More Money To China’s Public Piggy Bank

By Peter Lundgreen is the Founding CEO of Lundgreen’s Capital.

The time before the Covid-19 pandemic seems like an eternity ago, but fortunately, it is not – though much has changed rapidly. The disadvantage of macroeconomic challenges and imbalances is that they rarely disappear from a further crisis, just like the current one. If one remembers back then, an example would be when Germany’s GDP growth was rapidly heading towards zero in the first quarter of 2020, despite historically low unemployment. A consequence of the Covid-19 crisis is that even Germany has significantly increased its government debt and even suspended the constitutionally anchored “government debt brake”. The debt mountain translates into positive GDP growth in conjunction with the Covid-19 crisis, but overall, it is unlikely able to compensate for the lost GDP during the pandemic.

Therefore, even an economy as strong as the Germany stands with a heavy government debt and still the same challenges that steered growth towards zero before the crisis. Germany is far from alone in this situation, although China managed that journey quite differently, and relatively speaking, this makes a big difference.

In a philosophical moment, one can consider whether the macroeconomic challenges that China had before the crisis have diminished. The optimist will argue that, relatively speaking and compared to other countries, the problems have become smaller. My assessment is that the financial markets take a more definite look at conditions and therefore, I do not expect investors to take into account that government finances have deteriorated in many other countries – in the long term however, this situation can have considerable significance.

One of the projects that is now being dusted off again is property tax. China has a transaction taxation on real estate, but not a tax on real estate ownership. This tax has been discussed for many years and it is a sensitive issue, as the Chinese are not necessarily happy to pay taxes.  Moreover, there is always the concern for economic growth, which weighs heavily. Eternal economic progress, which translates into even more households moving up in the economic middle class, is simply a minimum requirement to maintain China’s internal balance.

So even though tax increases are a sensitive issue, the internal balance is also being pressured from another front as China’s society and economy becomes a more advanced economy and the expectation of a higher level of public service steadily increases. This discussion is very well known in Western countries, and in China, the main reason for reconsidering property taxes is precisely that the public piggy bank needs more income.

China’s most profane challenge before the Covid-19 crisis was the debt mountain at state-owned enterprises. It is my expectation that the central government already had this theme on the table for some time again.

I anticipate that the financial markets will increase focus on this challenge, which I also consider to be the biggest problem when assessing the pro et contra of China’s economy. There are truly very large sums that are due for payment or refinancing within the next 24 months. Just to illustrate how large amounts the are due in 2023, it corresponds to the total amount of bonds that matured during the period of 2018-2020. Again, this solely concerns corporate bonds issued by state-owned enterprises.

The Chinese government is not going to back this pile of debt, so I expect investors to take some losses on that account. A predominant proportion of investors are domestic, but there are also foreign investors who will probably try to get out of their investments. If one recalls the global crisis mood that the drop in China’s foreign exchange reserves caused just a few years ago, then a flashback is possible.

I could see a certain currency outflow from China again, but it is not worrying. My biggest concern has always been that China’s state-controlled banks would one day be asked to write off large amounts of their lending to the state-owned enterprises – I consider this risk to be rising again. If foreign investors leave the Chinese corporate bonds, it is also possible that this will put further pressure on the overall market for Emerging Markets bonds – should this happen, then this is probably the time when I would choose to increase allocation to this asset class.

Previous articleBabydash Set To Grow With More Funding
Next articleKL Mayor’s Bold Move Needed To Achieve Country’s Renewable Energy Agenda


Please enter your comment!
Please enter your name here