The Conundrum of China’s Exploding Trade Balance

A commentary by NS

It's a real conundrum for China. Trade imbalances increased significantly throughout the first two years of the decade, with this trend further accelerating in the first three months of this year — especially with the US and the European Union.

To the mercantilists out there, this may sound good, but the rest of us see a few major issues in the pipeline.

1) All those trade surpluses mean that China is getting stuck with MOUNTAINS of dollars and euros that are likely to be frozen and/or effectively stolen sometime in the foreseeable future. If it can happen to Russia, it can also happen to China.

2) Many countries all around the world would be delighted to convert a substantial lump of all of THEIR dollar reserves into the currency of their primary supplier – i.e. China. From a diplomatic perspective, this would be a positive development for China. The problem with this is that a direct conversion would simply result in China’s dollar mountain – i.e. its at-risk-capital – getting even bigger.

3) Sanctions will hurt China. Of course, they will hurt the EU and the US even more, but both profess to be willing to go back to the Middle Ages for the sake of… something. Perhaps the goal is Poverty for All as a solution for income inequality and climate change. The upside is that the US gets rid of its enormous debt to China.

Solutions:

1) Belt & Road is one way to dump those dollars and euros into third countries by transforming them into asset-backed loans to the recipient countries rather than holding useless US/EU debt. It also employs Chinese construction companies which are seriously running out of things to build in China. DONE.

2) Fill up national reserves of oil and food. Talk about DONE. China holds 50% of world's food reserves for 18% of the population.

3) Buy more GOLD and all kinds of metals for industry which don't go stale. IN PROGRESS? There are rumors that it's happening but haven't seen the numbers. Part of the problem is that many of these metals come from Russia, and Russia doesn't want euros or dollars anymore.

4) Start accepting Russian rubles from third countries! Rubles are literally gold. Black gold that is. Maybe the volume is too small to make a major dent, but every bit helps. TO DO LIST.

5) At some point you have to let the yuan float. Yes, it will increase in value, making everything made in China more expensive which will lead to a decrease in exports. However, it will make Chinese yuan more desirable worldwide and weaken the US. It has to be done. The time is probably now. TO DO LIST.

6) Buy up property and companies in friendly countries in Asia, Africa and South America. Doesn't even matter if these companies are not hugely profitable, or even losing money; it’s better than holding dollars that are gonna go poof in a couple of years at the latest. WORK IN PROGRESS.

7) Consider buying more from US and EU? But what? They hardly make anything anymore other than Instagram influencers, and all the stuff that's actually worth buying is under export restrictions. Maybe more machinery from Germany, but how much more can China buy that is not already on some export-restricted list? Maybe start buying wood, steel and other things whose production damages the environment so there is less environmental damage inside China. IN PROGRESS for exporting environmental damage.

8) Maybe let more US and European companies into China? It gives leverage for asset freezes and also they will want to expatriate some dollars and euros. FAIL!

9) Buy Australia or install a puppet regime. Liberate it if that fails. TO DO LIST.

The other conundrum: How are the folks in Beijing going to find time to do all of this while keeping half the country locked down?!