Why is there so much Chinese money?

It continues to amaze me how few investors, economists, and financial journalists are able to connect simple pieces of the finance puzzle. So let me do it one more time. This time using China’s enormous money supply.

Growth Requirement

China’s National Bureau of Statistics recently reported year-over-year economic growth of 4.3% for the second quarter. That likely looks very impressive. In Europe, we must be satisfied if growth reaches 1%.

Yet 4.3% is actually a very poor number. It represents the slowest pace of growth since the fourth quarter of 2022 and falls well short of the official 5% growth target set in Beijing.

In mainstream financial media, the discussion immediately turned to what caused China’s disappointing growth figure and what it could mean for the global economy, inflation, and so on.

But the real conclusions are rarely drawn.

A Truly Unrealistic Target

As I explain extensively in The Great Rebalancing, China is aging faster than any other major economy. So fast, in fact, that its labor force will shrink by hundreds of millions of people over the coming decades. Yes, you read that correctly. To put that in perspective, childcare capacity in China has fallen by 40% in recent years simply because there are not enough children to care for.

In every country, the size of the labor force is the single most important factor determining how fast (or slow) an economy can grow over the long run. With China’s population aging at such an extraordinary pace, that growth rate is obviously nowhere near 5%. Yet the central government in Beijing stubbornly sticks to its 5% target. China would have to achieve extraordinary productivity growth to reach that target without resorting to financial engineering. Unfortunately, that is not the case.

The Trick

The solution to China’s growth problem?

Exactly the same as France’s or Japan’s: Debt.

Governments around the world buy economic growth using ever more debt. As far as I know, no politician has ever been elected on the promise: Let’s all shrink our economies. Everything else will work itself out.

The more unrealistic the growth target, the more debt is required to achieve it. That immediately explains why China’s debt burden is growing much faster than elsewhere in the world. Less than twenty years ago, China’s total debt was substantially lower than that of Europe and the United States. Since 2023, however, the opposite has been true: China’s total debt burden has become larger. And, more critically, it continues to grow at a much faster pace.

China is literally borrowing its way to 5% economic growth.

Money Is Debt

This piece of the puzzle is almost always missing from the financial media’s analysis. But it doesn’t stop there. As the chart below shows, China’s money supply is now more than twice the size of that of the United States. Even though China’s economy is more than one-third smaller and the Chinese yuan is not even close to becoming the world’s reserve currency.

How is that possible? The explanation is actually pretty straightforward. In today’s financial system, money equals debt. To finance all that debt, the system needs ever more liquidity, or, in other words, more money. The focus of the monetary system is increasingly on the monetization of debt. Central banks create new money and buy government debt. Or they inject it into the banking system, where regulations require banks to hold government bonds as liquidity buffers.

Gold Shines

The final piece of the puzzle is gold. Why is China buying such enormous amounts of gold? Precisely because it is creating such enormous amounts of money. What most people do understand is that our money depends on trust. Trust that you can use it to buy your groceries, that other people will accept your money today and tomorrow, and that it will preserve its value over time.

When so much money is created, that trust inevitably comes under pressure. After all, who is lining up to receive their salary in yuan? So if China wants to keep buying growth with debt, financed by creating ever more money, it also has to buy trust.

How do you create trust in your currency? By backing it with real value. And more often than not, that value is gold.

The Great Rebalancing

Although I believe the reasoning above is difficult to dispute, many investors and economists still look at me rather blankly when I explain that this is how the system works. Yet it really isn’t such a difficult puzzle.

And when I then explain that I have built an entire investment fund around this dynamic, I am regularly dismissed as a conspiracy theorist or an extremist investor. The fact that for thousands of years financial systems have started to wobble whenever trust in money and debt disappears simply isn’t on their radar.

That’s fine. I’ll just keep building. After all, I enjoy solving puzzles.

Ready to Future-Proof Your Portfolio?

Do you think it’s time to look differently at the world and your investments? Then discover whether the Blokland Smart Multi-Asset Fund is the right fit for you. Feel free to contact me at jeroen@bloklandfund.com.