Opinion: Nursing China’s Debt Hangover

A large screen displays Chinese Premier Li Keqiang delivering a speech during the opening session of the National People’s Congress (NPC), in Beijing on March 5.



In any other country, an official target of 6% annual economic growth would be almost preposterous. In China that target, announced Friday, is so modest it’s clear something else is going on. That something: Beijing’s escalating fears about a rumbling debt volcano.

Many observers were left scratching their heads when Premier

Li Keqiang

revealed the 6% GDP-growth goal at the annual National People’s Congress. Most economists expect an expansion between 8% and 10%. Since the comparison is with last year’s pandemic slowdown, it would be all but impossible for China not to achieve 6% growth. Last year Beijing didn’t publish any growth target for the first time since the mid-1990s, and it might have made sense not to revive GDP targeting.

So why publish a lowball target that China is assured of reaching? A plausible theory is that this is part of a strategy to rein in debt. More aggressive GDP targets have historically goaded governments at the central, provincial and local levels to goose the numbers by using cheap credit to fund white-elephant public-works projects or to subsidize politically connected companies. Perhaps Mr. Li and his boss, President

Xi Jinping,

hope that setting a modest target will signal their displeasure with this strategy.

If so, they need to signal harder. Elsewhere in the economic plan, Beijing is tightening the limit on local-government borrowing for public works—barely. The quota for such bond issuance will fall to 3.65 trillion yuan ($562 billion) from 3.75 trillion yuan last year—a decline to about 3.4% of GDP from 3.7%. Given how saturated China is with infrastructure after previous stimulus drives, it’s hard to say what this new borrowing will buy.

Beijing knows the magnitude of the challenge it faces. Total debt has risen to some 270% of GDP from 250% before the pandemic. Too much of that credit has gone to government boondoggles, state-owned enterprises and real estate; too little has gone to productive private enterprises. Banking regulator

Guo Shuqing

highlighted the problem when he warned this week about a “bubble” in Chinese property prices.

Solving it will be another matter. So far, Beijing is sticking to its strategy of tolerating a higher number of credit defaults, including by state-owned firms. Capital Economics calculates that in the past six months, and for the first time, more state-owned firms than private companies have defaulted.

Defaults are reaching into the sensitive property industry and foreign-denominated bonds, as when China Fortune Land Development this week defaulted on a $530 million overseas bond issue. The aim is to discipline markets, but not too much. Beijing also is leaning on defaulting firms to reach repayment agreements with creditors, perhaps to discipline corporate managers while limiting creditors’ losses.

Against all these challenges, 6% may be a realistic GDP growth target this year, and China has exceeded expectations before. But a global economy laid low by Covid-19 can ill afford for the second-largest economy to catch a debt flu.

Paul Gigot interviews former Trump national-security official Matthew Pottinger. Photo: ZUMA Press

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