The Chinese economy is hurting. Officially, the Chinese GDP registered robust 5.5 percent growth in the first half of 2023. Unofficially, the picture appears much bleaker. However, a simple economic slowdown would be manageable for the Chinese Communist Party (CCP)—but it is the financial risks that worry the regime.
Following the 2008 global financial crisis, the Chinese fueled economic growth with heady doses of capital infusions financed through debt. Provincial leaders took out debt to finance infrastructure spending. Households borrowed more to buy more homes. Corporate leaders borrowed from banks to finance ever-ambitious growth plans.
According to the International Monetary Fund, in 2008, general government debt to GDP stood at a tiny 27 percent. Still, by 2022 that number had grown to 72 percent and did not include large amounts of unofficial government debt tied to local government financing vehicles. By multiple accounts, China's debt to GDP now exceeds 300 percent of GDP. Chinese households became some of the most indebted in the world relative to income.
With the real estate urbanization boom slowing rapidly, this is placing enormous pressure on everyone. Local governments, who would get, in some cases, more than 50 percent of their revenue from selling land to developers, face a collapse in their revenue. Developers stand on the brink of bankruptcy with a glut of unsold homes. Indebted consumers show no appetite to buy more homes in the hope prices go up. The fundamental problem becomes all the debt associated with this gluttony.
Officially, China’s non-performing loan ratio stands at a respectable 1.6 percent, accounting for just under 3 trillion yuan (also known as RMB). However, these numbers seem questionable under even mild questioning. As a simple example, just the debts of effectively bankrupt real estate developers Evergrande and Country Garden are approximately equal to China's official non-performing loan value. While both developers have non-bank debtors through bondholders, pre-sold units, and suppliers, this gives a picture of the scope of the problem and how data fails to capture the financial risks.
