Currently, the Chinese economy is facing unprecedented downward pressure, with the collapse of the real estate market leading to a severe shrinkage of up to 80% in the assets of the people. While official opinions remain unusually silent on the recent Fourth Plenum, speculations on power struggles within the Chinese Communist Party (CCP) and predictions of a potential regime change in China have been rampant on the internet. These sentiments of anticipating change are rooted in the economic turmoil.
Simultaneously, the warning recordings made by economist Xiang Songzuo several years ago have resurfaced, providing a powerful macroeconomic footnote to the current crisis.
In stark contrast to the official silence surrounding the Fourth Plenum, many social media users are discussing the intensification of internal struggles within the CCP, suggesting that Xi Jinping may relinquish military power at the Plenum, leading to a potential change in regime afterwards, which could bring about positive changes in China.
In his speech recording from 2019, Xiang Songzuo mentioned the former CEO of China International Capital Corporation, Zhu Yunlai, who is the son of former Premier Zhu Rongji. According to Xiang Songzuo, Zhu Yunlai revealed that China’s total debt had reached a staggering 60 trillion yuan. Xiang Songzuo questioned the sustainability of China’s economic model, which relies on debt and leverage at all levels – government, corporations, and individuals. He expressed skepticism about the continuation of such a model, describing it as unsustainable.
Xiang Songzuo’s alarming figure of 60 trillion yuan in debt (mainly referring to the total sum of non-financial sector unpaid debts) is significant due to its inclusion of implicit debts often underestimated or overlooked in official statistics, particularly debts of local government financing platforms (LGFV).
This enormous debt structure, primarily comprising household debt, non-financial corporate debt (including LGFV debt, the largest portion), and explicit government debt at various levels, is a result of the long-term dependence on investment and credit expansion to drive GDP growth.
Xiang Songzuo warned that while the majority of profitable companies in the U.S. are primarily in the high-tech manufacturing sector, China’s most profitable companies are still monopolistic tobacco and real estate firms, indicating the fragility of China’s economic structure.
According to Xiang Songzuo, with real estate accounting for 80% of the wealth of the Chinese people based on official data, the real demand for real estate in the future is questionable.
Financial blogger “Tom” suggested that Xiang Songzuo’s words allude to the devastating impact of an asset bubble burst on societal confidence. Xiang Songzuo’s warnings from years ago have now materialized in reality.
Xiang Songzuo also cited former central bank governor Zhou Xiaochuan’s warning about the “Minsky Moment” – a sudden realization in the market that the held assets (stocks, real estate, funds, etc.) are worthless, causing a collapse in confidence and leading to a frenzy of asset sell-offs and steep price declines.
Xiang Songzuo stressed that if China continues to play with debt and financial games, a Minsky Moment could erupt – where public confidence collapses, and asset prices plummet.
Six years later, Xiang Songzuo’s macro warning has not diminished but has instead received micro-scale validation through the financial actions of local governments. This year, the issuance of local government debt has exceeded 8.5 trillion yuan, revealing the liquidity crisis engulfing local finances.
Financial blogger “Boss Politics and Economics” analyzed that the issuance of over 8.5 trillion yuan in local government debt this year is not a healthy investment signal but a desperate attempt by local governments to handle debt pressures. This vividly exposes the unsustainability of the macro debt model.
As reported by the Shanghai Securities News on October 11, the amount of local government debt issued this year has surpassed 8.5 trillion yuan, including significant increases in special-purpose bonds and general bonds. The excessive issuance of special-purpose bonds is far beyond last year’s 800 billion-yuan quota.
In recent years, there has been a significant increase in the issuance of local debt restructuring bonds. According to a resolution passed by the National People’s Congress Standing Committee in November last year, the arrangement involved replacing implicit debts of local governments with explicit bonds over five years, starting from 2024, supplemented by 800 billion yuan annually from newly issued local government special bonds to bolster government funds specifically for debt reduction.
The composition of this scale reflects the immense pressure faced by local finances.
“Boss Politics and Economics” analyzed the composition of the 8.5 trillion yuan debt, its sources, its destination, and its possible consequences.
He mentioned that the 8.5 trillion yuan local debt comprises three main pillars, each pointing to the unsustainability of the macro debt model:
New bonds theoretically intended for infrastructure investments (urban utilities, transportation, affordable housing) to stimulate development. However, due to many projects lacking profitability and low returns, the new investments have not generated enough cash flow to repay the debt.
This approach of exchanging future debt burdens for current GDP growth, behind the success of the Chinese economy, involves leveraging expansion. However, the cost is a heavier debt burden in the future, proving Xiang Songzuo’s concerns about the economic model sustained through leverage expansion.
These funds are typically used to repay maturing debts, especially shifting local governments’ high-interest and opaque implicit debts (LGFV debts) to explicit bonds. The larger the size of refinanced bonds, the greater the pressure on local finances to fulfill payments, indicating a depletion of cash flow. This money does not reduce the total debt amount but replaces a nearing “exploding bomb” with a “longer fuse,” illustrating the precarious state of local finances, likened to the financial “ICU ventilator,” which is not a solution but merely extends the crisis.
The issuance scale of such bonds vastly exceeds the planned 800 billion yuan, with a portion explicitly used to repay outstanding debts (such as delayed project payments, supplier payments, etc.).
The repayment of delayed debts highlights the severe strain on local government finances, reaching a point where maintaining everyday operations and paying suppliers becomes unsustainable. This exposes the financial vulnerability of local governments, even resorting to robbing Peter to pay Paul cannot cover the most urgent debts, necessitating the use of these “special” tools to address potential payment crises that may trigger social issues.
He noted that over the past few years, how much project payments, supplier debts, and corporate debts have local governments defaulted on. These are aged bad debts that even implicit debts do not account for. Now, even with borrowed money running out, there is a need to invent a new tool, termed special additional special purpose bonds, ostensibly new issuance but essentially printing money to cover the most urgent and potentially socially destabilizing debts.
The incident of the 400 billion debt in poverty-stricken Dushan County, Guizhou, from a few years ago is still fresh in people’s minds – within a short span, 400 billion in financing resulted in a staggering array of unfinished projects. So, who will repay this 400 billion debt? According to “Boss Politics and Economics,” it ultimately falls on central government transfers, i.e., using taxpayers’ money nationally to fill the void. Dushan County is just a microcosm. Looking across the country, how many industrial parks sit empty upon completion? How many new towns have become ghost towns? How many highways see sparse traffic, unable to even recover maintenance costs?
As warned by Xiang Songzuo, once society loses faith in assets and the financial system, the “Minsky Moment” could erupt at any time. To avoid a collapse of societal confidence, relying solely on “borrowing to repay” is no longer sufficient. China’s economy urgently needs a structural change away from debt expansion dependence towards internal growth.