China’s economy faces structural issues and a massive debt burden as the boom comes to an end.
Is the “Chinese Miracle” Fading to Black?
The world’s second-largest economy is grappling with a plethora of different challenges. The country is facing below-trend economic growth, a plummeting currency, rising youth unemployment, shrinking manufacturing activity, and a property sector seeped in financial problems.
China is wrestling with “huge structural problems” that threaten the overall economy moving forward, says Nicholas Lardy, the non-resident senior fellow at the Peterson Institute for International Economics (PIIE), adding that Beijing will unlikely see growth rates of 8 or 9 percent again.
“The boom is over,” Mr. Lardy said.
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Last year, the Chinese economy reported an annual growth rate of 3 percent. In 2021 and 2020, it was 8.4 percent and 2.2 percent, respectively. Since growing more than 14 percent in 2007, GDP growth has been on a downward trajectory.
But while some assert that Beijing is spiraling downward to 2 percent expansion amid various problems throughout the country, Mr. Lardy asserts that he does not see this in the data he is watching.
“I do think that their growth over the next few years is likely to be significantly higher in the 3 percent,” he said during an online Center for Strategic and International Studies (CSIS) event. ”I certainly think there are a lot of structural problems. There are a number of threats. But I don’t think they’re going south here.”
Despite abandoning most of the pandemic-era COVID Zero public health restrictions and reopening the economy, economists’ expectations of a substantial boom never materialized. Consumer demand has been anemic, resulting in a deflationary climate in July. Exports have cratered amid below-trend demand from key trading partners that are facing stubbornly high inflation and slowing growth. The effects of the collapse in the real estate market, which accounts for approximately two-thirds of Chinese household wealth, are spilling into the broader economy.
All of this has prompted the Chinese government and the People’s Bank of China (PBOC) to unleash multiple stimulus efforts in recent months, from lowering key interest rates to cutting taxes on stock trades. A chorus of market analysts argue that Beijing needs to fire off bazooka-like stimulus to resuscitate the economic landscape.
“Some markets are bracing for the sort of bazooka stimulus response that we have seen at times in the recent past when China has been struggling economically. But we are not at all sure we will see that this time,” stated Robert Carnell, the regional head of research, Asia-Pacific, at ING, in a note.
But the paucity of a hefty response “points to a worrying degree of policy paralysis,” says Julian Evans-Pritchard, the head of China economics at Capital Economics, in a report. Without a significant stimulus response, “the downturn could persist for a while longer,” noted Mr. Evans-Pritchard.
“We now expect q/q growth of just 3.0% annualised over the rest of the year,” he wrote. “This rests on the assumption that policymakers will eventually intervene more forcefully. But even then, any economic reacceleration is likely to be modest given the structural decline in trend growth.”
Economists present the case that officials are tolerating weaker economic growth and refraining from putting the pedal to the metal due to the enormous amount of debt facing all levels of government.
China’s Debt Mountain
The debt-laden Chinese property titans, Country Garden and Evergrande Group, have captured all the media attention. But governments are also dealing with this reality of hefty red ink. And, Jude Blanchette, the Freeman Chair in China Studies, told the CSIS event that these debt issues establish a “ceiling for growth.”
Federal debt has skyrocketed since 2011 as officials have tried to prevent the sinking of the Titanic during various economic events, including the 2008-09 global financial crisis and the 2015 property sector decline. It is estimated that the national debt is north of $14 trillion, up 36 percent from 2022, and represents about 250 percent of GDP. This is higher than the U.S. but lower than Japan.
The chief concern among economists is that this trend could result in a financial crisis or a prolonged economic slump comparable to Japan’s Lost Decade of the 1990s.
But it is not only the central government that is observing mountainous debt levels. Local governments–provincial and municipal–are seeing immense debt volumes, totaling a projected $12.8 trillion in 2022. In addition, leaders are struggling to keep up with growing debt-servicing costs.
For example, Guizhou, a southwestern province, is one of the most indebted governments in the country, reporting nearly $166 billion in debt at the end of last year. The debt-to-GDP ratio is 62 percent.
Hegang, a Chinese city bordering Russia, has maintained debt totals that are more than double its fiscal income. Officials have responded to these fiscal holes by implementing more pecuniary restraints due to enormous annual budget deficits.
Experts note that local government financing vehicles (LGFVs) have contributed to these issues. LGFVs have functioned as funding mechanisms to support infrastructure projects. In 2020, for instance
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