In the backdrop of China’s slowing economy and concerns about trade with the U.S., there is a bigger problem out there, which is China’s mounting debt crisis.
Managing debt is not a problem that is particular to the Chinese, as all governments struggle with this as they balance the needs of stimulating their economies with borrowing with managing their debt ratios and servicing costs.
One of the weak points about democratic governments is that the policies that emerge cater to the wishes of the people, and politicians that do not heed this enough are simply voted out of office and replaced with those who are more willing to give the people more what they want, which is usually more spending.
Public support isn’t the only major influencer here, as if we do get to a crisis like we did in 2007, governments may step in and act in ways that may not be that popular, as we saw with the hundreds of billions of dollars that were used for bailouts during this time.
During less intense times, public opinion does play a significant role generally, and does serve to steer us away from fiscal responsibility to some degree. A lot of people may not care so much for where we may end up down the road, where they may discount the future considerably in favor of more prosperity now.
The Chinese government doesn’t have to worry about such things very much though, even though keeping public sentiment under control is still a concern for them. If things do get bad enough, the people may end up speaking, but given their limited options, their responses will need to be directed toward more drastic ones, the sort of things that topple governments not by public vote but by revolution.
This type of scenario is on the distant horizon, but this is not a threat that the Chinese just brush off, and when you’re running a totalitarian government and want to stay in power you do need to still keep your ear to the ground to some degree.
China Has Borrowed Itself into Prosperity
As China has emerged from what was essentially a backward economy by today’s standards into the economic giant that it is today, this did bring a lot of new prosperity to the Chinese people. While we may marvel at the success of this transformation, it’s not that this does not come with it some real costs and some real concerns.
China does enjoy a level of control over their country and economy that democratic governments cannot even dream about, where their actions are not constrained or even need to be influenced by external parties or procedures, short of what may prompt a mass revolt that is.
This added power does give a government the opportunity to respond to crisis in a way that isn’t contingent upon any external approval, but it can also be used to escalate borrowing well beyond what may be manageable, something we are already seeing in China.
Should they borrow too much, or should they regulate too little, this can at least potentially create a state of crisis that may compare or even surpass anything we’ve seen in the Western world. We’re already seeing signs of some real trouble brewing on the horizon, and some of this is now appearing right before our eyes.
We could characterize China’s pending debt crisis not so much as a shock-based event like we often see in Western economies, things like stock market crashes or dramatic economic downturns, as it is perhaps a slower burning fire, albeit a very large one.
People have been speaking about China’s potential debt crisis for several years now, mostly due to their level of borrowing not being sustainable. China has essentially borrowed itself into prosperity, and whenever you borrow this much money, there has to be a time of reckoning, as the cost of servicing this debt mounts.
In a real sense, this situation is a lot like the housing crisis of a decade ago, where things would continue to move along as long as home values kept expanding, and people could keep refinancing their homes to stay ahead of creditors. Once these home values stopped going up, the situation was bound to implode.
China Cannot Really Afford Much of a Slowdown
China needs to keep expanding at a healthy rate to not see their debt to GDP ratios go even higher, and they are already pretty high already. China’s total debt to GDP has doubled over the last 10 years and now sits at 253%, and is predicted to eclipse 300% by 2022, according to the IMF.
In comparison, the U.S., with all the debt they have, has gotten this ratio down below 100% now, and China has now earned the title of the king of this problem, having now eclipsed Japan, and it’s just going to get worse.
It’s not that these numbers are that alarming, it’s the trend that is the bigger concern, and while this snowball gets larger each year, how big it will eventually grow to is the scary part here.
That is using the numbers that are released, but much of China’s debt isn’t even on the books officially. This local debt not included in the figures may be as high as $6 trillion by some estimates. This is considerably less than the $30 trillion that they are counting, but this is still quite a bit more debt and would put the debt to GDP ratios up to where this becomes even more of a concern.
We may already be seeing the repercussions of the combination between a slowing economy and mounting debt. Officially, non-performing loans represent less than 2%, but Charlene Chu of Autonomous Research, a leading expert on China’s credit crisis, believes that a quarter of these loans are in default, worth $8.5 trillion.
The way China is trending, we may be heading for even worse predicaments. China’s imports declined notably in December, and if anything speaks to a slowdown, this statistic sure does. Meanwhile, government spending on moves on full steam ahead, and the plan here is to escalate this further by putting even more pressure upon the economy.
China cannot afford to see its economy slow down too much given the mounting pressures it is under, and therefore the news that they are now so seemingly eager to resolve the trade dispute with the United States should not be too surprising if we look at the situation closely enough.