China's Local Government Debt Crisis Explained

In order to meet Beijing's ambitious growth targets, local governments have amassed huge debts as domestic demand has slowed and this practice has become unsustainable. In this video we explain this brewing economic crisis and why it's bad news for China.

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[sivx]

A lot of civil servants in China had their wages slashed, some by almost 40-50% and their bonuses are withheld. China's civil service is considered the 'iron rice bowl', meaning you're set for a comfortable life since the wages, bonuses and perks are quite good especially in the 1st tier cities. This actually caused a lot of discussions in weibo regarding the real status of the Chinese economy until one by one were deleted by the government.

[pablosskates]

Once a country runs out of productive infrastructure to invest in they need to switch their use of funds to stimulating consumer-lead consumption. Otherwise it’s like a company that uses investor funds to grow but once they mature, instead of paying dividends, they keep building factories to produce surplus product no one wants. Anyone remember Japan’s “roads to nowhere”? It’s like that on steroids.

[StarlightInsights_com]

*Goodhart's Law:* “when a measure becomes a target, it ceases to be a good measure.” 💸

[jerrywood]

You did a good job of describing the short term issue, but then there's the long term problem of these impoverished local governments trying to maintain that infrastructure. Maintenance costs start out small, but grow rapidly as that infrastructure ages.

[matthewshields]

A while back I read a report claiming China's GDP could be 40% - 60% of the value they report. Unlike the US and most other nations there is no independent body that calculates GDP.

[Urgelt]

Good summary, but you didn't mention 'hidden' debt - off the books, informal, dubiously collateralized. By some estimates this form of debt amounts to as much as a third of the visible local government debt.

Taken together, local government debt and falling local government revenue, caused by the collapse of a severe housing bubble, has resulted in nonpayment of worker salaries, bank runs, and other symptoms of recession more severe - thus far - than what we are now experiencing in the West.

It doesn't help that transparency is a concept unknown in China. Nobody believes official GDP or economic statistics in China.

The CCP can resolve this crisis. But the resolution is likely to be inflationary and painful.

[NinjaMan]

The only thing is that this debt issue has not been a recent development. The CCP dictates growth targets, and the local authorities are ordered to meet them. Government spending directly inflates GDP so local governments are pushed to spend heavily.

[filipe]

That's the problem with autocracies. They might have the ability to construct megaprojects, but you don't get the public oversight that ensures that the projects are actually needed.

[naniyo]

I think the key point is that China is borrowing from domestic banks in local currency, and that almost all the banks are state-owned. Basically there will be a financial crisis ONLY IF the communist party wants a crisis. As you've pointed out, CCP can always arrange the balance sheet, such as subscribing to new shares of the defacto-bankrupted banks who over-lent to the LGFV under zero public scrutiny, so that the loans to the local govt can be renewed every year without ever defaulting.

[bulletflight]

If the Emperor can blame the debt crisis on his regional governors, he can still reign.

[jacoporegini]

It's very difficult to change policy without changing the government.

[hf]

Very concise explanation and really good advertisement placement as well...Kudos!

[charleslynch]

Chinese Province: We've run out of money and can't pay out debt
CCP: What debt
Chinese Province: *Blinks Confusedly*

[maavet]

Now even China owes something to China

[laurentleplat]

Gonna be hilarious when they realize that, Oh Yeah! We also need to MAINTAIN that infrastructure!!!!

[MsZeeZed]

Sounds like a serious concrete addiction.

[williamlloyd]

Can you imagine the annual costs of maintaining 1000 bridges over the next 30 years?

[shubashuba]

Overbuilding infrastructure can be even worse than underbuilding because the cost of maintenance will outpace profitability in a few years. The CCP will have to either accept deteriorating infrastructure or borrow even more to maintain it. We'll either see hyperinflation if the government prints money to pay the debt or rising taxes which will reduce consumer spending.

[ericarmandomartinez]

Anyone else like this narrator more or is it just me? I feel like he is more clear and I understand and capture more when he delivers! Not the other one is bad I simply think this one is more clear and makes sure to pronounce more properly rather than rushing through the news

[CyFr]

The channel Joe Blogs goes extremely in depth with economic news and analysis almost every day.
Its a bit dry, but highly recommended.