Commentary
Debt flows reveal much about the economic imbalances evident in China’s economy. Private businesses and households, seemingly devoid of confidence in the future, are pulling back from borrowing and investing and actually paying down existing debts.
Only Beijing and the local governments under its command are expanding their financial footprint. China’s only bet on the future is coming in the narrow areas favored by Beijing.
According to reporting from Beijing-based think tank the National Institution for Finance and Development, debt-based leverage has actually declined of late, falling 1.1 percentage points this past spring to 308.2 percent of the country’s gross domestic product (GDP).
For Americans, where excess debt—government, corporate, and individual—threatens sustainability, the Chinese paydowns may look enviable, but for debt to decline in a growing economy is remarkable by any standard and also raises questions about sustainability, especially when considering the mix of what sectors of the economy are pulling back and which are expanding.
All the paydowns are occurring in households and private businesses. Chinese households have been paying down debt since mid-2024. They continued to do so this past spring, with total financial leverage falling by some 1.3 percentage points of GDP. Mortgage debt fell for the 13th consecutive quarter, dropping by some 1.8 percentage points of GDP. Private businesses made comparable paydowns, with some 60 percent of listed firms reporting a reduction in their relative debt loads.
The reason this is troubling, or should be for Beijing, is that households and businesses typically borrow in order to take advantage of what they believe are opportunities. A family, for instance, will take out a mortgage on their dream house in anticipation that their income will grow over time, making it easier to carry the mortgage, even as the family continues to enjoy the home.
Generally, businesses borrow to invest in expansions. The cutbacks in both sectors suggest that neither shares much of this kind of confidence.
As the debt drawdowns indicate (as explained in an earlier column in this space), Chinese people have little reason for confidence. Their living costs have outstripped their incomes, job security has deteriorated, and the property crisis has depressed real estate values and, with it, household net worth.
Following a depressed consumer sector, private businesses see more value in paying down debt than in borrowing to expand. As if to confirm this picture, official data show private business investment in fixed assets fell some 7.1 percent over the past year.
Unlike households and businesses, the government typically goes into debt for political reasons, sometimes for public works, but also frequently to support a military effort, support generous welfare outlays, or perhaps to fund programs for political favorites. And that is just what Beijing is doing. Some funds, to be sure, have flowed to public works with general economic applications, but much has flowed to the relatively narrow, high-technology objectives of Beijing’s “Made in China 2025” program.
What the debt patterns show, then, is that China’s economy is becoming increasingly twisted toward the narrow areas chosen by Beijing while most of the rest of the economy languishes. To be fair to the authorities in Beijing, they have made some efforts in the past to address these imbalances. Those efforts, however, have failed, as this latest financial data makes clear.
Meanwhile, the Politburo, the Chinese Communist Party’s chief decision-making and policy arm, shows no sign of making enough effort to redirect these economically destructive trends.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
