Can bitcoin survive China’s debt bubble?
By: Michael Kern
Tags: Bitcoin, Economics, Crisis, Debt, China

China is a key figure in the global economy, there’s no doubt about that. The nation has seen unprecedented growth over the past 20 years, but a hiccup in third quarter GDP reports this year has begun to raise doubts about the sustainability of the pace at which Beijing is taking on new debt.

China’s Debt

According to some studies, approximately 25 percent of China’s debt can be attributed to wasted infrastructure investments in what have become ghost cities.

Though the spending had its rationale at the time, creating jobs and demand for industrial commodities, that investment may be lost forever. Since the new infrastructure served little real-world purpose, these investments weren’t recovered by the state or the participating corporations.

And that’s just domestic spending.

On an international level, China has dumped billions into overseas projects, from its ambitious One Belt One Road Initiative to the billions in loans it has dished out to prop up countries in Africa and South America.

In fact, many of the world’s top emerging economies are heavily in debt to China — a problem which, if not resolved — could lead to these countries converting their national assets to pay off the debt, much like Sri Lanka already is.

The Debt Trap and Its Impact On Emerging Economies

Sri Lanka may be the most recent case of an otherwise promising emerging nation getting pulled back into a slump thanks to overreliance on debt.

China’s grasp on Sri Lanka has led to a ballooning debt of over $13 billion, and with an annual projected revenue of just $14 billion, Sri Lanka has had to hand over key assets, including one of its largest ports on a 100-year lease in 2017.

Additionally, this vulnerability has led to China spending millions to influence Sri Lankan elections in an attempt to re-elect President Mahinda Rajapaksa, who originally signed off on many of those debts.

But Sri Lanka isn’t the only country under China’s spell.

Under China’s Belt and Road Initiative, Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan are now all at an increased risk of above-average debt, which has created an extremely delicate economic landscape, especially when considering that China, itself, is teetering on the edge.

Slowing Economy, Collapsing Markets

China’s slowing growth is already beginning to impact financial markets, with the Shanghai Composite falling over 20 percent since the start of the year, and a number of analysts saying the collapse has just begun. Adding fuel to the fire, there is the ever-escalating trade war taking place between China and the United States.

Though China’s markets have yet to succumb to a full-blown panic sell-off, the Central Bank of China is continuing to prop up the yuan to keep consumers eager. But this fix is only temporary.

In addition to market woes and slowing growth, however, China is dealing with another problem; shadow banking.

With over $10 trillion in asset-management products on the market, earnings are flatlining as liquidity dries up and bad loans start to pile up — a major problem for products largely built on balance sheets. Because of this, funding costs are skyrocketing, and capital outflows are speeding up at unsustainable rates.

Bitcoin and the China’s Debt Bubble

Over the past two years, China has given crypto investors whiplash with its back-and-forth rulings on exchange, mining and trading regulations, highlighting its influence on global markets in the process.

It’s no secret that China has some draw in the emerging crypto-economy. In fact, some of the biggest dips in crypto markets have been directly attributed to simple rumors that China was going to “ban bitcoin.”

So what happens when China’s debt bubble actually pops?

Generally, there are two schools of thought on this matter. One, a bullish resistance to the broken fiat system, and the other, a bearish take on regulatory influence.

In the first, advocates say that this is exactly why cryptos were created.

Joe DiPasquale, CEO of cryptocurrency fund of hedge funds BitBull Capital, notes,

“Bitcoin was forged in the fires of economic uncertainty.”

And indeed, it was.

Bitcoin, for its role, was built to be a deflationary, government resistant currency without borders. But as with everything, there’s a catch.

People actually need to use cryptocurrencies in order for cryptocurrencies to fulfil their roles. And the question on everyone’s mind is, if people do use cryptocurrencies, will governments step in?

The bearish take assumes just that. No government would ever allow cryptocurrencies to succeed where its fiat failed.

Removing the financial control of centralized governments is a loaded proposition. And a proposition no centralized government is especially eager to explore. Prying this control from governments, especially China, will be an uphill battle.

And without the approval from, or at least an apathy towards cryptocurrencies, it might be worth it to hope for the best, but prepare for the worst.

Featured image from Pexels.