Even as China featured among the few countries that managed to post healthy growth in 2020 notwithstanding the severe economic and health impact of the Coronavirus pandemic, several economists have questioned the veracity of the data. While the International Monetary Fund projected a 7.9 per cent growth for China in 2021, it said that the dragon must allow its overburdened lenders to be liquidated for economic growth to be sustained in the medium term, the Nikkei Asia reported.
The opaque nature of information flow from the country has added to the worry for think tanks and ratings agencies across the world. Spanish economist Daniel Lacalle in his blog, about two months ago, said that China’s is a “planned GDP” and that the growth is not demand driven but is pushed by a tactfully expanded government expenditure. “A planned GDP. The GDP of China is dictated by production, not demand. It is not an observed GDP, but rather planned by the government together with the provinces.
For this reason, many analysts scrutinize the data and deduct various factors, including the increase and valuation of inventories,” Lacalle pointed out in his blog. However, he also noted that economic recovery is underway but “it is not dissimilar to that of many of the leading Asian countries.” “It is not by chance that inventories of iron ore, automobiles and finished goods have risen to the highest level in seven months as the economy recovers.
If the economic situation were in the announced expansion, inventories would be falling rapidly when sold. Much is produced that is then not sold and remains in warehouses,” Lacalle added. Interestingly, China also does not follow the practice of revising GDP figures. The final December figure “stands and is consolidated without question.”
China’s rising debt problem
As China has been expanding its hold over the world through the much hyped Belt and Road Initiative (BRI) which runs across over 70 countries, its debt is rising continuously. The Washington-based Institute of International Finance (IIF) last year said that China’s debt was on track to hit a whopping 335 per cent of GDP. This however included debt across all sectors such as household, government, financial and non-financial corporate. The country’s overall level of debt is driven primarily by real estate, corporates and shadow banking.
Deftly, China has kept direct borrowings by the central government at a reasonable level but the accounts of the local governments and its companies and banks are mired in a web which is difficult to analyze. The Committee for the Abolition of Illegitimate Debt, in a study done before the Covid 19 outbreak highlighted that China’s overall debt calculation is complicated though “research has been able to estimate central government debt with precision”.
What makes it murky is the accounts of the local governments and state owned enterprises. “The central government is not overleveraged and benefits from ample foreign currency reserves. But regional governments have expanded unsafe financial operations since 2007, and often resort to off-the-counter loans or shadow banking.
Analysts said that while the Chinese government had started the exercise of cleaning up the mess, the pandemic has derailed the drive. “While China’s lending traditionally comes from the major state-controlled banks, there has been a gradual shift towards less transparent alternative lending sources that can produce high-risk loans and contribute to China’s debt woes. This lending is at times done through smaller local and provincial banks that sell lightly regulated investments,” wrote ChinaPower.
The Harvard Business Review in an article pointed out that China has turned into a major global lender in the last two decades with outstanding claims exceeding more than 5 per cent of global GDP. Almost all of this lending is official, coming from the government and state-controlled entities.
According to the HBR, “China has extended many more loans to developing countries than previously known” and the “systematic under-reporting of these loans has created a ‘hidden debt’ problem – meaning that debtor countries and international institutions alike have an incomplete picture on how much countries around the world owe to China and under which conditions.” It said that the Chinese state and its subsidiaries have lent about $1.5 trillion in direct loans and trade credits to more than 150 countries around the globe, making China the world’s largest official creditor. However, the country has never published any official data on this despite the huge lending size.
Surprisingly, China is not a member of the Paris Club-- an informal group of creditor nations with the aim to strike workable repayment solutions. Not just that. The country is also not part of the Organisation for Economic Co-operation and Development (OECD). Both Paris Club and OECD maintain loan records of official creditors. China’s financial assistance is directed in the form of trade credits, foreign direct investment advances under the Belt and Road Initiative (BRI) besides direct loans.
An analyst on condition of anonymity said that China’s immediate problem emerges from the fact that most of the countries that have benefited from the dragon’s loans have been “badly hit” by the Coronavirus pandemic and are in no position to repay the debt.