Economists are currently faced with a significant challenge about the trajectory of China’s economy, akin to the predicament encountered during the Lehman Brothers episode.
It Was Already in 2008
Discussions about the extensive debt of over $9 trillion owed by China’s local government investment entities to state banks and other creditors are often contextualized within the framework of a crisis resembling 2008. They attribute it to the prevailing atmosphere of fervent conjecture surrounding the anticipated occurrence of a significant financial event commonly referred to as the “Lehman moment,” which is widely believed to have the potential to inflict severe damage upon the largest economy in the Asian region.
The notion in question is not devoid of rationality, naturally. It can be argued that historically, no emerging power propelled by economic growth fueled by debt has managed to evade what is commonly referred to as a “Minsky’s moment.” The likelihood of China successfully avoiding a similar downfall experienced by Japan, Southeast Asia, and Wall Street could be more promising.
China’s off-balance credit boom facilitated through local government financing vehicles (LGFVs) poses a significant risk to an already complex and imbalanced economy. The subject under discussion pertains to a substantial accumulation of debt that surpasses the collective gross domestic product of Japan, Germany, and Finland.
A more appropriate point of comparison lies within the realm of the national counterpart to Enron Corp., a company that experienced a significant collapse in 2001. Through intentional or fortuitous means, the proliferation of unique purpose entities has facilitated the Chinese Communist Party in concealing substantial amounts of debt and hazardous assets.
Global credit rating agencies are faced with a significant challenge in their understanding of China Inc., as they currently need more crucial information that would enable them to comprehend the intricacies of the situation entirely.
The task of concealing the fissures has grown increasingly challenging over the past two years following the default of the prominent developer China Evergrande Group. Furthermore, the prevailing challenge lies in the prominence of Country Garden’s potential default predicament, which continues to captivate international attention. Concerns regarding the resilience of the shadow banking sector in the face of decelerating growth have been amplified by the challenges experienced by Zhongzhi Enterprise Group.
Over the past 25 years, it is noteworthy that no major economy has consistently defied the expectations of skeptics who have foreseen an impending downturn. Regardless of the specific historical events such as Enron, Lehman, or the economic warnings of Hyman Minsky, it is evident that China has consistently demonstrated the ability to avoid potential crises.
We Can Only Dream About the Planned Economic Growth Rates
Is the fortune of Chinese leader Xi Jinping experiencing a decline? Indeed, the prevailing circumstances within the nation have significantly diminished the likelihood of achieving economic growth rates surpassing the 5% threshold.
The growth rate of 3% observed in 2022 for an economy of China’s magnitude and degree of advancement can be characterized as residing within recessionary territory. The observed phenomenon can be primarily attributed to a voluntary reduction in activity, which the implementation of stringent COVID-19 containment measures by Xi predominantly instigated.
Following the reopening of China, it was observed that the anticipated resurgence in growth did not materialize in a manner that was universally expected. The following explanations are as follows: Firstly, it has been observed that consumers who have experienced trauma during the pandemic tend to save their financial resources rather than engage in discretionary spending.
Secondly, the property sector has experienced a significant decline, resulting in substantial challenges that overshadow the positive effects of economic reopening. Thirdly, the invasion of Ukraine by Russia has had a detrimental impact on the export industry, leading to inflationary pressures. Lastly, the restrictions imposed by U.S. President Joe Biden on China’s access to crucial technology have caused unintended consequences and negative repercussions.
The underlying theme is recognizing that the Chinese model, which has exhibited remarkable efficacy over three decades, is currently confronting a profound existential predicament. Suppose China does not experience a substantial crisis with global ramifications. In that case, the prospects of achieving the necessary accelerated growth to surpass the United States economy by 2030 or 2040 appear increasingly uncertain.
The current situation presents a critical juncture for the party led by Xi, as its legitimacy is contingent upon achieving growth rates surpassing the threshold of 5%. Given the absence of comprehensive polling practices or the facilitation thereof in China, discerning the sentiments of the nation’s vast population of 1.4 billion individuals, as well as the 500 influential members occupying the upper echelons of the political hierarchy, about Xi’s performance, remains an insurmountable challenge.
The primary challenge faced by President Xi Jinping lies in effectively prioritizing the various economic challenges at hand. The property sector, potentially contributing up to 30% of the gross domestic product (GDP), presents a notable challenge. The issue at hand resembles the lousy loan crisis of the 1990s, which continues to burden Japan’s current economic landscape.
One may direct their attention to the Bank of Japan, an institution trapped within the confines of the quantitative easing domain for 24 years. There is a potential risk associated with any indication that BOJ Governor Kazuo Ueda may consider reducing the scale of quantitative easing (QE) measures. Such a course of action could result in a resurgence of deflationary pressures in Japan and adversely affect global financial markets.
The measures implemented by President Xi Jinping in the tech sector have adversely affected the overall performance of the economy. Commencing from the latter part of 2020, the regulatory authorities under the leadership of Xi Jinping conveyed a clear message of power to prominent innovators within China, including Jack Ma, the founder of Alibaba Group. In less than twelve months, the stunt above eradicated over $1 trillion worth of technology stock wealth.
An additional concern pertains to the waning efficacy of China’s stimulus apparatus. China has consistently engaged in extensive infrastructure development endeavors over the past three decades. Similar to a pharmaceutical agent or corticosteroid, the efficacy of the intervention is presently inadequate to achieve stabilization of the patient. The debt situation in China, encompassing LGFVs, is also increasingly emerging as a significant global impediment.
Dissatisfaction With Public Policy Is Getting Higher
The culmination of demographic strains is becoming increasingly apparent. As the demographic shift in China progresses, the deflationary pressures causing concern among the populace can become further entrenched. In the meantime, the party led by President Xi Jinping needs to exhibit more practicality in establishing more robust social safety nets aimed at incentivizing households to increase consumption and decrease savings.
The convergence of various factors in 2023 may elicit disfavor within the inner circle of Xi Jinping. Moreover, China is anticipated to be effectively removed from its role in propelling worldwide economic expansion in the upcoming year.
The current phase of suboptimal performance being experienced by China coincides with a deceleration in Japanese economic growth and stagnation in Europe. The United States, while potentially evading a recession, is currently experiencing the repercussions of 17 months of Federal Reserve tightening on its largest economy.
The deceleration of China’s economic growth, regardless of the occurrence of a crash, is a matter of concern for both President Xi’s political position within Beijing and the overall global economy.