The coronavirus outbreak has already taken a great toll on the Chinese economy, with all headline readings pointing towards a record slowdown in growth during the first two months of the year. But there is an even greater danger for what was once the world’s fastest-growing major economy: that Covid-19 will become the catalyst that will bring its many long-simmering problems to the boil. At the centre of these problems is a rising systemic risk in its banking and financial systems caused by a high level of debt accrued over the past decade.
By CARY HUANG
SOURCE: SOUTH CHINA MORNING POST
The outbreak could not have occurred at a worse time. The past 10 years have not only seen the economy saddled with this debt, but it has also involved a steady structural slowdown that last year saw the growth rate fall to 6.1 per cent, the lowest in decades. Now, just at the very time the country might consider spending more to prop up that growth rate, a raging pandemic means it will be making much less money than usual.
The latest data from the Chinese Ministry of Finance shows fiscal revenue plunged by 9.9 per cent in the January-February period, the steepest drop since 2009. Overall tax revenue fell 11.2 per cent, driven by a 19 per cent slump in value-added tax (VAT) revenue, the main source of fiscal income. These drops come just as the government has offered a handsome tax cut in response to the pandemic.
Meanwhile, the escalation of the pandemic in the rest of the world will only further weigh on China’s economic growth, corporate profits and personal income. In turn, this will inevitably drag down government revenue in months to come.
Beijing’s proposed stimulus spending will only exacerbate China’s already-massive debt pile, which had reached 310 per cent of gross domestic product by the end of last year, according to the Institute of International Finance. Many economies that have experienced such levels of debt have gone on to suffer a financial crash or economic crisis. China now accounts for about 60 per cent of the US$72.5 trillion emerging market debt.
A deleveraging campaign had reduced Beijing’s debt mountain in 2018. But it has since returned to credit-driven stimulus to support growth and combat the effects of its trade war with the United States. About 80 per cent of China’s debt stock was accumulated over the past decade as the country strived to achieve the politically significant milestone of doubling its economic sizefrom 2010 to 2020. The milestone was a key goal in President Xi Jinping’s Chinese dream of “national rejuvenation”. CONTINUE READING THIS INTERESTING ARTICLE HERE