China weathered the pandemic with 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 thanks to tough measures against the pandemic, an export boom and a flood of credit. But tax pressure on local governments is high, social frictions are increasing and the private sector remains in trouble.
The military detention imposed by the People’s Republic has the merit of keeping the contamination under control. That prompted an early return to near normal, allowing factories to run again and produce medical supplies to meet growing demand from abroad.
To keep the other parts of the engine running, local governments have spent record amounts of debt to increase spending. The central bank was conservative on interest rates compared to its Western counterparts, but new loans totaling nearly $ 3 trillion were made, up nearly 20% from 2019.
However, infrastructure spending barely increased, indicating a shortage of promising projects: much of the trillion yuan raised in bond markets was likely used to extend loans. With rising debt and falling revenues, as well as obligations to spend more on medical services, many local governments are under severe stress, contributing to a series of high-profile defaults by state-owned companies this year past. Guosheng Securities estimated that 22 of the 31 regions have a debt-to-income ratio of more than 300%. In Hubei province, where Wuhan’s viral epicenter is located, it is 643%.
While emergency measures have fueled the overall growth rate, the private consumption and investment needed to bolster the recovery remain fragile. While unemployment statistics seem relatively stable, many companies are cutting wages or no longer paying.
Without much help from Beijing on the way, the average disposable income after inflation grew by only 2.1% in 2020, compared to 5.8% in 2019. Private investment in fixed assets grew by only 1% in 2020, while the state 5.3% increased. Retail sales were down 3.9% after an 8% increase in 2019.
There are more subtle problems. While many Chinese took pride in their collective ability to curb Covid-19 when the United States hesitated, a year of unprecedented economic and psychological stress has taken its toll. Media news of suicides and violent crimes is on the rise, and now more than 100 million people in northern China are again in detention. This year may be more difficult than last.