Hi Intriguer. In a dose of much-needed good news, Israel and Hamas agreed yesterday to further hostage-prisoner exchanges, and extended their truce by two days until Wednesday night.
But our focus today is on another important but slower-burning story: China’s ongoing economic problems.
Understanding those problems and the choices China faces is important because so many of China’s recent actions on the world stage - including making nice with the US and Australia earlier this month - can be explained by the domestic imperative of improving its economy.
In any event, I think it’s a story well worth getting across, if for no other reason than to be well-armed going into the eggnog-fuelled holiday debate season.
- John Fowler, Co-Founder
TODAY’S NEWS
Truce extended. Following last night’s news that Hamas and Israel had extended their truce, the US announced Secretary of State Antony Blinken will now head to Israel and the region for the third time since October 7. His various aims include to increase aid, release all hostages, and protect civilians in Gaza.
Biden and Xi to skip COP28. A White House official says US President Joe Biden won’t attend the upcoming COP28 climate summit in Dubai, and we’re hearing the same about his Chinese counterpart Xi Jinping. But another 160+ world leaders will still be there, including Pope Francis and King Charles.
Marble row. Greek Prime Minister Kyriakos Mitsotakis has expressed “annoyance” after British PM Rishi Sunak cancelled their planned meeting today at the last minute. The row relates to the Parthenon Marbles, which Greece wants returned after Britain’s Lord Elgin removed them from Athens in the 19th century.
Miners freed. Rescuers in India have finally broken through to 41 miners stuck in a collapsed tunnel since November 12. Complications in the digging works have plagued the rescue mission.
TOP STORY
Source: DALL-E “dark storm clouds looming over Shanghai, China”
China’s shadow financial system is creaking under increasing amounts of bad debt
Chinese authorities have launched a criminal investigation into Zhongzhi Enterprise Group, one of the country's biggest shadow lenders, days after it told investors it was “severely insolvent”. The firm blamed “internal management [running] wild” for its problems, which is one of the rarer corporate excuses you’re ever likely to hear.
“Shadow banks” emerged in China after the global financial crisis in 2007 to satisfy the country’s ravenous appetite for credit. But they’re largely unregulated and are therefore not subject to the same risk, liquidity, and capital restrictions as traditional banks. The sector is now worth ~$2.9T.
So, what’s the problem? During the good times (aka pre-COVID), nothing. China’s shadow banking sector helped facilitate huge government investments in infrastructure that would otherwise be uneconomical.
But right now, China’s economic fortunes are not so good:
Chinese debt (private + government debt) reached a dizzying 280% of GDP back in May (and the real figure is likely higher)
Recent forecasts suggest the economy will probably meet its 5% growth target but will slow in 2024 (and the real figures are likely lower), and
Foreign investment outflows have already exceeded $100 billion this year, which will further depress growth next year.
Slowing growth is a problem for China’s shadow banks because they hold a lot of high-risk municipal government and real estate debt. In the worst case, a rapid collapse of the shadow banking system could threaten a wider crash in China’s economy.
But that nightmare scenario remains highly unlikely. Xi Jinping has staked his legitimacy and legacy on his promise of restoring Chinese greatness. That means he’ll do everything in his considerable power to ensure that Zhongzhi’s collapse - and any others in the future - are quarantined from the rest of the economy.
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