China’s historic Bubble has been integral to CBB analysis for two decades. I’ve on a weekly basis chronicled how interconnected Chinese and the U.S. Bubbles worked in harmony to inflate one epic global Bubble. Loose U.S. monetary policy and financial conditions were initially instrumental in stoking expansion of Chinese finance and economic output. As for China, it “recycled” massive trade surpluses with the U.S. back into American securities markets, helping sustain U.S. Bubble excess.
It was a symbiotic relationship of far-reaching historical significance. China was desperate for growth and development. The U.S. preferred to deindustrialize – while still enjoying access to cheap manufactured goods (lower CPI, greater monetary accommodation and higher asset prices). Rather than a fledgling competitor, China development was considered a potentially enormous economy determined to adopt free-market capitalism and integrate with the West. They aspired to be like us.
The booming Chinese economy essentially enjoyed unlimited cheap finance. And as dollars flooded in, their ballooning horde of international reserves bolstered China’s pegged currency regime. This stoked “hot money” inflows, while unleashing domestic Credit creation. There were essentially no restraints on Chinese bank lending, as China circumvented the type of currency vulnerability that would typically place constraints on EM Credit Bubble excess.
Bubbles are mechanisms of wealth redistribution and destruction. “Symbiotic relationships” – typified by cooperation and integration – are by their nature transitory phenomena, creatures of the early-Bubble notion of an expanding economic “pie.” Inevitably, late-cycle insecurities and fears of a shrinking pie spur disintegration and conflict.
The prolonged global Bubble period literally inflated China to superpower status, creating rival Bubbles without precedent. The newfound intensity of this rivalry was revealed during the Trump presidency, most conspicuously in fraught trade negotiations. Heated trade talks forced Beijing again to retreat from measures meant to rein in Bubble excess. Understandably, the perception solidified that Beijing wouldn’t dare risk piercing China’s colossal Bubble. The pandemic then incited the most outlandish stimulus measures and system Credit expansion imaginable. (more…)