China’s mounting debt crisis (2024)

China’s debt is nearly 44% of its GDP and its local governments owe nearly $5.14 trillion. With the economic slowdown and collapse of land sales revenue, provinces and local governments in China are facing an embarrassing situation. The irony of China facing a debt trap just like so many devastated countries along its Belt and Road Initiative (BRI) is not lost on spectators.

According to S&P rating, the direct debt of local governments has exceeded 120% of their revenue. The tactic that this has resulted in is local government financing vehicles (LGFV). The ground reality of such a debt financing tool is that the government is borrowing money from citizens on WeChat in amounts as low as 10,000 yuan in order to get around the fact that banks will not lend to them anymore.

Another fallout of the crisis is that across the 31 provinces, regions, and municipalities are on a hiring spree this year in order to promote economic growth and prevent the migration of talent. China’s new premier Li Qiang has set a job creation target of 12 million and local governments have responded by increasing the debt that they owe by hiring 190,000 people. 18% of the population aged 16 to 24 is unemployed at present and more than 11.5 million new graduates are expected to hit the job market.

Country Garden Holding which is considered one of China’s largest and safest property developers reported a net loss of more than a billion in 2022. The real estate sector accounts for more than a quarter of China’s GDP and developers are rapidly changing strategies in order to avoid defaulting on loans. Cost cutting often means abandoned projects, ignoring smaller cities and participating in the free for all land sales that the government is organizing in order to fill the massive debt that has accumulated during the COVID crisis. The debt also extends to other sectors with public medical insurance funds being depleted after the money was used for pandemic control, quarantine and mass testing.

Raising the retirement age and cutting medical benefits are just some of the fallout of the debt crisis. Protestors have taken to the streets with the elderly leading the charge. The online censors have even removed `Wuhan health insurance’ from searches in worries that protests will further expand across China. The snowball effect of using medical insurance funds for COVID testing does not stop here. As the government tries to increase the retirement age, such a move is likely to impact pensions as well. The elderly are protesting being cut off from access to their benefits and the youth are protesting being cut off from access to jobs as people retire. Being a worst case scenario for tackling the shortfall of public health insurance funds, poorer provinces and regions may still be forced to roll out these measures in order to tackle the deficit.

The insurance sector has also been hit hard due to the economic slowdown and property crisis. The impact of reduction in people’s income, lowering household consumption patterns and inability of sales agents to have face-to-face conversations has profound implications for the sector. Insurers such as China Life are focused on converting its high-performing agents into specialized and professional teams with a digital outlook. To what extent such an approach will conflict with its own online marketing initiatives is unclear as everyone tries to adjust to a post COVID economy. A worrying point of concern is the massive disinformation campaign that is ongoing that refutes all the hard data on the sector with soft language about the growth of the Chinese insurance sector. If the global capital markets are to recover faster, perhaps all institutions are willing to go along with this delusion to avoid rocking the boat. Worries over the insurance sector have perhaps prompted the government to issue sweeping reforms in the regulatory aspects of banking and insurance.

Amidst concerns over the debt crisis, Xi Jinping has targeted the financial sector with dozens of executives from the Central Commission for Discipline Inspection. The majority of financial and regulatory institutions in the sector have slashed their salaries amidst concerns of being targeted during the “corruption” probe. At the same time, setting up the new regulatory body called the National Financial Regulatory Administration has raised a lot of concerns about how the socialist market economy will interact with global finance. The tight central control means that the financial sector has now become an arm of the state as opposed to a commercially oriented market based system.

Resources and salaries will be drastically overhauled in the future under the guise of regulatory control as the Chinese Communist Party pursues its agenda. The more worrying concern is the lack of transparency in future actions amidst the growing debt as propaganda continues to push out false narrative of the China growth story. Having witnessed the habit of the CCP of declaring victory and moving on, one wonders how the financial sector will actually recover in the years to come amidst the climate crisis, technology developments, machine learning, artificial intelligence, and China’s desire to maintain it’s image as a global superpower. Having integrated so deeply into the world economy, one can only hope that the next global crisis does not emerge from China as it seeks to pass its debt into the global financial markets.

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