Following an announcement in Beijing that China’s economy scored 6.9 percent growth in the January-March period from a year earlier, some of the Japanese media painted positive pictures with headlines saying that the growth exceeded the government’s target and that slowdown of the Chinese economy clearly bottomed out. As if to refute such optimism, however, concerns are mounting in international financial circles that the present status of China’s economy is getting ever closer to what had existed in the United States when it was hit by the crisis triggered by the collapse of Lehman Brothers in 2008.

An American analyst stationed in Beijing points to an extraordinary expansion of personal debt as a major risk to the nation’s economy. After the economy started showing signs of a slowdown in 2014, the government took every conceivable step to revitalize the real estate market by easing housing loan regulations. As a result, housing prices in major cities have shot up — by 78 percent in Beijing and 50 percent in Shanghai compared with 2010 levels. Household debt meanwhile kept expanding to account for more than 30 percent of fresh lending in the latter half of last year, up sharply from around 15 percent previously.

A Japanese correspondent in Beijing sums up the situation by saying that the government is trying to shift the burden of keeping up the economy’s growth from the debt-laden public and corporate sectors to households, by getting people to cough up their savings and spend more because the state-driven stimulus policies are nearing their limits. Consumers rush to real estate “because they have nothing else to buy,” says the reporter, adding that some of the people he knows complain that they have a hard time going on a shopping spree overseas due to tightened controls on capital outflow since last year, while others say they want to buy real estate before prices get even higher.

It is risky to rely on personal consumption and debt to play a leading role to stimulate the economy for two reasons.

First, once personal incomes stop increasing, people’s debt would quickly become irrecoverable, resulting in sharp rises in such debts. In recent years, the increase in personal incomes in China has constantly outpaced the growth of the nation’s economy. At the beginning of 2015, individual incomes were rising around 8 percent from a year earlier. But the growth slowed to around 6 percent in the latter half of 2016. Swelling personal debt coupled with slowing growth of income was a phenomenon also observed in the U.S. on the eve of the Lehman shock. It is no coincidence that consumer spending was driven by real estate in both cases (subprime loans in the case of the U.S.).

The second reason is that housing prices in urban areas are posing heavy burdens on consumers. According to an estimate by Kokichiro Mio, a senior researcher at Nissay Basic Research Center, the average housing price in Beijing has reached 16 times the people’s average annual income. That is roughly the same level as in central Tokyo in 1990 — just before the collapse of Japan’s asset-inflated bubble boom. In advanced economies, housing prices are reportedly in the range of four to six times people’s annual income.

The real estate market and consumer debts are not the only ticking time bombs that pose a risk to the Chinese economy. Huge sums of money with nowhere else to go are being poured into financial instruments known by a generic term of “wealth management products (WMP).” An unfounded belief — contrary to facts — that any loss would be covered by banks selling the products led the Chinese to invest 26.3 trillion yuan (equivalent to nearly ¥450 trillion) in those products as of the end of last June. Since early 2015, the WMP yields have exceeded the market interest rates, and the gap has now reached around 1 percentage point. It appears inevitable that the WMP bubbles would burst sooner or later.

Public works spending in China meanwhile continues to concentrate on construction projects. Last year, China remained the world’s No. 1 in terms of the construction of skyscrapers for the ninth year in a row, building 84 structures measuring 200 meters or taller, accounting for about two-thirds of the global total of 128. Earlier this year, the Chinese government announced a scheme to establish a new financial city called “Xiongan New Area” in a farming village a couple of hours of drive southwest of Beijing. Domestic steel and cement manufacturers, which suffer from excess production, have welcomed the plan aimed at creating a special economic zone like Shenzhen.

On top of all these complicated economic risks comes the policies of the Communist Party regime led by President Xi Jinping. With its reckless state-driven stimulus efforts, China’s outstanding debt has reached 277 percent of its gross domestic product. Meanwhile, the rigidity of its foreign exchange and monetary policies has become noteworthy.

According to the aforementioned Japanese correspondent, maintaining stability in the value of the renminbi currency is of the utmost importance to Xi’s government. Xi reportedly instructed the People’s Bank of China and other relevant institutions late last year never to let the yuan’s exchange rate fall — as it guarded against the policies of the incoming U.S. administration of President Donald Trump, who kept calling China a “currency manipulator” during his election campaign.

In fact, China’s foreign exchange policy took a major change in direction in 2014 from guiding the renminbi lower to halting the currency’s slide — thus shifting from the earlier dollar-buying and yuan selling to yuan-buying and dollar-selling operation. So far, the government has spent $1 trillion, or a quarter of its foreign exchange reserves, to shore up the renminbi, and such an operation is likely to continue.

A weaker renminbi would accelerate capital flight, a long-standing problem for the Chinese economy. Even with the steps to keep up the currency’s value, the drain on capital has not stopped, forcing the government to tighten rules further. The problem here is that the rules tightened to halt the capital outflow are discouraging investments from overseas. If foreign investments cease to serve as an engine that drives growth of the economy, the state will have to shoulder an even greater burden. The result would be a vicious cycle of increased debts, currency instability and further state interventions. Every time this happens, fears exist there will be a Lehman shock-type catastrophe.

China will also have to keep an eye on the moves of the U.S., which exited from the zero interest-rate policy, to keep the yuan’s value stable. When the Federal Reserve Board raised its rates last December, Chine followed suit within several hours. In the case of China, however, even a small interest rate hike could cause defaults among heavily-indebted corporations, households and the public sectors.

Financial sources are increasingly worried that there is little that the Chinese central bank can do. The U.S., on the other hands, appears to have many means of putting China in trouble. Whether the U.S. trade deficit with China widens, or it raises its interest rates or the unforeseeable happens in the international markets, China will always have to worry.

This is an abridged translation of an article from the May issue of Sentaku a monthly magazine covering political, social and economic scenes. English articles of the magazine can be read at www.sentaku-en.com

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