While China’s growth forecasts were revised down this week, moderate inflation has provided policymakers with a degree of flexibility adjusting the nation’s growth focused monetary policy. However, with ballooning national debt, is it enough to save the Chinese economy?
The World Bank released new findings on the Chinese economy this week, slashing the country’s growth forecasts over 2022 and 2023.
The revised research estimated a 0.3 per cent reduction in China’s forecasted 2022 growth rate, falling to 5.1 per cent. However, broad contractions are observed internationally with a 0.5 per cent reduction in the forecasted growth of the United States - dropping to 3.7 per cent.
While a decrease in growth is bad news for industry and government, moderate inflation over 2021 has provided policymakers with flexibility in adjusting the country’s monetary levers and stimulate public and private spend through the tail end of the pandemic.
According to research published in Bloomberg this week, China’s producer price index increased by an estimated 10.3 per cent over 2021 while the consumer price index rose by a steady 1.5 per cent. While some analysts suggest that China is suffering from stagflation with the inflation figures not matched by higher domestic economic growth, the figures nevertheless represent a decline in PPI and CPI from the month prior.
This drop in inflation has given China’s central bank the opportunity to cut interest rates to promote economic activity while the world’s economy flounders during the pandemic if it chooses to do so.
Over recent months, there have even been calls by some Chinese economists to use an increase in inflation as a tool to compensate for low fertility rates and a projected decline in China’s population.
This week, Ren Zeping, former chief economist at Evergrande Group, called on China’s central bank to “print” some 2 trillion yuan to entice Chinese families to have more children.
“The central bank [should] print an extra 2 trillion yuan to encourage society to have 50 million more kids in 10 years,” Ren said, adding that the money would be roughly 2 to 3 per cent of the country’s gross domestic product (GDP).
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“This can solve China’s low-birth and ageing-population problems and energise the future without burdening people, companies and local governments. Based on our studies, this is the only, and the most practical, solution.”
In response to the economist’s calls, Beijing blocked his social media.
Nevertheless, China’s modest inflation rates have provided the country with economic flexibility to lower rates and stimulate public and private investment.
While the country’s low inflation rate has provided Beijing with flexibility to stimulate public and private investment, China’s heavy handed approach to combating the spread of COVID-19 has resulted in widespread worker shortages and industry closures.
In fact, over recent weeks it has been reported that global companies including Samsung and Volkswagen have suffered production shutdowns, while ports have struggled to operate under pandemic regulations.
Though it doesn’t appear that China’s workforce shortages will necessarily improve on the other side of the pandemic.
Findings from the United Nations suggest that the number of Chinese adults over the age of 65 will grow from 12 to 26 per cent by 2050, meaning fewer workers to service an aging population.
Moreover, a substantial skew in gender ratios among the nation’s youth threatens social cohesion with some 115 males for every 100 females for citizens between the ages of 10-19.
China’s spiralling debt
Despite favourable inflation and interest rates for the Chinese economy, public and private debt threaten to upend the Chinese economy.
In fact, Chinese local governments, citizens and companies have straddled themselves with a higher debt-GDP ratio than the US (currently estimated to be 250 per cent). Meanwhile, Reuters has illustrated that China leads the world’s super powers on private debt (210 per cent of GDP versus the US at 151 per cent).
Dr Antonio Graceffo, author of Beyond the Belt and Road, published an analysis in War on the Rocks last year examining the growing threat of bad debts in the Chinese economy, and how poor lending practices threaten to upend the country's leading financial institutions.
“And this is just on the surface. Underneath lies a staggering quantity of murky debt, off-balance-sheet lending, wealth management products, and local government funding vehicles. All told, China’s debt is considerably larger than it appears at first glance, and so high that some analysts feel it is at dangerous levels and could spill over, doing severe damage to the world economy,” Dr Graceffo wrote.
He argues that a Chinese collapse will impact the entire globe, including many developing nations where China sources its natural resources. Already, Chinese coal and steel imports have begun falling, and in turn, Chinese manufacturing outputs have also begun falling.
However, some do stand to benefit economically from a faltering Chinese economy in the long term. The analyst argues that on balance of probabilities it is likely that international companies would seek to review their supply chains and relocate to countries such as India, Indonesia and Vietnam.
“Companies in China are suffering from supply chain disruption, higher input costs, pollution curbs, and logistical issues due to pandemic measures, such as fuel rationing, electricity rationing, and disruption at ports. Factory-gate prices, the price of products at the factory, have been steadily rising. All of these circumstances have driven factory inflation to its highest level in 13 years,” Graceffo wrote.
Worryingly, a faltering Chinese economy could spell disaster for Australia and the US. Not only does the US have key investments in China, but China is a critical export-import hub with Western nations.
Simply, the Chinese economy is full of bad debt. While global media has remained firmly fixated on the recent Evergrande scenario, Dr Graceffo lists several large Chinese companies which over recent months have begun falling victim to poor lending and financial practices.
“In October another Chinese developer, Fantasia Holdings Group, missed its repayment of $206 million in five-year dollar bonds. Later the same month, China Properties Group’s subsidiary Cheergain Group defaulted on $226 million worth of debt payments,” Dr Graceffo wrote.
“Almost at the same time, another developer, Modern Land China, missed its payment of principal or interest on a $250 million bond. The most recent addition to the default club is homebuilder Sinic Holdings, which also defaulted on $250 million. Yet another Chinese developer, Kaisa Group Holdings, is in danger of missing its debt payments. The company was valued at about $1 billion, but saw its share price drop by 15 per cent when the possible default was announced.”
Despite these figures, there is no real way of knowing the totality of bad debts in China or just how many large Chinese companies are at risk of economic collapse. Indeed, recent findings from economists at Goldman Sachs illustrated that bad lending and liabilities aren't solely a private problem by demonstrating that debt held by local governments in China amount to half of the Chinese economy.
How can the Chinese government fix the debt issue?
Analysts have warned that attempts by the Chinese government to mitigate the risk of bad loans by creating additional oversight on lending may in fact hasten the collapse of many Chinese companies that will simply run out of money. Meanwhile, tightening the lending practices for local government entities, which have an estimated US$2.3 trillion of debt, could cause many of the country’s infrastructure projects to grind to a halt.
Compared with the US, China has a very liberal attitude toward classification of debt. Dr Graceffo illustrates that distressed loans are typically not counted as non-performing loans on the balance sheet, with Chinese financial institutions requiring a higher threshold for the loan to be considered bad.
Astoundingly, it appears as though China has taken a leaf out of the US’ pre-GFC book: packaging and selling bad loans.
“To get non-performing loans off a bank’s balance sheets, they are often bundled and sold to investors... For investors, the price of these bundles of non-performing loans is dependent on the statistical probability that the loans will be repaid. By obscuring the repayment risk, the bundle can be sold at a higher price,” Dr Graceffo wrote.
It seems that in response to the faltering economy, Beijing has begun to tighten its purse strings. Just this week, it was revealed that the Chinese government has slashed its foreign investment to Africa to $40 billion. The debt crisis in China has now impacted the Chinese policy of debt trap diplomacy.
While China has favourable inflation and interest rates that are conducive to supporting ongoing domestic growth, a demographic cliff and burdensome national debt threaten to upend the entire economy.
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