China’s having its 2008 financial crisis at the worst possible time

China’s leaders on Thursday announced lofty economic goals for the coming years, repeated Chinese Communist Party (CCP) buzz phrases and offered up traditional Marxist jargon after the Communist Party’s much-anticipated Third Plenum. However, as Reuters reported, they provided “no implementation details.”

As a result, the Chinese economy will continue to erode. Continued erosion will almost inevitably result in a debt crisis, undoubtedly one of historic proportions.

The CCP pledged, at the meeting held once every half decade, to enhance social security and healthcare programs and implement tax and financial reforms, but the ruling organization has promised these changes before. The Plenum communique said China would support “new quality productive forces,” one of Xi Jinping’s favorite phrases.

The CCP recycled lots of time-worn jargon, with calls to “stay committed to Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents and the Scientific Outlook on Development” and to “fully implement Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.” 

The communique also said the CCP would “work to better adapt the relations of production to the productive forces, the superstructure to the economic base and national governance to social development,” to “provide strong impetus and institutional support for Chinese modernization.”

The four-day event, however, gave virtually no guidance as to how the Communist Party would keep those promises. Perhaps that failure is a result of the perception among some leaders that the economy is so weak that it may not survive a remedy, as Premier Li Qiang intimated in June. 

“According to Chinese medical theory, at this time, we cannot use strong medicine,” he said at the World Economic Forum meeting in the Chinese city of Dalian late last month. “We should precisely adjust and slowly nurture, allowing the body to gradually recover.”

Perhaps China does not have the luxury of time. 

The official National Bureau of Statistics reported 5.2 percent growth of gross domestic product for 2023. The respected Rhodium Group, however, pegged growth at “more like 1.5 percent.” Since then, there has been a noticeable erosion. Beijing reported 4.7 percent growth in the just-completed calendar quarter. In reality, the economy is somewhere near the break-even mark.

Xi Jinping has pinned hope on exports, which increased only 3.6 percent in dollar terms in the first half from the same period last year. Imports, a telling indication of domestic demand, point to a failing economy. They fell 2.3 percent in June.

Other indicators, especially in the all-important property sector, suggest a contraction of the overall economy. Property investment in China fell 10.1 percent in the first half from a year ago. Home sales by floor area were down 19 percent in the period. New construction starts plunged 23.7 percent.

The country is on the edge of deflation, and soft prices are sure signs of weak consumer spending. Most economists, such as Nobel laureate Paul Krugman, have told China’s leaders this year that consumption is the only sustainable basis for China.

Xi, however, has ignored such advice. Instead, he has looked to bolster manufacturing, thereby pleasing core Communist Party constituencies, helping state banks and building China’s capacity to wage war.

Observers had hoped that the Third Plenum would endorse the empowerment of China’s consumers. Yes, there was a rhetorical bow to consumption — the communique promised the CCP would “strive to expand domestic demand” — but the promise was empty.

China needs a consumption-based economy because the United States and European Union are beginning to close their markets to Chinese products, due to the regime’s predatory and criminal trade practices. Even countries in the so-called Global South are reluctant to let China decimate their local industries with a flood of exports. Indonesia, Turkey, Mexico, Chile and Brazil, for instance, are increasing tariffs on Chinese goods.

The stakes for China could not be higher. Even if the country were growing at the claimed pace, it would not be able to retire debt. As a practical matter, China is now having its long-delayed 2008 crisis. 

In 2008, Chinese leaders Hu Jintao and Wen Jiabao decided they would not suffer a downturn, so they embarked on what is undoubtedly the biggest peacetime stimulus program in history. China, as a result, went on a building binge and created double-digit growth. Governments at all levels borrowed as if there were no tomorrow — local government debt alone is estimated to be as much as $11 trillion — to finance the expansion.

Now, debt-fueled stimulus isn’t working. According to Michael Pettis of the Carnegie Endowment, in the second calendar quarter of this year, the country produced 1 yuan of GDP growth for each 4.2 yuan it spent. The figure in the first quarter was 1 yuan of growth for every 10.8 yuan expended.

As a result of wild spending, China’s total country debt-to-GDP ratio is, per my estimate, around 350 percent. No one knows, however, because there is so much “hidden debt” and because Beijing has been issuing inflated GDP statistics. 

A debt crisis is coming, and it is bound to be the biggest in decades.

That makes the Third Plenum result so disappointing. The Plenum, according to tradition, should have been held last year. The delay is probably due to disagreements among senior party figures. 

Xi Jinping in recent weeks has been issuing calls for “unwavering faith and commitment” to his economic vision, a hint of lingering discord.

The Third Plenum has been seen as a “defining moment” of Xi’s rule. At that “monumental gathering,” however, nothing happened. The failure to do anything tells us that China’s ruling organization has run out of solutions.

Gordon G. Chang is the author of “The Coming Collapse of China” and “China Is Going to War.” Follow him on X @GordonGChang.