Financial markets are short-term minded by nature. For this reason, Chinese short-term numbers cause a lot of global attention, too – more than they deserve per se. Nobody can sufficiently judge the correctness of official Chinese statistics for GDP, inflation, urban unemployment, the PMIs, bad or non-performing loans, etc. <\/p>\n\n\n\n
Thus, it also seems\u00a0impossible to come to a conclusion\u00a0on the efficiency of the recently announced two financial support packages of enormous 10 trillion RMB totally (6 plus 4 trillion which means in USD 838 billion\u00a0for \u00a02024-2026 and USD 539 billion for five years to come; in Swedish about USD 838\u00a0miljarder\u00a0<\/em>plus 539\u00a0miljarder<\/em>). According to IMF sources, “hidden local debt” may\u00a0amount to as much as\u00a0totally 60 trillion RMB – an amount that would be far away from tranquillizing\u00a0– and very contrary to what\u00a0China’s minister of finance the other day\u00a0described as “controllable” (more on the topic and definition of\u00a0 “hidden debt” and\u00a0China’s scaring total domestic debt situation in one of my forthcoming blogs).<\/p>\n\n\n\n The size of this latest government action indicates that Chinese political leaders now have become really worried about the local debt issue – but the real magnitude of these problems remains uncertain due to the unknown true dimension of the total provincial and local indebtedness.<\/p>\n\n\n\n Again, the institutional factor of poor transparency remains as one of China’s major shortcomings – and China’s recent policy reaction against overwhelming local debt came very late also in this special context.<\/p>\n\n\n\n As a matter of fact, the local debt problem is not new. Already in 2013, I published an article on this topic though local debt in China was not really addressed as important by the international analyst community at the time (https:\/\/publications.bof.fi\/bitstream\/handle\/10024\/44981\/172270.pdf?sequence=1&isAllowed=y<\/a>). It became indeed more obvious for a broader scale of (Western) analysts first more recently when the signals of the bursting real estate bubble became more scaring. <\/p>\n\n\n\n Other relevant structural issues<\/strong><\/p>\n\n\n\n Apart from the debt situation, other trend or long-term issues should be far more relevant for deepening corporate analysis than purchasing manager indices and quarterly GDP figures like, for example, economic policy in general terms, the role of the market economy in official policy strategy, the vast government subsidies to SOEs, the frequent institutional shortcomings, the bursting apartment bubble, the structure and credibility of the financial system as a whole – plus last but not least the strongly shrinking population in the forthcoming decades (see about Chinese demography my articles in this blog from April 10 this year, https:\/\/blogg.lnu.se\/china-research\/?p=3530<\/a>). <\/p>\n\n\n\n We keep in mind: This summing up of endogenous structural risks could be extended and needs completely different analytical tools compared to the ordinary business-cycle approach.<\/p>\n\n\n\n However, the above-mentioned structural factor “stability of the financial system” should already have gained (some) strategic priority by now also by Chinese political leaders – expressed in the\u00a0here described\u00a0attempt to achieve a better balanced local debt structure. At the same time, we should not forget\u00a0government-subsidized\u00a0unprofitable\u00a0production (for exports) which certainly hides further risks for non-performing bank loans.\u00a0<\/p>\n\n\n\n The uncertain issue of financial stability<\/strong><\/p>\n\n\n\n All this should lead to the conclusion that the volume of bad or non-performing loans should be discussed more broadly than it still is the case when official Chinese publications and comments have been published. <\/p>\n\n\n\n Altogether,\u00a0China\u00a0must work very hard to avoid a future\u00a0financial explosion. Consequently,\u00a0China\u00a0may also be the biggest single financial threat to global financial markets at some point in the future. It is late for\u00a0China\u00a0to decrease risks – but (hopefully) not too late.\u00a0<\/p>\n\n\n\n The number of Chinese medium- and long-term challenges could, of course, be extended further. Many obstacles still have to be tackled – either decreased or eroded.<\/p>\n\n\n\n We know that the quality of Chinese statistics has been underperforming for a long time, particularly as regards GDP. And there is no evidence that things have improved during the ongoing crisis – or whatever China’s growth problems may be called. Here we have one of the reasons why financial markets should not overestimate the role of business cycle analysis on China.<\/p>\n\n\n\n Even BOFIT – the specialized research institute of the Finnish central bank Suomen Pankki – wrote in its latest forecast on the Chinese economy that “BOFIT’s alternative calculation of Chinese GDP suggests real growth might have been considerably lower” (add: in the third quarter 2024).<\/p>\n\n\n\n