China's Debt, Jack Ma, and the Grandma Problem
Book: Financial Cold War by James A. Fok | ISBN 9781119862765
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The middle chunk of Chapter 5 is where James A. Fok connects China’s financial plumbing to everyday pressure. Debt keeps climbing. Private tech giants challenge party power. And a demographic clock is ticking that no amount of infrastructure can stop.
Still building, but will they come?
China still grows through investment. In the 1990s critics mocked empty airports and highways. Growth filled them. But GDP targets reward local officials for borrowing and building, even when returns fade.
Since 2008, debt grew around 20 percent a year, far above GDP. In 2007 it took 6.5 trillion yuan of new credit to add 5 trillion yuan of nominal GDP. By 2015 it took 20 trillion for the same result. Household debt hit 62 percent of GDP by 2020. Shadow banking, wealth management products, and hidden local government platforms make the true total hard to pin down. Estimates range from 270 percent to 335 percent of GDP.
Doomsday calls have been wrong so far. China has low external debt, huge foreign assets, and a closed capital account. In a crisis, the state would likely print money and absorb losses rather than let depositors take the hit. That avoids a 1997-style Asian meltdown. It also blocks full capital account opening.
Liberalization steps since the mid-2000s already eroded control. QDII schemes let approved managers invest abroad. Individuals can convert $50,000 a year. Trade mis-invoicing, Macau casinos, and luxury watch arbitrage leak money out through “net errors and omissions.” Those outflows jumped from $108 billion in 2014 to $188 billion in 2015.
The 2015 currency episode was a turning point. After years of appreciation, the PBOC tried a more market-driven fixing on August 11 and devalued 1.9 percent against the dollar. Markets panicked. Reserves fell $415 billion between July and December. Donald Trump and Senator Grassley accused China of manipulation even though Washington had demanded a more flexible rate for years.
The PBOC learned that partial openness is dangerous limbo. Speculators test the band. Savers move money offshore when returns at home are suppressed and property feels unsafe.
Alien attack
In 2013, a 14-year-old Hangzhou company called Alipay launched Yu’ebao and pooled small deposits to bid for higher bank rates. Within a year it held $93 billion from 80 million users. Banks hated it but had to compete.
Jack Ma built Alibaba from a small apartment in 1999 into a payments and commerce giant. Phone line costs collapsed after the China Telecom IPO push. WTO accession boosted exports. The iPhone supercharged mobile commerce. By 2020 Alipay handled $17 trillion in payments.
Private firms now drive most growth. The top 1 percent of firms by value added were 65 percent private by 2007. Internet champions copied Western models but adapted them fiercely. Baidu benefited from Google being blocked. Tencent’s WeChat grew from a WhatsApp-like messenger. They won because the sector was new, capital-light, and lightly regulated at first.
That success threatened the old order. The party elite and connected families had blurred lines between state and business. Rent-seeking might have hit 20 to 30 percent of GDP under Hu Jintao. JPMorgan’s “Sons and Daughters” program, hiring princelings for SOE business, ended in a $264 million settlement.
Xi Jinping arrived in 2012 facing corruption anger, inequality, and pollution. His anti-corruption drive disciplined over a million party members and took down tigers like Zhou Yongkang. Wang Qishan told Hank Paulson there is no economic reform without it.
Xi also tightened control. Party branches inside private firms. SOEs bought stakes in listed private companies. Term limits on the presidency went away in 2018.
The Jack Ma moment came on October 24, 2020 at the Bund Summit. Ant Group had priced a $315 billion IPO, the largest ever. Ma called China’s banks pawnshops with a pawnshop mentality. Hours earlier Wang Qishan stressed supervision over innovation.
Two days before trading, the Shanghai exchange suspended Ant citing new regulations. Grey market shares had traded at a 50 percent premium. Bookrunner fees near $400 million vanished. A Christmas Eve probe into Alibaba monopoly behavior followed.
Regulators had real concerns about Ant’s capital levels and investor protection. The timing reinforced a belief that rules apply when the party decides.
Who will look after grandma?
China’s fertility boom in the 1950s and 1960s met the one-child policy just as workers peaked. The demographic dividend was huge. The hangover will be bigger.
By 2030, over-65s will be 25 percent of the population. The working-age pool is already shrinking by millions a year. By 2050 there may be only 2.1 workers per senior, down from 7.7 in 2017. Pension and health spending could rise from 7 percent of GDP toward 20 percent.
Most pensions are unfunded. Migration broke traditional family support. One child may need to support two parents and four grandparents. Raising the retirement age faces public backlash. Allowing three children has not fixed birth rates stuck near 1.7.
Chinese households hold about $33 trillion in bank deposits versus $17 trillion in stocks and $11 trillion in bonds. Americans hold far more in securities. Low returns on cash will push welfare costs onto the state unless savers diversify.
That is why opening capital markets at home and abroad is not optional. It is a survival strategy. Part 3 shows how Stock Connect, Bond Connect, and the Belt and Road fit that push, and where Hong Kong fits in.
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