Since Xi Jinping first turned rogue internationally around 2018 when he got his second term as top CCP leader, much of the West has been lamenting his ideological bias against the market sector, as if the latter were the panacea of all the economic ills of China. So now most of the attention in Western media has been on how badly China’s state sector has floundered, and all sympathies are for the corporate giants such as Alibaba and Tencent being bullied by Xi. However, the true picture of the world’s second-largest economy is not quite so simple.
Many of the China pundits fail to see that China’s “market sector” is equally problematic (and just as exploitative and corrupt) compared to its government sector. And that applies perfectly to the discussion of the debt problem, which is now topical.
Indeed China’s government debt problem has been serious and is actually boiling over, as seen by the SOS issued by some debt-distressed provincial governments such as that of Guizhou, where ambitious local Party chiefs famously built three municipals airports all within 15 minutes from the city center of the prefectural city of Zuni, during the period 2014-2019.
Figuring that would show the country’s actual total government debt-to-GDP ratio standing at about 133 percent, significantly higher than the U.S. figure of 112 percent shown in the same BIS data. In actual terms, China’s total government debts amounted to US$23.3 trillion, as reckoned at the end-of-2022 using the exchange rate of 6.9 yuan per U.S. dollar. That’s pretty bad if one notes that the notoriously huge pile of outstanding U.S. Treasuries debts stood at US$24.9 trillion.
So, adding government and market-sector debts together, China’s grand total runs at 353 percent of its GDP, against the U.S. at 264 percent. If we leave out all of China’s hidden local government debt, its grand total would still beat the U.S. figure by 33 percentage points! In other words, the Chinese economy is extremely highly leveraged, much more so than the U.S. economy, and the main culprit is not the state sector.
This alarming fact, however, is hardly even mentioned in the China debt story now being played up in America’s major media, which are still largely operating under an outdated China narrative underpinned by the facile “state sector bad, market sector good” dichotomy. In reality, there is very little daylight between China’s state and market sectors except at the very top levels of the CCP, where Xi is using his direct control of the SOEs to wrestle economic power from his political enemies in the older Hu Jintao-Jiang Zemin faction, which is still deeply entrenched in the Chinese market sector as its members were the early birds to Deng Xiaoping’s 1980s “reform” bonanza.
Purportedly in support of some central government initiative, market-sector company A borrows money from an LGFV to buy land from the county government to do a real estate-cum-infrastructure project such as a tollway, then sells back 60-80 percent of the shares to the LGFV. This essentially makes it a partner of the local government, thereby legalizing borrowing under the Xi policy of encouraging public-private partnerships.
The local government leaders, eager to sell public land to cover budget shortfalls arising in good part from spending on their career-enhancing grandiose projects, readily provide an uncollateralized (“implicit”) loan guarantee to company A, which the LGFV happily accepts; the loan money is then doled out, bribe premia for all parties included. The LGFV can raise the capital for A by selling off-balance sheet bonds or borrowing directly from state banks, which now feel comfortable because they are just lending to another government entity.
But it has been a tradition now since day one of Deng’s reforms that so-called market-sector companies (company A in the above hypothetical example) are often operated by former government officials or the relatives of officials who act in cahoot with their counterparts inside the government—short of which they mostly cannot survive. Thus, the distinction between the state and market sectors, so important and clear-cut in Western thinking, is but simply a division of labor within fuzzy extended benefits loops within a uniquely Chinese system.
So it was quite natural that the American government took twenty years to figure out that China is not a market economy after inviting it into the WTO in 2001, not to speak of the gross inability to decide what to do with “market-sector companies” such as Zoom and TikTok, which are controlling the lines of communication going into America’s boardrooms and bedrooms.
As a restart in thinking about China, one can stop regarding China’s LTFV debts as an exclusive government issue; and recognize that China-related data, such as those from BIS, separating Chinese debts into government and non-government debts are unavoidably superficial. Even the use of the terms “government-sector debts” or “market-sector debts”—such as in the very title of this essay—is actually misleading. The useful takeaway here is simply this: China is now a highly leveraged economy, and Western investors better beware.
