Join institutional investors, analysts and strategists from the world's largest banks: Subscribe today for as little as $7/month
Already have an account? log in
How Many Comrades Does It Take To Screw Up A Stimulus Unveil?
Six trillion yuan. That's the number. Or maybe it's seven trillion. Or eight trillion. Don't get confused!
Investors and macro watchers spent the last week obsessing over Beijing's refusal to commit to a headline figure for long-bond issuance and/or deficit-spending. The context, obviously, is the Party's maddeningly belabored stimulus rollout which began on September 24 when PBoC governor Pan Gongsheng announced a series of rate cuts.
Pan's press conference should've served as a blueprint for
We’ve discussed whether Xi agrees that the consumer needs immediate stimulus and structural reform.
WSJ article:
*”But Xi didn’t give his economic mandarins a blank check. According to officials and government advisers close to decision-making, he wanted to bail out indebted Chinese municipalities on the brink of collapse and revive the stock market, without veering too far from his focus on letting the state drive China’s transformation into an industrial and technological powerhouse.
For Xi, the officials and advisers say, the near-term goal isn’t to massively stimulate demand but to fend off a brewing financial crisis—or “derisking,” in official lingo, thereby helping to stabilize the overall economy and achieve the 5%-or-so growth target for this year.”*
So, there will be no drive toward a consumer-led economy in China. Xi’s vision is fingers in the debt dike then more of the same.
So, the question we discussed a while ago seems to be partly answered. Xi is focused on debt, not on the consumer.
China’s LG and LGFV debt must be at least CNY 100TR by now. “If one were to include LGFV bank borrowing and shadow credit, total local government debt likely would be in the 90 to 110 trillion RMB range, or between 75 and 91% of China’s GDP in 2022. Across China’s provinces, 12 of them now have local government debt over 50% of provincial GDP as measured by bonds outstanding. In just 2017, only three provinces had such high levels of debt. Only two provincial units, Shanghai and Guangdong, had local debt below 25% of GDP by the end of 2022. Because this debt requires constant servicing in the form of interest payments and repayment of principal, debt servicing likely has placed increasingly difficult constraints on the local and even the central budget. By the end of 2022, monthly debt servicing has surpassed 100% of monthly fiscal income for 12 of China’s 31 provincial units. Repayment demand has further accelerated in 2023.”
https://china.ucsd.edu/_files/2023-report_shih_local-government-debt-dynamics-in-china.pdf
Xi made the situation much worse by cratering the property market (as land sales to developers was a major part of LG income) and piling more unfunded mandates on LGs (including huge Covid lock-down expenses). Indeed, the LG debt crisis is largely a creation of the central government.
The debt servicing burden is extreme, exceeding provincial income in some periods. LGs are cutting services, not paying wages, and still issuing new debt to pay interest on existing debt.
Central government issuance of CNY 6TR over 3 years will do little to resolve this debt problem. Might kick the can forward a year. ” Local debt can only be sustainable when the central government takes on more expenditure tasks or transfers more funding downwards, or when local governments find a way to increase income.” Nothing along these lines has been discussed by Xi’s men.
https://www.cambridge.org/core/journals/china-quarterly/article/political-economy-of-chinas-local-debt/7E49310CA4D931BCE77DE1499C8388FE
The links above are well worth reading, but for the TL:DR version:
https://www.atlanticcouncil.org/blogs/econographics/sinographs/chinas-local-government-debts-are-coming-due/
Add on corporate and household debt, which has also soared.
I think we are slowly getting an answer to another question we discussed – is the central govt able to solve the debt problem?