To meet the Chinese government’s GDP demand, China’s non-performing debt has risen out of sight. Who will pay for the losses and clean-up?
China’s domestic debt needs to be bailed out
East is reading Reports China’s local government debt in 2020 was 50% higher than World Bank, IMF estimates.. There is no doubt that the situation today is much worse.
China’s local government debt reached 90 trillion yuan (US$12.49 trillion) in 2020, 50% higher than estimates by the World Bank and International Monetary Fund, according to a recent study by Professors David Dao-Kui Li and Zhang He of the Academic Center for Chinese Economics. Practice and Thinking (Admission), Tsinghua University.
Results
- The rapid accumulation of infrastructure debt is the main reason behind the rapid rise in the leverage of local governments and the real economy as a whole.
- Local government debt in China shows a cross-linked structure, with local governments creating entities to secure loans, and these entities in turn leverage those borrowed funds to obtain more financing for their subsidiaries.
- Without central government intervention, local debt becomes unsustainable.
Michael Pettis chimes in
Michael Pettis 9 comments
- The East Reads has just published a translation of an interesting speech recently given by Li Daokui of Tsinghua. He raises four points that I think are particularly important. Given his fame, I think his lecture shows how views have changed in China.
- The first point relates to the sheer size of local government debt. He claims that local government debt has been underestimated: “Our analysis revealed that in 2020, local government debt in China approached 90 trillion yuan, equivalent to 88% of GDP at the time.”
- He adds: “This estimate greatly exceeds those cited by most scientists.” For example, the IMF or World Bank typically estimates it at about 60 trillion yuan, or roughly 50% of GDP.
- Second, it indicates that infrastructure spending is largely the main source of debt. This has been obvious to some of us for many years, but I think this study may help force the recognition that infrastructure investment in China has been a bigger problem than real estate investment.
- The third interesting (to me) point he makes reinforces his second: “In the absence of central government intervention, local debt becomes unsustainable.” Because most of the debt went to finance infrastructure, if infrastructure spending had been productive, this would not be the case.
- The fourth point is that the “fundamental” reason behind the rise in local government debt is “local governments prioritizing GDP growth, with a particular focus on near-term GDP gains.”
- I interpret this to mean that the purpose of infrastructure spending in recent years has not been to meet economic growth needs, but rather to generate short-term economic activity. Again, some of us have been making this argument for a long time, but it’s never really been a formal part of Chinese macroeconomic thinking.
- I have long argued that since this was the year in which it became officially clear that local government debt was unsustainable, this was also the year in which a consensus would begin to develop about the negative impact of excessive infrastructure spending.
- There is still a long way to go before these views gain consensus among policymakers, but I think it is becoming difficult to find a Chinese economist who does not understand the relationship between unsustainable debt, unacknowledged losses, and infrastructure spending.
GDP is overstated
China has grossly overestimated its GDP. The money went to useless projects that were used to achieve artificial targets of 7 percent of GDP.
The Chinese leadership has set GDP targets and local governments have been forced to achieve these targets.
The result was huge real estate bubbles that have now burst, and state-owned enterprises are rendered worthless. Religion remains.
We’ve been discussing this since 2014. Reality has finally set in.
Stresses in China’s banking system; Avoid falling
Flashback December 26, 2014: Pettis talks about pressures in Chinese banking system; Avoid falling
Bettis provides a great deal of information about China’s growth transition, and the outlook for that growth.
The four stages he sees are as follows.
The first stage: The first period of liberalization reforms under Deng Xiaoping
The second stage: the period of investment growth
Stage 3: A period of overinvestment in which “miracle” GDP growth was accompanied by a much greater expansion of debt to the point of saturation and malinvestment.
The fourth stage: The second period of liberalization reforms under Xi Jinping
Now the “liberal reforms under Xi Jinping” are in reverse. Security crackdowns have become popular as Xi strives to find ways to fix the chaos. Criticism of the government is severely punished.
Michael Bettis chimes in on China’s growth and debt
Flashback November 22, 2020: Michael Pettis chimes in on China’s growth and debt
Beijing’s goal of doubling GDP by 2035 requires such rapid debt growth that I’m pretty sure they will quietly abandon this goal after a few years..
Betis’ 2012 bet with The Economist
The Economist bet with Bettis that China will overtake the United States in GDP by 2018.
I found it funny and so did Pettis.
The dating game: Michael Pettis challenges The Economist to bet on China
Somehow, my original post was not moved to my current blog, but here is my original post on GlobalEconomicAnalogy The dating game: Michael Pettis challenges The Economist to bet on China
The Economist has paid off. Surprisingly, China is still not close and is heading in the opposite direction.
In 2012, she commented:I wonder if 2030 is still too optimistic from China’s perspective.“
“Based on the claim”Purchasing power paritySome have overtaken China over the United States. But comparing countries so disparate on the basis of purchasing power parity is completely flawed.
The myth that China has surpassed the United States in GDP
On August 8, 2023, I discussed The absurdity of purchasing power parity and the myth that China has surpassed the United States in GDP
Michael Pettis: “Adjusting GDP for differences in purchasing power makes a lot of sense in some cases. But the way these measures are implemented is so problematic that it is very difficult to find any economist who takes these measures seriously.“
One implication of this, of course, is that if China engages in an orgy of bad investment, it will become poorer (with more and more money going to what are actually expenses) while artificially boosting its GDP growth (with expenses increasing exponentially). growing). converting them into assets). This appears to be what happened in 2009-2010 and beyond.
And unless you believe the United States is failing to recognize investment losses to anywhere near the same extent, if you really want to compare the two economies more usefully, you will have to make at least two adjustments: You will have to adjust China’s GDP upwards for price. Differences and Also adjust it down for unrecorded losses.
My dot is much smaller and more precise. China and the United States implicitly collect GDP data in very different ways, most notably the way Chinese lenders, banks and households treat much of the debt as if it were implicitly or explicitly guaranteed by the central bank. Local government agencies. This means that investment losses are not shown as losses (expenses) because it is politically difficult to do so, and instead are carried forward and thus shown as assets.
The collapse of the bonds of the largest real estate development company in China
On August 10, 2023 I noticed The bonds of the largest real estate development company in China collapsed to 25% of the nominal value.
In the post above, I sarcastically equate GDP with “grossly distorted measures.”
Grossly distorted procedures
She has attacked the United States countless times regarding GDP and described it as “grossly distorted measures.” Not many people have read my previous comments questioning US GDP.
But China’s real estate bubble is unlike anything else in the rest of the world. China has vacant malls, vacant airports, and entire cities vacant. All state-owned enterprises are insolvent.
US companies recognize losses when properties collapse. China holds state-owned enterprises at book value.
The United States is dropping bombs all over the world, creating enemies in the process. What exactly is produced in it? However, government spending adds to GDP by definition.
However, no one will revise GDP downward. Not in the United States, and certainly not in China.
The secret behind ghost towns in China
Oddly enough, vacant, dilapidated, and unoccupied buildings are worth more than if someone tried to make them livable.
The rent will not come close to paying the mortgage and you will have unhappy tenants anyway.
How does China distribute losses?
Who pays to clean up this mess is the big question at hand.
Most likely, future growth will be restricted, effectively masking losses over long periods of time. This will be difficult for China given its large demographic problem.
China is walking a tightrope. Consumption must be enhanced.
Note that China was completely dependent on state-owned enterprises, real estate bubbles, and export subsidies for growth.
So, in addition to appropriating losses (or constantly hiding them), what is China doing to achieve growth? This is the second main question.
Silly talk about BRICS
Despite the above, people still believe that China will rule the world, that the dollar will go to hell, and that the currency based on the BRICS led by China will soon rule the world.
Few people bother to ask the main question: What would it take for a BRIC-based currency to succeed?
China and the BRICS group fail to achieve all the necessary conditions for success as a trade alternative to the dollar.
However, if the measure of success is defined as limited use of the BRICS currency to avoid US sanctions, it could succeed. See link above for discussion.