Shortage of Dollars and Pigs: Chinese U.S. Dollar Reserves and their Agricultural Crisis
China has a lot of problems these days. A trade war with their largest trading partner, worldwide backlash against their Made in China 2025 plan, the rapid aging of their population, and worrying signs that the Chinese economy is slowing down. Two new problems are a shortage of dollars and pigs.
Debt Binge To understand China’s position, you have to understand how, since the Great Recession, China has been accumulating massive amounts of debt. Jamil Anderlini, writing in the Financial Times, explains that: In the aftermath of the global financial crisis, China’s manufacturing and export dependent economy crumbled and the ruling Communist Party panicked. Party leaders estimated they needed to sustain a minimum annual growth rate of 8 per cent if they were to contain political unrest that could threaten authoritarian rule. The solution was to unleash what economists have called the greatest example of monetary easing in history — an enormous wave of easy loans channeled through the state-owned banking system Indeed, since 2008, Chinese debt has exploded from 7.7 trillion to 33 trillion today (adjusted for inflation) – and an almost doubling of their debt as a percent of GDP.
Shortage of Dollars Critically, China has also taken on a large amount of dollar denominated debt. Currently China’s total outstanding dollar-denominated debt is estimated to be around 3 trillion USD (or roughly 27% of China’s GDP). This puts the People’s Bank of China (PBoC) in a difficult position. With China’s economy slowing down, China may need to further stimulate it’s economy – or risk problems in its own banking system. In fact, China has devalued the yuan significantly since the Trump administration placed a 10% tariff on Chinese goods – effectively negating the tariffs. But, if the Yuan devalues (keep a careful eye on the crucial $7 level) Chinese companies may have a difficult time paying the debts which they have accrued in dollar terms. Moreover, devaluation, or even the possibility of devaluation, risks capital flight out of the country. China has been quietly tightening capital controls, but it’s unclear how effective this will be if the yuan devalues much further. Even without crossings the psychologically significant $7 barrier, there are signs that China might already be running short on dollars. Their foreign exchange reserves have fallen from a high of 4 trillion in 2014, to roughly 3 trillion today – a steep drop as a percentage of GDP and level that may be insufficient given the size of their economy. Additionally, numerous recent analyses have suggested the China is “running out of dollars” and that China has already quietly begun to limit the amount of dollars that Chinese citizens can withdraw from their accounts. If China does run short of dollars, it could lead to a “dollar crisis” in the country.
All of this leaves the PBoC with the choice between allowing their economy to slow down without further stimulus or devalue the yuan which could lead to a raft of problems in the country. Further devaluing would put Chinese companies that owe dollars in a very difficult situation and cause politically destabilizing high inflation in China. Shortage of Pigs Which leads us to China’s second new problem – a shortage of pigs. In the last few months, the African Swine Flu has destroy 22% of the Chinese pig population and it is estimated that this will increase to nearly 50% by the end of the year. And pork is not their only agriculture problem. They are also dealing with an army worm infestation.According to the USDA Foreign Agricultural Service, the Army Worm has: ...no natural predators in China and its presence may result in lower production and crop quality of corn, rice, wheat, sorghum, sugarcane, cotton, soybean, and peanuts among other cash crops. Experts report that there is a high probability that the pest will spread across all of China’s grain production area within the next 12 months In an excellent recent article from War on the Rocks which details the “The Perfect Storm Confronting Xi Jinping” the author explains that: This combination of agricultural threats means Xi will likely have to substantially increase his imports of foreign foodstuffs in order to keep food prices stable in China — and even then, pork prices are likely to rise. Indeed, domestic meat prices are likely to increase substantially as feed supplies are affected by fall armyworm…Moreover, if Xi is worried about domestic stability, he likely cannot pass along tariff-induced rises in food prices to the consumer (at least not in full). Indeed, given the combination of agricultural threats affecting vegetables, meat, and grains, he may have to substantially subsidize food prices to keep them from rising excessively, even before tariffs are taken into account. This combination is likely a substantial increase in governmental outlays, some of which will have to come from China’s hard currency holdings China has already seen a spike in food prices - and Chinese officials are suggesting the pork prices could rise 70%. The New York Times recently highlighted the new challenges facing Beijing and it notes the sharp increase in food prices – and how food inflation back in the late 80s was a key part of the Tiananmen Square protests.
The rise in food prices, the trade war, and China’s increasing debt – both in yuan and dollars – forces a difficult choice. China may need to devalue the yuan - but a significant devaluation could have serious consequences for China and the rest of the world. Threat to the Rest of the World
China's economy appears to be slowing significantly. This is worrying for the entire global economy.
China's real estate values are extraordinarily high. Higher than Japan's during its asset bubble in the 90s. China avoided the worst of the 2008 crash by adding a tremendous amount of debt and stimulus to their economy - if the bubble bursts now they could be looking at a Japanese style lost decade(s) or worse.
If China faces a financial crisis and is forced to devalue their currency substantially it would undoubtedly create massive global financial instability. Within China the cost for food imports would rise, capital would attempt to flee the country, and Chinese companies would have difficulty paying their dollar debts.
Moreover, a weaker yuan would be economically destabilizing for many other countries and geopolitically destabilizing for the world.The Trump administration is already talking about additional currency tariffs that could be imposed if China devalues their currency further.
Either way such a crisis would be unlikely to stay localized to China. Today China is the second largest economy in the world and has been almost the sole “engine for growth” in the world since the Great Recession. According to the former chief economist at the IMF, Kenneth Rogoff who says that “If there’s a country in the world which is really going to affect everyone else and which is vulnerable, it’s got to be China today.”
About the Author
Founder and Global Macro Strategist at Cassandra Capital LLC and author of the upcoming book Sleeping on A Volcano: The Worldwide Demographic Upheaval and the Economic and Geopolitical Implications, Joshua has been obsessively following global trends and collecting data for over a decade. His analysis takes into account not only the larger view of the rapidly changing global economy but also the longer demographic and geopolitical trends.