China's Spending Crisis is Worse Than Evergrande Collapse: CCP Bankrupt, Protests Everywhere

Summary

China's economy is facing a deep crisis due to excessive local government and corporate debt, with LGFVs and state-owned enterprises playing a central role. Despite efforts by the government to avoid a debt deflationary spiral through low interest rates and money printing, the country suffers from low consumer spending, rising inequality, and stagnant wages. The Chinese Communist Party's focus on state control and centrally planned investments has exacerbated the situation. Without reform, particularly reducing state intervention and allowing for private sector growth, China risks continued economic decline.

Takeaways

• 😀 Local governments in China relied heavily on Local Government Financing Vehicles (LGFVs) to fund projects due to their inability to issue debt before 2014.
• 😀 LGFVs allowed local governments to raise money through state-owned companies, creating a significant real estate and infrastructure bubble.
• 😀 Despite reforming the budget system in 2014, LGFVs are now burdened with up to 10 trillion in debt, posing a severe financial risk to China.
• 😀 Corporations in China, especially state-owned enterprises, hold around 160% of GDP in debt, which is significantly higher than the US in relative terms.
• 😀 A large portion of Chinese state-owned enterprises (SOEs) is in financial distress, holding 45% of total corporate debt but generating only 15% of earnings.
• 😀 China's economic slowdown and COVID-19 exacerbated the debt problems of both state-owned and private companies, leading to a growing financial crisis.
• 😀 The risk of a debt deflationary spiral is imminent, where reduced consumer spending and falling prices result in widespread defaults, exacerbating the economic crisis.
• 😀 The Chinese government has been using low interest rates and heavy money printing to stave off a debt deflation spiral, but these measures are unsustainable long-term.
• 😀 China’s chronic low consumer spending is rooted in income inequality, where only 60% of GDP goes to household disposable income, compared to 77% in the US.
• 😀 The CCP’s economic policies prioritize state-owned enterprises and centralized investment strategies, which have led to a concentration of wealth and inefficient economic growth.
• 😀 The solution to China’s economic problems would require reducing state control, selling off state-owned enterprises, and allowing for a market-driven economy that supports higher wages and consumption.

Q & A

What are Local Government Financing Vehicles (LGFVs) in China and how do they impact the economy?

LGFVs are companies set up by local governments to borrow money for infrastructure and real estate projects, bypassing the restrictions that prevent local governments from issuing debt directly. These vehicles played a key role in funding growth targets but also contributed to China’s escalating debt crisis, as their borrowing spiraled out of control.

How did the Chinese government address the debt issue caused by LGFVs after 2014?

In 2014, China reformed its budget system to allow local governments to borrow money directly, rather than relying on LGFVs. However, by that point, the damage had already been done, and the debt accumulated by LGFVs remained a significant challenge, contributing to more than half of China's GDP in total debt.

What is the current state of corporate debt in China, and how does it compare to other economies?

Chinese corporations hold about 160% of GDP in debt, which is more than double that of the U.S. in relative terms. This represents one of the highest corporate debt levels globally, with state-owned enterprises particularly burdened by debt, as they account for 45% of total corporate debt but only generate 15% of corporate earnings.

What is the potential risk of a debt deflation spiral in China?

A debt deflation spiral occurs when businesses are unable to generate enough revenue to meet debt obligations due to falling prices and weak demand. This causes defaults, which in turn hurts the economy further, creating a vicious cycle. China is at risk of entering such a spiral, particularly as consumer spending remains low and corporate debt continues to rise.

How has the Chinese government responded to the threat of a debt deflationary spiral?

The Chinese government has lowered interest rates and increased money printing to maintain economic stability and prevent a debt deflationary spiral. These measures are aimed at making debt cheaper, thus helping businesses and local governments manage their heavy debt loads. However, this approach may only delay the inevitable crisis.

What role does income inequality play in China's economic issues?

China suffers from significant income inequality, with only 60% of GDP going to household disposable income, compared to 77% in the U.S. This disparity is partly due to the dominance of state-owned enterprises and the neglect of wages for ordinary workers, which limits consumer spending and exacerbates the country's economic problems.

Why is the Chinese economy so dependent on state-owned enterprises (SOEs)?

The Chinese economy is heavily reliant on SOEs due to the Communist Party's control over key sectors of the economy. These enterprises absorb significant investment, but they often prioritize state goals over the well-being of ordinary citizens. This leads to inefficiency and limits economic growth for the population.

What is the suggested solution to China's economic challenges, according to the script?

The solution proposed is for China to reduce state control, privatize state-owned enterprises, and shift to a market-driven economy. By doing so, the economy would become more efficient, wages would rise, and consumer spending would increase, leading to more sustainable economic growth.

Why is the Communist Party unlikely to implement the proposed solution for China's economy?

The Communist Party is unlikely to implement these reforms because reducing its control over the economy would undermine its political power. The Party prefers to maintain control over state-owned enterprises and economic planning to ensure its grip on power, even if this perpetuates inefficiency and economic problems.

What are the long-term consequences if China continues its current economic strategy?

If China continues its current strategy of heavy state intervention, reliance on state-owned enterprises, and increasing debt, the country will likely face a severe economic crisis. The debt will become unsustainable, and the economy may enter a deflationary spiral, leading to widespread financial instability and a loss of public confidence in the government.