We seem to have entered a phase where concerns about China related to debt are becoming more of an issue. Let us start with something we have noted regularly which is the way that local government’s have borrowed and of course relates to the property boom.
But there is one more elephant in the room: Borrowings from local government financing vehicles. For years, municipalities have been relying on these off-balance-sheet entities to fund infrastructure and support the local economy. LGFV debt rose to 57 trillion yuan ($8.3 trillion) in 2022, or 48% of China’s gross domestic product, according to estimates from the International Monetary Fund. ( Bloomberg)
Actually this makes it sound a bit like the Euro area with its off balance sheet vehicles but to be fair to it China has played the game on a larger scale.
It is fiscal maneuvering on an epic scale. LGFV borrowings are almost the same size as official central and local government debt combined.
Bloomberg is rather shy about mentioning the property word but it gets there eventually as it gets to an issue which has concerned us.
To make matters worse, after the property slump, municipalities may not be in a position to help out their LGFVs even if they wanted to. Before Covid, regional authorities got roughly 20% of their income from land sales. Last year, this important revenue stream tumbled 23%.
There are clearly issues here but I am not so sure about this bit.
Call it luck or stellar crisis management. China, one of the world’s most indebted nations, has not experienced a full-blown financial crisis, yet.
On that subject Michael Pettis makes some interesting points. Firstly the Chinese structure is set to avoid that.
A financial crisis is caused by an asset-liability mismatch. China has a largely-closed and highly-administered system banking system, in which regulators can restructure liabilities at will. Under those conditions China was never likely to have a financial crisis.
There is a catch though as we move onto something that is a major theme here. A crisis is also an opportunity to clean things up.
“Too much” debt is a problem because it puts downward pressure on future growth. A financial crisis, while spectacular, is just one of the ways in which it does so. In fact, as Japan showed, avoiding a financial crisis may be more costly economically over the long term.
So now we move from echoes of the Euro area to a fear of Turning Japanese. What you end up with is these.
In your head, in your headZombie, zombie, zombie-ie-ieWhat’s in your head, in your head?Zombie, zombie, zombie-ie-ie-ie, oh ( The Cranberries )
Property Prices
From the point of view of the debt holders above there was some good news earlier.
New home prices rose 0.5 per cent on the previous month, according to official data released on Monday, following a 0.3 per cent increase in February. ( Financial Times)
From our point of view I am much less sure, because if prices were too high that is the Western mistake as we chase them ever higher and make them increasingly unaffordable. Also I am not so sure about this bit.
The positive data signalled some relief for China’s ailing property sector, which has suffered a liquidity crisis over the past two years that has plunged a series of developers into default
Whilst the property sector will obviously prefer rises to falls the previous boom relied on expectations being for unabated growth and thus easy pickings. Whereas now we know that the music can stop.
Also the drumbeat of trouble seems to be continuing as I note this from last Thursday.
Sunac China’s stocks should only be worth HK$1 per share, indicating a potential downside of 78%, JPMorgan said in a note. ( @CathyYianZhang )
It had been suspended for around a year and fell 55% on its return.
Belt and Road Initiative
The next issue is something that is as much a matter of foreign policy as economic policy.
China’s $1tn Belt and Road Initiative infrastructure finance programme has been hit by spiralling bad loans, with more than $78bn-worth of borrowing turning sour over the past three years. ( Financial Times )
This makes it sound like China’s property sector although the numbers are at least smaller so far. But the size of the problem is picking up pace.
About $78.5bn of loans from Chinese institutions to roads, railways, ports, airports and other infrastructure around the world were renegotiated or written off between 2020 and the end of March this year, according to figures compiled by New York-based research organisation the Rhodium Group.This is more than four times the $17bn in renegotiations and write-offs recorded by Rhodium in the three years from 2017 to the end of 2019.
These days 78 billion does not seem so much, but one number did catch my eye and this is the scale of the Chinese operation. I knew it covered a lot of countries but not that many.
In addition, Beijing has extended an unprecedented volume of “rescue loans” to prevent sovereign defaults by big borrowers among about 150 countries that have signed up to the BRI.
How much has it done?
The value of such sovereign bailouts amounted to $104bn between 2019 and the end of 2021, according to a study by researchers at AidData, the World Bank, Harvard Kennedy School and Kiel Institute for the World Economy.
A problem for the loans are that times are hard.
Increasing numbers of BRI borrower countries are being pushed to the brink of insolvency by a slowdown in global growth, rising interest rates and record high debt levels in the developing world.
Comment
These matters has contrary strands. If we start with the domestic local government debt we see that it was predicated on a housing boom that no longer exists. It has become the classic establishment game to pump up house prices ( asset prices) to make property borrowing look better as well as telling people there are wealth effects. So I would not be surprised if the Chinese turn up with more tricks on that front. After all us Western Capitalist Imperialists have been at that game for years and indeed decades.
The issue of the Belt and Road Initiative can be looked at in the economic way that the Financial Times has but I think that there is more to that story. In return for the loans China is buying influence and gaining power. The issue we have noted before is it moving into countries with natural resources that China both wants and needs. We have yet to see examples of it taking control of the ports for example that are supposed to have loan clauses that permit that. But again China may be happy to increase influence and play a long-term game. In some places it seems to be working.
Brazil President Luiz Inácio Lula da Silva has urged developing nations to find an alternative currency to the dollar, denouncing the central role of the greenback in global trade.
Thursday’s comments, from a speech made during this week’s state trip to China, lend another voice to growing de-dollarization rhetoric from leaders of BRICS countries — Brazil, Russia, India, China, and South Africa. ( Markets Insider )
If China increases its control over more of the world’s natural resources then it may be quite happy with progress so far. But yet again we see an economic model that relies on debt which means we will need more economic growth to pay it, just as the latter becomes harder to find.
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