Chinese Communist Party (CCP) has created a monster just to decrease the vulnerabilities of Xi Jinping. While Beijing is somehow managing to keep its economy alive on life support, these persistent situations are making the local governments crack under pressure. China is one of the world’s most indebted significant economies, with both public and private debts. Worse, its state-owned banks, particularly in the real estate sector, are sitting on mounds of bad debts and non-performing loans. This economic catastrophe is bound to squeeze the funding to state governments, and as the resentment among the populace increases given the decreasing living standards, the local governments can start falling as dominos.
Economy in disarray and mounting bad loans:
As China’s classification of non-performing loans differs from that of the United States, troubled or possibly distressed loans may be under-counted. Many of China’s ‘regular’ loans would be classified as non-performing in the United States, where non-accrual loans, as well as loans that are 90 days past due but still accruing interest, would be labelled non-performing. Because China has five types of issue loans, this is a considerably tougher definition of non-performing loans. Loans may be classified as “special mention” on Chinese banks’ balance sheets rather than non-performing loans, despite the fact that the probability of failure is extremely high.
Banks in China have observed a decline in loan income, implying that non-performing loans are higher than stated. This fact is frequently concealed by Chinese banks reporting high profits. But, profits are subjective, and bad loans that have been moved off the balance sheet may not be included in the revenue minus costs computation. However, the ratio of interest revenue to loan volume is a strictly objective statistic which reveals that Chinese banks are not performing as well as they appear to be.
Local governments and a catastrophe in the making:
Another source of concern is local government debt. The central government has pressed local governments to enhance economic growth through infrastructure expenditure, which is supported by local government financing vehicles, as part of China’s development objectives throughout the previous decades. China’s local government debt was officially $3.97 trillion at the end of last year. Experts, once again, feel the true figure is significantly higher. There is also “hidden debt”, which is the result of local governments acting as guarantors for other organisations that borrowed money.
Off-balance-sheet borrowing takes place through so-called local government funding vehicles, which are created only for the purpose of borrowing money and investing it in local infrastructure development. As a result, the debt is recorded on the accounts of the local government finance vehicles rather than the local government, despite the fact that the local government is ultimately responsible for the loans.
Over the last eight years, the debt value of these local government financing vehicles has nearly tripled. According to Goldman Sachs, “hidden debt” in China could be as high as $8.2 trillion, or over half of the country’s GDP.
Shrinking opportunities and mounting danger for local governments:
Local governments have issued a record amount of bonds. They had a quota of $3.75 trillion in 2021, but the central government reduced it to $3.65 trillion in an effort to decrease debt. Even if bond quotas are reduced, debt is still piled on top of debt. 60% of the proceeds from these bonds were utilised to retire maturing debt rather than investing in infrastructure.
Selling land to property developers accounts for around a third of local government revenue. This puts local governments, developers, and banks in a situation where they are influenced to make more loans rather than less. Making dubious real-estate loans while carrying bad debts over to the following quarter has allowed banks to increase their on-paper earnings. According to some estimates, the property industry accounts for around 29% of China’s GDP and roughly 30% of all bank loans.
Since 2008, much of the expansion has been powered by debt – a potential problem that has been overlooked because job creation and rising living standards are priorities. Job creation, on the other hand, may be less of a motivator now, leading the CCP to be more ready to rein in debt and rein in areas of the economy that were permitted to run amok for the sake of greater growth.
All in all as things keep heading for the worse, and the bad loans keep mounting, the situation is looking grim. While the central government can manage the cash crunch to an extent, local governments stand too vulnerable, as Beijing keeps hiding all the bad loan underneath the rug of deceit.