\/strong> So your viewers can understand because it’s a bit technical. So let’s assume you’re an economy and you create debt. You want that debt to create more GDP than the debt you’re giving. So if you’re giving one unit of debt, you want that one unit of debt to create one point, something of GDP.<\/p>\n <\/p>\n
So in theory, you would want it to be two, three, four. Okay, that’s not very easy. But if it’s a plus, it means that your debt was accredited. So it helped the economy. The problem here is, since 2008, China from using approximately let’s say, two units of debt to create one unit of GDP. So we’re already negative, because when you have two units of debt to create one unit of GDP, it means that that one unit will end up as a bad debt at some point. It’s not imminent, but at some point it will add up. So we went from 1 to 2.2 units of debt to create one unit of GDP. And right now we’re approximately between eight and nine units of debt to create that same one unit of GDP. So China needs more and more debt to sustain the same rate of growth.<\/p>\n
<\/p>\n
TN:<\/strong> Right. So instead of a multiplier effect, which is what kind of economic impacts people usually talk about, there’s almost a divisor effect in China.<\/p>\n <\/p>\n
MN:<\/strong> You could say that. But because it’s a closed economy, that money can’t leave the system. So in theory, if you had a free account or if you had an open capital account, the Chinese will say, oh, my God, my currency is overvalued. Or let me take some money out of China and make a dollar. Now, this is not possible because Chinese have, I think, a quota of $50,000 a year they can take out? Something like that. Now, obviously, there are ways to take money out, but it’s not the easiest thing, and it’s not for everyone.<\/p>\n <\/p>\n
TN:<\/strong> I guess. It’s jewelry and watches the latest.<\/p>\n <\/p>\n
MN:<\/strong> Right. Okay. It was also Bitcoin. They try to be creative. Well, there’s a good ratio here, which is pretty interesting, and people forget. Now, if you devise the M2, the FX reserves to M2, why do I do that? Because let’s assume money is the money supply within the system. The ratio goes to 9%. Now, the Tiger countries in the Asia crisis in ’97 had the same ratio of approximately 25% to 30%. When it dropped below the 25%, you had the big devaluation.<\/p>\n <\/p>\n
Now, China doesn’t have a big external debt. So since it doesn’t have a big external debt, there is no trigger from that side of the equation for China to be forced to liquidate that fixed reserves to cover for it. But even though they have approximately $3.2 trillion of FX reserves and maybe another trillion from the banks and everything. I’d say 4 trillion. The M2 is approximately around $36 trillion right now. So these numbers… Imagine a hot balloon that you put air. At some point it’s going to blow. We don’t know what that level is. Okay. It could be like ten years before that happened. Or we could see, in my view, the Japan-like model where for ten years, you have an anemic growth. But you don’t see anything really, not a substantial bust. Because one thing.<\/p>\n
<\/p>\n
TN:<\/strong> You also just destroyed the idea of China becoming a global currency, of the CNY becoming a global currency. Right. Because if they do have to trade on an open basis, then it’s way overvalued. Right. It’s like monopoly money.<\/p>\n <\/p>\n
MN:<\/strong> Well, China tried or is trying, at least. And it appears through Alipay and WeChat to create a digital Yuan. Why does he want to create a digital Yuan. It’s pretty simple. If the world is using a digital Yuan outside China, it means that the CNY or Yuan or Renminbi or whatever you want to call it, will be used abroad. So this means that it’s usage outside China will increase.<\/p>\n <\/p>\n
We’ve seen, however, that during the last two years, and I’m sure you have the guests, which are better to talk about this, know this subject a bit better than me. The dollar usage has gone up. The dollar is around 87% of global transactions. It actually went up. So there’s a discussion where everyone says the dollar is dying. The dollar is dying, the dollar is dying. Okay. And I understand where it’s coming from because of the policies. But monetary policies are relative. They’re not absolute. Maybe US is doing something bad, but the rest of the world is not doing something better.<\/p>\n
<\/p>\n
So right now, the US dollar dominance increases. Now. I’m pretty sure I understand that this cannot stay at current levels. But going from 87% to being to 5%, it’s not something that’s going to happen in the next 2 years.<\/p>\n
<\/p>\n
TN:<\/strong> I think the dollar had been down to like 82% six to seven years ago. And seeing it go up to 87%, that’s not a small amount. But the Fed does not want to be the World Central Bank. The US Treasury does not want to be the world’s treasury. So there’s this belief that the US wants to be the dominant global currency. I don’t necessarily believe that’s true. I think there are advantages to having a large portion of global currency usage, but I think 87% is just way too much. It’s way too much concentration of risk, actually, for the Fed and for US monetary officials. Go ahead. Sorry.<\/p>\n <\/p>\n
MN:<\/strong> No, you’re absolutely right. I think you’re right. However, the US, I think would like to remain the number one. Now, I don’t know what the percentage, the optimal percentage would be. But I’m pretty sure they prefer being the dominant than not being the dominant.<\/p>\n <\/p>\n
TN:<\/strong> Oh, yeah, absolutely. They want to say number one, but 87% is just too much.<\/p>\n <\/p>\n
MN:<\/strong> Since we’re talking about the dollar. The important thing about the dollar is that if the dollar strengthens, okay. And I don’t have a strong view here, I think it’s going to strengthen, but I understand if it doesn’t. If the dollar strengthened, this puts the pressure on emerging markets as a whole, because usually emerging markets tend to borrow in foreign currency because the foreign currency interest rate is much lower than the local currency.<\/p>\n <\/p>\n
For example, in Turkey, it’s 20%. The dollar is 0%. So if there’s a Turkish corporate wants to launch a bond, it will borrow on dollars at five 6% instead of borrowing at 20%. So they try to do that.<\/p>\n
<\/p>\n
Now, as the dollar strengthens, especially for emerging markets, this puts pressure to repay the debt and it becomes harder and harder. So if the dollar were to strengthen, that would create a very, very big problem. I think the Goldman Sachs issued a report where it showed that the growth divergence between emerging markets and developed markets is at its lowest point. If you look at the cycles and it leaves that it could expand and right now, I think it discounts like a 4% growth for EM as a total.<\/p>\n
<\/p>\n
So if the dollar strengthens, I don’t think we’ll see these numbers. I think you’ll see pressure on EM. Huge.<\/p>\n
<\/p>\n
TN:<\/strong> Talking about EMs, and we talked about reserves and you mention Turkey. Let’s talk about Turkey Turkey for a minute because you’ve made some really interesting statements about Turkey. And I’d like to really understand your perspective.<\/p>\n","protected":false},"excerpt":{"rendered":"The emerging markets expert Michael Nicoletos shares his insights into the Chinese economy and why it’s in a very big trouble? This is the first part of the discussion. Subscribe to our channel to get notified when Part 2 is out. In this first part, Michael talked about China’s household debt and how […]<\/p>\n","protected":false},"author":1,"featured_media":42300,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[70],"tags":[200,436,671,679,712,713,714,718,728,775,793,798,870,48,950,1166,1232,1249,1390,1394,1397,1527,51,1767,1798,2002,2005,2203,2238,2274,2421,2609,3168,3216,3217,3219,3247,3249,3279,3360,38,3951,3959,4039,4044,4070,4107,4157,4284,4387,4455],"class_list":["post-42064","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-quickhit","tag-alipay","tag-bitcoin","tag-china","tag-china-bank-loans","tag-china-fx-reserve","tag-china-gdp","tag-china-gdp-is-an-input-number","tag-china-household-debt","tag-china-leverage","tag-chinas-big-debt-problem","tag-chinese","tag-chinese-economy","tag-cny","tag-complete-intelligence","tag-consumer-economy","tag-debt-and-gdp","tag-digital-yuan","tag-dollar","tag-em","tag-em-meltdown","tag-emerging-markets","tag-evergrande","tag-fed","tag-fx","tag-gdp","tag-hong-kong","tag-hong-kong-household-debt","tag-investment-economy","tag-ireland","tag-japan","tag-leverage","tag-michael-nicoletos","tag-property-market","tag-quick-hit","tag-quick-hit-experts","tag-quickhit","tag-real-estate","tag-real-estate-in-china","tag-renminbi","tag-russia","tag-tony-nash","tag-turkey","tag-turkish","tag-unproductive-loans","tag-us","tag-us-dollar","tag-us-household-debt","tag-us-treasury","tag-wechat","tag-world-central-bank","tag-yuan"],"_links":{"self":[{"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/posts\/42064","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/comments?post=42064"}],"version-history":[{"count":0,"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/posts\/42064\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/media\/42300"}],"wp:attachment":[{"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/media?parent=42064"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/categories?post=42064"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/completeintel.com\/wp-json\/wp\/v2\/tags?post=42064"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
![\"Banking](\"https:\/\/www.completeintel.com\/wp-content\/uploads\/2021\/10\/2021-10-21-08.58.53.jpg\")
<\/strong><\/p>\n![\"budget](\"https:\/\/www.completeintel.com\/wp-content\/uploads\/2021\/10\/automation-meme-9-1-1024x572.jpg\")