Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
Despite the hope of the international financial community, China is not heading for structural reforms, says leading economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, to CNBC. Pushing up demand is not high on the agenda for China’s leadership, he says, and they do not want to push up debts levels to new heights.
Financial expert Victor Shih dives into the 2024 figures at the annual NPC and concludes China cannot roll over debts anymore and finance its budget like it did before. He tells Bloomberg that central state policies have increasingly replaced a market-driven economy.
China’s economy is dealing with some tough years, writes leading economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, in ChinaFile, especially now that it does not have enough tools with debts and the property crisis like it did in the past. “So we need to brace for the consequences of the Xi model: slower growth in China, a big rise in Chinese technology exports, and more protectionism in the rest of the world,” he writes.
Arthur Kroeber:
China’s economic malaise results from a combination of political decisions, structural factors, and policy mistakes. The central reason for it is that Xi Jinping has decided to make national security and technological upgrading—not economic growth—his policy priorities.
The broadening definition of national security, and the increased influence of security interests in economic policy, have soured private investor confidence. The focus on technological upgrading has led to an economic strategy that relies almost exclusively on industrial policy. This means that the government devotes most of its attention to the supply side of the economy: boosting production of semiconductors, clean energy equipment, electric vehicles, industrial machinery, ships, and other products seen as needed to increase the country’s technological capability and self-sufficiency. Virtually no serious effort goes into figuring out how to unlock domestic demand—especially from households, which now save about a third of their income, one of the highest savings rates in the world.
These policies mean that China’s economy will have two faces in the coming years. The chronic shortage of demand will mean disappointing GDP growth—probably 3-4 percent on average over the rest of the decade—and a constant struggle to shake off deflation. But at the same time, its technology-intensive sectors will thrive, thanks to both government support and China’s uniquely competitive manufacturing ecosystem. The result will be persistent high trade surpluses and, probably, a strong wave of protectionism from countries that want to preserve their own industrial capacity.
This policy stance also makes it very hard for China to solve two of its biggest structural problems: the collapsing property market and the huge and growing debt burdens of local governments. The last time China faced a challenge of this scale was the late 1990s, when nearly half of all bank loans went bad. At that time, it responded with a combination of financial engineering to postpone the reckoning of bad debts, well-targeted infrastructure stimulus, and aggressive deregulation of manufacturing and housing which unlocked huge new sources of entrepreneurship and household demand. As a result, China grew out of its problems and by 2010 became the world’s second-biggest economy.
A similar approach today would recognize that deregulation of services—which account for more than half the economy, and all net new employment—is the main path to boosting consumer demand and accelerating economic growth. Too much of the service economy is either in state hands, or burdened by stunting regulations. But such a policy would conflict directly with Xi’s desire to keep the state’s finger on all economic levers. So we need to brace for the consequences of the Xi model: slower growth in China, a big rise in Chinese technology exports, and more protectionism in the rest of the world.
Financial expert Victor Shih looks at the dilemma China faces as local debts run out of hand, while revenue is dropping, and consumer confidence is low, at a panel discussion at the Ray School of Management at the UC San Diego.
China’s economy is not going to recover for the next two years, says renowned investor Jim Rogers to The Deep Dive. For the first time, the country is deeply indebted, faces a global bear market, and has not been able to solve the downturn in its real estate, he tells at the Deep Dive.
China has a longstanding tradition of bailing out large debtors using huge asset management companies (AMCs). But today they cannot solve the country’s real estate problems, says political and financial analyst Victor Shihto the Japan Times. “Any state injection into the AMCs could add further strain to the nation’s finances,” says Victor Shih
The Japan Times:
The savior role is one the asset management companies (AMCs) were set up to play in the wake of the Asian financial crisis as Chinese banks teetered on the brink of collapse. The biggest — China Huarong Asset Management Co. — typified the rot that later set in when it was forced to accept a 42 billion yuan ($6.1 billion) bailout last year and its chairman was executed for crimes including bribery.
The funds “can’t go on rescuing China’s property market this time,” said Victor Shih, author of “Factions and Finance in China: Elite Conflict and Inflation.” “Their own balance sheets are already so saddled with bad debt, they simply don’t have the ability to digest more.”
As recently as February regulators were looking to the AMCs as a solution to the crisis, calling on Huarong and China Cinda Asset Management Co. to help restructure weak developers, acquire stalled property projects and buy soured loans.
These same funds took trillions of yuan of bad loans off the balance sheets of the four biggest banks two decades ago. Once stability was restored, the funds, with combined assets of more than 5 trillion yuan, branched out to new sectors ranging from insurance to brokerages, and increasingly real estate…
Any state injection into the AMCs could add further strain to the nation’s finances. China’s debt to gross domestic product is already at 308%, a risky level that curbs the government’s ability to issue more stimulus, said Shih.
Almost half a year ago the real estate giant Evergrande started to fall apart under its 300 billion US dollar debts, but the collapse – expected by many – has not yet emerged. Financial analyst Sara Hsu explains in the Commercial Observer why this collapse has not happened.
The Commercial Observer:
“The real estate market in China represents China’s main means of savings since the financial system remains underdeveloped relative to that of developed nations. Therefore, the government has a significant interest in reducing the impact of real estate downturns,” said Sara Hsu, clinical associate professor of supply chain management at the University of Tennessee at Knoxville. Hsu has written for over 30 publications on the Chinese economy. “This means that there will likely be policies put in place to reduce price volatility in the housing sector.”
China’s economic growth for 2022 is now pegged at 4.8 percent, 0.8 percentage points lower than previously expected and a marked slowdown from the 8.1 percent growth achieved in 2021, the country’s central bank announced recently. Judging from the numbers, China’s economy is experiencing lagging growth, but an anticipated financial market crisis hasn’t materialized…
“Overseas investors are angry but the amount of Evergrande’s debt borrowed from overseas investors is far less than that borrowed onshore, so the fallout will not be extensive,” she said.
Maybe the question is not whether an exploding debt bomb at a Chinese company will spread financial shrapnel abroad, but whether a similar risk lies in other economies. Is there some version of Evergrande lurking in the U.S.?
The same situation is less likely to occur in the U.S. since banks tend to lend based on close examination of credit risk. In contrast, Chinese banks still lend to some extent based on government policy direction, which in recent years has included property and infrastructure construction, according to Hsu.
Financial and political analyst Victor Shih explains how the fall of Evergrande was triggered off by new financial regulations, and why Evergrande cannot be compared to the Lehman crisis in the US, he tells at a discussion at the German MERICS institute.
Investors worldwide have been watching developments at Evergrande, China’s second largest real estate company, as it struggled to repay its gargantuan debts. But while the problems are serious, financial analyst Sara Hsu does not expect a full collapse of the giant, she tells the commercial observer.
The Commercial Observer:
Evergrande is part of a sector that comprises as much as 28 percent of China’s economy, per the Financial Times. While real estate has been in a “bubble” for the last 15 years, cracks are starting to show as a result of the government “cracking down on risky property developers,” said Sara Hsu, visiting scholar at Shanghai-based Fudan University. “I think many people are aware of the real estate bubble in China, but it has not been vulnerable because the government hasn’t allowed it to be.”
The problem is that with few other good assets to fund, “investors continue to purchase properties and prices continue to rise,” added Hsu, who is an expert in Chinese fintech, economic development, informal finance and shadow banking…
So what’s going to happen to Evergrande?
Hsu thinks the government will step in to prevent a collapse and to stabilize things.
“The government is likely to force Evergrande to repay as much of its debt as possible, and [will] step in at the last minute to shore up obligations that might create systemic risk if they are defaulted upon,” she said.
The arrest of HNA founder and group chairman Chen Feng, and CEO Tan Xiangdong, last week was yet another signal indicating a major change in China’s economic relations, based on guanxi or old-style relations between power brokers, says political analyst Victor Shih to Bloomberg.
Bloomberg:
Unlike the technology giants — whose success and control of big data have made them a target — HNA grabbed the government’s attention for a different reason. Under the leadership of Chen and Wang, the group took advantage of the easy credit that swirled in China in the twenty-teens to fund a raft of overseas acquisitions. Deals worth more than $40 billion included significant stakes in Deutsche Bank AG and Hilton Worldwide Holdings Inc., luxury properties such as golf courses, landmark hotels across six continents and the 648-foot skyscraper 245 Park Avenue in Manhattan.
When Beijing became aware of the risks of such capital flight and leverage, it started to clamp down on the big acquirers. The high-flying Anbang Insurance Group, owner of New York’s Waldorf Astoria hotel, was seized by the government in 2018. HNA’s slow-motion unraveling began soon after, with it shedding assets as debt repayments loomed. The group still faces at least $63 billion in claims from creditors.
“Chen shared the same strategy of many business people with political connections — they used their connections to borrow as much money as possible from state-owned financial institutions,” Victor Shih, an associate professor who specializes in Chinese financial policies and elite politics at the University of California San Diego, said in an interview before Chen’s detainment. “The way that these conglomerates used leverage to over-pay for overseas assets rapidly was not sustainable and resulted in catastrophic deleveraging.”
Debt was the foundation stone for Chen and Wang’s ambitions. Both devout Buddhists, they set their sights on HNA becoming one of the top companies in the Fortune 500. Credit-fueled expansion helped the conglomerate rise 183 spots to 170th by 2017, but also sealed its fate within months as debt ballooned to more than $93 billion the following year.
For her part, Chinese financial technology expert Sara Hsu complaint at The Diplomat “structural failures in China’s financial system. “It indicates that the main problem, over-indebtedness, is common for many large institutions in the Asian giant, both banks and state-owned companies. Likewise, it highlights that” the real estate sector in particular has experienced an increase in prices in the last 20 years “, despite the government’s efforts to curb real estate speculation.
“Even after the Evergrande problem is solved, the disease of over-indebtedness is likely to continue of China, since the debt is allowed to function without restrictions in particular areas of the economy until it is too late to avoid any type of consequences “, writes Hsu who describes the situation of the real estate giant as “a symptom, not a cause” of the problem.
China got itself into trouble a few times when lenders who got into problems paying back debts. When China offers the same loans commercial banks can offer but without political ties, China has not so much extra to give, says strategic analyst Harry Broadman about the country’s’ international debt policies in the Africa Report, taking Zambia as an example.
The Africa Report:
The Zambian experience shows that China’s lending strategy needs to change, says Harry Broadman, chair of the emerging markets practice at Berkeley Research Group LLC in Washington. He questions why a borrower such as Zambia would not go to a commercial bank – which would have no ulterior political motives – if the loans are made at commercial rates.
“If China wants to remain in the international creditor game—where by dint of its political structure it is not a commercial-based economy and its motives as a lender are far more than only commercial—it needs to make itself attractive in other ways to debtors if it wants to charge commercial rates,” Broadman says.
Local governments in China have amassed an amazing amount of debt. Dropping revenue and disappointing economic performance is a major challenge, writes financial analyst Sara Hsu in the China-US Focus. "The outlook for local government financials is not positive."
Sara Hsu:
The outlook for local government financials is not positive. So far, over one-third of China's provinces have not met growth targets this year. Many of the provinces experiencing slow growth are those poorer regions that have been left behind. This means that local governments will continue to have relatively low levels of revenue while under a massive debt overhang.
The trade war with the US hasn't helped. Local governments took responsibility for maintaining employment in the face of the trade war by boosting business tax cuts and ramping up infrastructure spending once again. This was funded by the sale of municipal bonds. The scale of municipal bond debt has risen massively from $34 billion in 2017 to $183 billion in 2019. Supply has mounted while demand for municipal debt has declined. It seems likely that state-related entities will be forced to hold municipal debt if market demand is insufficient, but this will only exacerbate the drag on growth.
Short-run challenges may create yet another stumbling block for local governments. Most ominous is the fact that local government municipal debt matures in 2020. This debt load amounts to $283 billion. Circumstances under which local governments took on the debt are not much different from the current situation, meaning that there are few to no sources of new growth. Although the central government has canceled a scheduled decrease in revenue sharing to local governments, the local government fiscal burden is high.
The local government debt burden is likely to persist due to the overall revenue shortfall and high debt loads faced by local governments. Something has to give, whether it is debt repayments, maintaining full employment, or buoying GDP. It may take more than a financial expert to get local governments on the track to fiscal sustainability once and for all.
Private companies have a hard time getting bank loans, says economist Arthur Kroeber to Barron's. But that is nothing new, he adds, the problem is that state-owned companies get loans too easy. That division is more important than the level of China's debts, he adds. "Too much attention has been paid to the debt problem."
Barron's:
Arthur Kroeber: The latest survey of corporate chief financial officers showed that the finance conditions for private companies is quite poor. There is a problem there, but they have always had that issue. The problems are not so much that private companies get too little; it’s that state-owned companies get too much. It is loss of opportunities for private companies to expand and do as much as they are capable of doing...
Kroeber: I agree with the generalization that way too much attention has been paid to the debt problem and its significance has in many ways been exaggerated. But I think there are some issues that are material. China’s gross debt to GDP is probably around 260%. That is not particularly high for a developed economy, but it is extremely high for a developing economy. Although you have not had deleveraging in the sense of a reduction in that ratio, it is clearly an aim of government policy not to let that ratio rise—or not very much. It is an important constraint on policy and one of the reasons, over the last year and a half as the economy has slowed, that the government doesn’t want to do more debt-fueled stimulus.
Hong Kong might have lost much importance as a gateway to mainland China, for the financial markets Beijing still needs a stable Hong Kong, says financial analyst Victor Shih in NTD. The reason Chinese entities are borrowing through Hong Kong is that the financial institutions around the world, including the International Monetary Fund, legally treat Hong Kong as a separate entity, he said.
NTD:
Chinese companies use Hong Kong’s capital markets to attract foreign investors, while international companies use the city as a base to expand
into mainland China. Experts warn that Beijing would shoot itself in the foot if it takes an increasingly hard line against protestors, seriously damaging Hong Kong’s standing as a stable financial center.
There’s $3 trillion in dollar-denominated debt issued by Chinese companies, according to estimates. And Hong Kong, an important source of capital for China, provides roughly a trillion dollars of that amount, according to Victor Shih, a professor of political economy at the University of California–San Diego School of Global Policy and Strategy.
U.S. banks and investors have lent roughly $180 billion to Chinese banks and Chinese companies mainly through Hong Kong, Shih said in his testimony at a congressional hearing held by the U.S.–China Economic and Security Review Commission on Sept. 4.
U.S.-based pension and mutual funds also own additional billions in bonds issued by Chinese entities, he said.
“When you’re in debt to the tune of $3 trillion, you don’t want your creditors to suddenly compress your credit limit by $1 trillion,” Shih said at the hearing. “That would be a big problem for China. And I think that may be one of the reasons why China thus far has chosen, I would call it, a very moderate and soft-line approach in Hong Kong.”
The reason Chinese entities are borrowing through Hong Kong is that the financial institutions around the world, including the International Monetary Fund, legally treat Hong Kong as a separate entity, he said.
The debts are issued by the subsidiaries of Chinese companies headquartered in Hong Kong, allowing them to enjoy lower interest rates compared to debt issued in mainland China.
In the early years of China’s boom, companies and local governments could borrow liberally knowing that accelerating growth could help ensure that their gambles paid off. Now that the country’s economy is huge and maturing, it has become increasingly difficult for China to simply grow its way out of its debt.
“China already is in the midst of the largest credit bubble the world has ever seen,” said Victor Shih, an associate professor at the University of California, San Diego. And, Professor Shih added, the Chinese government has not been able to wean itself off its debt habit.
“The government simply cannot afford to think about the medium term and must focus on short-term continuation of the credit bubble,” he said.
The latest round of government-driven financial largess was remarkable in size and scale, economists said.
Yujiapu, Tianjin's financial district, is building China's Manhattan, with loans since most inhabitants still have to arrive. That goes well, says financial analyst Victor Shih, as long as the project has the political goodwill in Beijing to subscribe giants loans, he tells in the New York Times.
The New York Times:
For now, Tianjin can continue to borrow for projects like the Juilliard campus because it has a powerful patron in Beijing, said Victor Shih, an associate professor at the University of California, San Diego, and an expert on the Chinese economy. That official, He Lifeng, was once the No. 2 Communist Party official in Tianjin. Mr. He now heads the central government agency that approves all major development projects, meaning he can authorize banks to lend more money to Tianjin.
“If the political will collapses for the Binhai area, then the bank loans will begin to dry up and the whole area is in trouble,” Mr. Shih said.
Officials at the National Development and Reform Commission, the agency where Mr. He works, did not respond to a request for comment.
China's economy is going through a reduced growth and, says investor Jim Rogers, that might be an excellent idea as the country has to bring back its debts, he says on his weblog. 'China's economy is slowing, fortunately for China and fortunately for the world."
Jim Rogers:
China's economy is slowing, fortunately for China and fortunately for the world. When anything goes straight up without a pause is going to have a huge crash someday. The situation, the way I read it, well, you know what's happening with Trump, you know what's happening with the trade war and things of that sort. But also China has built up a lot of debt in the last decade or so and the government is now insisting, demanding and forcing people to start reducing their debt. When you go from adding debt to reducing debt, you're obviously going to have a slowdown. That's my assessment but I'm sure there are other things going on as well.
China's bad loans are increasing, but the country's financial authorities have been trying to crack down on this source of financial stability. How are those efforts faring now China is suffering from a relative drop in economic growth. Financial analyst Sara Hsu discusses the dilemma's the authorities are facing especially now the trade war is ongoing. Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers' request form. Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.
, 
