China’s debt cannot be resolved by shuffling debt-servicing costs

CHINA FINANCIAL - Report 29 Aug 2023 by Michael Pettis

Special points to highlight in this issue:

* July data were very poor, indicating that weak demand continues to plague the Chinese economy. Imports were down, inflation was low, and retail sales seriously disappointed.

* Debt creation in July was much lower than expected, but economic growth may have been close to zero. At this rate it seems that by the end of 2023, China’s debt-to-GDP ratio will have risen by far more than I was expecting at the beginning of this year.

* While Beijing has discussed various ways in which it will address its debt problem, most of the proposed or discussed measures merely shift debt-servicing costs from one sector of the government to another. They do not truly resolve the government debt burden.

* China will only have resolved its debt problem when it accepts much lower GDP growth rates, when it begins liquidating government assets to pay down excess debt, and when it transfers income from local governments to the household sector. So far it hasn’t accepted any of the three.

Now read on...

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