China with the diplomatic coup of the Asian Infrastructure Investment Bank appears on a hot streak. However, the economic and financial problems appear bigger and bigger everyday.
Hainan has admitted to major debt problems. Haikou, the capital of Hainan, estimates total revenue of 21b rmb with 15b rmb of debt maturing this year.
The McKinsey Global Institute notes that total Chinese debt is 282% of GDP while the debt laden Americans and Germans come in at a more frugal 269% and 258% respectively. With credit growth continuing to expand rapidly and a loosening of requirements for second homes, there is little evidence of deleveraging.
Now China seems intent on exporting its problems. The enormous glut of Chinese steel with iron ore prices a long term lows, has prompted some Chinese steel makers to export surplus capacity abroad with scant evidence of demand of size. Even crazier is that the Chinese government seems intent on supporting this strategy with various forms of financial capital.
Three quick economics lessons for China. First, if there is surplus capacity globally, moving that surplus capacity from one country to another still leaves surplus capacity. Second, Chinese subsidies to move loss making Chinese steel producers abroad subsidizes foreign consumers. Third, steel and iron ore are global commodities. Chinese steel producers producing in foreign countries still have to compete in a global market. If the market price is below their break even, they still lose money and the foreign country can buy on the world market.
It seems destined to get worse before it gets better.