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This week, China wrote a $14 billion check to bail out Hengfeng Bank, one of the many provincial banks that used off-ledger loans to fund China's economic growth. While news of a US-China trade deal dominates media coverage, Hengfeng is a sign of the economic and social crises to come, as China grapples with a domestic debt crisis that is linked to an increasingly bloated and inefficient political economy.
In his new report, China's Economic Slowdown: Root Causes, Beijing's Response, and Strategic Implications for the US and Allies [[link removed]], Hudson Senior Fellow Dr. John Lee [[link removed]] examines how Xi Jinping's ambitious geostrategy is inextricably linked with China’s worsening domestic and economic imbalances.
By prioritizing national power, Dr. Lee argues, Beijing is neglecting much needed spending on domestic social and public services. Scroll below for highlights from the new report.
Read the New Report [[link removed]] Read John Lee's Op-Ed in The Wall Street Journal [[link removed]]
Key [[link removed]] Report Takeaways [[link removed]]
Beijing will soon have to confront its own economic reality and fiscal mortality. The solvency of local governments that are overwhelmingly responsible for providing social and public goods, and the stability of the entire financial system, are presumably higher priorities than building the nation’s military power.
China will not be able to achieve its external objectives without the cooperation of the US and other major advanced economies. Despite its size, China's economic levers in the world are surprisingly limited in important respects. Even the resilience of its domestic economy is enormously vulnerable to US policies.
Contrary to the view that Xi has absolutist control over the CCP, his high tolerance for risk is causing immense angst for other senior Communist Party members and Chinese policy makers. The more that Chinese failures and international resistance is attributed to Xi’s actions, the more pressure he will feel to take a cautious approach.
Quotes have been edited for length and clarity
Read the New Report [[link removed]]
5 Harbingers of China's Debt Crisis [[link removed]]
The sources of China's potential fiscal and financial crises:
Shadow banking and local debt: China's local governments have long raised revenue by appropriating rural land, rezoning it, and selling it for industrial or residential uses. In 2014, up to 70% of local government income was from rezoning proceeds. To fund sales and construction, over 155,000 local government financing vehicles (LGVFs) were created to skirt restrictions. As the property market cools and the debt burden rises, local governments and developers will find it increasingly difficult to meet their debt obligations.
Aging society, unfunded pensions: Only one-third of all urban residents and less than 5 percent of rural residents have some form of central, provincial, or local pension. Reports estimate that this pension liability could grow to $10.8 trillion over the next two decades, or almost 40 percent of China's GDP.
The local revenue gap: The central government has increasingly reduced the tax revenue that local governments rely on, while expecting them to pick up a larger percentage of expenditures related to social and public services. Recently, the gap in needed revenue has been bridged by proceeds from land and property sales, but as these sales slow, there could be an additional $500 billion local government fiscal gap by the end of decade.
Treading water on debts: Hundreds of billions of dollars — estimated to be around one-third of all local government borrowings — must be found each year just to stave off the insolvency of LGFVs. If Beijing chooses to formally recognize what may be more than a trillion dollars’ worth of distressed and non-performing loans, it will require hundreds of billions of dollars to rescue and recapitalize the balance sheets of state-owned lending institutions.
Overseas priorities: China’s rapid advancement as a military power imposes massive costs. The PLA’s budget has increased at double-digit rates as Beijing asserts its influence in Xinjiang, Tibet and Hong Kong; polices its borders with Russia and India; develops cyber, surveillance, and space assets; quells an average of 100,000 mass unrest events every year; and enforces anti-access/area denial capabilities in the South China Seas.
Quotes have been edited for length and clarity
Read the New Report [[link removed]]
Hudson Institute [[link removed]]
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