Mini-Latin Americanization: The Slow Death of Economic Vitality || Digging into China

Hi, I'm Dong Shong. Welcome to Digging into China, where we explore China in depth to review unique perspectives. China's macroeconomic data for April has been gradually released. Today, we'll analyze the published figures, focusing particularly on financial data. To be frank, April's financial data is shockingly dismal, almost beyond comprehension. To begin with the loan data for small and micro enterprises at the end of March, the outstanding loan balance stood at 35.3 trillion yen. By April's end, it had fallen to 34.3 trillion yen. In just one month, the loan balance for these business dropped by a staggering 1 trillion yen. This is unprecedented, truly unheard of. A one trillion yen decline in loan balance in a single month indicates that the small and microenterprises took out no new loans during this period and were instead frantically repaying existing ones. Such an extreme anomaly cannot be attributed to these business voluntarily settling their debts. The only possible explanation is that amidst the escalating US China tariff conflicts, commercial banks have refused to extend the loans to private enterprises in the export sector. Moreover, they've abruptly shifted to demanding immediate repayment, pressuring these businesses to settle loans early. This alone accounts for the dramatic 1 trillion drop in loan balances for small and microenterprises in April. Supporting loans to private and small business is a declared national policy of the Chinese government and a key priority loudly championed by the People's Bank of China PBOC. Yet as soon as the US China tariff conflict intensified, this commitment was swiftly abandoned. China's banking system is a peculiar one. At its apex is the PBOC. Nominally a ministry level institution under the state council but in practice its political influence is akin to that of a minor administrative unit. The PBOC's department heads are typically overseas educated finance experts from modest backgrounds. Essentially a group of studios technocrats lacking elite political connections. In contrast, the leaders of China's major commercial banks often hail from politically powerful families, wielding substantial influence and genuine vice ministerial authority. Directives from the PBOC are frequently met with indifference by commercial banks, which often treat them as mere suggestions. These banks follow their own operational logic, prioritizing risk management over the rationality or legitimacy of national policies. The PBOC and the commercial banks are rarely aligned. Given its limited political cloud, the PBOC has little to no sway over the major commercial banks. From the PBOC's perspective, in a critical moment like the USChina tariff conflicts, it would be unthinkable to undermine businesses or betray their trust by forcing export oriented private enterprises to repay loans prematurely. Such actions are utterly reprehensible, tantamount to self- sabotage. However, from the commercial bank standpoint, pressuring these private firms to repay early is a rational decision. It's the only way to mitigate operational risks and avoid a sudden surge in bad debts. In this context, the commercial banks have clearly prevailed. While the PBOC's commitment to supporting private enterprises has been cast aside. Next, let's examine the social financing data for the first four months of this year. Starting with the PBOC's report on the increase in social financing scale. First, consider monthly loan growth. January saw over 7 trillion yen in new loans. February affected by the Luna New Year dropped to around two trillion yen. March rebounded to over 5 trillion yen. But in April, as the US China tariff conflicts erupted, loan growth plummeted to just 1.16 trillion yen. A month-month decline so severe it defies easy calculation. Breaking down April's figures that the new rembi loans amounted to a mere 88.4 billion yen, a stark contrast to the previous three months. Other subcategories far no better. Foreign currency loans, interested loans, trust loans, and the bank acceptance bills all recorded negative values reflecting a sharp contraction in commercial activity. In April, corporate bounds posted a positive 234 billion, but this is largely because only local government financing platforms issuing urban investment bonds can still access this market. As for government bonds, national and the local bonds issued by the Treasury, the net financing scale reached to 972.9 billion Y. Other categories are negligible and warrant little attention. This reveals a harsh reality. In April, financial activity across the national across the nation effectively stalled. Commercial banks are aggressively pressuring private enterprises to repay loans, leaving government entities as the only ones still able to borrow from the financial system. Turning to the remb loan data for the first three months of the year, the first quarter showed a respectable performance. January recorded the new loans of 5.22 trillion Y. February had a 652.8 billion Y and March reached 3.82 trillion Y. In total, the first quarter's new loan scale amounted to 9.7 trillion Y, a 6.4% increase over the 9.1 trillion Y from the first quarter of 2024. A seemingly solid result. But how much of those 9.7 trillion UN loans went to private enterprises? This figure would truly reflect China's commitment to its private sector. Such data is rarely published and typically hard to obtain. However, at a press conference in late April, the PBOC disclosed that a new loans to private enterprises in the first quarter totaled 2.4 4 trillion yen with an outstanding loan balance of approximately 45 trillion yen by March's end. This allows us to gauge the financial systems prioritization of private business. In the first quarter, total new loans nationwide reached 9.7 trillion with four with a 2.4 trillion allocated to private enterprises. Simple division yields 24.7%. the true share of private enterprise in the financial system. By the end of March, the total loan balance for all enterprises was 180 trillion yen with the private enterprises accounting for 45 trillion yen or 25%. These numbers align precisely. Thus, it's clear that the private enterprises represent just a quarter of the financial systems business, hardly a priority. Following the April escalation of the US China tariff conflicts, private enterprises were effectively abandoned by the financial system. Banks forced early loan repayments, pushing these firms to the edge of to prevent the loans from turning into bad debt. This is the true operational logic of China's financial system. Beneath the polished rhetoric lies a brutal truth. Private enterprises are the backbone of economic vitality. Capable capable of efficient investment, job creation, foreign exchange earnings and a consumption growth. They stand on the front lines of the US China tariff conflict. Unlike a military conflict which relies on state forces, this tariff war depends on thousands of thousands of private export oriented enterprises. Yet, ironically, as soon as the conflict intensified, the financial system cut off their support, demanding debt repayment. In essence, this amounts to a collective betrayal by China's banking system. While soldiers battle on the front lines, their weapons are seized, forcing them to charge unarmed into the enemy's onslaught. The audacity of this behavior is unprecedented, utterly deplorable, and deeply unsettling. The final data set concerns the investment multiplier, which measures how much fixed asset investment each of new debt generates. In 2015, this multiplier peaked at 3.6, meaning one of new debt drove 3.6 yen of investment. Since then, it has declined sharply. By April this year, it had fallen to 0.9, meaning one of a new debt generates only 0.9 yen of investment. The missing 10 cents is absorbed onto a cycle of borrowing to repay old debts. When debt growth exceeds investment growth, the debt becomes fundamentally unpayable. This underscores a grim reality. As the banking system abandons private enterprises and relies solely on government borrowing, China's financial and investment activities have lost their dynamism. The entire system teeters on the brink of collapse. Analyzing April's data lead to a stark conclusion. China's economy risks a sudden breakdown at any moment. Yet the National Bureau of Statistics paints a different picture proclaiming the national economy withstands pressure and grows steadily. Sound familiar? It's the perennial China's economy triumphs again narrative. Why then does the Communist Party cling so stubbornly to appearance? Manipulating data, tightening fiscal policy, and resisting reform even as the economy grows increasingly unsustainable. What drives this? I've long believed the Xiinping lacks a deep understanding of history, even that of his own party. The errors he's repeating are ones the Communist Party made decades ago. To stumble over the same mistakes is frankly indefensible. In the late 1980s, China was in the early stage of reform and opening up. Transitioning from a planned economy to a market one wasn't as simple as issuing a decree and creating a free market overnight. It was a chaotic hybrid. On one side, the plant economy persisted. Grain, coal, and steel had a state controlled prices absurdly low. On the others, market were emerging. Farmers could sell produce. Urban residents could open shops and goods in the free market followed market prices. This created a bizarre phenomenon. A ton of steel might cost 100 yen at the state price, but 300 on the open market. Those with connections could secure a quota, buy at 100 and sell for 300% profit without effort. This burst China's first wave of new rich, the speculators. They didn't they didn't produce or innovate. They thrived on connections and information gaps. Ask them where the steel came from and they wouldn't know. But they knew who controlled the quotas. The downside, ordinary people couldn't access affordable goods and faced high market prices. Businesses struggled to compete with those holding quotas leading to market chaos and widespread discontent. The Communist Party determined to showcase the success of reform demanded a soaring GDP and impressive economic data. Local governments launched the projects indiscriminately. industrial parks, train stations, uh chemical plants. Business expanded recklessly headless of market demand or return. But these projects require funding with limited fiscal revenue. Where did the money come from? The PBOC printed and the stateowned banks became cash dispensers. Loans were issued without the regard for a project's profitability or even its existence. just a proposal was enough. The result was a nationwide GDP race with hot money flooding the system and the dubious projects proliferating. By 1988, China's M2 growth rate exceeded 30%. Money supply spiraled out of control and inflation surged with the CPI surpassing 20% entering hyperinflation territory. As the situation unraveled, then Premier Jang proposed a disastrous solution fully liber. The outcome was predictable with hyperinflation devaluing money daily. People rush to withdraw cash and buy goods. Banks faced ruins. Bank faced runs and closed their doors. Store shelves emptied and a panic gripped the nation. Only then did the Communist Party recognize this era and halt price liberalization. It's no exaggeration to say that the Tanaman Square protest of 1989 were directly linked to the hyperinflation and the failed price reforms of the late 1980s. Economic instability fueled political unrest. What was China like in the early 1990s? Public confidence had crumbled. Stateowned banks were mired in losses. Bad debt ratios reached 30 to 40% and no one there to reveal the true state of affairs. Policies shifted abruptly. Reforms stalled and economy entered a deep freeze. The late 1980s served as a warning to the communist party. Pursuing vanity projects and chasing rapid glory is a dead end. Back then, runaway inflation and the soaring prices sparked public outrage. The government's panic at the price reforms failed spectacularly. Today, it's deflation. Stagnant consumption and a shrinking investment. Yet, Xi Jinping persists. He's attempting another round of price reforms rebranded as stimulating domestic demand and boosting confidence. How? Let's examine his actions. First, he launched a nationwide tradein program for consumer goods, urging people to replace functional refrigerators, washing machines, and air conditions. Framed as a green initiative, it's really a tactic to inflate consumption data and nudge CPI upward. Visit the China's major e-commerce platforms and you will see substantial government subsidies for electronics. Second, he's pressing local governments to boost investment and stimulate the domestic demand. How the familiar playbook, special purpose bon urban investment companies, mixed ownership reforms for stateowned enterprises and the PBOC support. The projects are recycled ideas. the funds flow in the same direction, same strategy, new packaging to keep local governments stacking up economic data. She has permitted a debt restructuring, allowing them to borrow to repay old loans while building infrastructure and high-tech projects to maintain an attractive growth curve. How does this differ from the 1980s when thousands of chemical plants were built? Today it's thousands of chip factories, digital economy zones, and a smart manufacturing basis. The objective remains unchanged. Make the numbers look good. More audaciously, she speaks of boosting confidence, uplifting, right? But examine the methods. High unemployment, no issue. Alter the statistics and stop publishing data. Low consumption. adjust last year's baseline to make this year's growth appear stronger. Wing business confidence, issue directives, hold motivational meetings, and deploy task forces to manufacture optimism. Ultimately, GDP growth must hit 5%. Anything less is unacceptable. This is a deflationary economic illusion driven not by genuine purchasing power or structural reforms, but by administrative mandates. artificial consumption and orchestrated the prosperity to mask the economy's fractures. Yet walk any streets in China and the reality is the stock. Restaurants are empty with more staff than patrons. Office buildings stand vacant, entire floors unused, shops closed one after another, and the landlords can't find a tenants even at the reduced rents. How does this differ from the late 1980s? Then it was a runaway inflation and a failed price reform with the government blaming the public. Today it's deflation and a stalled consumption. Yet the government still points fingers at the people. The core issue is the same. Refusing systemic reform, prioritizing performance over solutions and chasing appearances over substance. Where does this path lead? The answer is straightforward but sobering. China's economy won't collapse abruptly like Latin America's but will slowly erode drifting towards a mini Latin Americanization. GDP growth will continue driven by investment but its quality will decline. Cement traded for numbers infrastructure for symbols while real consumption and production vitality fade annually. Local governments will appear to manage a debt, but their financing platforms will become zombie entities perpetually rolling over unpayable loans. State-owned enterprises will expand. Private firms will grow cautious. Innovators will dwindle and the policy followers will proliferate. The market will lose its entrepreneurial spirit, replaced by those chasing government cues. Data will show deflation easing, CPI turning positive, and the PMI consistently above 50. But on the streets, shops will close, office buildings will empty. Young people will leave, and the government will still proclaiming the economy is a stable and improving. This is China's many Latin Americanization. Not an Argentine style debt default or a Venezuelan currency collapse, but a tightly controlled market weakened, superficially stable yet increasingly dysfunctional system. The more the government intervenes, the slower the economy moves. The better the numbers look, the grimmer the reality. Ultimately, China won't collapse, but it won't be revitalized either. It won't perish from war or disaster, but from repeated vanity projects and a refusal to reform, reflect or adapt. A slow decline in tapid waters. Xi Jinping's policies are steering China back to the 1980s when it struggled to transition from a planet to a market economy. Now he's pulling the market economy back towards a planned one. Not the old ration ticket system which is impractical but a new form of planned economy. How does it differ? The old plan economy set production supply and the prices. She's new planned economy maintains n nor nominal market pricing but dictates industries investments and the growth targets. Previously state-owned enterprises dominate. Now they lead while private firms are marginalized and the large private companies are essentially stayed controlled in disguise. Prices were once state set. Now they are manipulated through subsidies, controls and a window guidance. It appears to be a market economy but it's a re-engineered planned economy at its core. In essence, the old planned economy directed the production through plans. The new one cloaks markets in administrative control. It seems like a market logic operates, but resources follow policy. Business decisions await leadership approval and the capital flows align with the guidance documents. You believe you are competing in the market, but you are chasing political signals. You think you are innovating but you are completing project applications. You assume the state is a fostering new industry but it's a stateowned enterprises and a conglomerates re reconstructuring a planned system in modern guys. The master stroke this new planned economy is cloaked in legitimacy branded not as a return to planning but as high quality development. a Chinese style new national system and a market mechanisms guided by top level design. At its core, it's the old planned economy dressed in innovation garb bearing a market's label and orchestrated by administrative fiat. If Xiinping remains in power for another 20 years, the next two decades will see China rigid yet not dead, gradually bleeding out for at least the next 20 years, meaningful reform is unlikely to materialize. 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 YouTube suggest my videos to others. I'll be back with more content soon.