China’s Economy Has Collapsed
China’s Economy Has Already Collapsed 2023.07.10 No.246
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China’s unstable economic situation this year has caused great concern, and one of the biggest uncertainties comes from the huge amount of local government debt that will soon come due. The publicized local government debt is only a small part of it. The various hidden debts, including municipal investment debts, which are about twice as large as the publicized debt, are appalling. Its scale is so large that, once it gets out of control, it is bound to cause very serious disasters. However, the scale of hidden local government debt is like a black hole, always a mystery, the real Chinese characteristics. We can only make judgments based on publicly available information. An article was published by domestic media, saying that local infrastructure led to a debt of more than sixty trillion yuan and it would take a miracle to pay it back, as the interest-bearing debt balance of municipal investment companies in two thousand and twenty-one is fifty-six trillion. In two thousand and twenty-two, municipal investment debt may have totaled sixty-five trillion yuan. In addition, the Ministry of Finance announced that local governments owed thirty-five trillion yuan in debt. In total, local government debt has reached one hundred trillion yuan. In addition, the Guancha Syndicate recently published an article by two Tsinghua University scholars entitled “Five factors hindering economic recovery, how to break it?” It says that a PhD students did an in-depth study of local government debt for his doctoral dissertation. He estimates, local government debt in two thousand and twenty is nearly one hundred trillion yuan, which is roughly ninety-five percent of that year’s GDP. Currently, the entire local government debt is at least one hundred trillion yuan. It may reach one hundred and twenty trillion yuan, or even more, which is more than the entire population’s private deposits in banks. It is worth noting that over these years, the rate of increase in local government debt has greatly exceeded the rate of increase in GDP. The scale and speed of such a debt cannot but make one shudder and appalled. In the past two years, due to the economic downturn, local revenue has dropped drastically, coupled with the fact that the real estate sector is in the doldrums and the revenue from land sales has dropped drastically, many local governments are not even able to pay the interest. Some local governments have even publicly stated that they are no longer able to cope with the huge debt problem. The deteriorating local government debt is now at the tipping point of collapse, and a major crisis could occur at any time.
There have been many scholars who have analyzed and explored the issue of local government debts, and have issued warnings, only that it has not caused much response. Perhaps those scholars talk about the issues in ways that are too broad and lack focus. Perhaps scholars in China deliberately avoid those most sensitive issues. Just a few days ago, Goldman Sachs Group, the Wall Street giant and leading U.S. investment bank, released three reports in a row on China’s banking system. It points out that China’s major state-owned banks have too much risk exposure to local government debt, which would hit them hard in the event of a collapse. It therefore has downgraded their stocks to sell from neutral or buy.
Risk exposure is a term used in the financial circle to refer to risky credit balances due to debtor defaults. Goldman Sachs believes that local government debt poses a significant systemic financial risk to China, the world’s second largest economy. This news, along with other negative news from China, caused a sharp market shock, leading to a general decline in both Mainland China and Hong Kong stock markets. As a world-renowned investment bank, the authority and objectivity of the Goldman Sachs Group report is unquestionable, and because of this, the Goldman Sachs Group report has had a great impact.
Two days later, the Securities Times of China published an article entitled “Misreading the fundamentals of Chinese banks is not desirable”. It says that the report is misinterpreting, it’s not advisable to be bearish about the fundamentals of our banks based on pessimistic assumptions. and in response to Goldman Sachs’ claim that some Chinese banks have large local government debt and real estate risk exposures, the Securities Times says that, banks have been actively reducing real estate risks, and local governments are also taking efforts to defuse debt risks. It is a rare case for the official media to refute the report of an international professional organization. This is a side note that the CPC authority is very sensitive and worried about the Goldman Sachs report, so they hastily issued a rebuttal to stabilize expectations. Needless to say, Goldman Sachs’ calculations may have errors, but this does not affect the basic judgment. The problem is that no one can do an accurate calculation of the local government debts. The local government debt itself cannot be measured, because no one knows exactly how much they owe. In response to the CPC media, Bloomberg News points out that, the high-profile rebuttal of Goldman Sachs by the CPC media is intended to curb the negative sentiment in the market. It also shows that, in addition to concerns about rising debt stress and financial pressure, Beijing is uneasy about eroding investor confidence.
On the same day, the domestic media YI CAI published an article titled, “Goldman Sachs Releases Report on Chinese Bank Stocks, Suggests Local Debt Risks Pressuring Bank Earnings.” The article says, there is a position that the Goldman Sachs report is bearish on China, but the fact is that, according to the three full reports obtained by YI CAI reporter, this is actually a research report on China’s banking industry. It downgraded some of the banks’ ratings, but also upgraded the ratings of a few other banks. That said, this article argues that the Goldman Sachs report is not shorting China, but rather making an objective analysis of how Chinese banks may be affected by local debt. As opposed to the black-box operation of the CPC governments at all levels, the operating data of domestic listed banks has some transparency, which is undoubtedly the basis for analysis by international institutions.
A municipal investment company in Guizhou Province owed the bank more than fifteen billion yuan, facing default. The solution was a rollover for a period of twenty years, with the first ten years of interest-only payments and no repayment of principal. And the principal was to be repaid in installments over the next ten years. Recently, there has been news that some large state-owned banks have begun to offer twenty-five-year loans to municipal investment companies, with some loans exempted from interest or principal payments for the first four years. Replacing short- and medium-term loans with twenty-year or even longer loans is effectively using inflation to solve the debt problem, as the purchasing power of the Chinese yuan will certainly decrease considerably in twenty years. In the nineteen fifties, it probably only cost a few thousand yuan to buy a small courtyard house in Beijing. Now, it would cost at least a hundred million of yuan. In the early nineteen eighties, several hundred thousand yuan could buy a building of dozens of apartments, now, it’s not enough to buy one apartment. Of course, in a few decades, a house that sells for millions of yuan today could become totally worthless. This is the magic of time. Since local governments can’t pay off their short-term debt, they have to stretch out their repayments, and, in addition, not pay interest and principal. They solve the problem by not solving any problems. Of course, this approach only applies to debts owed by the governments and does not apply to ordinary people. In doing so, the debt of the local governments is alleviated, and it is the bank that will lose. This is an unacceptable practice for any normal commercial bank. Goldman Sachs, of course, had to issue a warning about the stocks of certain Chinese state-owned banks. The Goldman Sachs report says that China’s local government debt is excessively large and there is a certain risk of default; if debt rollovers were allowed, the risk of default would be contained, but banks would suffer several years of lost profits. Goldman Sachs is merely telling some big truths.
Five years ago, the Deputy Director of the Finance and Economics Committee of the National People’s Congress said: China’s local debt is about forty trillion yuan, but none of the local governments want to pay off the debt, and many of them can’t even pay the interest. That is, the top authority knows very well that local debts are simply borrowed but not repaid. Since you don’t want to pay it back and you don’t have to pay it back, the more the better. This is the major reason why it is difficult to stop local debts. And since there is no need to pay it back or be responsible, many local governments borrow debts, only to squander and waste, a problem with Chinese characteristics. I’m sure many still remember Zhuhai tram line Number one. It cost two point six billion yuan, but was dismantled after three years of operation. No one was held accountable. Of the nation’s twenty-five cities with subways, twenty cities are losing money. It is basically a losing business. There are even more numerous symbolic projects or image projects built at great expense all over the country, without any consideration of economic benefits. Many local governments are borrowing new debts to pay off old debts, or even borrowing debt to pay off the interest, with the debts piling up. The rate of increase in local debt has greatly exceeded the rate of increase in GDP. It has even exceeded the rate of increase in bank deposits. Someday, the local governments will turn all the bank’s money into IOUs. By then, what will happen to the banks and how will the depositors survive? Only God knows!
For years, Xi Jinping’s administration has repeatedly claimed that they would prevent and defuse financial risks and firmly hold the bottom line of no systemic financial risks. However, the debt is piling up and the risks are increasing. Faced with such a grave situation, the top authority is at a complete loss. They are just stalling for time, trying their best to cover up the problem and downplay it. With the local debts almost completely out of control, the top authority repeatedly requires “each family to take away its own baby.” They want to stay out of it, which is totally self-defeating. It is true that local debts are caused by local governments, but the impact of local debts involves the whole country and hundreds of millions of people. It is not enough to require “each family to take away its own baby” when debt has developed into a problem or even a possible crisis. The top authority must come up with countermeasures to stop local debt from further expanding and to solve the urgent debt crisis.
A few days ago, Guancha Syndicate published an article by an establishment expert: Should local debt crisis be saved and how? The article contains a paragraph that seems to lack basic political correctness and even seems like a challenge to the top authority. It says that China’s economy after two thousand and twenty-three is already in a state of “crisis”. In such a state, the economy would either be in a major recession or in a major growth, and “stabilization” would be the least likely to happen. One of the keys to whether it’s a great recession, or a great growth, is the ability to cope with local debt.
As a matter of fact, with local debts amounting to hundreds of trillions of yuan, the top authority simply cannot come up with any solution. Obviously, they want us to ignore the elephant in the room. A local government debt of this magnitude has the potential to trigger a serious financial and social crisis at any time. This is, so to speak, an extremely critical moment for local government debt. Goldman Sachs has undoubtedly touched the most sensitive nerve of the CPC by reminding the public to beware of local debts and the huge risks of state-owned banks at this critical moment.
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