China has gone through a pandemic on a mix of social tranquilizers and economic Red Bull, and now is the time to deal with the headache. The world’s second largest economy managed to grow by 2.3% in 2020 due to tough measures against the pandemic, rising exports and floods of credit. But the fiscal strain on local governments is deep, social frictions are on the rise, and the private sector remains in trouble.
The military-type closure imposed by the People’s Republic has the merit of controlling the contagion. This allowed for an early return to near normalcy, allowing factories to operate again and produce medical supplies to meet growing demand from abroad.
To keep the other parts of the engine running, local governments have issued record amounts of debt to increase spending. The central bank has been conservative in terms of interest rates compared to its Western counterparts, but new loans totaling nearly $ 3 trillion have been granted, an increase of almost 20% over 2019.
However, infrastructure spending has barely risen, suggesting a shortage of promising projects: A large trillion yuan raised in bond markets has likely been used to renew loans. Due to rising debt and declining revenues, as well as obligations to spend more on health services, many local governments are under severe stress, contributing to a number of surprising debt inconveniences by state-owned companies this year. last. Guosheng Securities estimated that 22 of the 31 regions have a debt-to-income ratio of over 300%. In Hubei Province, where the viral epicenter of Wuhan is located, it is 643%.
Although emergency measures have rekindled the main growth figure, private consumption and investment needed to strengthen the recovery remain fragile. Although unemployment statistics seem relatively stable, many companies reduce wages or stop paying.
Without too much aid from Beijing, the average disposable income after inflation increased by only 2.1% in 2020, compared to 5.8% in 2019. Private investment in fixed assets increased by only 1% in 2020, while the state one increased by 5.3%. Retail sales fell 3.9% after an 8% increase in 2019.
There are more subtle issues. Although many Chinese took pride in their collective ability to contain Covid-19 as the United States faltered, a year of unprecedented economic and psychological stress took effect. Media reports of suicides and violent crime are on the rise, and now more than 100 million people in northern China are in jail again. This year could be more difficult than last year.