China's huge debt problem

China has huge debts internally. Also, China has loaned to third world countries that are burdened by debt. At the same time, China has loaned money to the U.S. by buying Treasuries, although it is letting its holdings gradually diminish.

https://ticdata.treasury.gov/Publish/mfh.txt

Why China Has a Giant Pile of Debt

A major lender abroad, China is facing a debt bomb at home: trillions of dollars owed by local governments, their financial affiliates, and real estate developers.
By Keith Bradsher, The New York Times,
July 8, 2023

China, which has lent nearly $1 trillion to some 150 developing countries, has been reluctant to cancel large debts owed by countries struggling to make ends meet. That is at least in part because China is facing a debt bomb at home: trillions of dollars owed by local governments, their mostly off-the-books financial affiliates, and real estate developers…

Researchers at JPMorgan Chase calculated last month that overall debt within China — including households, companies and the government — had reached 282 percent of the country’s annual economic output. That compares with an average of 256 percent in developed economies around the world and 257 percent in the United States.

What distinguishes China from most other countries is how fast that debt has accumulated relative to the size of its economy. …

In 2010, only 5 percent of China’s overseas lending portfolio supported borrowers in financial distress. Today, that figure stands at 60 percent… [end quote]

I don’t know how this will impact the American asset markets. China has not yet had a massive financial crisis. It’s hard to say how the impact of a debt crisis in China and/ or third world borrowers might propagate internationally.

Wendy

6 Likes

I do not know the immediate relationship between the two markets US and China. I do know we will go on without them.

Because all that debt is domestic, I suspect China can avoid a financial crisis. Where I think the impact is and will continue to be felt are in demand and private investment. Entities in debt, whether it be people or companies or local governments, curtail spending and investments.

Reduced domestic demand leaves China with only two ways to pump economic growth, more giant public works projects and/or manipulate the Yuan to stimulate exports. Unfortunately for China, for a variety of reasons both strategies have pretty much run their course.

I’m a China pessimist. As the rapidly aging population increases the proportion of dependent elderly, the declining number of young folks are discouraged by 20+% unemployment for their demographic and being priced out of the housing market. It is increasingly difficult to see where domestic demand will come from. I think China will exhibit economic stagnation, much like what Japan has been going through but on steroids.

6 Likes

It certainly could work out that why, though I fail to see why it has to.

The US (and other countries) clearly “stoked demand” with Covid relief checks, why couldn’t China just do the same thing?

And I see lots of running room for China, especially in light of their well directed economic system. For instance, when US auto companies moved in they had the market to themselves. Chinese automakers have just claimed more than half the market, and in a bit over a decade. China has just started producing passenger jet aircraft, and I suspect in a decade they will be a major player. They have taken over the solar panel market, are working on the wind turbine market, and (I’m sure, given the current politics) are working to bring their chip fabs up to grade. Could that take several years? Sure, but if they think a sector is worth it, they’ll do it.

As for the demographic challenge, it’s something every country wrestles with to a greater or small degree. Imagine the Soviet Union following WW2. Or Germany. And now the US. Challenge? Yes. Insurmountable? Hardly.

I don’t know that the Japanese stagnation teaches us anything, but perhaps it will turn out like that. There are lots of things coming, from geopolitics to trade wars to demographic issues to resource shortages/surpluses. I’m not pessimistic about China’s chances at all. If they had better transparency and corporate governance I’d be investing there for sure.

4 Likes

I think the main thing it teaches is that it is possible. It doesn’t have to be what happens, but it can happen.

1 Like

We live in industrialized societies including China regardless of how many people are still dirt farmers.

That means the amount of labor is not that important. The demographic arguments mostly work because it is what it is. China’s economy is stymied and China’s population is falling. The two are not as correlated as is made out.

China has much bigger problems.

Probably because it wouldn’t work. China has a very high personal savings rate. That’s largely because there are few social safety nets for the elderly and about 90% of the population own a house in a nation where housing prices are very high (relative to wages). It is likely that relief checks will mostly go for retirement or to pay down the mortgage rather than spending.

Much of that economic success is not sustainable. A lot of the seemingly successful Chinese companies are dependent on government subsidies and currency manipulation to be able to compete internationally. That will become increasingly more difficult to sustain as Chinese worker costs rise. And getting back to the OP, a huge chunk of that GDP growth was driven by unproductive government spending funded by domestic debt. That too is not sustainable.

China’s demographic challenge is of historic proportions as few (if any) nations have ever aged so quickly. And I do think demographics is the primary determinant of China’s current situation.

Developing nations are generally associated with a high birth rate and short life span, giving rise to a young work force and lots of young dependents. As these nations develop, wealth and education cause a decline in fertility and increase in lifespan. This initially results in fewer young dependents relative to the work force, representing the optimal period of productivity and economic growth. This is called the demographic dividend. However, as the population ages the number of elderly dependents increase relative to a declining work force, reducing overall productivity. Economic growth slows. It is imperative for nations to build a support network for the elderly during the demographic dividend (when money is plentiful) in order to secure a stable transition from rapid to slow economic growth. China failed to do this.

Because of its one child policy, China is going through these phases on steroids. It benefitted from a phenomenal demographic dividend that has now come to a sudden end. The only question in my mind is how rough the landing will be. I think it will be difficult for China not to crash. China’s producer prices has declined for nine consecutive months and their reported inflation is 0. China is very likely about to enter a dangerous deflationary period. The combination of deflation, high debt, and a declining productive workforce can very quickly lead to prolonged economic stagnation if not recession. Meanwhile its elderly population is rising quickly with few social safety nets in place. These are not easy problems for a nation preoccupied with social stability.

4 Likes

It was relatively well-directed for decades, but recently they appear to have hit some major snags regarding malinvestment. For example, building massive complexes of buildings that have nobody living in them, aren’t truly complete, and have funding that has dried up.

2 Likes

Sez you. Meanwhile Chinese EV manufacturers have gone from zero to half the market and are launching internationally. They are seeding companies across the world in multiple international initiatives and drawing international investment from advanced economies everywhere. Their energy production is increasing faster than that in the West (much of it coal, which is not good), and their standards of living are continuing apace.

The service sector has gone from 25% to 50% of the Chinese economy in less than a decade, rising faster than the (so-called) advanced economies in the West. (The US is now at 77%) and in barely 30 years the Chinese have gone from 80% living agriculturally to 25%, with mass migrations to the cities, all without significant political upheaval.

The “costs” of Chinese labor are increasing, surely, but that seems to have knocked down economic growth by a mere percent or two; it doesn’t seem the cataclysm your VOA article suggests. I note that implementing solutions in that political system seem far easier than here, where overheated political rhetoric - often for partisan, not actual gain - belabor even the most trivial changes.

That can also lead to bad decisions, of course…

Quite true, but then we have our own economic disasters to point to. 2008 and mortgages is one such, I would put Enron front and center as another. No system is prone to perfection, and I’m sure that China will have many challenges ahead, especially given their recent entrance onto the world stage, I just don’t subscribe to the (ancient) theory that we’re ‘Murica, and they’re not, so they’re doomed. I think the Chinese have every right to be optimistic about the next decade, with the possible exception of the Taiwan problem (which admittedly, could be huge both for them and the rest of the world.)

5 Likes

Not unlike many American companies…

3 Likes

Yes they have. But I believe BYD is the only Chinese EV maker making a profit. Having most Chinese automakers price their EVs below production cost will take market share from the foreign devils, but it is not sustainable.

Impressive. However, a good portion of these accomplishments occurred because of massive government spending, cheap labor from favorable demographics, and currency manipulation that helped exports. China now has a debt problem that makes large spending programs more difficult, increasingly unfavorable labor demographics, and trade partners who are becoming more protective.

No major economy with the age demographics projected for China over the next 20 years has been able to sustain economic growth at anywhere near what China is shooting for.

1 Like