LIUZHOU, China—Officials were bullish about the future of their factory town in early 2019. The economy was prospering, a new industrial district was on the way and an elevated light-rail system was taking shape.
“The achievements of the past year have not come easily,” Mayor Wu Wei said in a city report at the time. He credited the grit of local party leaders but didn’t mention an ace in the hole.
For years, Liuzhou and scores of other Chinese cities together amassed trillions of dollars in off-the-books debt for economic development projects. The opaque financing was the yeast that helped China rise to the envy of the world.
Today, overgrown construction sites, sparsely used highways and abandoned tourist attractions make much of that debt-fueled growth look illusory and suggests China’s future is far from assured
As much as $800 billion of that debt is at a high risk of default, economists say. If the financing vehicles can’t meet their obligations, Beijing could either pay for bailouts, which might create a bigger problem by encouraging unsound borrowing. Or it could allow insolvent funding vehicles to go belly up, exposing Chinese banks to serious losses and potentially spurring a credit crunch that would further erode economic growth.
Deficit spending provided one solution. Chinese cities discovered decades ago that they could take on debt through state-owned entities known as local government financing vehicles, or LGFVs, to fund sewers, streets and the like.
Because the debts don’t appear on government ledgers—only on the LGFV books—cities were able to sidestep borrowing limits. The bonds were attractive to Chinese banks and other institutional investors that assumed cities were on the hook to pay them back. Investors figured that allowing bond defaults by LGFVs is too risky for China’s financial system and too costly for its economy.
www.msn.com/en-us/money/companies/trillions-in-hidden-debt-drove-china-s-growth-now-it-threatens-its-future/ar-BB1pXXG4
China’s Economy Is in Trouble. Xi Jinping Has Other Priorities.
Chinese leader Xi Jinping wants to fashion China into a manufacturing colossus that leads the world in technological innovation. His pursuit of that vision is increasingly weighing on China’s economy.
Growth is slowing and becoming more imbalanced, propped up by exports and a gusher of investment into factories, while much of the rest of the economy languishes. Consumers are reining in spending, the housing market is depressed, local governments are swimming in debt and foreign investors are pulling their cash—all at a time when China’s population is rapidly aging.
Yet expectations are low for Xi to make a significant course correction at a key Communist Party conclave this week, as he continues to put measures to enhance China’s economic security above other priorities.
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The event, known as the Third Plenum, happens every five years. In the past, it has delivered major economic overhauls that reverberated worldwide, such as when then-leader Deng Xiaoping used the 1978 plenum to shove China onto a path of economic liberalization, paving the way for decades of blistering growth.
This year, however, Xi seems more focused on steps to make China less dependent on Western technology, reduce China’s reliance on other countries for semiconductors and other essential goods, and stake out a commanding position in industries he sees as critical for the future, including clean energy, electric vehicles and advanced computing.
To that end, and to prop up economic growth, Xi has been pouring money into China’s factories. The results so far have been mixed at best, with weakening growth at home—the economy grew 4.7% year over year in the second quarter, down from 5.3% in the first—and mounting trade tensions overseas. A tide of cut-price Chinese goods has triggered fears of a new “China shock,” a rerun of the early 2000s when cheap Chinese competition swallowed up industries and jobs in the U.S. and elsewhere