Donald Trump’s escalating trade war with China, characterized by tit-for-tat tariffs which harm American consumers and exporters alike, doesn’t appear to be progressing to a victorious conclusion. However the U.S. has one important weapon left in its trade war arsenal, according to Anne Stevenson-Yang, co-founder and research director of J Capital Research Ltd., writing in Bloomberg: it can cut off China’s access to cheap dollars from U.S. banks.
- Stevenson-Yang notes that China’s economy, littered with failed enterprises, zombie companies and dead assets, constantly requires fresh capital to refinance and juggle these liabilities.
- Money shot: “China’s easy access to U.S. dollars over the past decade has fueled asset bubbles, driven an overseas debt binge and laid the groundwork for its low-cost, export-driven economy. Only cutting off the supply of cheap money will reverse this.”
- From 2009-2014 alone, China took in $2 trillion of foreign debt, enabled by the Fed’s policy setting low interest rates during this period. Chinese companies that held IPOs in the U.S. are now worth $890 billion.
- Easy dollar borrowing fuels a speculative economy: according to Stevenson-Yang, Chinese real estate developers alone have about $110 billion in offshore junk-rated debt outstanding. Easy money also allows Chinese companies to engage in practices like dumping products at unfeasibly low prices, since they can borrow more to cover costs.
- To stop the self-defeating flow of dollars to China, Stevenson-Yang recommends a) halting IPOs of Chinese companies, b) requiring American regulators and auditors to have access to Chinese companies’ internal audit papers if they are part of an American entity, and c) taxing all Chinese investment in the U.S., also enabled by cheap dollar borrowing.