SinoInsight 1
In recent weeks, various bits of information have surfaced which indicates that China’s economy has continued to worsen.
Chinese finance minister Liu Kun delivered a report on China’s final accounts for 2018 during a plenary meeting of the National People’s Congress on June 26. In his presentation, Liu said that local governments cannot illegally raise loans regardless of how difficult local financial conditions are.
China’s finance ministry had earlier released fiscal revenue and expenditure data for the January to May period on June 14. The national general public budget revenue in May was 1.7268 trillion, down 2.06 percent from a year ago. This was the first time in a decade since the national general public budget revenue saw a decline in May. Meanwhile, the national general public budget revenue for the January – May period grew only 3.8 percent year-on-year to 8.9919 trillion yuan, the second lowest growth rate in a decade (the worst growth rate for the period came after the global financial crisis in 2009).
On June 18, financial news website Yicai published a report which noted that three of the 10 provinces that have disclosed their fiscal revenue data for the January – May period were showing negative growth. The three provinces are Chongqing (down 5.3 percent YoY), Guizhou (down 5 percent YoY) and Beijing (down 4.4 percent YoY).
Finally, mainland media outlets recently reported a study by Shandong University School of Economics professor Li Yihui which found that nearly 60 percent of county-level governments are experiencing financial difficulties.
OUR TAKE
1. In 2018, we published several articles on why China cannot withstand the trade war. In our articles, we identified China’s financial shortages and local debt problems as two of the factors for why it is disadvantaged in a trade conflict with America. Finance minister Liu Kun’s caution to local governments about raising loans illegally and the other information which we listed above corroborates our analysis about the state of China’s economy and the coming financial and debt crisis.
2. During this year’s Two Sessions meeting, Li Keqiang announced planned cuts of 2 trillion yuan ($298.3 billion) in taxes and fees for firms and called on local governments to “lead frugal days” and “find ways to raise funding” without offering solutions in his work report.
Without direction from the central government on how to raise funds, local governments will likely move to 1) exploit private enterprises and local residents, 2) sell more land, or 3) take on more loans. The first option may serve as a quick fix, but will worsen the local and national economies over time. Local governments will find it tough to raise funds with the second option given that property prices already sky-high and will not increase by much; government revenue from land sales have already dropped by 30 percent in the first five months of the year. Finally, many local governments already have a mountain of debt and are defaulting on loans. Local financial institutions are finding it hard to issue bonds and have already begun selling bonds over the counter to private citizens.
Given the above circumstances, it is understandable why local governments might be tempted to illegally raise loans. Illegal loans, however, will merely add to the local implicit debt and eventually trigger a debt crisis.
3. The Sino-U.S. trade war has aggravated China’s economic woes. Economic problems will translate into social problems, and the Chinese regime’s finances will grow tighter as it pumps more money into “maintaining social stability.”
China’s economy could deteriorate to a point where Black Swans are triggered. As we wrote in our China 2019 outlook, “China could see political Black Swans and charging Gray Rhinos in the economic and social arena. The CCP regime will likely face immense challenges from inside China and abroad.”
