Last year, I wrote a feature explaining why China’s GDP numbers were cause for worry. At the time, the US-China trade war was just a possibility, and the English-language dialogue surrounding China was largely cautious about discussing the nation’s economic weaknesses. In this frame of mind, last year’s feature focused on how habits of debt spending have pushed up China’s nominal GDP numbers for decades. Though debt spending does not necessarily lead to catastrophe, some degree of economic pain becomes inevitable unless such patterns are dealt with.
Debt-based spending, especially on infrastructure and inefficient state-owned enterprises, has not gone unnoticed. Members of China’s central leadership, all the way up to Xi Jinping himself, have publicly acknowledged this problem and taken measures to tackle it. Over the past year, there has been some success in reducing unhealthy spending (though state media frequently has to remind local governments not to fall back on these old habits).
However, to keep growth smooth and consistent, other engines need to take the place of bad spending. The most recent quarter numbers published this July show China’s economy is growing at its slowest rate since the early 1990s, suggesting that other sources of growth are not taking over.
There have been strong expectations that China’s 1.5 billion consumers could fuel the shift to a self-sustaining consumer-based economy. It’s certainly true that Chinese consumers have made a sizable dent on global markets. Fifty years after living in an economy entirely closed off from the outside world, China’s middle and upper classes have fully embraced conspicuous consumption, which China’s government has assisted over the past year by cutting taxes for businesses and consumers. This could be a promising bright spot as other sectors of the economy slow down.
However, alongside this promising strong consumption is a growing pile of household debt. Though Chinese households have enjoyed an annual 10 percent increase in income thanks to the booming economy, this growth has been accompanied by an annual 20 percent climb in debt. Chinese household debt growth underwent a record increase in 2017, reaching 53.2 percent of GDP. Though not as high as US household debt, this represents three times the proportion of household debt just a decade prior. Much of this debt growth can be attributed to the skyrocketing price of housing. In the first half of 2018, consumer loans accounted for 36 percent of all bank loans—75 percent of these consumer loans were mortgages.
Consumer credit problems are not confined to housing mortgages. Other forms of consumer credit are expanding rapidly. According to Dinny McMahon at MacroPolo, credit cards now comprise approximately 10.6% of all outstanding bank loans, over three times what they accounted for a decade ago. The 85.1 billion RMB worth of delinquent credit card debt in 2017 made up only 5% of China’s total non-payable loans (NPLs), but delinquent credit card debt is growing faster than other types of corporate or retail debt due to an exponential rise in credit card use.
Chinese consumers are not only relying on credit cards for short-term credit. South China Morning Post reported in September that more and more Chinese millennials are using microloans to finance daily consumption and small luxuries such as cosmetics or movie tickets. The microloan company South China Morning Post profiled, Fenqile, had 29.2 million registered users at the time the article was published. Though not a major problem now, the lack of household savings, coupled with growing household debt, means one fewer fail-safe to soften the impact of a potential economic crisis.
Problems with household debt have huge economic implications, but even more urgent for China’s leadership is how economic anxieties translate into political movements. Last summer, online peer-to-peer lending platforms (an increasingly popular form of investment for individual households that accounted for over 1.2 trillion RMB ($180 billion) worth of outstanding loans in 2017) hit a crisis. Hundreds of platforms did not allow investors to withdraw money, either due to defaults or duplicitous pyramid schemes masquerading as investments. Protesters traveled from across the country to Beijing to petition the government to take action and recover their savings. They were met by hundreds of police officers, who swiftly moved them onto buses out of the city; at one point the entire Beijing financial district was under lockdown.
In 2019, any conversation about China’s economy would be remiss without mentioning trade. While it is tempting to attribute the nation’s economic deceleration to its trade war with the US, a slowdown of China’s international trade has been years in the making. For years, overseas clients have been moving manufacturing to other countries (especially to Southeast Asia) as wages and living standards in China have climbed. With the added pressure of US tariffs as an additional cost, even more companies are shifting their production chains elsewhere. This July, Reuters reported that US tech companies are planning to move major production out of China, and Taiwanese manufacturers are bringing their supply chains back home. Combined with an overall global drop in demand, China’s exports fell 1.3 percent in June from where they were last year. Relying on overseas purchases of cheap “made in China” goods was already on the way out, but US tariffs may have sped up the process.
In addition to a slowdown of exports, there has been an even sharper reduction of imports. While China’s trade surplus with the US has continued to rise this year, it is further evidence of weak demand among Chinese consumers. With reduced demand both at home and abroad, Chinese manufacturers and private enterprises are even more likely to rely on debt to keep the lights on.
China’s current economic picture would not have been ideal under any circumstances; however, it is particularly unfortunate now. Now is when Chinese policymakers intended to systematically close down unprofitable state-owned enterprises, sometimes called ‘zombie companies.’ The concern with shutting down such organizations is always unemployment; even before this quarter’s manufacturing downturn, China’s employment problems were already bubbling over into political pushback. Labor protests and related arrests were on the rise last year. Hong Kong-based advocacy group China Labour Bulletin recorded 1,700 labor disputes in 2018 compared to 1,200 in 2017, but the real numbers are likely to be even higher. Arrests have risen sharply over the last year as well, with at least 150 labor-related arrests in the second half of 2018; these have involved both veteran labor rights activists and university students. Though it is unlikely labor protests will force political change, the growing unrest creates another area to which local governments must divert scarce resources and further blunts incentives to kill zombie enterprises.
These cumulative local problems are of direct concern to the central leadership, and to Xi Jinping himself. With decision-making power on everything from military policy to panda diplomacy firmly consolidated around one individual, Xi’s priorities will have enormous ramifications for the whole country. And whatever else one may say about Xi Jinping, he himself is not an economic expert and does not have much intuition about how market economies work. Since Xi’s primary toolkit so far has been party discipline and political education, it is likely he will rely on these tools even more to prevent unrest.
None of this is to say China will not remain a major global economic power for the foreseeable future, or that Chinese entrepreneurship and innovation will not shape the future of the world. But the era of China’s growth is ending, with its economy operating largely on fumes. The biggest challenge to the US and the world for the next decade won’t be what to do when China’s economy surpasses the US. It will be how to respond when a globally-linked China goes through its first major economic crash.
Ann Listerud is a Party Watch Initiative Fellow with the Center for Advanced China Research. She was previously a research associate with the Simon Chair in Political Economy at the Center for Strategic and International Studies, a researcher and translator for Industrial Bank of Japan, Leasing Co. Ltd., and an English teacher for Henan University and the Shenzhen public school district. Her research interests include Chinese economic policy, state-owned enterprise reform, aging populations, and U.S.-China economic relations. Ms. Listerud earned her MA in International Affairs from the University of California, San Diego, and her BA from Beloit College, where she double majored in international relations and East Asian languages. She speaks and reads Mandarin Chinese and Japanese.