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Chinese officials have been urging local governments to tighten their belts because the 46 trillion yuan debt bubble is spiraling out of control. But as authorities started scrutinizing states’ balance sheets to perform budget cuts, they found over 14 trillion yuan of hidden debt, and credit firms say the real figure may be in the range of an astounding 40 trillion. In an attempt to fight the devastating effects of the health crisis, the Chinese government requested local governments to increase infrastructure investments to shore up growth, but they weren’t expecting states to get massive off-budget borrowings to do so, and now Beijing was forced to sound the alarm for a potential credit crunch, warning regional banks to brace for a tidal wave of bad debt. This could put China’s financial stability at risk, as the debt has been bought by all kinds of financial institutions, including banks, brokerages, and trust funds. Thus, the country’s $50 trillion financial system may soon find itself facing fiscal disaster. That’s what we’re going to investigate in this video.
In 2020, the Chinese government debt totaled 46.55 trillion yuan. The staggering debt load accounts for 45.8 percent of last year’s gross domestic product, and experts say, that since implicit liabilities are often hidden in the records of state firms or public-private partnerships, the real risks posed by the colossal debt bubble are definitely much bigger than the official figures can describe. Throughout the whole year of 2020, authorities alerted the Chinese government that the monetary policies enacted would cause major financial imbalances. The finance minister Lou Jiwei harshly criticized Chinese financial regulators late last year, affirming they were ignoring dangerous systemic risks. During a State Council meeting, the government cabinet specifically demanded a reduction in the government’s debt level. “Governments at all levels must tighten their belts,” the statement says. Moreover, Beijing has also ordered “all levels of government across China to lower their debt levels.”
A major investigation into local government’s implicit debt has started after officials began scrutinizing states’ balance sheets to detail local assets and liabilities and perform budget cuts in anticipation of the government’s debt-reduction campaign. They have found massive amounts of off-budget loan guarantees and other commitments and reported that, all together, local governments had 14.8 trillion yuan of hidden debt last year alone, and the figure is expected to rise even further as control agencies dig deeper to find buried liabilities. Tianfeng Securities estimated in a study that the actual size of local government hidden debt could be way over 40 trillion yuan.
The main driver of the huge implicit spending was the pressure placed upon local governments to make infrastructure investments and boost economic growth during the health-crisis-induced recession. However, the central government wasn’t expecting states to resort to off-budget borrowing to achieve their goals. According to Liu Lei, a senior researcher at the National Institution for Finance and Development, state officials will continue to find ways to “increase hidden debt because they are still under pressure to expand investment”.
That is to say, the many decades relying on fiscal spending have increased overall debt risks. Even when attempting to curb the debt load, the government is bound to engage in extra spending to meet its economic plans. In view of the size of this uncontrollable bubble, Beijing was forced to sound the alarm for a potential credit crunch and warned regional banks to brace for a tidal wave of bad debt. Regional banks are worried that the coming wave of nonperforming debt will undermine the financial health of the vulnerable lenders. Even more concerningly, the imminent credit crunch can jeopardize the stability of China’s financial system, as the debt has been bought by all kinds of financial institutions, including bank, brokerages and trust funds. In other words, this could set the stage for a dramatic collapse on the country’s $50 trillion financial system.
And given that China is still dealing with lots of headwinds, uncertainties brought on by the sanitary outbreak, and global economic issues that are spilling over into the nation’s economy, if authorities take a wrong turn when addressing this matter, we may soon find ourselves in the middle of another brutal global financial crisis. Only this time, the two biggest economic forces of the planet will be simultaneously collapsing, and they won’t be there to bail out the rest of the world.
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