By Ichiro Suzuki
In the final quarter of 2008, shortly after Lehman Brothers’ failure, almost all the U.S. bank CEO were scrambling in East Asia and the Middle East, visiting governments and sovereign wealth funds in the hope of raising funds to boost their capital base that was severely damaged by rapidly deteriorating value of their collateralized debt obligation (CDO) positions on the balance sheets. Almost everyone wanted capital from China but none succeeded in this mission. (Oddly, the only capital provider from East Asia was a Japanese bank, Mitsubishi UFJ, that was in a unique situation of having surplus capital to invest.) However, Beijing did stun the world with a massive 4 trillion RMB fiscal stimulus package, in November 2009 when the global economy was sinking into a black hole. The size of the fiscal package was approximately 20% of the economy of China that had overtaken Japan as the world’s second largest. The world’s financial markets greeted the announcement with a distinctly positive note, halting the decline and began to move upward strongly, though it did require another few months for the markets to reach the eventual bottom. Boosting domestic demand of the second largest economy that was growing at double digit rates has made a significant difference to the rest of the world, where demand was totally seized. China’s economic stimulus plan was widely seen as a success. While China's economic growth dipped sharply to almost 6% in Q4 2008 and Q1 2009, it had rebounded to over 8% in Q2 2009 and the north of 10% in Q3 2009. The move was so heroic, and the global economy owes a lot to China on its bold action.
That was then. In the 2010s, by the time Xi Jinping rose to power, China was no longer growing at double digits. The Chinese economy simply became too big to hold onto such torrid growth rates any longer. As a result of unconventional monetary policy in the developed world, and most notably that of the Federal Reserve Bank, the global economy went into the age of extremely low interest rates. Seemingly near free money got a number of emerging countries addicted to borrowing, especially in the U.S. dollar, and China was no exception to the habit. Though the government of China remained prudent, local governments and corporations piled up debt fiercely in order to achieve growth. State-owned enterprises (SOEs) and private corporations went onto an acquisition spree of overseas assets, often real estate. Even if Beijing has relatively low level of debt compared to developed countries in general, it is widely assumed that the Chinese government would be forced to assume the debt of local governments and SOEs. Though Beijing has technically no responsibility to private sector debt, the problem in the sector can grow too big to ignore. Hainan Island-based conglomerate HNA Group presented such a case. Through aggressive debt-financed acquisitions in tourism and financial services in the first half of the 2010s, HNA ended up with overextending themselves. Instead of letting the conglomerate implode, Beijing chose to stepped in and seized HNA in 2017. After divestiture if assets, the conglomerate is currently under control of an entity associated with SOEs. Wang Jian, an HNA confounder, died in France in a “likely accident” in 2018, falling while posing for himself for a photo. So far, HNA remains an isolated incident. Nonetheless, there is a fair chance that Beijing would have to be troubled with other private sector companies’ liabilities in a world of slower economic growth than the last decade.
Then, there are a number developing country governments that borrowed fiercely under the Belt & Road Initiative (BRI). These governments utterly lack a track record in managing their finances, to begin with, often indulged in reckless spending at the time of a commodity boom and then stumbling when the boom was over. Amid lower economic growth than the original plans, rates of return on infrastructure projects would definitely fall short of the initial expectations, leading to much longer payback period than had been hoped, if they turn profits. China’s lending to developing countries is estimated at over $5 trillion, a third of its GDP. If 10% of such debts becomes non-performing, that would be in excess of 3% of the economy, and developing countries do a lot worse usually when they fall into a serious slump. A considerable part of China’s financial resources could be tied to non-performing assets, weighing on the Chinese economy’s performance.
Putting all these factors together, Beijing has its hands full with its own troubles. No more largesse is coming from Beijing, and all Beijing can deliver is lower interest rates through the People’s Bank of China (PBOC). This is a bad news for the global economy. The U.S. has unveiled a fiscal package plan that is 10% of its GDP, but the markets gave it a yawning initial reaction to it. It remains to be seen how this goes.
About the author: Mr. Suzuki is a retired Japanese banking executive based in Tokyo, Japan.