Note: This thread is related to #Coronavirus #COVID19

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Tuomas Malinen+ Your Authors @mtmalinen PhD econ. Chief Economist of GnS Economics. Adj. Professor of Economics @ Uni Helsinki. Economic growth, economic crises, monetary unions and central banks. Feb. 12, 2020 2 min read + Your Authors

There are some deep misconceptions about the ability of #China to recover from the economic fallout of #coronavirus relatively quickly.

In this thread, I explain why this is unlikely, and why it's not China we should be truly worried about.

Let's start with the facts. 1/

It has been obvious for a while that China's economic growth lays in unsustainable ground.

If we deduct the growth of debt on the growth of GDP, we get an estimate on the 'organic' growth rate for Chinese #economy.

Which has been negative since 2011 (till 2017). 2/

This, unsurprisingly, has led to another pressing problem. China's productivity growth turned negative in 2012.

This, quite simply, means that China has been accumulating vast amounts of unprofitable investments, at least since 2011. 3/

When one adds the growth of the 'shadow banking' sector, mostly missing from standard debt calculations, a truly scary picture emerges.

(Please note that the PBoC has not offered estimates for shadow banking assets for 2018).

China's economy is swimming in debt. 4/

It's thus no wonder China's banks are struggling.

Faced by any prolonged economic slowdown, not to speak of a #recession, they are likely to fail in "en masse".

This is likely, why President Xi is pushing for a quick reopening of factories. 5/ 

The problem, as insightfully noted by @Amdalleq , forcing debt into the economy does not yield growth, if people stay at their homes.

More so, if highly levered banks are forced to consent to large losses, which means they simply cannot lend. 6/ 

Then we get to the real issue.

The Eurozone has been flirting with #recession since November. December industrial production figures were just horrible.

A massive fall in Chinese demand in January, February and (likely) in March will push Eurozone into a recession. 7/

A stress test by the #ECB showed that half of the biggest banks in the Eurozone would not survive if financial counterparties and some commercial clients pulled their money from the banks.

This is exactly what happens in a #recession. 8/ 

Alas, the true risk of the #CoronavirusOutbreak for the global #economy is not China, it's the Eurozone.

Why? Because we hold the largest concentration of global systemically important banks.

And, thanks to the #ECB, many of them are already weak. 9/ 

So, the next time someone tells you that the #coronavirus is not a threat to the world #economy, ignore it.

It poses the gravest threat we have seen for over a decade, maybe for decades.

At this point, we cannot know how the outbreak will proceed, but it may already... 10/

...have done enough damage to tip the world economy first into a #recession and then to a crisis, which may arrive, at full force, by summer. 👇

The clock is ticking. 11/ 

In any case, preparation is the key. 👇/End
#coronavirus #economy #recession #Crisis 

You can follow @mtmalinen.


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