China’s economy is getting wrecked
thanks to bad loans.
So to fix it, they want to issue...
more loans!
Welcome to China Uncensored.
I’m Chris Chappell.
China’s entire economy is stumbling thanks to a series of unfortunate events.
A massive heatwave is drying up rivers and cutting off power.
Authorities are still shutting down cities as part of their zero Covid policy.
And if that wasn’t bad enough, there’s a lending crisis and massive protests.
It’s mostly thanks to a series of horrible policies and corruption in the real estate
industry.
Real estate is about 30% of China’s GDP.
See, developers in China kept selling apartment units before completing construction.
They used the proceeds from sales, plus loans from banks and private investors, to further
expand business.
Everyone assumed real estate prices and demand would keep going up.
Until they didn’t.
It was essentially one big Ponzi scheme.
“Now developers are going bust after being deprived of easy credit, prices are falling,
homeowners are refusing to pay mortgages on unfinished homes and the slump in properties
being sold and construction is crippling local governments that rely on land sales for income.”
If you want to learn more in-depth about the property crisis, check out our previous episode
on it.
The link is below.
But making things even more complicated are China’s asset management companies.
They were designed to buy bad loans from banks after the 1997 Asian Financial Crisis.
But “Instead of fulfilling their mandate to clean up bad loans and fade away, they
just became progressively more adventurous in their funding and structuring.”
In other words, the state-owned companies that were created to fix the original lending
crisis ended up decades later contributing to a new crisis by making the very kinds of
bad loans they were supposed to stop.
And now they’re seeing their profits tank on property losses.
So how is the Chinese government responding to this new lending crisis?
By issuing more loans, of course!
More after the break.
Welcome back.
China’s economy is in a mess thanks to bad loans.
So China’s regulators are encouraging banks to make even more loans to fix the economy.
Galaxy brain move.
Last week, China’s State Council unveiled 19 policies worth a trillion yuan, or about
150 billion dollars.
It’s the latest of many spending programs.
The latest 19 policies include extending about $44 billion in credit to two state-owned banks
to finance infrastructure projects.
Local governments have also been given permission to issue about $73 billion of special bonds.
That’s in addition to the more than $500 billion they were given permission to issue
earlier this year.
Of course, all of those bonds have to be used for infrastructure projects.
State-owned power generation companies would also be allowed to sell $30 billion worth
of bonds.
And remember, bonds are basically just loans.
So yes, loans upon loans upon loans.
It’s getting out of control.
Of course, it’s not surprising that the Chinese Communist Party is spending all this
money on infrastructure projects.
They’re like the dad in My Big Fat Greek Wedding, who thinks that Windex solves everything.
Only instead of Windex, it’s infrastructure projects.
Need to grow your GDP?
Infrastructure projects.
Secretly colonizing Africa?
Infrastructure projects.
Too many young, unmarried men?
Infrastructure projects.
According to Bloomberg, “Beijing is making [about 1 trillion dollars’ worth] of government
funds available for construction projects.”
“Total spending could be even higher than that—three times that amount, by some estimates—once
bank lending and corporate funds are added.”
To make these loans easier, China’s central bank has cut interest rates,
and large commercial banks have followed suit.
Lower interest rates make lending cheaper.
But the flip side is, they also make China’s inflation worse.
Inflation is bad enough already, with China’s currency worth less than it’s been in two
years.
At any rate, the central government has issued policy directives.
And they expect them to be carried out.
But a lot of the local banks in China don’t really want to carry them out, or they do,
but they’re having trouble, thanks to challenges with operations, loss of investor confidence,
and rising costs.
“Financiers have been reluctant to invest in projects that likely won’t turn any sort
of profit since they’ve already sold out.”
But China’s central bank is having none of that.
It’s nagging commercial, rural, and even foreign banks with phone calls to get them
to lend.
Some of these banks are being told to ensure loan growth outpaces financial investments.
They’re even warned that “If you do not lend, you can’t invest.”
They’re also warning banks not to sell Chinese currency.
But according to Reuters, “Some of China’s state-backed financial institutions are pushing
back on Beijing’s calls to support the embattled property sector.”
Meanwhile, the central government is trying to make sure its plans are implemented by
dispatching special task forces to supervise local authorities.
But even if the stimulus goes as planned, many experts say these efforts fall short.
Economists at Goldman Sachs say, “Barring major policy easing measures, we think overall
[economic] growth will remain sluggish during the rest of this year.”
According to investment bank Nomura, “The measures aren’t ‘game-changers.’”
That’s partially because the real estate market is still in deep trouble.
On top of that, “Chinese government entities could face a $900 billion funding shortfall
this year.”
That’s because local governments still have to fund the Zero Covid policy—including
mass testing and mass surveillance—without funds from the central government, all while
getting far less revenue from selling land to developers.
There’s quite a lot of pessimism for how things will go in China.
A leaked email from the founder of Huawei, a Chinese state-owned telecommunications company,
warned of a “very painful historical period” and said to brace for survival.
One thing that could be done to alleviate the pain would be to lift the zero Covid policy.
“Frequent COVID outbreaks, mass testing, and lockdowns are acting as a handbrake for
the Chinese economy.”
But Chinese leader Xi Jinping won’t back down from zero-Covid.
That’s because authoritarians like him don’t let economics take priority over political
and ideological control.
Especially with the Chinese Communist Party’s Congress coming up.
There’s no way he’s going to admit zero Covid is stupid.
And now I’m going to answer a question from a member of the China Uncensored 50-Cent Army.
Those are fans of the show who contribute through Patreon or Locals.
Skip Davis on Patreon asks: “So what happens when the chikoms run out of water?
they're prolly gonna take it from someone else is my guess.
they deplete everything around them without regard to consequence.”
Hi Skip, good question.
The Chinese Communist Party has been concerned about water shortages for a long time.
In fact, one of the reasons they occupied Tibet in the 1950s is that Tibet is the original
source of water for most of Asia, and Mao Zedong wanted it for hydroelectric power,
and probably also for the ability to control surrounding countries.
China needs water not just for 1.4 billion people to drink, but also for growing crops
and for hydroelectric power.
So as the water situation gets worse, they’re already starting to do things like limit the
use of electricity and manufacturing.
And like you suggested Skip, China’s use of water, especially for hydropower, is causing
tensions with other countries.
That’s because the Chinese Communist Party is damming rivers that affect hundreds of
millions of people outside China.
Like the Mekong, in Southeast Asia.
They also have plans to build dams in Tibet that would divert water from the Brahmaputra
River.
That would have a huge effect on India and Bangladesh.
Some say this could cause a water war between India and China.
Thanks for your question, Skip.
And thank you to everyone who supports China Uncensored on Patreon.
Our show is supported mainly by viewers.
Visit Patreon.com/ChinaUncensored to learn more.
Or go to chinauncensored.locals.com
Once again, I’m Chris Chappell.
Thanks for watching China Uncensored.