On August 12, American economist Christopher Balding wrote in The Epoch Times that China is currently facing a huge obstacle. Still, the Chinese regime has not followed the usual way of stimulating economic development. According to Balding, the only possible reason is that the CCP is currently short of money.
Over the past 20 years, China has built a habitual expectation among global companies and markets that it will unleash big spending to spur growth whenever there are signs of an economic slowdown. For instance, in response to the 2008 global financial crisis, the Chinese regime unleashed more than 4 trillion yuan in stimulus spending, or about $58.6 billion at the time, or nearly 13% of China’s GDP.
Central government authorities would flood the market with fiscal and monetary stimulus until activity began to run too hot and then tighten the money supply. Management engaged in this financial measure to drive economic growth to elevated target levels while trying to smooth out the risks in either direction. Now, the Chinese economy is facing maybe its most challenging period this century:
Fiscal revenues of local governments have fallen sharply, especially in some places, by more than 20% to 40%. With depositors withdrawing in droves and mortgage borrowers refusing to pay, the mass protests took a toll on banks.
With the problems of real estate developers coming into the spotlight, companies across China face enormous challenges in paying off assets and liabilities due to excessive leverage and the risk of business closure due to the COVID-19 pandemic. So why does the Chinese regime not inject money to stimulate economic growth?
At a meeting last month, the Chinese Communist Party’s top decision-making body did not announce a new stimulus as some had expected. Instead, officials acknowledged significant downward pressure, abandoning their full-year growth target of 5.5%.
The regime is highly in debt
Economists say the lack of more potent stimulus by Chinese leaders this time is partly a sign that Beijing is more aware that the traditional way of propping up the economy by borrowing heavily to invest in infrastructure is unsustainable.
Nicholas Borst, director of China research at investment advisory firm Seafarer Capital Partners LLC, said there are some “real fiscal restrictions” in China right now, which were not there in 2008. In addition, Borst pointed out that the level of indebtedness in the economy is much higher than before.
According to Borst’s research, the Chinese regime’s total debt, including central and local authorities, was estimated at around 120% of GDP as of December, up from 60% in 2014. Furthermore, other forms of debt, such as off-balance sheet borrowing by local authorities, have snowballed and are nearly five times larger than the apparent central regime’s debt.
In China, the burden of stimulating the economy usually falls mainly on local authorities. And this year, their finances have become more strained as land sales dry up and tax revenue plummets amid coronavirus disruptions.
Another possible reason for the Chinese regime’s reluctance to boost economic growth is that the commonly used stimulus model produces less benefit than it has in the past.
The Wall Street Journal said, in 2015, China needed three times as much credit as during the 2008 financial crisis to drive additional economic growth, according to a study by economists at the International Monetary Fund. In China, new infrastructure projects need to consider the environmental impact, so the actual effect of new projects will decrease, and fewer jobs will be created.
China’s July data clearly shows that China is expanding the scope of infrastructure spending. Data for the month showed that infrastructure investment in environmental projects such as water conservancy achieved a high growth rate rarely seen in recent years. UBS Group AG said investment for the month increased by 18.4% year-on-year. In addition, spending on transportation facilities increased by 2.1%, compared with 1.2% in July.
Another problem for China is that whatever stimulus the Chinese regime takes now may be undercut by strict anti-epidemic policies that have hit business and consumer confidence hard.
Tommy Wu, an economist at Oxford Economics, said: “As long as the dynamic zero policy remains unchanged, it will be very challenging to restore confidence in consumption or the private sector. The economy is likely to go through a long hard time.” As a result, Oxford Economics lowered its full-year growth forecast for China to 3.2% from 4% this month.
Is it possible politics undermine the Chinese economy?
Some economists say China’s failure to take more decisive steps to support the housing market reflects the political paralysis ahead of a party meeting this fall. Officials are reluctant to take measures that could be contrary to Xi Jinping’s overall debt reduction policy. Priority measures such as real estate market speculation are thus inhibited.
According to Christopher Balding, Chinese leader Xi Jinping has prioritized greater adherence to the central direction of the Party and socialist rejuvenation. Is it possible (that) his policies of restraining banker pay, targeting corruption, and restraining debt growth are finally paying off? It’s possible, but an unsatisfying answer. We are in the last year of his second term, and all of these are policies Xi has been pushing for years. So why hasn’t the policy changed until now?
With Xi expected to be reelected for a third term, as Christopher Balding pointed out, there are credible reports of pushback against Xi’s agenda. Choking the funding that has driven China’s economic growth since 2008 would be a way to weaken Xi in an election year when the CCP is typically flooding the economy with stimulus. However, this seems problematic because, given the nationwide problems, it would require quite a degree of cooperation across many institutions to defy Xi.
None of these possibilities seem satisfying. There is one last but very worrying possibility: What if China is just out of money?
Is Beijing out of money?
Balding stated in his article that banks withhold deposits or limit withdrawals and capital levels. Even using official data, capital deposits reach the regulatory minimum of about 8%. Even if the regime wanted to engage in a significant stimulus, there is little evidence that the Chinese financial sector has the capital to absorb a rapid increase in public debt. Nor do Chinese households have the capacity, given their high leverage that now exceeds most of the OECD countries.
The only source capable of purchasing government or corporate bonds at the scale needed to absorb a significant Chinese stimulus program would be the People’s Bank of China (PBOC). As a result, the PBOC would be forced to fund the stimulus, presenting significant problems. Given the lack of broad demand for additional credit from companies or households, there are also demand-side problems. In other words, the banks lack the ready capital to absorb large issuance of credit. With the enormous current burden, no one besides the central regime wants to take on new debt.
If growth drops significantly for China, given its debt-fueled economic growth model, it will present a significant risk to repayment. However, if they do not issue new debt, growth will drop, creating a death spiral.