Limitations of China’s Growth Patterns Revealed by Excess Debt —SOE and housing speculation threaten the feet of the Xi Jinping administration—

The Chinese government has announced that it will change its stance on “implicit government guarantees” and proceed with the liquidation of zombie companies. But there are still many zombie companies, and the liquidation process is not easy. The government is not moving toward the abolition of “implicit government guarantees” but only temporarily reducing the scope of coverage.

Debt default is not the “exit” from the resolution of the excessive corporate debt problem, but the “entry point” of a long process toward resolution. The extent to which debt, including bank loans, has been reduced must be examined to determine whether the liquidation of zombie companies is progressing.

In the wake of the COVID-19 pandemic, the volume of outstanding total social financing, which indicates the amount of funds supplied to the real economy, has recorded the most significant increase since the collapse of Lehman Brothers. At the end of 2020, corporate debt outstanding reached 163.2% of GDP, entering uncharted territory.

“Implicit government guarantees” are given not only to corporate bonds but also to bank loans. Even if deleveraging proceeds, the problem of excessive debt will not be resolved because debt is unevenly distributed to companies with low repayment capacity. The difficulty of raising funds depends on whether or not the government has invested in them, and it can be said that the problem of excessive debt is caused by state-owned enterprises.

State-owned enterprises have little presence in China’s real estate development. However, the government cannot afford to sit back and watch the default or bankruptcy of real estate developers because the rise and fall of the real estate development industry, which accounts for a high percentage of GDP, have a serious impact on the economy and society.

In response to the overheated real estate market, the government tried to control the inflow of funds into the real estate market by regulating the total amount of real estate-related loans and through the “three red lines,” which specify the debt reduction target. These efforts have produced certain results.

The problem of the excessive debt of state-owned enterprises and soaring house prices has never previously been a drag on economic growth. However, since the proportion of state-owned enterprises in the economy has stopped falling, and it is difficult to expect a virtuous cycle in which real estate investment and house prices continue to rise, China will be exposed to more downward pressure than expected.

In order to prevent China from falling into a prolonged slump, it is essential to restructure the ownership system of state-owned enterprises and control house prices by introducing real estate and inheritance taxes. However, it is unlikely that the ownership system will be reformed. In addition, while the government is willing to introduce a real estate tax, it may be undermined by being a low tax rate.

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