Money Rehab with Nicole Lapin - How China's "Debt Bomb" Will Affect Your Investments

Episode Date: July 12, 2023

You might think that China's ticking "debt bomb" might not have anything to do with you if you're living outside of Asia; but if that were true, then why did US Secretary of Treasury Janet Yellen fly across the world to meet with China's top economic policymakers?

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. it's time for some money rehab. For your weekly roundup of the biggest headlines on Wall Street and how they affect you and your wallet, I try to pick a handful of interesting stories that relate to the world of business news, investing, and the economy. But sometimes a story is so big that it needs a whole episode. And that's the case with this week's story, Treasury Secretary Janet Yellen's visit to China.

It follows the visit to China made by Anthony Blinken, the U.S. Secretary of State, about a week before. And Yellen's trip will be followed by John Kerry, who is set to travel to China later this month for talks on climate issues. We don't have time to get into the entire history of U.S.-China or sometimes as they're referred to U.S.-Sino relations, but the heart of the U.S.-China relationship is a financial one with big implications for the American and global economies. So let's take a look at some of the issues that made Yellen pack up her scarves, pop her collar, and fly to the other side of the world. To set the stage after decades of explosive growth and heavy investments in countries around the world, China's economy is faltering. In a nutshell, this results from structural

conditions like an aging workforce and an increasingly unstable business environment. These problems are hardly unusual, but what happens in China doesn't stay in China, because China is the largest lender in the world. China doesn't just lend to central banks. The company also lends money directly to various projects like dam building and rail construction. But again, it's not just countries. Real estate developers, local governments, and companies owe the state-controlled banks a massive amount of money. JPMorgan Chase recently determined that internally Chinese borrowers own 282% of the country's economic output for the year. The problem isn't just the size of debt, it's how quickly it has accumulated,

with much of it coming from the last 15 years or so. As a result, China is now face to face with what's been labeled a debt bomb. Plus, the loans aren't reported the same way as state to state loans, which masks just how big the debt is. One study by the College of William and Mary puts the debt load at over $800 billion, with many countries owing China 10 percent or more of their annual GDP. As a result, many countries have a close financial relationship with China. All of those international loans have given China a huge amount of power. After all, no one wants to alienate their lender, right? In a global economy, no country stands

alone. But because of China's role as a global leader, its fortunes hold far more sway over economies around the world than any other country. And to clarify, I've said loan about 500 times so far, and that's an important distinction. These are loans, not bonds. Usually government projects are funded by bonds with a fixed rate of interest. But because China is giving out loans, they have an adjustable rate of interest tied to Western interest rates. And as Western central banks are raising interest rates to control inflation, poor countries all around the world are facing ballooning debt payments. They may never be able to repay these debts, yet China is reluctant to forgive because remember,

the economy in China is not doing so hot right now. And against this complicated backdrop, Chinese-American relations are going through a rough patch. One of the biggest issues is the U.S. ban on the export of high-level semiconductor chips to China. You know how every time we turn on the news these days, we hear about AI? AI requires a very specific type of advanced computer chip, and the U.S. is the best in the world at making them. Last year, the U.S. government banned the export of those chips to China, along with any chips or components needed in the manufacture of those chips. This puts China at a serious disadvantage in terms of its own technological advancement. In response, China has banned Chinese companies from using chips made by Micron, which is a U.S.-based chip manufacturing company. And to further turn up the heat,

last week China threatened to ban the export of two metals vital to the construction of these chips, gallium and germanium. China is essentially the only country in the world doing large-scale mining of these metals. This ban would start in August and be devastating to the chip industry and all other industries that depend on it, like the auto industry. Yellen's trip didn't solve the looming debt bomb or resolve the chip problems, but she wasn't trying to. Her goal with this trip was to restart talks between the two sides and try to simmer down the situation. She specifically denied that the U.S. is trying to decouple from the Chinese economy, a threat that some in the

U.S. government have made that the Chinese government has found deeply upsetting. Yellen has stressed just how disastrous severing financial relations would be for both sides. Neither the U.S. nor China offered any changes to policy on the issue of export bans, but her trip and Blinken's before it did get both sides to the table and talking. With China's oversized influence on the global economy, ignoring the situation and allowing it to fester could be the worst thing the US could do. And we shouldn't ignore it either. For today's tip, you can take straight to the bank. You don't need to be an investor in a mine or a semiconductor lab for these conversations to affect you. If you're invested in the market, you will be affected because this chip standoff

affects a wide variety of tech products and therefore the major tech companies you likely invest in. So it's a good time to check your portfolio and make sure you're diversifying your investments with industries beyond tech. During times like these, pros look at gold, commodities, bonds, and of course, index funds that track the whole market. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on

the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.