Chinese local governments face an economic catastrophe.
They put themselves in deep debt,And Chinese people are suffering for it.
Welcome to China Uncensored, I’m Chris Chappell.
China’s economy is in a downward spiral, sinking ever deeper into debt to get out of
debt.Part of it is thanks to crazy spending.
China isn’t exactly known for being a spendthrift, but it bit off even more than it could chew
with its zero-Covid policies.
According to news outlet Radio Free Asia, “Financial analysts have estimated that
around one-third of public expenditure last year went on the rolling lockdowns, mass quarantines
and compulsory daily COVID-19 testing programs”
That’s a lot of money not spent on more productive things.
Then again, when you have an authoritarian regime in control, efficient economics isn’t
on top of its priority list.
While it still has to deal with the consequences of zero-Covid spending, shrinking revenues
aren’t helping matters.
China is in the midst of a housing crisis, which is really hurting local governments.
That’s because, under the Chinese Communist Party, provinces in China aren’t allowed
to levy taxes, despite having to shoulder expenses, things like public education and
health.
According to the Rhodium Group, “local governments…
are responsible for upward of 85 percent of expenditure but receive only about 60 percent
of tax revenue”.
And thanks to the pandemic, that tax revenue is also down.
Those local governments are going to have to come up with creative solutions to make
more money.
They can’t just do what all of us do when we need quick cash and… sell our kidneys.
Because this is China.
Why pay for organs when you can just forcibly harvest them for free?
To make revenue, local governments rely on things like land sales.
In China, all land is owned by the government and is sold or leased to companies for development,
so land sales are a big source of revenue.
In fact, land sales alone typically account for more than 40 percent of local government
revenue.
The housing crisis is putting this into jeopardy.
Last year, total official revenue from land sales dropped by over 23 percent, a loss of
about $288 billion.
That’s not exactly chump change, and the effects have been wide reaching.
As a result, 22 out of 31 provinces in China saw declines in revenues in 2022.
Now, every province and municipalities except Shanghai reports having fiscal deficits.
To top that off, local governments have way too much debt to deal with.
As The Economist put it, cities are on the verge of a debt crisis…
…and it’s about to get nasty.
But my favorite Chinese state-run media, The Global Times, says all this talk of China’s
debt crisis is just Western fearmongering.
China’s local government debt risk is controllable.
That’s what they say about all their problems.
Western fearmongering.
A panda broke loose from a zoo and ate your pomeranian?
That’s just Western fearmongering.
But things aren’t all hunky-dory.
According to S&P Global, last year, two-thirds of local governments had debts exceeding 120%
of their income, compared to just 77% in 2018.
That’s higher than unofficial debt thresholds set by Beijing.
The New York Times reports, “According to official data, China’s 31 provincial governments
owed around $5.1 trillion at the end of 2022, an increase of 66 percent from three years
earlier.”
Given that China always tweaks data to make itself look better, you best bet that things
are worse than what official reports say.
You know things are bad when even China can’t hide the fact that it owes tons of money.
Earlier this year, an International Monetary Fund report put China’s local government
debt much higher than what China reported.
Rather than $5.1 trillion, the IMF puts local government debt at $9.5 trillion, equivalent
to roughly half the country’s economy.
Half of what they make is already out the window?
What are they doing, renting in New York City?
That’s a joke… if anyone knows of an apartment in New York that costs *only* half of what
you make, let me know about that sweet deal immediately.
It’s even worse than that thanks to China’s hidden debt.
Where does that hidden debt come from?
I’ll tell you after the break.
Welcome back.
Even before Covid, Chinese local governments were collecting a lot of debt on the books,
but there’s even more debt that they aren’t counting.
What?
China fudging the numbers on something?
Nooooo.
I mean, sure, they lied about the amount of Covid deaths by plus or minus several million.
But debt?
Never!
The IMF puts local government debt at around $9.5 trillion, but it also says that the debt
could actually be double that amount.
Analysts estimate that China’s actual government debts surpassed $18 trillion last year, of
which nearly $10 trillion is so-called 'hidden debt.’”
By the way, if you just heard a loud clapping sound, that was the IRS rubbing their hands
together at the thought of anyone owing that much money.
Driving this hidden debt is local financing.
In particular, the local government financing vehicles, or LGFV for short.
LGFVs are businesses, owned by the local governments, that raise money needed to meet “growth
goals” from Beijing.
The CCP bans municipal authorities from borrowing from banks or selling bonds directly in the
market.
LGFVs allow them to get around that.
The Chinese government has put a lot of pressure on local governments to grow China’s economy,
especially in the wake of the 2008 financial crisis.
But, of course, local governments don’t have the funding they need using just the
budgets they’re given.
So they use LGFVs to spend directly on things like roads, bridges, subways, and long-term
state welfare projects.
According to Nikkei Asia, “LGFV bonds have been popular among investors because they
are deemed to carry implicit guarantees that the local government backing them will step
in to make repayments should the vehicle default.”
And, indeed, local governments go to great lengths to keep them running to prevent bad
credit, which would make it more expensive for them to issue bonds.
There are a lot of problems with LGFVs.
One of them is the fact that they’re very untransparent and hard to track.
Gee, I wonder why local governments in China would gravitate towards something that’s
untransparent and hard to track.
Andrew Collier, a managing director at Orient Capital Research , calls LGFVs a “black
hole of the Chinese financial system… used to fill the gap between local government revenue
and expenditure”
Given how pretty much all information in China is in a black hole, I wouldn’t be surprised
if China declared black holes Chinese territory.
It makes sense.
They’re the only thing in the universe that sucks more than they do.
Another problem is that LGFVs rarely make enough profit to pay back their own debt.
That’s why most rely on constant refinancing and frequent injections of cash to stay solvent.
It’s a feat of financial wizardry unrivaled even by David Blaine.
It’s also dangerous.
According to the Center for Strategic and International Studies, “one of the most
pressing potential risks to China’s financial system is the possibility that LGFV bonds
might start defaulting in large numbers”
China recognizes that hidden debt is a huge problem.
Chinese Premier Li Keqiang listed "preventing and defusing local government debt risks”
as one of the Chinese government’s major tasks for this year.
It’s on their to-do list along with improving food security, becoming the undisputed rulers
of the world, and catching up on this season of Ted Lasso.
Li said authorities must “improve the mix of debt maturities, reduce the burden of interest
payments, and prevent a build up of new debts while working to reduce existing ones,”
The Politburo, China’s top decision-making body, called for strengthening local government
debt management and strictly controlling increases in hidden debt.
Even Chinese leader Xi Jinping said “it’s necessary…to prevent and resolve hidden
debts.”
The only things he wants inflating are spy balloons The problem is, local governments
are stuck between a rock and a hard place.
They’re under pressure to meet growth and infrastructure targets but don’t have the
funding, so they’re willing to let debt rise to reach them.
So why not just walk away from LGFVs?
As a professor at Peking University points out, “If local governments walk away from
LGFVs, that simply throws the burden of loss onto the local banks who lent money to the
LGFVs, and these will have to be bailed out anyway by direct or indirect transfers.”
Now, I’m not saying LGFVs sound like Ponzi schemes.
But they don’t not sound like Ponzi schemes.
Kind of like how avocado pudding doesn’t not sound like delusional vegans spending
$11 on a mediocre “dessert.”
Local governments have to pay a good chunk of the debt soon.
And that could be difficult.
The chief China economist at UBS noted that "LGFVs are under considerable pressure on
debt repayment this year, because their income is often associated with real estate and land
sales”
According to the Wall Street Journal, “The main concern isn’t that cities will default
and trigger a financial crisis, though economists say that can’t be ruled out.
It is that cities will have to keep cutting spending, delay investments or take other
actions to keep creditors at bay, impairing growth for years.”
But these cuts are already happening, and it’s at the expense of ordinary Chinese
citizens.
I’ll tell you more after the break.
Local Chinese governments have a lot of hidden debt to deal with.
They hoped that economic growth would outpace or at least match their growing debt, but
it was never feasible to operate that way.
So what *is* their solution?
Well, isn’t it obvious?
Spend more money!
Many LGFVs went on a land-buying spree last year to fill the vacuum left by developers
while borrowing more from state banks and issuing more bonds.
Meanwhile, state-run media announced a bunch of new projects.
For example, Guangdong, China’s biggest province by economic output, announced that
it would invest $1.2 trillion on 1,530 projects in 2023, and Henan said it would spend $261
billion on 2,500 projects.
And Chinese projects are always huge successes, and never catastrophic wastes of money, right?
Just like their…
um.
Or the, uh…
Well, I’m sure it’ll work out.
The idea is that investment in infrastructure improves living conditions, which encourages
people to spend money, which improves the GDP, and everyone lives happily ever after.
But these projects don’t necessarily translate into better living conditions.
As if China’s history of building useless roads isn’t proof enough.
This road is more useless than a Playstation to a platypus.
Because as everyone knows…
Platypuses prefer XBOXes.
Anyways, here’s an example: in Henan province, the city of Shangqiu said that it would fund
701 projects.
This was after saying that it had spent a billion dollars to pay interest on its debt,
which was another way of saying it spent a third of its entire tax revenue on just debt
interest alone.
So how will the city fund 701 projects?
Why, it plans to cut spending on education, health care, employment protection, transportation,
and many other public services.
This is after Shangqiu wasted tons of money on things like urban beautification projects
and roads to nowhere.
Because who needs… basic necessities, when you can have… nothing to show for it?
These kinds of cuts are happening everywhere in China.
Some of these cuts, especially those reducing medical benefits, have led to protests in
Wuhan, Dalian, and Guangzhou.
Others have affected people’s paychecks.
“Authorities in Yunnan said…that they could barely make their payroll.”
Al Jazeera reported that a civil servant in eastern China had her paycheck delayed for
three months.
And the Wall Street Journal reported that a street sweeper hadn’t received her monthly
salary of around $320 for at least seven months.
Although those aren’t the government’s fault.
That’s obviously the work of Western fearmongering!
Don’t let America scare you, you’ll get your checks… in another few financial quarters…
probably.
Things are so bad that “cash-strapped provincial and local governments are auctioning off public
schools, cutting back on contracts with private contractors, and slashing pensions.”
And once again, the beautiful Communist utopia collapses in on itself.
And this show would not exist without support from viewers like you.
YouTube frequently demonetizes, suppresses, and secretly unsubscribes people from this
channel.
Join what I call the China Uncensored 50 Cent Army, by contributing to the show on Patreon.
You’ll get a bunch of cool perks, including the ability to ask me questions I’ll answer
on the show.
Today’s question comes from
Greg, in response to our episode about Shein.
“Great reporting and explaining why this is so detrimental to businesses large and
small Chris!
What can be done to bring more light and focus on this issue???”
Great question Greg.
In case you haven’t seen our episode on Shein , it’s basically a Chinese fast fashion
app that’s able to undercut American competitors by getting everything made super cheat in
China, quite possible with the help of slave labor.
So number one, don’t use these Chinese apps.
Shein Temu Tiktok, any of them.
There’s a reason the Chinese Communist Party is pushing them and it’s not good news for
the people using them.
Instead, try to buy things from anywhere but China.
In the short term, that can be a bit more expensive, but in the long term, nothing will
cost you more than China dominating the economy.
Talk to your friends and family and get them to do it too.
Write to your elected representatives and tell them you want to see action on cutting
off Chinese suppliers who use slave labor which is basically all of them.
And really, all the clothing you need can be found on chinauncensored.tv/merchandise.
All of these great shirts not made in China!
Thank you for your question Greg, and your support.
And thank you for watching.
Once again I’m Chris Chappell.
See you next time.