Premier Li Keqiang doesn’t have a background in tightrope walking. But the Cirque du Soleil folks might want to audition the Chinese premier given the balancing act he’s trying to pull off.
The act with which Li entertained the nearly 3,000 representatives gathered for the annual National People’s Congress included talk of a “tough struggle.” In his speech on Tuesday, Li admitted Beijing faced a “grave and more complicated environment” as Donald Trump’s trade war trips up the economy.
As such, China is ramping up its stimulus machine to keep growth between 6% and 6.5%, which would be the lowest in three decades. Yet the balancing tools Beijing uses will be kept in check.
China’s fiscal deficit will increase to 2.8% of gross domestic product. That is up from 2.6%, but below the 3% threshold Beijing views as the international standard. Taxes will be cut, too – both for personal income and value-added levies.
But the real trick is how Beijing aims to ramp up stimulus under the radar – off-balance sheet by means of local government bond issuance. It’s here where we need to pay close attention to where the tensioned wires on which Li is walking lead.
This financial sleight of hand – and feet – won’t surprise students of Beijing’s other forays off-balance sheet, far from center stage. They include local-government financing vehicles, or LGFVs, which aren’t counted directly on regional leaders’ budgets.
It’s a nifty way to open the stimulus spigot anew, and far from the prying eyes of Moody’s, Standard & Poor’s and Fitch Ratings. And clearly, it will provide a much-needed pick-me-up as US President Trump’s tariffs crimp growth. As Andrew Batson and Chen Long of Gavekal Research point out, 23 of China’s 31 provinces have already cut their annual growth targets for 2019, with the median target falling to 6.5% from 7.0% in 2018.
One takeaway is that Chinese President Xi Jinping isn’t as ready to tolerate slower GDP growth as this week’s headlines suggest. The 6.6% growth China produced in 2018 was the slowest since 1990. Creating a 6% floor for 2019 sends a message to municipal leaders angling for national attention.
For the last 20 years, that’s meant producing faster-than-average GDP rates. This ambition results in political acrobatics around the nation. Every municipal leader hopes to create the next Shenzhen with six-lane highways, international airports, universities, cavernous civic centers, perhaps even the next Guggenheim project.
All this debt financing raises China’s longer-term risk profile. Officially, Xi’s team is allowing local leaders to issue about US$320 billion of “special purpose” bonds, up from US$283 billion. Expect loads more, though. In 2018, more than 80% of infrastructure upgrades were fueled by special purpose borrowing. As global headwinds dent mainland growth, that proportion is sure to increase.
This strategy is in itself a kind of balancing act. The hope is that underlying projects generate enough cash to handle principal payments as well as interest. That assumes Trump blinks and ends his trade war.
Indications are that Trump has grown weary of stock-market volatility – and the feedback effects on his approval ratings. He seems increasingly anxious to strike a deal with Xi.
That would cheer Asia, which has been cast in the role of collateral damage these last 12 months. Though Trump’s levies are aimed at China, they’ve devastated the supply chains on which nations from South Korea to Singapore rely on.
Trouble is, policymakers haven’t a clue what Trump might do next. It’s great that he allowed the March 1 deadline for additional tariffs to pass without incident. But given the scandals and investigations swirling around his White House, Trump’s legislative prospects are few. He’s likely to see trade actions as his best chance for policy wins. Neither China nor Japan is out of harm’s way.
Stable Chinese growth would be just the thing to calm regional nerves. And that’s exactly the balancing mechanism that Xi aims to deliver in 2019.
Yet that means coping with myriad conflicting forces simultaneously. One is slowing global growth. Another is managing China’s dueling bubbles in debt, credit and property. Another still is not exacerbating risks China will experience the “Minsky moment” economists long feared.
This is when a credit-fueled expansion meets a nasty end. It happened to Japan in the 1980s, developing Asia in the 1990s, Wall Street a decade later and, more recently, a Europe stumbling from crisis to crisis.
China’s reckoning could be epic, though. Its roughly $34 trillion pile of public and private debt is often explained away by high savings rates. Make no mistake about it, though, Beijing’s leverage is increasing apace, no matter what officials say.
As financial trapeze acts go, this one is particularly dicey. The faster China grows, the less Xi’s men are doing below the surface to recalibrate growth engines from exports to services. The more Beijing levers up its balance sheet, the more the second-biggest economy takes on a hair-raising quality.
All while Li is telling us all’s well. That’s a Cirque du Soleil-caliber feat. Just don’t look down.
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