China’s Debt to GDP Ratio Climbs as Beijing Maintains Unproductive Investment
- Doubtful China can achieve 4.4% growth this year
- CCP’s focus on growth drives up debt
- Election later this year may bring changes
China’s GDP narrowly avoided contraction in the second quarter as its National Bureau of Statistics put growth at only 0.4 percent on the year. Coming after 4.8 percent growth in the first quarter, the world’s second-largest economy registered only 2.5 percent growth in the first half as Beijing felt the impact of a zero-Covid policy that forced shutdowns and restrictions.
Debt to GDP is a problem facing many economic powerhouses including the US & Japan.
The decline in GDP growth started in 2010, when the economy posted a rise of 10.6 percent, falling to 6 percent in 2019, and just above 2 percent as Covid hit in 2020. Prior to the pandemic, China’s growth averaged about 10 percent a year since economic reforms began in 1978.
The International Monetary Fund has repeatedly lowered its forecast for Chinese growth in 2022, putting it at 4.4 percent in April after 4.8 percent in January and 5.6 percent in October. It now looks doubtful that China can achieve that level, let alone its target of 5.5 percent.
China’s unusual definition of GDP
Unlike most other countries, as Carnegie Endowment for Peace senior fellow Michael Pettis has noted, China’s GDP figures do not measure output but rather the resources Beijing is willing to employ for economic activity – an input measure. Chinese President Xi Jinping has called for genuine growth from consumption, exports and business investment, rather than what he calls inflated growth from investment in real estate and infrastructure.
Debt to GDP climbs to 270%in 2020
In any case, China has financed growth in recent years with greater amounts of debt. The overall ratio of debt to GDP rose to 270 percent in 2020, from 247 percent in 2019, but then remained stable in 2020 as business investment increased and Beijing limited investment in real estate and infrastructure.
Government debt in relation to GDP has also risen in recent years, hitting 57 percent in 2019 and nearly 69 percent in 2020. Statista, a German database company, projects the government debt to GDP ratio in China rising to just above 73 percent in 2021 and nearly 78 percent in 2022, continuing an upward trend through 2027.
Cash flow problems at companies
The question is whether this growth in debt is sustainable if GDP growth falters. A recent virtual meeting of Chinese economists pointed to cash flow problems at companies and households and lockdowns have crimped consumption. Retail sales declined 11 percent on the year in April. All indications are that the growth in debt is not sustainable, and few Chinese economists would disagree with that assessment.
President Xi Jinping once again insisted in the last week of July that China must end what he called unbalanced and inadequate investment, sounding a theme he has hammered away at for years. However, as noted by Pettis, who is a finance professor at Peking University’s Guanghua School of Management, the Chinese leadership is not willing to face the consequences of following through on that course of action. Nor are they likely to do so this year, with the Communist Party Congress due to be held in the second half.
The pivotal fact for China’s leaders is that a GDP growth rate below 4 percent is unacceptable. But maintaining growth above that level entails a continuation of unproductive investment that is feeding the country’s debt, including the government debt.
Economists believe a shift to greater consumption or bottoms-up investment in technology or other productive sectors would entail institutional changes political leaders are not willing to accept.
Elections may bring changes
The party will reshuffle its leadership at the congress later this year, though Xi is expected to accept an unprecedented third term as president. Whether that new leadership is willing or able to take the steps necessary remains to be seen.
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