Shadow of crippling debt hangs over Xi’s speech

It was the same old rehashed rhetoric. In President Xi Jinping’s keynote speech to celebrate the 105th birthday of China’s Communist Party, he warned of the “risks and challenges” facing the economic superpower. At times, it was like “déjà vu all over again.”

Flanked by key Politburo cadres in Beijing’s Great Hall of the People, his 40-minute address was riddled with repetition and short on substance. Missing entirely from today’s lecture to the Party faithful was the four-letter word that cannot be spoken.

Debt is now intrinsically linked to Xi’s “Chinese Dream,” eating away at his plans to build a “prosperous society.” Across government, corporations, and households, it has rocketed above 300% of gross domestic product.

To put that into context, China’s nominal GDP is roughly US$20.85 trillion. “China’s current level of indebtedness puts it in a league of its own,” Mark Williams, the chief Asia economist at Capital Economics, pointed out last month.

At least $18 trillion of Chinese household wealth was wiped out when the biggest property bubble in history popped in 2021. The fallout has left around “100 million people struggling to repay their debts,” according to Bloomberg earlier this month.

The product of a credit boom that has been underway for 18 years …

Mark Williams, Capital Economics

Existential crisis:

• Still, the public sector accounts for up to 40% of outstanding liabilities, reports show. 
• The Wall Street Journal also estimated that total “hidden debt” is as high as $11 trillion.

Delve deeper: “The irony is that one driver of both government borrowing and the lax lending standards of [state-owned] banks is the desire to prop up economic growth and prevent job losses,” Williams, of Capital Economics, told Fortune Magazine.

Between the lines: “But the product of a credit boom that has been underway for 18 years is a banking system propping up unproductive firms, widespread losses across industry, and entrenched [manufacturing] overcapacity,” he added.

Big picture: Logan Wright, a partner at the Rhodium Group and author of Broken China, was quick to highlight the options facing Xi and the Party. “The key questions facing Beijing concern which types of political costs China’s leaders are willing to bear,” he said.

China Factor comment: In the meantime, Xi continues to add to the debt pile by fueling massive manufacturing overcapacity, even as domestic consumer spending collapses.