Opinion: Nursing China’s Debt Hangover

A large screen shows Chinese Premier Li Keqiang delivering a speech during the opening session of the National People’s Congress (NPC) in Beijing on March 5.


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In any other country, an official target of 6% annual economic growth would be almost absurd. In China, this goal announced on Friday is so modest that it is clear that something else is going on. That something: Beijing’s escalating fears of a rumbling debt volcano.

Many observers scratched their heads when Prime Minister Li Keqiang unveiled the target of 6% GDP growth at the annual National People’s Congress. Most economists expect an expansion between 8% and 10%. Given that the comparison is made with the pandemic slowing down last year, it would be next to impossible for China not to achieve 6% growth. Last year, Beijing didn’t publish a growth target for the first time since the mid-1990s, and it might have made sense not to revive GDP targeting.

So why publish a lowball target that China is sure to reach? One plausible theory is that this is part of a debt containment strategy. More aggressive GDP targets have in the past led central, provincial and local governments to increase the numbers by using cheap loans to fund public white elephant construction projects or to subsidize politically affiliated companies. Perhaps Mr. Li and his boss, President Xi Jinping, hope that setting a humble goal will signal their displeasure with this strategy.

If so, you need to signal harder. Elsewhere in the economic plan, Beijing is tightening limits on local government borrowing for public works – barely. The bond issuance rate will decrease from 3.75 trillion yuan last year to 3.65 trillion yuan ($ 562 billion) – a decrease from 3.7% to about 3.4% of GDP. Given China’s saturation with infrastructure after previous stimulus measures, it’s hard to say what this new borrowing will buy.

Beijing knows the scale of the challenge it faces. Total debt has increased from 250% before the pandemic to around 270% of GDP. Too much of that loan went to government boondoggles, government corporations, and real estate. Too little has gone into productive private companies. Banking regulator Guo Shuqing highlighted the problem when it warned of a “bubble” in Chinese house prices this week.

It will be a different matter to solve. So far, Beijing has stuck to its strategy of tolerating a higher number of loan defaults, including from state-owned companies. Capital Economics calculates that in the past six months, for the first time, more state-owned companies than private companies have defaulted.

The defaults extend to the sensitive real estate industry and overseas bond issues as China Fortune Land Development defaulted on a $ 530 million bond issue overseas this week. The aim is to discipline the markets, but not too much. Beijing also relies on defaulting companies to enter repayment agreements with creditors, possibly to discipline company managers while limiting creditors’ losses.

Despite all of these challenges, 6% could be a realistic GDP growth target this year, and China has exceeded expectations previously. But a global economy put down by Covid-19 can hardly afford the second largest economy to get a debt flu.

Paul Gigot interviews former Trump security officer Matthew Pottinger. Photo: ZUMA Press

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