China's Debt Crisis Unveiled by Insider: Artificial Bull Market Worsens Instability

A series of unprecedented disclosures have shed light on China's debt crisis, potential bailout strategies, and concerns over the nation's economic stability. Insights from a Chinese finance expert, coupled with recent data on local debt and central government deficits, reveal a situation that may be far more dire than previously known.

Staggering Debt Levels Rarely Disclosed

China's debt problem has largely been kept from the public eye. However, recent remarks by Professor Li Jianjun, Vice President of China's Central University of Finance and Economics, have opened a window into the true scale of the crisis.

Professor Li revealed that official local government debt has reached 42.23 trillion RMB ($5.93 trillion USD). It has also incurred an additional 57.16 trillion RMB ($8.03 trillion) in implicit debts from urban investment bonds. This brings the total to nearly 100 trillion RMB ($14.04 trillion).

When central government debt is included, the overall figure climbs to approximately 130 trillion RMB ($18.25 trillion).

Considering China's 2023 GDP of 126 trillion RMB ($17.69 trillion), the debt-to-GDP ratio has soared to 103%. This figure is far above the internationally accepted danger threshold of 60%. Some analysts liken this to the situation in Greece before its financial crisis.

Why Now?

The timing of Li Jianjun's disclosure raises questions, prompting speculation about the motivations behind it. One interpretation suggests that China's economic outlook may have deteriorated to such an extent that officials are attempting to informally convey the severity of the situation to investors. By sharing this data in a relatively low-profile manner, authorities might be subtly signaling the need for caution, akin to instructing passengers to brace for a rough landing.

Another possibility is that this disclosure serves to preemptively absolve government departments of blame should the situation worsen. By releasing these figures now, officials may be seeking to shield themselves from future criticism. They may be laying the groundwork for a narrative where they had taken steps to inform the public.

Can a 10 Trillion RMB Stimulus Save China's Economy?

Amid the financial crisis, Reuters reported that China's National People's Congress is considering a 10 trillion RMB ($14.04 trillion) stimulus package to stabilize the economy.

However, even a large infusion of capital may not resolve the underlying issues. An analysis of the latest fiscal data suggests a more complex reality. It indicates that stimulus funds may primarily serve to cover existing fiscal deficits rather than drive new growth.

Fiscal Data Paints a Bleak Picture

Despite China's reported GDP growth rate of 4.8% in the first three quarters of 2023, data from the Ministry of Finance offers a different perspective. Total government revenue fell to 19.39 trillion RMB ($2.72 trillion), a 5.6% year-on-year decline.

In contrast, government expenditure has remained high at 26.22 trillion RMB. The growing fiscal gap has led to a cumulative deficit of 6.83 trillion RMB ($0.96 trillion) — 16.1% higher than 2023. This widening revenue-expenditure gap reached a record 35.2%, projected to rise beyond 37% by year-end.

Profit Plunge in Chinese Industrial Sector Signals Economic Strain

In a concerning development for China's economic health, recent data reveals a significant contraction in profits among industrial enterprises categorized as "above designated size." This sector includes entities with annual principal business revenue of at least 20 million RMB ($2.81 million).

According to the latest figures, during the first three quarters of 2024, these firms experienced a year-on-year profit decline of 3.40%.

However, the situation deteriorated further in the latter months, with profit contractions reaching 22.24% in August and a staggering 23.90% in September.

This sharp decline in profitability not only underscores the sector's challenges but also directly impacts tax revenues, as businesses struggling to turn a profit are inevitably less capable of contributing to government coffers through taxation. This scenario casts a shadow over the fiscal stability of the government, which relies on such revenues to fund public services and infrastructure projects.

A Stimulus That Covers Debt, Not Growth

To bridge this expanding gap, China's government is increasingly reliant on debt issuance. So far, the nation has issued 9.7 trillion RMB ($1.36 trillion) in central government debt and 6.69 trillion RMB ($0.94 trillion) in local bonds, a 12.7% increase over 2023.

Total bond issuance is expected to reach 23 trillion RMB ($3.23 trillion) by the end of 2024. It's clear that a significant portion —13 trillion RMB ($1.83 trillion) — will be used merely to repay maturing debt rather than stimulate new economic activity.

The Debt Burden and Its Impact on Economic Stability

China's total debt now stands at approximately 130 trillion RMB ($18.25 trillion), surpassing GDP. Adding another 33 trillion RMB ($4.63 trillion) would represent a 25% year-on-year increase. This daunting figure would place immense pressure on an already fragile fiscal foundation.

In summary, while a 10 trillion RMB ($14.04 trillion) stimulus could temporarily offset deficits, it appears unlikely to spur meaningful growth given the existing debt load. Instead, this fiscal strategy may be more of a stopgap measure than a sustainable solution for China's economy.

Despite government attempts to boost domestic consumption, a close look at Chinese household savings reveals a striking concentration of wealth that suggests purchasing power may be limited for most citizens.

Wealth inequality appears steep, with recent data indicating that nearly 80% of household savings are held by only 2% of the population. This imbalance suggests that only a small elite holds the financial resources to drive consumption, leaving the majority with limited disposable income.

Concentration of Wealth in China: 2% of Households Control 80% of Savings

Data from China Merchants Bank offer insight into this divide. The bank's "Golden Sunflower" clients are those with assets exceeding 500,000 RMB (approximately $68,000). They make up just 2.4% of its customer base but hold over 81% of total deposits.

Extrapolating from these figures, it is estimated that the bulk of China's 147.6 trillion RMB (around $20.2 trillion) in household savings belongs to this narrow demographic.

In stark contrast, the remaining 98% of households share a modest 29.5 trillion RMB ($4.14 trillion), or roughly 20% of total savings.

This disparity underscores the financial pressures faced by the majority, who collectively carry the weight of China's 81.6 trillion RMB ($11.46 trillion) in personal debt. For the average Chinese household, the balance of debt against modest savings erodes financial flexibility, which could further hinder efforts to stimulate consumption-led growth.

The implications are profound. When disposable income is concentrated in the hands of a small fraction of society, broad-based consumer spending — the backbone of a stable economy — becomes challenging to sustain. For China's economy, this means that attempts to spark growth through domestic spending face considerable headwinds due to the limited purchasing power among most of the population.

In a bold but ultimately disastrous move, the Chinese government's recent intervention in financial markets has revealed the precarious state of the nation's economy. The attempt to artificially inflate market confidence through policy-induced bullish trends in the Chinese stock markets resulted in a dramatic but short-lived surge.

The Impact of a Two-Week Artificial Bull Market

From September 18, the China Securities Index saw a frenzied nine-day increase, peaking with a 44.1% rise. However, this artificial bull market crumbled after the National Day holiday. The market plummeted on October 8, never to recover its momentum. This episode, lasting only nine days, not only demonstrated the volatility of the market but also the government's control over economic indicators.

Retail investors, lured by this sudden upswing, injected approximately 3 trillion RMB ($0.42 trillion) into the market. Yet, as the market fell, these investors faced significant losses, with estimates suggesting that nearly 2 trillion RMB ($0.28 trillion) would eventually be wiped out, representing a severe financial blow.

When viewed against the backdrop of total household savings of 147.6 trillion RMB ($20.73 trillion), this loss might appear minor at just 1.36%. However, for the majority of Chinese citizens, whose net financial position is already strained with assets amounting to 29.5 trillion RMB ($4.14 trillion) against a debt of 81.6 trillion RMB ($11.46 trillion), this loss significantly erodes their economic resilience.

Destroying the Foundation of China's Economy

The government's market intervention was intended as a rescue. However, it has instead been criticized as a scheme benefiting primarily state-owned enterprises and major investors at the expense of retail investors. Analysts argue that this not only exacerbates wealth inequality but also fundamentally weakens consumer confidence and spending power, crucial elements for economic growth.

Economists are now sounding alarms, suggesting that what might have been a gradual economic slowdown could now accelerate into a deeper, more immediate crisis. Some predict that without a significant course correction, China's economy might reach a critical point within a single quarter. Beyond that point, even drastic measures like unchecked money printing might prove ineffective.

In essence, this two-week market manipulation may have irrevocably damaged the economic foundation upon which China's financial stability rests, signaling a potential shift in the country's economic trajectory.

Author: Jennifer Zeng

Find articles by Jennifer Zeng on JAPAN Forward. Follow her on X (formerly Twitter) and on her blog page, Jennifer's World.