China got through the 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 2.3% in 2020 thanks to tough measures against the pandemic, an export boom and a flood of credit. But the fiscal strain on local governments is deep, social frictions are increasing, and the private sector remains in trouble.
The military-type confinement imposed by the People’s Republic has the merit of having controlled the contagion. That allowed for an early return to near normalcy, 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 issued record amounts of debt to increase spending. The central bank was conservative on interest rates compared to its Western counterparts, but new loans were made totaling almost $ 3 trillion, an increase of almost 20% over 2019.
However, infrastructure spending barely grew, suggesting a shortage of promising projects: Much of the trillion yuan raised in bond markets was likely used to renew loans. With rising debt and declining revenues, as well as obligations to spend more on medical services, many local governments are heavily stressed, contributing to a series of striking debt 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 the viral epicenter of Wuhan is located, it is 643%.
Although emergency measures have reignited the headline growth figure, the private consumption and investment needed to cement the recovery remain fragile. Although unemployment statistics appear relatively stable, many companies cut wages or stop paying them.
Without much aid from Beijing on the way, average disposable income after inflation grew by just 2.1% in 2020, compared to 5.8% in 2019. Private investment in fixed assets grew by just 1% in 2020 , while the state one increased 5.3%. Retail sales fell 3.9% after a rise of 8% 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 has taken its toll. Media reports of suicides and violent crime are on the rise, and now more than 100 million people in northern China are confined again. This year could be more difficult than last.