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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Chinese building is on a hithero unheard of scale, as this little fact shows:
China used more concrete in the three years 2011/12/13 than the USA used in the whole of the 20th Century.
Since our property bubble is based on the restriction of building, it would appear that we have to look elsewhere for the causes of any property bubbles in China, if indeed there is one.
So if the market isn’t being manipulated like ours, then doesn’t it look like liquidity is the debt problem, rather than insolvency, & if this is the case, isn’t it right that govt. both local & central get involved to keep the cash flowing?
Hi therrawbuzzin
I think the issue here is that whilst they needed some newer infrastructure we are in the territory of Ireland and Spain pre credit crunch where too much is built. Then the developers hit trouble and there is a swing the other way…
Thank you Shaun, that is a terrific asnwer.
I would be a little cautious about the BRI story, it depends on who is telling it. There are currently a lot of tensions about who should take a haircut first over loans to a lot of countries. The US dominated World Bank, IMF etc say the Chinese should write down the loans so that the ‘establishment’ can then negotiate with the countries a suitable settlement , ie take the spoils. Needless to say the Chinese are telling them to ‘do one’, arguing everyone is equal and all should take equal haircut if indeed any is required ( ie people who take a long time perspective may be willing to wait it out).
Just part of , albeit an important part of, the ongoing global readjustments from unipolar to multipolar world.
The biggy for me is are the USA likely to accept their
dollar plummeting in value without a fight?
That’s precisely why I think US interest rates could have farther to go.
Off topic here in the UK a Reuters poll suggests one more UK BOE rate rise
https://uk.investing.com/news/economy/boe-to-raise-rates-once-more-in-may-but-decision-a-close-call–reuters-poll-2986603
Hi Peter
That is quite possible although I suspect their eyes will be on US events and that they think that the Federal Reserve will do.
They have brought most of their problems on themselves,creating bubble after bubble and out of control unfunded government spending ,the endless wars and political interventions and manipulations,the weaponisation of the dollar and I think the final straw was the confiscation of 380 billion dollars of Russian money.Usa has acted like the playground bully to the rest of the world for too long and now countries are working together to free themselves from its domination and oppression,the failure of the dollar when it comes will be self inflicted IMHO , their arrogance and hubris have brought them down and in the end no matter what desperate measures they use the dollar will eventually fail
Hi Kevin
There have been plenty of claims that the power of the US Dollar is waning, but it has remained strong. However this phase of using finance as a weapon always ran the risk that other countries would set up an alternative system.
Early days yet, but yes its still the no1 currency by far. Personally I am not about to ditch USD money or assets.
However people looking for a replacement ie the yuan , are off beam. The type of multipolar world I think is developing clearly has China as the major other player, but its likely that its currency will not replace the dollar. Countries wishing to remove USD threat/risk will carry multiple currencies in order to trade bilaterally with their counter parties. In this way the world rids itself from the unipolar financial threat of blackmail which clearly has developed over the last 30 years.
@KEVIN, I don’t just agree, but have posted similarly about the US abuse of its position of sole super-power & how unwise that was,