China risks getting old before it gets rich. Like so many journalistic clichés, this misses the real story: how mainland households risk getting too indebted before getting rich or old.
At about US$7 trillion, household debt is now a record 50% of gross domestic product. Not astounding compared with, say, France or Japan, both of which have ratios north of 55%. And most certainly not relative to the US and UK. According to detailed Bank for International Settlements data from 2016, Britain’s and America’s ratios were 87% and 79% respectively.
Yet the trajectory of household debt is troubling on two fronts. One, China’s level of development. Beijing, remember, has yet to prove it will beat the middle-income trap that ensnares all too many developing nations around the $10,000 level. China is currently around $9,000 in nominal terms.
Another: The consumption growth that excites investors is increasingly debt-financed and, therefore, unsustainable. This matters because the rising wages China has enjoyed this past decade might stall to some extent. Without a surge in productivity, income gains are denting Chinese competitiveness. That’s why Indonesia, the Philippines, Thailand, Vietnam and others are angling for factories in China.
Much is made of how China must focus more on the quality of GDP than the quantity. Sadly, President Xi Jinping has only talked about this vital transition. It’s great, for example, that Xi recently tapped the reform-minded Liu He to oversee financial retooling. As vice-premier, Liu will work with The People’s Bank of China to take air out of debt, credit and property bubbles.
6.5% growth target is the problem
There’s just one problem, and it’s a big one: Xi’s 6.5% growth target. In both 2016 and 2017, the punditariat said that, surely, Xi was confident enough to scrap the GDP goal. Nope. Same thing in March, when the Communist Party made Xi leader for life. Nope, again. The party’s 6.5% aim throws cold water on hopes a newly supersized Xi will get a handle on China’s excesses to avoid a debt reckoning.
How much latitude will Liu have to shake things up? Only Xi knows. The bigger question is whether Xi’s long reign actually deadens the appetite for epochal reform.
The conventional wisdom is that Xi’s newly exalted status will hasten upgrades. Confident he’ll be in power for another 10 or 20 years (or more, perhaps), Xi, 64, will bring state-owned enterprises to heel, tame the shadow-banking industry, attack corruption and accelerate the transition from smokestack industries to innovation and services. Or will the 6.5% imperative trump all else?
Around China are dozens of municipal leaders all hoping for national prominence – a seat at the table in Beijing. Xi, for example, made his bones in the 1990s and early 2000s in eastern Fujian and Zhejiang provinces. Xi is a princeling, descending from parents connected to Beijing’s inner circle. Less privileged leaders get Beijing’s attention with GDP rates that exceed the national target.
If you’re an ambitious regional power broker and think Xi will be around for the next two decades, the inclination is to hit the GDP accelerator. But rebalancing the economy means slower growth. In other words, not making your portion of Xi’s 6.5%. Rather than disappoint, officials may gin up new infrastructure projects – white-elephant stadiums, international airports, six-lane highways, civic centers, universities, museums.
That could mean more debt, more credit, more imbalances, more opacity, more pollution, more complacency and more imbalances that might derail Xi’s economy – and his legacy – at some point. Now, add rising household debt to the mix of risks throughout the second-biggest economy.
The bet on China, remember, is really on 1.4 billion people eventually becoming more American, consumption-wise. The more indebted they are, at this early stage, the less likely investors will find the Holy Grail of a sustainable Chinese consumer boom.