In 2020, the new coronavirus outbreak almost brought China’s economy to a halt, with the economy contracting for the first time in the first quarter of last year, when the epidemic reached its peak, with gross domestic product (GDP) shrinking 6.8 percent year-on-year, the worst performance since the official release of quarterly GDP data in 1992.
And just at the beginning of this year, the epidemic has returned with a vengeance, with seven provinces and regions in mainland China having declared a “state of war”. Like last year, the epidemic has been accompanied by a major capital market turmoil that has begun to send out signals.
China just wrote a city, oil prices shake
This year, international oil prices fell just as China closed its cities, with February delivery of New York West Texas Intermediate crude down $0.22, or 0.4%, to close at $52.02 a barrel on Jan. 11, and March delivery of Brent crude down $0.42, or 0.8%, to close at $55.57 a barrel.
Reuters commented, “The resurgence of the outbreak in Asia, with Shijiazhuang, a city of 11 million people in China’s Hebei province, under lockdown measures, coupled with uncertainty over Federal Reserve policy, triggered some profit-taking in early trading today.”
The impact of the epidemic on oil prices has been so pronounced that in April 2020, West Texas crude oil futures for May had a negative quote for the first time in history. The reason for this negative quote was the soaring epidemic, plummeting demand for crude oil and global oil overflow.
Resisting the epidemic and the cold hit people’s income and consumption
In addition to international commodities like oil, the resurgence of the epidemic has also impacted the income and consumption of Chinese residents, as many provinces and cities in China have entered a “state of war” at the start of 2021 to fight not only the epidemic but also the harsh winter.
According to mainland media reports, the epidemic is fierce in Hebei, with Shijiazhuang and other cities under home quarantine, while Inner Mongolia is “a battlefield everywhere” and Beijing has entered a quasi “wartime state”, while Heihe city in Heilongjiang province is “closed” and several cities in Liaoning province, including Dalian, have declared a “wartime state”. In the past week, at least seven provinces and regions have declared a “state of war”. In first-tier cities such as Shanghai and Guangzhou, mutations of the virus have been found, increasing infectivity by 40% to 70%.
The new wave of outbreaks comes as China has been experiencing extremely cold weather for the past few days. Beijing, for example, is experiencing the “cold of the century,” while temperatures in some cities, such as Shenyang in northeast China and Jinan and Shanghai in east China, may hit a 20-year low. Meanwhile, heavy snow fell in Inner Mongolia, Shaanxi, Shanxi, Henan and even Hubei. Yet just in the midst of this extremely cold weather, mainland China is experiencing a tight supply of electricity, which is not enough to adequately supply heat and heating, while some businesses have also had to lose power and economic activity has been somewhat affected.
The traditional Chinese New Year is coming soon, but it is a bit difficult for the epidemic-resistant and cold-resistant Chinese people. Recently, several cities in Beijing and Shanghai have issued the initiative of “not returning home during the New Year”, suggesting that enterprises and institutions “spend the New Year in place”.
With city closures, travel restrictions, and “spend New Year’s Eve in place”, it is inevitable that the Chinese New Year, the peak consumption period, will also be affected.
In early 2020, China’s economy came to a near standstill due to the outbreak of the CCP virus, which hit small and medium-sized enterprises (SMEs) in particular hard and reduced disposable income by 25%.
Let’s look at the situation at the first quarter of 2020. According to data from the National Bureau of Statistics of the Communist Party of China, the per capita disposable income of urban residents in the first quarter of 2020 was RMB 11,691, down 3.9% in real terms, while the per capita disposable income of rural residents was just over a third of that of urban residents, at RMB 4,641, down 4.7% in real terms. From the data, we can see that the epidemic hit the income of rural residents more than urban residents.
The impact of the epidemic on overall consumption is also very serious. Between January and March 2020, China’s total retail sales of consumer goods fell by 20.5% from January to February and by 15.8% in March.
IMF: China’s government debt to exceed GDP in 5 years
In the “anti-epidemic, anti-cold” threatening the income and consumption of Chinese residents, China’s systemic financial risks are also rising further. Last year, major professional institutions already made predictions.
In December 2020, Reuters reported that China’s banking sector would be under increased pressure to raise capital or issue debt in the coming years to absorb losses. Guosheng Securities also said that it is likely that Chinese banks will face financing pressure this year as investors expect China’s banking sector to be hit by non-performing loans this year.
In the last year, a number of Chinese state-owned enterprises have defaulted on their debts, and Fitch Ratings has also said that it expects the default rate of Chinese state-owned enterprises to continue to rise in 2021.
In addition, according to ANZ estimates, China’s real estate sector will face $77.5 billion in debt service pressure in 2021.
After talking about the predictions for banks, state-owned enterprises and real estate, it is time to look at the situation of the Chinese Communist government sector.
On January 8, Bloomberg reported that China’s general government debt will rise to 92% of GDP in 2021 and 113% of GDP by 2025, according to a report released by the International Monetary Fund (IMF). This means that in the next five years, the government debt of the Chinese Communist Party will exceed the economic output.
In addition, the IMF also believes that China’s economic recovery relies heavily on government sector support, but private consumption has not kept up, making China’s economic growth uneven. As a result of increased spending to support the economic recovery, the CCP government’s annual fiscal deficit is expected to rise to 18.2% of GDP in 2020, up from 12.6% of GDP the previous year.
Among the various forecasts from professional institutions, we can see that the Chinese economy in 2021 is sending a more sinister signal.
Moody’s: Negative outlook for local governments in the Communist Party of China in 2021
On December 9, 2020, Moody’s, an international credit rating agency, released its “China Local Government Outlook 2021” report, which rated the outlook for local governments in China as negative due to the recovery of the Chinese economy from the epidemic, but the strength of the recovery varies from province to province.
The Moody’s report noted that the shrinking corporate tax base and changes in land concession policies have made local government finances more difficult, while the funding gap for local governments continues to widen and local governments continue to rely on state-owned enterprises, especially urban investment companies, to support investment in infrastructure projects by raising debt, all of which increases the risk of local government indebtedness. Western and northeastern provinces in China have weaker fiscal and debt positions and will face significant challenges to economic growth, the report said.
What puts China’s finances in shackles?
From all the analyses, the economic outlook across China is not good, and the key to economic recovery is support from the government, which has to rely on fiscal revenues. So what do the Chinese Communist authorities think about China’s fiscal revenues?
On January 6, Reuters said in an analysis that an aging society and a society with fewer children before it gets rich is affecting all aspects of China’s society and economy. The article also mentions that officials from the Ministry of Finance of the Communist Party of China (CPC), when discussing the 14th Five-Year Plan and 2035 economic development targets, also believe that China’s potential economic growth rate will decline year by year, and that aging and fewer children are the main reasons.
The slowdown in economic growth, the decline in fiscal revenue, the unabated rigid expenditure, and the potential pension gap caused by the aging population have all made the contradiction between fiscal revenue and expenditure extremely acute.
According to the data, from 1992 to 2013, China’s general public budget expenditure growth rate remained at 10% for 22 consecutive years, including 8 years above 20%, dropping to below 10% from 2014 to 2019, yet still higher than the revenue growth rate for 5 consecutive years, leading to deficit situations in some years.
Meanwhile, special local government debt, which has continued to expand in recent years, is not factored into the deficit. Most obviously, with the economy on the downside, China’s fiscal space is increasingly narrowed to support the widening deficit.
From January to November 2020, China’s general public budget revenue was nearly RMB 1.7 billion, down 5.3% year-on-year, while the country’s general public budget spending exceeded RMB 2 billion, up 0.7% year-on-year.
Officials from the Communist Party’s Ministry of Finance said that in the following five years, China’s fiscal revenue will operate at a low level and the pressure on spending will be high, and that fiscal difficulties are not a short-term problem, but a medium- to long-term dilemma. Some local governments have debt ratios of more than 100%, and some counties are as high as 400%.
For the CCP, the income gap is huge, the gap between the rich and the poor and the aging problem is already imminent, and the CCP’s fiscal policy is already stretched to the limit, and the existing policy is unsustainable.
At the same time, the gap in social security contributions is getting bigger and bigger. According to data from the Ministry of Finance, from 2013 to 2019, the amount of fiscal subsidies to social security funds has skyrocketed, from more than 730 billion yuan in 2013 to more than 1,900 billion yuan in 2019, a 2.6-fold increase, accounting for 10% of the general public budget revenue that year.
With the downward pressure on the economy and the epidemic still recurring, the CPC’s fiscal revenue growth rate continues to decline, while spending remains unabated, making the fiscal “tightening” trend continue.
Especially in 2020 to 2024, the CCP’s national debt and local government debt are in a concentrated repayment period, and the arrival of the peak of debt service is bound to aggravate the financial difficulties.
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