The Crisis
China’s local governments are facing a serious debt problem that poses challenges to the country’s economic growth and financial stability. Local governments have borrowed heavily from banks and other sources to finance infrastructure projects, often using special financing vehicles called LGFVs (Local Government Financing Vehicles). However, their income from land sales and taxes has declined due to the property downturn and the COVID-19 pandemic. As a result, many LGFVs are struggling to repay their loans or bonds, which amount to more than $9 trillion, or half of China’s GDP. The central government has limited their borrowing capacity and urged them to prevent and defuse debt risks, but some local governments have asked for debt relief or restructuring from lenders. This has created a standoff between local and central authorities, as well as between LGFVs and banks, over who should bear the losses and how to resolve the debt crisis.
Not as Rosy as it Once Was
For decades, China has enjoyed unprecedented economic growth and improved living standards for its people. The country’s GDP per capita has increased by around 700 percent since 2001. Millions of Chinese have been lifted out of poverty and have access to better health care, education, and public services. However, the outlook for China’s economy is not as rosy as it once was. The country is facing a looming debt crisis, as local governments have borrowed excessively to fund infrastructure projects that are often wasteful and unnecessary. The property market, which accounts for a large share of China’s income and wealth, is also in trouble, as developers and home buyers struggle to repay their loans amid falling prices and oversupply. Moreover, China’s geopolitical position has become more precarious, as it faces criticism and sanctions from the West for its human rights violations and its support for Russia in the conflict in Ukraine. These challenges pose serious risks to China’s economic stability and social harmony, and may undermine its long-term development goals.
A Woman and a Llama
In recent months, China has witnessed a surge of public dissent and dissatisfaction with the ruling Communist Party, as people suffer from the economic and social consequences of its policies. Some of the examples of protests are:
- In Henan province, hundreds of bank customers staged a demonstration outside the central bank in Zhengzhou, demanding their frozen deposits back from four rural banks that had run into liquidity problems. The protest turned violent when a group of unidentified men attacked the protesters, injuring some of them.
- In Beijing, thousands of residents gathered near the Liangma River to protest against the strict and costly zero-Covid measures that have disrupted their lives and livelihoods. They chanted slogans such as “Give us back our freedom” and “We want to live normally”.
- In various cities, people have expressed their anger and frustration at not being able to withdraw money from their bank accounts or losing their deposits due to bank failures or fraud . Some have accused the government of failing to protect their interests and regulate the financial sector properly .
In Sichuan province, a woman caused a sensation by walking around with a llama on a leash, drawing crowds of curious onlookers and media attention. She said she was protesting against the government’s ban on keeping pets in her apartment complex, and that she wanted to raise awareness of animal rights. Her choice of animal was also a subtle way of mocking the authorities, as the phrase “walking llama” in Mandarin sounds very similar to a profane expression meaning “f*ck your mother” (cǎo ní mǎ 草你妈).
These incidents have worried the CCP, which fears losing its legitimacy and control over the population. The party has responded by cracking down on the protests, censoring online discussions, and launching investigations into the banks. However, these measures may not be enough to quell the growing discontent and resentment among the people, who are demanding more accountability and transparency from their leaders.
China vs the USA
The CCP (Chinese Communist Party) has also adopted an increasingly belligerent stance towards the USA, its main rival in trade, politics and security. The two countries have been locked in a trade war since 2018, imposing tariffs and sanctions on each other’s goods and companies. The CCP has also accused the USA of interfering in its internal affairs, such as Hong Kong, Taiwan and Xinjiang, and of undermining its sovereignty and territorial integrity. Moreover, the CCP has been expanding its military presence and activities in the South China Sea and the Taiwan Strait, where it has conducted frequent exercises and patrols to assert its claims and deter US allies. These actions have raised tensions and risks of conflict between the two powers, as well as between China and its neighbours.
However, some analysts believe that these announcements are designed to keep the Chinese population on side rather than serious threats, and that the CCP doesn’t have the technological independence or the money to wage war. As with Taiwan, this sabre rattling may be a way to maintain power and legitimacy at home. While the people may feel a genuine pride in their country and its achievements, the resulting nationalist sentiment is being used to deflect criticism from the controlling CCP.
So You Want a Revolution?
The real threats to China are not external, but internal: revolution and bankruptcy. The CCP faces growing discontent and dissent from its own people, who are unhappy with its authoritarian rule, its mishandling of the Covid-19 pandemic, its crackdown on civil liberties and its corruption. The CCP also faces a looming debt crisis, as its local governments, state-owned enterprises and private firms have borrowed excessively to fund unprofitable and wasteful projects, often with the help of shadow banking. China’s debt-to-GDP ratio has reached 300%, one of the highest in the world. If China fails to repay its debts or defaults on its obligations, it could trigger a financial meltdown that would have devastating consequences for its economy and society.
China Sneezes and the World Catches a Cold
The impact of revolution or bankruptcy in China would be felt not only by its own people, but also by the rest of the world. China is the world’s second-largest economy and the largest trading partner for many countries. It is also a major supplier of consumer goods, raw materials and intermediate products for global supply chains. A political or economic collapse in China would disrupt these supply chains and cause shortages, inflation and losses for businesses and consumers around the world. It would also create uncertainty and instability in global markets and geopolitics, as China’s role and influence in regional and international affairs would change dramatically.
A collapsing yuan and a Chinese economic crash would also have a bigger global impact than ever before. The yuan is the world’s fifth-most used currency for international payments and trade settlements, and it is included in the IMF’s basket of reserve currencies. A sharp depreciation or devaluation of the yuan would make Chinese exports cheaper and more competitive, but it would also hurt China’s trading partners and creditors, who would see their purchasing power and asset values decline. A Chinese economic crash would also reduce China’s demand for imports and investments from other countries, especially those that rely on China as their main market or source of capital. This would hurt their growth prospects and increase their vulnerability to external shocks.
One Possible Solution
One possible solution to China’s debt problem and its impact on global trade is the involvement of international factoring companies. Factoring is a form of trade finance where a business sells its accounts receivable or invoices to a third party at a discount, in exchange for immediate cash. This can help improve the cash flow and liquidity of the business, as well as reduce the risk of non-payment or default by its customers. International factoring companies, such as those based in Hong Kong, Singapore and other countries, could step into the breach if confidence is lost in Chinese local banks, which are often burdened with bad loans and regulatory constraints. This could benefit the global trade receivables market and bring China more into the orbit of western standards of accounting and doing more transparent business.
In Conclusion
In conclusion, China is facing a series of challenges that threaten its economic growth and political stability. The CCP’s crackdown on various sectors, its debt crisis, its trade war with the US and its military expansion in the region have all raised concerns and criticisms from both domestic and international actors. However, there may be some opportunities for cooperation and reform, such as the involvement of international factoring companies in China’s trade finance market. As the ancient Chinese philosopher Laozi said: “A journey of a thousand miles begins with a single step.” China needs to take some steps to address its problems and improve its relations with the world.
