In an economic landscape reminiscent of Japan’s descent into stagnation in the early 1990s, China is currently facing a similar trajectory, albeit under different circumstances. A former adviser to China’s central bank, Li Daokui, has brought to light the staggering scale of debt accumulated by local Chinese authorities, a figure much higher than previously estimated. This revelation sheds light on the underlying vulnerabilities of China’s economic model, which for years has been fueled by massive infrastructure spending and relentless borrowing.
Unveiling the True Scale of Debt
Li Daokui’s assessment paints a worrying picture of economic health. By 2020, local authorities had amassed an estimated 90 trillion yuan ($12.6 trillion) in debt, predominantly spent on infrastructure projects unlikely to yield sufficient revenues for debt servicing. This alarming figure, representing 88% of China’s GDP, poses a significant challenge for national authorities. Without a major shift in economic policy, China risks following Japan into a period of prolonged economic stagnation.
The debt accumulated by China’s local governments is largely hidden behind complex financial arrangements, such as the financing of the vast rail transit loop in Chongqing. Li’s analysis reveals that a significant portion of this “capital” was, in reality, debt disguised under various financial instruments. This misrepresentation of financial health has masked the true extent of the debt crisis at the local level.
Comparisons with Japan’s Lost Decade
The parallels with Japan’s economic stagnation are striking. Like Japan in the 1990s, China’s growth rate is insufficient to manage its burgeoning debt, created during years of unbridled expansion and optimistic valuations. Tokyo’s response to its crisis – offering forbearance to companies and avoiding large-scale bankruptcies – is a path that Beijing may find difficult to emulate without significant policy changes.
Moreover, China faces the additional challenge of navigating a shift in ideology. Solutions such as selling off state assets, akin to Japan’s approach under Prime Minister Junichiro Koizumi, clash with President Xi Jinping’s emphasis on the state’s role in the economy. This ideological barrier complicates the potential pathways for China to effectively address its debt crisis.
The Implications of China’s Debt Dilemma
China’s debt problem is more than just a financial issue; it is symptomatic of a deeper economic malaise. The misallocation of investment over the past decade into sectors such as property, infrastructure, and manufacturing has led to significant, yet unacknowledged, losses. These unrecognised losses, if not addressed, threaten to undermine China’s financial stability and economic growth.
The key to resolving this crisis lies not just in managing liabilities but in acknowledging and addressing the losses on the asset side of balance sheets. This requires a comprehensive understanding of the real value of assets and a swift allocation of losses in the most economically efficient manner. Delaying this recognition, focusing solely on minimizing financial disruption, and continuing to fund non-productive investments could exacerbate the overall economic cost, as seen in Japan’s experience.
In conclusion, China’s burgeoning debt crisis is a complex issue that requires a multifaceted solution. It calls for a strategic rethink of economic policies, an ideological shift towards more market-oriented reforms, and a clear recognition and allocation of losses. As the Asian giant navigates this challenging economic terrain, the decisions made by its policymakers will have far-reaching implications, not just for China but for the global economy. The path China chooses to tackle its debt crisis will be a defining factor in its economic future and its role on the world stage.
Source: https://www.cryptopolitan.com/chinas-debt-crisis-continues-to-escalate/