The IMF on China’s Economy: True Diagnosis, Fantasy Treatment and Then What?
Published in Epoch Times on 12 February 2024
The IMF on China’s Economy: True Diagnosis, Fantasy Treatment and Then What?
As long ago as 2007, Premier Wen Jiabao declared that China’s economic growth trajectory was “unstable, unbalanced, uncoordinated and unsustainable”.
The terrible warning pronounced by Premier Wen astonished many foreign China experts at the time, but the annual report on China just published by the IMF reminds us how right he was.[i]
The IMF’s diagnosis of China’s economic problems is excellent, its proposed remedies for avoiding crisis are classic, and its warning of the downside risks if those remedies are not applied is stark indeed.
But how realistic are its remedies?
Before answering that question, we must look at the economic problem that is most likely to have dire political consequences for China’s Communist regime: the crisis in funding local governments. The IMF describes the prospects in very sombre terms. Until the crisis in the property sector broke in 2021-22, 40% of local government revenues were generated by land sales to developers, but those sales have now collapsed, and the IMF warns that “fundamental demand for new housing is expected to decline by almost 50 percent over the next 10 years… in some regions, the adjustment could be much sharper.” Moreover, “housing starts are projected to remain below fundamental demand during the next 10 years as part of the demand is met by the completion of currently unfinished housing, excess inventories of existing finished housing, and secondary markets sales of vacant housing purchased for investment purposes.” This means there is no prospect of reviving land sales as a source of local government revenue in the foreseeable future.
The collapse in this source of revenue has come on top of another problem: the heavy reliance of local government on debt financing. According to the IMF, “In all but the richest provinces, local government augmented debt is well above the 60 percent of GDP benchmark used by the authorities to identify risk… local government’s own business models are in most cases unsustainable, with negative cash flows from operations.”
Many local governments are already effectively insolvent. Julien Garran of the MicroStrategy partnership has demonstrated that central government cannot bail them out because the problem is too big: he has estimated it as over 100% of GDP.[ii] Nor can the regime inflate the problem away, because that would undermine the currency.
Local governments are using Ponzi schemes to keep themselves afloat. When those schemes run out of road, as soon they must (the average maturity of local government financing vehicle debt is about 3 years), they will dismiss have to employees, close down services and terminate infrastructure projects; they will default on their obligations to bondholders; depositors in smaller banks will lose their deposits; investors in wealth management products related to local government financing will lose their capital; businesses dependent on local government financing will collapse, and unemployment will escalate massively.
Can the Chinese regime not prevent this from happening? Some of the remedies proposed by the IMF for this and other problems in China’s economy are technocratic in character and could be applied within the present political framework. But others go much further. The IMF veils them in anodyne language but stripped of that they are highly political.
The most important are privatisation of state-owned enterprises, a decisive role for market forces instead of state planning, free trade, and an end to protection of Chinese companies against foreign competition. The Communist Party has never fully accepted such policies because they would undermine its monopoly of political power.
To suppose that they could be applied without systemic political change is sheer fantasy. Pity the authors of the report: the IMF’s remit does not permit them to even mention the need for political change.
It is not only the IMF that shrinks from the conclusion that China’s only hope of salvation is a political revolution. So do the vast majority of foreign commentators.
But consider this. The local government funding crisis will deepen while the Ponzi schemes play out. Then, in three to five years, people who have lost their bank deposits, investors who have lost their capital, entrepreneurs who have lost their businesses, and workers who have lost their jobs and have no adequate welfare benefits on which to live, will have nothing to lose. They will be outraged. Disorder will break out, and the security forces will not have the will to resist them because military, police and security service personnel will be among those who have lost their life savings.
A people which has tolerated a coercive state that enabled a rising standard of living will not tolerate one that makes them poor. A ruling elite which for decades has agreed with Wen Jiabao that China’s economy has been “unstable, unbalanced, uncoordinated and unsustainable”, but were happy to profit from it, will then judge that their best hope of defending what remains of their own wealth and power, and saving the nation, will be to lead the movement for change. They will mobilise the angry masses to demand a free press to hold government to account, an independent judiciary that will defend their right to do so, and an army, police force and security services whose allegiance is to the state and the people, not to a political party. In short, they will lead a political revolution.
[i] IMF Country Report No. 24/38: People’s Republic of China 2023 Article IV Consultation, February 2024.
[ii] Wicksell’s Revenge by Julien Garran, MacroStrategy, 20 November 2023.
