The following is from Hideo Tamura’s serial column that marks the front page of the monthly magazine “Hanada” published on the 26th.
It is a must-read not only for Japanese citizens but also for people around the world.
China’s Financial Bomb Ahead: Renminbi Collapses
China’s real estate bubble bursting has begun to trigger financial instability.
The collapse of the renminbi market is waiting in the wings.　
In the previous issue of this column, we discussed the suspension of payments by China’s major trust company, Zhongshu Enterprise Group, and its subsidiary, Zhongyu International Trust Co.
The total assets of non-bank financial institutions, including the Zhongshan Group, amount to about 2,700 trillion Japanese yen, more than the country’s GDP, and many of them are saddled with huge losses.　
The Xi Jinping administration’s approach to dealing with the situation is to conceal information, including press control, thoroughly.
Investor housewives, small business owners, and others are daily pouring into the Zhongxing and Zhongyu office buildings in Beijing, Shanghai, and other major cities.
Still, Chinese newspapers and television do not report any of this.
The public security police in each region have the personal information of each of the more than 150,000 investors nationwide and are monitoring their movements around the clock.　
On August 10, before the Western media began reporting the default of Zhongshan and Zhongyu on August 14, President Biden referred to the Chinese economy as “a ticking time bomb on its way to exploding.
President Xi’s absence from the September 9-10 G-20 summit in India may have been part of his strategy of silence.　
In the case of China, it has managed to prevent a widespread financial crisis even after its real estate bubble collapsed many times.
The secret to this success lies in the thorough window dressing of information.
China does not classify many of its bad debts as “bad loans.
According to financial regulators, the NPL ratio of commercial banks has, oddly enough, been falling as the real estate bubble burst.
The NPL ratio for all commercial banks was 1.6% in June 2011, down from 1.9% in September 2008, before the bubble burst.
Evergrande Group and Country Garden, two of the largest real estate companies, continue to suffer huge losses, but bank transactions continue.
The scenario seems that debt repayments will resume once the real estate market improves, and lenders and borrowers will avoid a difficult situation.
However, that approach may not work this time either.
The Xi administration is trying to lower the down payment ratio on mortgages and ease restrictions on purchasing second and third condominiums.
Still, the oversupply of housing will become even worse in the future with the aging of the population.　
The decline in real estate investment, which accounts for about 30% of GDP, has caused the economy to stagnate, and the unemployment rate among urban youth exceeded 21% in June.
Deflationary pressures are mounting.
In order to break out of this situation, the People’s Bank of China, the central bank, has issued a large amount of funds to buy up government bonds to support the government’s fiscal stimulus, which is the standard practice in the Western world.
When Lehman Brothers collapsed in September 2008, the U.S. Federal Reserve more than doubled its issuance of dollar funds in a short time to buy up mortgage and government bonds.
As a result, the U.S. was able to avoid the financial crisis and deflation that followed the collapse of Japan’s Heisei bubble economy.　
China, however, needs help to afford a massive increase in Renminbi funds issuance or a significant interest rate cut.
China’s monetary and financial system is based on the dollar standard.
The People’s Bank of China uses the previous day’s closing rate as the reference rate for the day, with fluctuations limited to 2% above or below that rate.　
The issuance of Renminbi funds depends on the inflow of dollars into the country.
The source of dollars is current account surpluses, including the trade balance and foreign investment and loans to China, but the current account surplus is about $400 billion per year.
Foreign companies and investors have significantly reduced their investment in China since March 2010, leaving a net inflow of foreign currency of only a few tens of billions of dollars.　
Moreover, the People’s Bank of China (PBC) has been selling dollars to support Renminbi’s purchase, so in July of this year, the PBC’s foreign currency assets were nearly $320 billion less than in February of last year.
A quantitative expansion of monetary policy and a sharp cut in interest rates in such an environment could accelerate the depreciation of the Renminbi.
The People’s Bank of China’s purchases of government and local government bonds through increased issuance of funds will have to be limited to a small scale.
A large-scale fiscal stimulus is also impossible.　
So, will China’s dependence on the dollar make its life easier?
After Russia invaded Ukraine, China and Russia switched their settlement currency from the dollar to the Renminbi.
China has also been trying to penetrate the Renminbi settlement in the global South, seeking to get rid of the dollar, and Iran, Brazil, Argentina, and other countries have responded.
As a result, in July, the Renminbi accounted for more of China’s external payments than the dollar, both in receipts and payments.　
However, even when China receives RMB funds, its partners, including Russia, immediately sell them on the free market in Hong Kong.
The markets for Renminbi assets such as stocks, bonds, and real estate are opaque and full of regulations.
Because the risks are so significant, other countries don’t even look at it.
The Xi administration’s anti-dollar measures will hit the Renminbi like a boomerang and return.