China Economic Review

Debt dilemma

Faced with various problems domestically and externally, the decision in Beijing seems to be to just pile on the debt. After a year of relatively determined efforts to rein in this debt monster, it was announced this week that the Center had ordered local governments to issue more bonds to spend more money on infrastructure and other projects – that is, papering over the cracks with more spending.

For years people have been saying that this is unsustainable, and at some point it will be. China’s special characteristic is that the vast majority of the debt involves loans between various parts of the party-state octopus – the money is funelled through the state banks and most of it goes to local governments and state-owned enterprises, so there is not the commercial imperative to pay it back and clean it up that there is in a normal economy.

But there is a still a point at which things get wobbly, presumably. The P2P problem has been smothered by state finance institutions, and the RMB is being held above the magic 7. Shanghai stocks, however, had a bad week, and the US-China trade spat appears likely to deepen. Meanwhile, another Chinese delegation will soon be heading for Washington to try to resolve the problems. Good luck on that. The US is distracted by the impending mid-term elections and endless Trumpian nonsense, but the threats that Beijing has issued don’t appear to have scared anyone in the US administration into considering a course change. All in all, not a pleasant time for Those in Command.