One of the ironies of the intensifying tariff war between America and China is that that neither of the two giants seems to have a viable economic model. Both countries' systems are based on dodgy financial engineering and printing money, or just inventing new types of money out of thin air.
First, China's problems. There are two currencies in China: the yuan and the renminbi. The latter is the domestic currency, for internal use, and the former is the external currency, which is pegged (fixed) to the US dollar, and creates the 'hard' currency that allows China to trade with the rest of the world.
Since 2002 the internal supply of money, renminbi, in China (called M2) has increased from $US1 trillion to about $US30 trillion, in an economy of about $US12.5 trillion. That is an unprecedented printing of money, without parallel. It was mostly poured into investment, especially infrastructure. About 40 per cent of China's GDP is investment, compared with less than ten per cent in most developed economies.
It has led to an extreme level of debt. Loans in China are estimated to be a staggering 400 per cent of GDP, with about 45 per cent thought to be bad. China's banking system, in other words, is insolvent, at least in conventional capitalist terms.
The extraordinary printing of renminbi has been largely masked by China's stockpiling of yuan (US dollars) as it ran large trade and current account surpluses. But that is beginning to dry up. China just recorded its first current account deficit for 17 years. This writer was surprised to hear at a recent webinar that China does not have the money to fund its much-publicised Belt and Road initiative, and will be turning to multilateral organisations for funding. China's stock of yuan, hard currency, could be drying up.
Ordinarily, the banking crisis would mean imminent economic collapse, and it may yet have that result. But China has one big advantage: the government owns most of the land. That has been crucial for China's strategy of de-industrialising the West, especially in heavy industry. In the West, businesses have to pay for the land, or pay rent (which is often more important than lower labour costs). In China, the land, and often the electricity, has come free, so it has been a no-contest.
China's public ownership of land is a once only, get out of jail free card for the ailing banks. The property can