How Long Until China’s Debt Crushes the CCP?

Hi, I'm Dong Seong. Welcome to Digging into China, where we explore China in depth to reveal unique perspectives. Today, we are going to examine the financial state of the Chinese Communist Party, and determine the true limit of the Chinese government's debt, where the ceiling on the CCP's borrowing lies, and in what year the CCP might face insolveny. First, let's consider the time frame. In essence, how long can an economy endure the squandering and misallocation of its resources? China's economy can still manage to stumble forward for now. And the reason is straightforward. Households and the private sector are bearing the cost of the CCP and Xi Jinping's mismanagement of economic resources. The CCP holds a monopoly over all of China's core means of production. The more fundamental the resource, the tighter their control. Essentials like coal, banking, water, electricity, and the land are firmly in the CCP's grasp, giving them the authority to dictate the pricing of society's basic inputs. These critical resources are the lifeline of businesses. By arbitrarily inflating their prices, the CCP can manipulate the private company's behavior at the economy's foundation. On top of that, they impose a maze of administrative obstacles. This requires approval that needs an official signature. Frankly, anyone running a business in China deserves commenation. Operating a factory means navigating at least 100 bureaucratic stamps. Even local neighborhood authorities can make life unbearable for a company if they choose to target it. Why is Xi Jinping's economic strategy destined to fail? His policy pretends to foster competition between stateowned enterprises and private firms. Is that realistic? State-owned enterprises are backed by the CCP's coercive power, while private firms have little behind them. Perhaps at the best, a wellplaced official offering support. Why do Xi Jinping's efforts to encourage the private sector inevitably fall short? The CCP's stateowned enterprises are and are the hybrid, neither fully governmental nor truly corporate, neither marketdriven nor independent. Consider a clear example. Many state-owned enterprises such as the major management consulting firms in financial services. Could even the most well-funded private company compete in their domain? Not at all. These firms benefit from numerous government granted special policies. What are these so-called special policies? In essence, they are privileges that allow stateowned enterprises to bypass competitive rules. Expecting them to compete fairly with the private firms would mean either provoking these privileges, allowing them to retain but not use them, or extending identical privileges to every private company. Without any of these, how can the private sector possibly compete on equal terms with the state-owned enterprises? If the fairness touted by the CCP remains government controlled, then regrettably any fairness not rooted in market principles is mere pretense. Xiinping's understanding may only extend to believing that permitting a business to operate is fairness enough. Yet, he fails to recognize that his very presence is the source of the inequality. History and the current experience of the Chinese people underscore one truth. The dominance of stateowned enterprise is the root of economic disaster. Their privileged status is the fundamental cause of economic calamity driven by one factor. The distortion of resources and the weight of power. With this understanding, we can reframe the issue. the private sector's capacity to generate a value set ceiling for China's debt. The real economy isn't what the CCP's media portrays that entrepreneurs owe their existence to the CCP's China. In reality, China's private enterprises sustain 80% of the nation's jobs and prop up the CCP's state-owned enterprises. Beyond that, they even support the CCP itself. For the first 30 years of CCP rule, a planned economy with no private sector brought the national economy to the edge of collapse as even CCP's own history tax acknowledged on the eve of reform and opening up. With this logic established, let's revisit China's debt ceiling. It becomes simpler to construct a basic model. We are looking at the dynamic boundary between the private sector's economic contributions and China's debt growth rate. More precisely, when the private sector's share of the economy falls too low, the misallocation of resources triggers economic collapse. We can analyze this data from various perspectives. For example, the share of private sector financing in total social financing. the private sector's overall proportion of the Chinese economy or a comparison of the private sector's contraction rate against China's debt growth rate. This approach reveals the extent of China's economic decline and clarifies its debt ceiling. The next question is simpler. By understanding the degree to which the private sector's economic share is shrinking and the trajectory of China's debt growth, we can calculate a linear relationship between the two. This reveals the rate at which China's debt expands as the private sector contracts. Using international benchmarks, we can then evaluate China's debt limits. The key measure of debt levels is the ratio of total debt interest to government revenue. A standard used globally. China's government collects about 20 trillion yen in annual revenue. When debt interest surpasses 10 trillion yen, it signals an economy on the brink as it exceeds 50%. At that stage, China's debt will have crossed the threshold of collapse. One might argue, couldn't they just lower interest rates to zero to keep that interest below that ratio? If rates fail to zero, the UN's exchange rate would collapse, sparking massive imported inflation that would lead to social unrest, a different scenario entirely. This explains the CCP's current policy disarray. They aim to sustain exports while also stabilizing the UN's exchange rate. An approach that essentially uses the private sector's hardearned foreign exchange to subsidize the capital account. By refusing to revalue the UN, the CCP is hammering foreign exchange reserves. Treasury yields and the commercial bank loan rates are already at the rock bottom. Further reduction in bank loan rates would cause the banking system to implode. The current interest rate spread is barely enough to keep banks operational. If loan rates drop more, the Ministry of Finance would need to inject funds to maintain banks core capital. Thus, the cost of additional rate cuts continues to climb. That's why despite endless discussions and meetings on economic challenges, the CCP keeps arriving at the same conclusion. They are out of solutions. Ultimately, the CCP recognized the private sector's importance, but the Xi Jinping's uh brand of political correctness poses a barrier. This political stance is a sacrocent for sheep. Questioning the stateowned economy's primacy would undermine the legitimacy of his leadership. That's why even for even forums meant to promote the private sector must emphasize the vital role of a state-owned enterprises. Last year, even Hu Xi Jin, a longtime CCP mouthpiece, was silenced for overemphasizing the private sector's economic significance and over interpreting she's remarks on reform at the third plan delayed by 10 months. By elevating the private sector's political standing, who challenged she's untouchable political narrative, highlighting the private sector's role was seen as opposing she's authority of economic policy. a line no one not even Hu Xi Jin can cross. If we estimate China's debt at 148 and a half trillion Yen, the breakdown is approximately central government debt at 42.5 trillion Y, local government debt at 46 trillion Y and the local government financing platforms at 60 trillion Y, totaling 148 12 trillion Y. Now, let's examine the link between the private sector's declining share of the economy and China's debt growth. A clear trend emerges. Since 2018 or 2019, the private sector's economic contribution has fallen from a peak of 61% to 48.5% last year with a projected 46% this year. Conversely, the government debt to GDP ratio has surged from 56.7% in 2018 to 93.8% today. A 50% increase in under seven years. That's Xiinping's remarkable feat. The government debt growth over the past seven years equals the total debt accumulated in the 30 years prior to 2018. This illustrates the scale of she's economic disruption. The linear correlation between these trends is striking. By plotting the data as a trend lines and a scatter plot, we calculate a correlation coefficient of negative0.972%. In statistics, a coefficient above 0.8% signals a strong positive correlation while below negative 0.8% indicates a strong negative correlation. A negative 0.972% reflects an absolute negative correlation. Meaning that as the private sector's share declines, the CCP's debt ratio rises. The linear regression equation shows that for every 1% of drop in the private sector's contribution, the government's fiscal deficit ratio increase by 3%. The private sector's share can decline in three ways. The private sector itself shrinks. state-owned enterprise investments grow diluting the private sector's uh proportion or both occur simultaneously. The private sector contracts while the stateowned sector expands. China currently faces this third scenario, meaning the private sector's economic contribution is likely to decline even faster moving forward. Why? In the first quarter of 2025, non- tax revenue jumped by 10%. Industrial and residential electricity and water prices are set to keep rising. If you are a business owner, would you continue operating or investing? Can society expect any growth in private sector investment? If we project the linear rate of change, China's fiscal system could collapse entirely within a decade. But let's assume the private sector's contribution declines steadily, not at an accelerating pace, a generous concession to the CCP. The most optimistic scenario. Even then, China's fiscal outlook barely improves. The subsequent calculations are straightforward. As the private sector's contribution rate falls, we determine when that interest exceeds 50% of fiscal revenue. Typically debt interest below 10% of fiscal revenue is low risk manageable where most developed nations sit at a 20% it's medium risk with repayment pressures emerging and the fiscal flexibility wanning the US is nearing 20%. At a 30% is high risk with fiscal space severely constrained and the governments risk a cycle of borrowing to repay all the debts. Above 30% is extreme risk. The fiscal system is consumed by interest approaching or entering collapse. Using 50% as our benchmark today is once again a generous assumption for the CCP, the ideal case. The Soviet Union and Eastern block collapsed at around 40%. We have key data points. China's total debt stands at 148 trillion yen. Annual fiscal revenue is roughly 21 trillion yen. The relationship between the private sector's declining share and the fiscal deficit ratio shows a 1% drop in private sector contribution raises the fiscal deficit by 3%. China's reported the GDP is 134 trillion yen. This also highlights that the private sector's investment efficiency is three times that of government investment. Thus, the greater the private sector's economic share, the stronger the currency's value. Conversely, as the share of state-owned enterprises and a government ideology rises, the currency's value should fall. If we calculate China's total debt interest at a 3% rate, an average since central government debt interest is below 3% but the local government financing platform that exceeds 3%. Otherwise, there will be no need for central debt swaps, then the overall borrowing rates is likely around 3% with little variation. As China's government debt and interest burden grow, when will interest reach 50% of total fiscal revenue between 2038 and 2040? Assuming a 1 and a4% annual growth in central government revenue using the Soviet Union's threshold collapse at a 40% debt interest to fiscal revenue, the CCP would face collapse between 2034 and 2036. Consider a household. If 40% or 50% of monthly income goes to bank interest, can they carry on? Of course not. The debt doesn't shrink and they are trapped in perpetual borrowing. Some CCP supporters might claim internal debt isn't real debt, just print more money. But unrestrained money printing sparks hyperinflation. If hyperinflation erupts in China, the fallout would extend far beyond economic decline, triggering a comprehensive crisis of social order and political stability. First, the living costs would spiral with prices soaring. Essentials like food, fuel, and housing could double or rise 10fold rapidly, devastating ordinary people's life. Second, saving would evaporate and the middle class would collapse. The deposits and the pensions of China's hundreds of millions of middle-class citizens would have become worthless. Wealth accumulated over generations could vanish overnight. Third, businesses would fail and unemployment would surge. Even large stateowned enterprises could falter as demand shrinks and financing costs climb. A massive unemployment wave would hit particularly in manufacturing and serviceheavy coastal regions. Fourth, food security risk would intensify. China already faces declining food self-efficiency. Hyperinflation would drive up imported food cost while domestic agriculture would struggle with rising prices for fertilizers and seeds. Urban residents might face food shortages and the rural areas could cut output as profits dwindle, raising the spectre of famine. Fifth, the currency's credibility would collapse, deepening international isolation. A UN undermined by hyperinflation would paralyze domestic economic cycles and international trade. foreign investors would exit and the UN's global aspirations would halt with the US China decoupling already limiting key export markets. Hyperinflation would further erode China's trade capacity leading to economic isolation. This of course is just one pep one perspective a projection based on statistical models offered for your consideration. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps you to suggest my video to others. I'll be back with more content soon. Until then, be well.