Debt Flows Unveil Various Imbalances in China’s Economy
The mobility of debt reveals numerous imbalances within the Chinese economy. Private enterprises and households appear to lack confidence in the future, reducing borrowing and investments while beginning to repay existing debts.
Only Beijing and its subordinate local governments are expanding their financial influence. China’s sole bet on the future lies in the narrow areas favored by Beijing. Apart from the authorities in Beijing, it seems that no one in China has confidence in economic growth.
According to a report from the National Institution for Finance and Development (NIFD) based in Beijing, the debt leverage ratio has actually decreased recently. It dropped by 1.1 percentage points in the spring of this year, reaching 308.2% of the country’s Gross Domestic Product (GDP).
For Americans, excessive debts of the government, corporations, and individuals threaten sustainable development. While China’s debt repayment situation may seem admirable, a decline in debt in a country experiencing economic growth is unusual from any perspective, raising doubts about sustainability, especially considering which economic sectors are contracting and which are expanding.
All debt repayments are happening at the household and private enterprise levels. Chinese households have been repaying debts since mid-2024. In the spring of this year, the momentum of household debt repayment remained strong, with the financial leverage ratio as a percentage of GDP decreasing by around 1.3 percentage points. Mortgage debt has been declining for the 13th consecutive quarter, with its share of GDP dropping by about 1.8 percentage points. Private enterprises have also engaged in similar debt repayments, with about 60% of listed companies reporting a reduction in their relative debt burden.
The worrisome aspect of this phenomenon (or worrisome for Beijing, one might say) is that households and enterprises typically leverage borrowing to seize what they perceive as opportunities. For example, a family might apply for a mortgage to realize their dream home, anticipating that their income will grow over time, making it easier to repay the loan, even as the family continues to enjoy the comforts provided by the house.
Normally, enterprises leverage borrowing for investment and expansion. But layoffs indicate a lack of confidence in doing so.
As debt reduction signifies (as previously discussed in this column), Chinese individuals lack confidence. Their cost of living has exceeded their income, employment security has deteriorated, the real estate crisis has depressed housing prices, leading to a decrease in household net assets.
After a slump in the consumer market, private enterprises see more value in debt repayment than borrowing for expansion. Official data shows that fixed asset investment by private enterprises declined by about 7.1% over the past year, seemingly confirming this viewpoint.
Unlike households and enterprises, government borrowing is usually for political purposes, sometimes for public projects but more often to support military operations, sustain generous welfare spending, or fund projects advocated by certain political figures. This is precisely what Beijing is currently doing. Admittedly, some funds have been directed toward public projects of general economic significance, but the majority has flowed into the narrow high-tech goals of Beijing’s “Made in China 2025” initiative.
From the Chinese debt model, it is evident that the Chinese economy is increasingly tilting toward the narrow areas selected by Beijing, while other major economic sectors lag behind. Fairly speaking, the Beijing authorities have made efforts in the past to address these imbalances. However, as the latest financial data shows, these efforts have failed.
At the same time, the Politburo, the highest decision-making and policymaking body of the Communist Party of China, has not shown enough effort to reverse these destructive trends in the economy.
Author Bio:
Milton Ezrati is a contributing editor for The National Interest magazine, hosted by the Human Capital Research Center at The State University of New York (SUNY) Buffalo. He is also the Chief Economist at Vested, a prominent communication firm based in New York. Prior to joining Vested, he served as the Chief Market Strategist and Economist at companies such as Lord, Abbett & Co. He frequently writes for City Journal in New York and blogs for Forbes. His latest work is “Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live” (2014).
Original Source:
Debt Movements Reveal Much About China’s Economic Imbalances
Published in the English edition of Epoch Times.