Covid lockdowns
Have lit the fuse
on China’s ticking time bomb of debt.
Welcome to China Uncensored, I’m Chris Chappell.
The Chinese Communist Party needs money. Desperately.
According to the Japanese financial holding company
Nomura , China has a nearly 1 trillion dollar funding gap.
That means they’re not bringing in as much money as they’re spending. And that’s a huge problem.
But first, what’s causing it?
Simple. The Chinese Communist Party’s insane Zero Covid policy,
where they’re locking down entire cities, often for weeks at a time.
Locking down workers and businesses wipes out taxable income. Not to mention all the money
the government is spending on Covid stuff. I’ll get into that a little later in the episode.
But this is not only affecting those individual cities that are locked down.
It’s affecting the entire country. Supply chains
are complex. A lockdown in Shanghai means products don’t get to Shenzhen, and so on.
In May, Chinese premier Li Keqiang admitted things are now
worse for the Chinese economy than they were during the height of the pandemic in 2020.
To fight that, the Chinese Communist Party plans to do what it always does when it wants
to artificially boost falling GDP numbers—build stuff! It doesn’t matter what, just build things!
Sometimes really weird things.
But hey, anything for GDP!
That’s why Chinese leader Xi Jinping has announced yet another infrastructure push.
But while that might help inflate China’s GDP numbers on paper,
it covers up a much more serious problem—China’s local governments are going broke.
See, while Xi Jinping is doing his infrastructure push,
local governments have been hung out to dry.
According to Nomura,
tax revenue has gone down by about 370 billion dollars.
Part of that is because government is giving people tax refunds.
You know, so people won’t be mad at the government for the crazy lockdowns.
But local governments are getting thrown under the bus.
See, they’re also forced to give tax refunds.
And local governments in China can’t levy personal income taxes. They can levy business taxes,
but they only get to keep 40% of that money. The rest goes to the central government.
And business income is way down—because local governments have forced a lot
of businesses to close, especially in major cities like Shanghai and Tianjin.
You know what else is way down? Land sales. That’s another key way local governments raise money.
Nomura estimates land sales are down more than 500 billion dollars.
Now keep in mind, this revenue drop is not limited to cities in lockdown.
It’s happening everywhere, so it’s not like just opening up is going to solve things.
“Although financial data isn’t readily available for many Chinese cities, the southern tech
hub of Shenzhen released figures showing a 44% year-on-year drop in fiscal revenue in April.”
One analyst at Moody’s said that “one consequence will
be that there will be less money left over for infrastructure expenditure.”
But Xi Jinping wants MORE infrastructure, so local governments have to figure out how to pay for it.
But it’s not just infrastructure spending that’s creating a problem.
I’ll tell you more after the break.
Welcome back. It’s not just more infrastructure
spending that’s causing budget problems for local governments.
It’s also China’s growing Zero-Covid industrial complex.
A lot of companies have been making money off of all of China’s mass Covid testing,
PPE manufacturing, quarantine camps, and other aspects of China’s Zero Covid policy.
The problem is, who’s paying for all of this?
In just over a month, China spent four billion dollars building 300 quarantine hospitals.
But that’s nothing compared to what they could be spending on constant mass testing,
one of the big things they’re rolling out now for Zero Covid.
Nomura estimates it could cost up to 1.8 percent of China’s GDP,
if they test a majority of people every two days. That’s more than 300 billion dollars.
Of course, it could be less, if they don’t test as many people as often.
But now there’s a growing debate over who’s paying for the tests.
So far, local governments are once again on the hook.
But they’re trying to get out of paying for everything out of their own budgets.
Instead, they’re using state-run medical insurance funds.
That’s money that’s collected from companies and employees and administered by local governments.
It’s supposed to help people pay for medical care.
But now local governments are being told they cannot use these
medical insurance funds to pay for mass testing.
They have to pay for it out of their own government budgets instead.
Which is a big problem.
But there’s an obvious solution for local governments: Borrow money! Borrow a lot of money.
The senior director at S&P Global Ratings said the “widening deficit means there’s
a chance of more borrowing or debt burden in the future.”
So to fix China’s failing economy, they’re going to go into more debt.
Which ultimately means that to avoid a disaster today, they’re kicking the can down the road.
This happens all the time.
Which is why some say that China’s next debt crisis will be from local government debt.
And speaking of kicking the can down the road, the central government is
also giving local governments money this year that they should be getting next year.
“[China’s] Ministry of Finance noted some funding for next year
would be transferred ahead of time to help local governments with tax refunds and cuts this year.”
Right, just borrow from your future self. Surely you can do that forever.
And this is the problem with state planned economies. The
central government implements big policies that cause disastrous results on the local level—in
this case, Zero Covid. It is wrecking the economy.
And sooner or later, the can they kicked down the road
is going to kick them back. In the face. I think that’s how this metaphor works.
And now it’s time for me to answer a question from a member of the China Uncensored 50 Cent Army.
Todays’ question comes from Tea Drinker on Locals. Chris, ever got around to playing Shenmue 3?
Ohhh, now that’s a good question. If you don’t know the history, Shenmue was a game that came
out in 1999 for the Sega Dreamcast. It was the most expensive video game ever made at the time.
Real cool setting and characters, but left off on a horrible cliff hanger. Shenmue 3
didn’t get made till nearly 20 years later and it still doesn’t wrap up the story. Total scam.
But anyway, we’ve been talking about maybe creating a gaming channel.
Use video games as a background to talk about important current events
with the hopes of maybe getting around YouTube’s algorithms.
So my question to everyone watching, is that a channel you’d like to see us start? And if so,
what would you like to see us play? Obviously Shenmue 3. Let me know in the comments below.
Thanks for your question and your support, Tea Drinker.
And thank you for watching. If you want to support China Uncensored, join our censorship
free social media platform on Locals. That’s chinauncensored.locals.com. Link is below.
Once again I’m Chris Chappell, see you next time.