Rising Debt Creates Interesting Time for China
April 18, 2018 7:59 PM
With the U.S. appearing to withdraw from some of its international commitments and antagonizing friend and adversary alike with its trade policies, these seem to be good times for China’s President Xi Jinpeng.
Not only has he essentially become leader for life after a rewrite of the PRC’s constitution, but his Belt and Road initiative offers a different vision of global integration, which when backed by China’s considerable foreign exchange reserves, could conceivably be renamed one road, one belt, one bankroll.
But a collection of western journalists and economists, some with considerable time living in China, are skeptical of China’s continued upward trajectory, though none predict a fall of the great wall of positive news reports from the party’s propaganda ministry. Their thesis is that the accumulated debts of China’s state-owned companies, addiction to state-delivered subsidies and a culture of putting off tough decisions will at some point slam the brakes on decades of remarkable growth with a corresponding crimping of national ambitions.
Concentration of power can be helpful in getting things done, but issuing orders does not necessarily get the desired results. According to one story, a few years back banks were ordered to more actively trade foreign currencies. So in the mornings banks bought a set number of dollars. In the afternoon, they bought back the same amount of renminbi, the Chinese currency. On paper, it looked like impressive results.
The directive had been followed. In reality it did not move the market as the policy makers had intended. This appearance of activity and compliance with orders is apparently not confined to currency markets. It reminds some cynics of the ancient axiom: The sky is high, and the emperor is far.
President Xi is of course on to all of these tricks. He indirectly admonished bureaucrats recently, telling them to place serving the people over “holding meetings and exchanging papers.” Good luck with that.
Overcapacity is another problem. The Chinese government dumped huge sums of money into cement, steel and other kinds of production facilities, supplied by state-owned firms that vacuumed up raw materials from abroad. The factories kept churning out mountains of products to meet demand that no longer existed. Some of the surplus was sold in the international market, pushing down prices and angering producers in other countries. Central planning mistakes can cause unintended consequences, including diplomatic friction. China’s government will need to work overtime managing its trade relationship with its largest export market, the United States.
Revenge of the zombies
A third problem is the so-called zombie firms—state-owned enterprises that don’t produce much but gobble up subsidies in the form of loans that become debt. These zombies behave more like vampires in that they suck blood from the larger economy. The government is reluctant to pull the plug on them because they employ millions of people. And the government and the Communist party that runs it are reluctant to do anything that might cause widespread anger and chaos, threatening its legitimacy. Huge debt. Huge problem. No easy solution.
Central planning created the zombies. But the pieces don’t always fit together as planned. A giant fabrication machine, perhaps the largest in the world, sits idle. It was intended to make parts of the fuselage of a passenger jet, the first produced by China. But the jet is years behind schedule, and only a few months ago made its first test flight. Airplane experts say its technology is already outdated, as is the official dream of breaking the Airbus/Boeing duopoly. Costs have gone through the hangar roof, but no one is quite sure by how much, or what happens next.
Real estate is another debt trap where runaway speculation, weak regulation and orders to crank out building materials come what may have created a glut of buildings, many of which stand empty in places where there are no tenants.
High rates of economic growth have been necessary to lift millions out of poverty, connect the country with high speed rail, pay pensions and provide a billion plus people with healthcare. All amazing accomplishments. But the population is aging rapidly, and the growth has caused inflation which raised wages to the point where once reliable jobs are now moving to cheaper countries in Asia. While it’s easy to join the chorus of western critics, and even some Chinese, that the Great Wall of economic success will soon come tumbling down, those chattering classes are growing hoarse and there’s been no collapse or even hard landing.
Looking at the available evidence objectively, it’s hard to believe that China can maintain projected growth rates of six percent, which it probably needs to keep everyone content. That and the further centralization of all decision making under the newly all-powerful President Xi, and the limited capabilities and bandwidth of the bureaucrats facing a daunting agenda of challenges, and it’s easy to see why the Chinese characters phrase “May you live in interesting times” is an expression of both good luck and a curse.
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