Delayed for more than a year, the Fourth Plenum of the 19th Chinese Communist Party (CCP) Central Committee finally took place from Monday to Thursday last week.
During the plenum, Chinese President Xi Jinping (習近平) had to face three difficult issues: reversing the downward pressure on the economy caused by structural imbalances; concluding the China-US trade dispute; and dealing with the pro-democracy protests in Hong Kong set off by the introduction of a now-scrapped extradition bill.
The most challenging of these matters is management of the economy amid a downturn, which has spun out of control.
According to data released on Oct. 18 by the Chinese State Council, the country’s GDP grew 6 percent in the third quarter.
US President Donald Trump ridiculed the numbers at a Cabinet meeting, saying: “I think it’s probably minus something. It could very well be minus. It could very well be in negative territory.”
As inflation driven by massive unemployment and African swine fever is brewing, a volcano formed by a combination of anti-Xi factions and public resentment could erupt at any time.
The best indicators when evaluating risk are GDP, which has been made to look better by printing money; national debt, which keeps growing as China continues to borrow money to service debt; and the leverage of private financing. Together, they are pushing the economy to the brink of collapse.
How serious is China’s debt problem? According to a Bloomberg report, the country will enter a peak period of offshore bond defaults next year, with principals ranging from about US$300 million to several billion US dollars. These bonds have at least 15 percent yields, essentially usurious interest rates.
Hainan Airlines, a subsidiary of China’s HNA Group, incurred an operating loss of 3.52 billion yuan (US$503.5 million) in the first half of this year and it still has debts of 700 billion yuan.
Starting this year, there have been reports about state-run and private enterprises in China defaulting on debt. Chinese Premier Li Keqiang (李克強) is calling for deleveraging efforts, while the People’s Bank of China is loosening its grip. It is a bit like a drug addict unable to resist the temptation of morphine.
According to Moody’s Investors Service, the liabilities of China’s state-owned enterprises and government financing vehicles had risen to 60 trillion yuan as of October last year. Yet a more severe challenge comes from rising household debt leverage.
One report showed that average bank deposits among the top 5 percent of depositors in China was 470,000 yuan, while the average savings of the other 95 percent was only 24,000 yuan. Distrurbingly, 40 percent of the latter group had no savings, which means that as many as 560 million Chinese cannot make ends meet.
The latest data showed that China’s total household debt was 40 trillion yuan. About 170 million Chinese, the so-called “post-1990s” generation, contribute 20 trillion yuan of total household debt, with each person liable for 120,000 yuan. Most of these young people have not yet married or bought their own home.
Li implements supply-side, structural reform by deleveraging government-owned enterprises, cutting excess production capacity and inventories. On the other hand, he also encourages people to buy homes and increase consumption to make GDP figures look good.
The government and state-owned banks are the big winners, and property developers are also making fortunes, while hundreds of millions of people fall into the traps of credit-card debt and mortgage payments. Behind the illusion of a wealthy country, people are living in poverty.
At the plenum, the CCP passed the “Central Committee’s decision on several major issues concerning how to uphold and improve socialism with Chinese characteristics, and advance the modernization of the national governance system and governance capabilities” to the bewilderment of observers.
While public opinion focuses on the internal power struggle within the CCP’s top echelon, who gets promoted and who is demoted, not a single word was said about people’s livelihood and the economy.
The question is how much trouble the debt incurred to realize Xi’s dream of “the great rejuvenation of the Chinese nation” will bring.
It seems unlikely that Kaohsiung Mayor Han Kuo-yu (韓國瑜), the Chinese Nationalist Party’s (KMT) presidential candidate, will be able to rely on China to “get rich.”
Chen Chih-ko is a nonprofessional investor.
Translated by Chang Ho-ming
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