Zhao Yanjing on Bailing out Local Government Debt

Zhao Yanjing, “Should We Bail Out Local Government Debt?  If So, How?”[1]
 
Introduction and Translation by David Ownby
 
Introduction
 
Zhao Yanjing is a professor of urban planning at Xiamen University in Fujian, and a frequent commentator on national and international affairs (see his Aisixiang profile here).  I don’t think he is particularly famous, but he writes interesting articles on timely topics in a very feisty style, adopting a “truth-telling tone” similar to that of Sun Liping in Sun’s blog posts (see here for an example of Sun in truth-telling mode).  I first noticed Zhao right after the beginning of the pandemic , because he wrote an interesting piece that I translated on how China should “get its narrative” right on the virus.
 
The piece translated here is a follow up to another text on China’s real estate crisis published in May of 2022 (translated here), and makes similar arguments.  If you have not been following the crisis, you might prefer to start with Zhao’s earlier piece, which provides a clearer explanation of the problems China’s real estate sector is facing. 
 
In a nutshell, China’s real estate market is enormous, plays a huge role in China’s (and thus to some extent, the world’s) prosperity, and—according to many analysts—is on the brink of a collapse that would burst China’s economic bubble and spark a global economic downturn.  The market has been booming for decades, as residential property serves as the major investment vehicle for most Chinese, and the boom has of course fueled speculation, which naturally encouragers developers to borrow ever more money to build ever more houses to keep up with demand.  

In Zhao’s telling, the cause of the current crisis is the central government’s clumsy, populist efforts to control housing costs through price controls and other measures, all of which means that developers cannot make their money and pay their debts.  If companies like Evergrande, the one that makes the most headlines, fail or declare bankruptcy, banks and lenders throughout the world will start to call in their debts sector-wide, and the economy will crash, affecting developers, lenders, homeowners, the construction industry, the home renovation industry, the home furnishing industry…A version of this happened in Japan in the early 1990s, and Japan’s economy has never quite recovered.  For good, concise overviews of the property market situation in China in English, see here and here.
 
Zhao further points out the oversized role that land and land sales have played in China’s economic development—local governments in particular have leveraged land sales to underwrite economic growth—and argues that when the central government intervenes to slow speculation through price and other controls, this kills the goose that has laid thousands of golden eggs.  Superficially, of course, this puts Zhao on the side of the greedy capitalist developers and against the poor suffering consumers, but as he puts its, China’s capital market is essentially the property market, and if real estate values do not continue to rise, the logic of the system quickly turns unhealthy and systemic growth slows.  A rising tide lifts all boats, while a tsunami destroys everything in its path.
 
The text translated here was published on February 22, 2023 on the online platform of The Observer, where it was viewed some 80,000 times in the first few days.  Zhao is responding to an online criticism of him penned by Zhao Jian 赵建 (b. 1980), an economist at the Atlantis Financial Institute 西泽金融研究院 in Beijing.  The title of Zhao Yanjing’s original piece was “Debt is the Key to Restarting the Economy,” and the title of Zhao Jian’s rebuttal is “The Key to Restarting the Economy is not Debt, but Credit,” which sums things up fairly well.  A few days earlier, on February 16, Beijing Cultural Review published a very similar if longer piece by Zhao Yanjing, which included an introduction discussing the distinction between debt and credit in macroeconomic terms, along with by Zhao Jian’s article.  Readers hungry for more detail and debate can thus consult the Beijing Cultural Review article.  For my purposes, the text on The Observer, a rebuttal of a rebuttal, is sufficient.
 
Zhao Yanjing is essentially arguing against those who say it is time for China’s local government debt bubble—part and parcel of the real estate bubble—to burst.  The arguments of those who want to burst the bubble are familiar to everyone and based on common-sense understandings of debt.  Taking on too much debt can be the ruin of families, corporations, and nations, and history is full of speculative frenzies and Ponzi schemes.  Something that it too good to be true rarely is and sooner or later the piper must be paid.
 
Zhao Yanjing knows this, of course, but insists that nation-states have other options.  His examples come chiefly from American history.  The Revolutionary War left the American states with mountains of debt, which Alexander Hamilton nationalized so as to prevent local defaults and to start to build a national market and a national currency.  During the Latin American debt crisis in the 1980s, Federal Reserve Chairman Paul Volker told American bankers essentially to “pretend nothing happened” and roll bad debts over for years until the crisis passed.  In other words, having a clean balance sheet at the end of every fiscal quarter is not the only goal.  Before one bursts a bubble—or lets a bubble burst—it makes sense to try to understand the costs that will be incurred, and if the costs are too great, find alternative solutions.  In Zhao’s view, China’s central government, if not rich enough to pay off the totality of local government debt in one fell swoop, can nonetheless intervene in ways that will keep the economy alive, and which might have other positive effects on China’s economy.          
 
In an interesting flourish, Zhao casts the Sino-American rivalry as a “battle of the balance sheets,” meaning that certain American bubbles look ready to burst as well—the stock market and national debt.  The winner, Zhao suggests, might well be the one who can hold out the longest, not necessarily the one with the cleanest balance sheet.  I have no idea if this makes sense or not, but it might make China’s debt hawks think twice.
 
Translation
 
China has long since evolved from a traditional economy to a modern economy, but old ideas about the “natural economy” have not experienced an automatic update in the process, and our view of debt is a typical manifestation of this.  "Debt aversion" is not only a common understanding at all levels of government, we even find a stubborn "scholarly correctness" on the issue even in professional academic circles. An important reason behind this phenomenon is that the existing macroeconomic theory lacks a proper framework for normative analysis of the issue of debt.
 
This article will use the analysis of local debt put forward by Dr. Zhao Jian in his article “The Key to Restarting the Economy is not Debt, but Credit,” which is in fact an  online commentary of a recent piece I wrote entitled “Debt is the Key to Restarting the Economy.”  My goal is to offer a professional discussion of debt from the perspective of the balance sheet, providing a new understanding of the formulation of macroeconomic policy.
 
Local Government Debt:  Should We Bail Them Out?
 
Should we bail out local governments? This is the most urgent question requiring an immediate answer.  Zhao Jian's point of view—“No!”—is that of mainstream academics.  In this view, the reason why local governments have defaulted on their debt is because local governments “do not have clear responsibilities like the central government…All local governments compete to overdraw the central government’s credit, and those who are slow to do so lose out.” This judgement is largely an extension of the debt aversion from the era of the natural economy, and does not really reflect a deep understanding of the nature of local debt in the modern economy.
 
First of all, local debt is mainly used to fund public goods that do not collect fees, such as parks, schools, and roads.  The fact that these assets do not collect fees does not mean that they produce no income, and such investments lead indirectly to an increase in local government tax revenue. However, under the current fiscal and tax system, many tax revenues are shared between the central government and the local government, and they are shared in different places; the liabilities are reflected in the balance sheet of the local governments, but not the income, which is misleading. 
 
Second, public goods (such as schools and subways) will increase the value of land in the areas they serve, and land prices are the valuation of the equity held by local governments, which constitutes the main collateral securing local government debt. If we look deeply at China's local debt, we find that most local debt is in fact invested in public infrastructure (roads, tunnels, bridges, schools, parks, subways...).   These huge assets generate little recurring income, and most of the value accrues to the land contiguous to the assets, again constituting equity for the owners of the land.  Given this, if house prices or land prices are artificially suppressed, the ownership equity cannot be fully recuperated through land sales, and the balance sheet will face collapse.
 
In theory, local governments can cash in their credit through land sales (equity financing). However, if the central government requires local governments to suppress land prices and housing prices for the sake of other macroeconomic goals, this results in forced sales below the market price, or even no sales for want of buyers, which in turn shrinks the equity on the local government's balance sheet. Once we understand the nature of the local government debt crisis, the central government's rescue of local governments not only is not "immoral," but is necessary and must be done.
 
How to bail out local governments?
 
Having answered the question "should bail out local governments," the next step is to discuss the concrete measures to take.  In response to the debt rollover plan proposed in my article on “Debt is the Key to Restarting the Economy,”  Zhao Jian offered a harsh criticism: "Recently, some 'scholars' even proposed rolling over all debts for three years, which is a fairy tale...If all liabilities are rolled over, they will become bad debts, which will destroy China's credit and economy.  All financial institutions will immediately find themselves in a huge liquidity crisis, having lost control of the management on assets and liabilities!"
 
Economics is not mathematics, but more like medicine; the curative effect of any remedy must be supported by clinical observations, and not taken for granted because it looks good on paper. I did not invent the "debt rollover," and it has been "clinically tested."  In his The Great Recession: The Other Half of Macroeconomics and the Fate of Globalization, Richard Koo provides a real life case study of a coordinated rollover of bank debts: 
 
"In 1982 the Latin American debt crisis exploded, the result of which was that seven of the eight largest U.S. banks fell into technical insolvency, and thousands of other financial institutions were in dire straits. Paul Volcker, then Chairman of the Federal Reserve announced a policy of 'pretend and delay' on the day the crisis erupted. Volcker directed all U.S. banks with loans of more than $1 million in Mexico coming due to roll them over, even if Mexico was already bankrupt in August of 1982. He also assured the banks that the authorities would not view those loans as non-performing (even though they were), freeing the banks from the pressure to write off bad loans. This policy was maintained for seven years, thus giving American banks the time they needed to rebuild their balance sheets."
 
As a result, "not only did Volcker's extraordinary actions lead to no credit crunch or economic downturn, but virtually none of the cost was borne by the U.S. taxpayers, even though the vast majority of the nation's largest banks remained insolvent for nearly seven years...In fact, the 'pretend and delay' policies of 1982 and 2009 not only did not cost taxpayers a dime, but were critical to the continuing functioning of the economy."  Japan and Europe chose the traditional remedy suggested by Zhao Jian, and the subsequent results were in sharp contrast to those achieved by the United States.
 
In fact, even in the U.S., where finance is highly developed, debt aversion is a common understanding among the general public. Koo calls the “ignorance of U.S. officials, academics and investment bankers (not commercial bankers) concerning the ‘pretend and delay’ policies of 1982 and 2009” “shocking”.
 
Koo writes that "those ignorant officials and economists continue to give reports, talking about what Japan (and other Asian economies after the 1997 Asian currency crisis), should do about their banking crisis, despite their complete ignorance about the crisis in their own country." Today, there are many "ignorant officials and economists" in China who are doing the same thing. They regard "what Americans say" as the gold standard, but turn a blind eye to "what Americans do."
 
Stigmatized local debt
 
One point of view expressed in Zhao Jian's article is very representative. He believes that local governments’ debts are a matter of "local government platforms issuing bonds for local banks to buy," which comes down to “one hand washing the other,” and is not “true credit.”  To a large degree, these are the imaginings of an “armchair scholar.”
 
Even local banks cannot lend at will without sufficient collateral. You can say that the local government has fudged and overestimated the value of the collateral, but it is absolutely impossible for the bank to create debt by "one hand washing the other." In fact, before the collapse of the land market, given their monopoly position in the primary land market, most local governments had ample credit.
 
In the popular narrative about local debt, local governments are often described as playing the negative role of "speculators." "All local governments compete to overdraw the central government’s credit, and those who are slow to do so lose out…More and more economies are addicted to the drug of debt, because once they get a taste the ‘quick fix’ of the debt-driven economy, they no longer want to do the hard work of building assets." Again, this is something taken for granted by "armchair scholars," and in fact, even with the help of debt it is hard for local governments to develop, to say nothing of trying to develop without debt.  This is because urban development not only requires land acquisition and demolition, but also the organization of a series of projects from their planning to their ultimate construction.
 
The idea that "expanding your liability side only requires accounting entries and cash transfers, meaning that you can quickly grow your balance sheet almost out of thin air" is again the pure fantasy of an armchair scholar. You can accuse local governments of poor investment returns and low-quality assets, but it would be very ungenerous to deny the difficulty of the work they do at the local level.
 
In order to answer whether local debt has been a positive or negative factor in China's great urbanization process, we must first abandon the prejudice associated with “debt aversion" and correctly understand the nature of local government debt. 
 
Local debt and urbanization 
 
It is important to emphasize that the success of China's industrialization over the past forty years has largely been based on large-scale urbanization. The traditional view is that industrialization drives urbanization, and urbanization is just a by-product of industrialization, and further argues that "bank loans should be in the hands of entrepreneurs so that they can grasp the 'purchasing power created out of thin air' to organize factors for production and innovation," thus achieving industrialization.  This theory is very popular, but it puts the cart before the horse. The truth is, without massive urbanization, industrialization simply does not happen. 
 
The reason I say this is that the very existence of modern production and consumption requires very costly assets.  We cannot let every enterprise build their own roads and bridges, generate electricity, and run 5G networks, nor can we expect families to run their own schools and hospitals.  All of these need to share the cost through collective consumption in the form of public goods, and cities are in fact the concentration of public goods, and the enterprises that provide these public goods have a specific name:  "government." 
 
Only when governments provide these costly assets can enterprises and families operate on the basis of their own less extensive assets.  These asset-heavy externalities will make the assets of households and enterprises more valuable, thus providing households and enterprises  with a certain amount of credit. Otherwise, no matter how much "entrepreneurial spirit" we have, we will not be able to build the balance sheet of modern enterprises (families), to say nothing of producing what Zhao Jian calls "operating cash flow."  Hence from the moment of its creation, "government" is not the opposite of the "market," but instead the core of the market. As an enterprise engaged in the production of public goods, the government must also obey the constraints of the balance sheet.
 
Since public services are the aggregation of these costly assets on which all businesses and households rely, the government needs huge financing to build its balance sheet. It is precisely because of this constraint that only a few countries in the world can achieve a high level of urbanization. That China has been able to carry out such a high level of urban infrastructure in a very short period of time is the greatest of China’s “miracles,” and most of this miracle has been achieved by local governments. 
 
What has allowed local governments in China become development-oriented governments, while local governments in other countries remain only service-oriented governments? A key reason for this difference is that the value generated by public services is mostly reflected in land prices in China, while in other countries it is reflected in property taxes.
 
China's local government monopolizes the primary land market system, allowing this value to enter the local government's balance sheet in the form of ownership equity, providing the necessary credit for the generation of local debt. For precisely this reason, once the real estate market collapses, local governments not only will be unable to issue large-scale debt financing, but their balance sheets will also be reduced to zero overnight. Considering the scale of assets and credits at the local government level, the impact of such an event on the economy is by no means comparable to any corporate bankruptcy.
 
The revolving door of debt
 
Practice has proven that China's urbanization model is very successful, but local governments have also accumulated huge debts. As the incremental demand for urban development decreases, it becomes more and more difficult for local governments to repay debts by selling land, and it is difficult to sustain the expansion of the balance sheet through the appreciation of ownership equity. 
 
Instead, the rapid increase in general expenditures often erodes the government's ownership rights through fiscal deficits, which then triggers the local government debt crisis. The above problems are fundamentally the product of the current fiscal and tax system. If the existing system remains unchanged, there is practically no solution to this problem at the local government level. To solve this problem, local government debt must be placed at a higher economic level in order to find a way out of the predicament. 
 
The most representative case from past experience is Alexander Hamilton's intervention to "replace local debt with national debt." The Revolutionary War led the United States to accumulate a large amount of debt, including some $209 million in notes and bonds issued by the states. If the newly established federal government had taken the position that the states were responsible for their own affairs, local governments would have immediately gone bankrupt.  But the United States did not take this path. The U.S. federal government was established in 1789, and in 1790, Hamilton, the first Secretary of the Treasury, proposed the "revolving door plan" of replacing local debt with national debt, or in other words, replacing the severely depreciated Continental currency with a new federal currency, and substituting longer-term national debt for the various shorter-term local debts. 
 
The reason why Hamilton did this is because he found that as long as creditors can receive stable interest payments and the debt can freely circulate in financial markets, many national debt holders are unconcerned about receiving full repayment of the initial loan.
 
In this scenario, when short-term national debt comes to term, long-term national debt can be issued to repay it. This is an early version of the Ponzi scheme that Zhao Jian sees as "pure evil."  However, replacing local debt with national debt not only helped the U.S. federal government to build its balance sheet, but also helped various state governments resolve their bankruptcy crisis.
 
Why was Hamilton able to successfully replace local debt with national debt? A key reason is that after the Revolutionary War, the United States established a federal government with the power to collect taxes.  If we regard the federal government as a business, the debt issued to fight the War of Independence can be regarded as an "investment" in the establishment of the federal government, and the federal government created by the "crowdfunding" of the states is not a negligible asset, because the huge and stable "business income" provided through federal taxation becomes the ownership equity of the federal government. From the perspective of the federal government's balance sheet, ownership equity corresponds to assets, and Hamilton's replacing local debt with national is completely in line with this financial logic.
 
In their paper "The Capital Structure of Nations," Patrick Bolton and Haizhou Huang found that currency secured by tax receipts constitutes a securitized government ownership interest, and that using this currency to buy federal bonds is the equivalent of equity financing. As long as the "business" of the federal government has a stable tax revenue, bondholders can receive dividends without interruption. 
 
With increasing tax revenue, the federal government can issue more treasury bonds, and the central bank can also issue more currency by purchasing treasury bonds, ultimately realizing the monetization of the entire economy. It was by relying on such accumulation via internal circulation that the United States was able to get rid of its dependence on outside capital, and built internal capital even while practicing isolationism, ultimately achieving monetary sovereignty from European countries.
 
Replace local debt with national debt
 
If we compare China's urbanization to the American Revolutionary War, China’s central government after urbanization is like the U.S. federal government established after the American Revolutionary War, and the local debt is equivalent to the debt owed by the American states after the war.
 
The profound logic hidden behind the simple saying "if you want to get rich, first build roads" is that while the free infrastructure produced by local governments through debt seems on the surface to have no direct benefit, in fact it will eventually be converted into an increase in government tax revenue.
 
According to the tax-sharing system set up in 1994, the central government receives a higher share of tax revenue. This means that the central government does not contribute capital, but shares in the equity interests of local governments.
 
It is precisely this intangible transfer of wealth that has made the growth rate of central government tax revenue higher than the GDP growth rate for many years, and the proportion of total tax revenue that goes to the central government is also much higher than the proportion of central government investments in overall investment. As long as this large-scale transfer of credit to the central government continues, and debts at the local level remain, the balance sheets of the local government will remain out of kilter, and the debt problem of the local government will never be solved.
 
If this logic is correct, then not only is it not “immoral” for the central government to take over part of the local government’s debts, but instead it is an inevitable policy choice as urbanization comes to an end.  Not only will it not be “an irreversible disaster for China’s credit and economy,” "causing a huge liquidity crisis," but instead will establish a strong national balance sheet and generate sufficient currency, thereby avoiding the lack of liquidity that will inevitably result from local government debt reduction.
 
If the central government does not take over local debt, the local government must continue to sell land to repay these debts. If this continues, the local government will never be able to move past "land finance," and it will be impossible for the Chinese economy to realize the transition from "high-speed growth" to "high-quality development.”
 
What is particularly important is that national debt creates currency in a way that local debt does not.  Therefore, the process of replacing local debt with national debt is also the process that will help China get rid of its dependence on the U.S. dollar and regain monetary sovereignty.
 
Another outcome of the 1994 reform of the tax-sharing system was that new tax revenues did not rely on the central government's liabilities, and in order to manage its own balance sheet, the central government had no choice but to rely on local government liabilities to indirectly ensure the balance of assets and liabilities.
 
As mentioned at the beginning of this article, money is created by banks through liabilities—this creation must be mortgaged via credit, and in specific terms, banks purchase highly liquid ownership equity in the market—in the United States, the Federal Reserve purchases treasury bonds, in Japan the central bank buys stocks, while in China commercial banks hold real estate. 
 
In China, due to the absence of the central government debt, the central bank is unable to create base money directly, and only indirectly moves currency throughout the economy via commercial banks.  The result of this monetary policy will inevitably lead to stagnation and dysfunction when the central government attempts to regulate the macro economy.
 
Of course, I am not suggesting that the central government immediately take over all local government debt, because the scale this debt is such that even if the central government wanted to assume the debt, it could not afford it in the short term.
 
Fundamentally, the explosion of local government debt is largely due to problems with collateral. The collateral for local government debt is mainly land, but land and real estate have lost liquidity due to continuing central government policy trying to cool down the real estate market.
 
Thus, once the central government stops suppressing real estate, significantly reduces new land supply, and reverses land market expectations, collateral liquidity can be restored, and many local government bonds will still be redeemable. The better the recovery of the real estate market, the less debt the central government will need to take over, thus buying the time required to replace local debt with national debt. 
 
"Gresham’s Law" in capital markets
 
Let's take a look at the "third repayment possibility" that Zhao Jian called "pure evil," what he called "funding cash flow or debt via a Ponzi scheme.”
 
The Ponzi method is actually very common in finance. Replacing short-term debt with long-term debt, quantitative easing…whatever you want to call it, these dazzling terms are all essentially Ponzi finance. From the more popular term "Ponzi scheme," it is obvious that the public generally holds a negative attitude towards this financing model, so it is necessary to clear up what is being misunderstood here. 
 
Ponzi debt is essentially a process of increasing debt by continuously overestimating ownership equity. Obviously, if the owner's equity remains unchanged in real income terms, the liabilities created by overestimating the owner's equity (credit) will eventually burst the bubble.
 
But the question is why everyone thinks this way, while in the real world, Ponzi financing is not uncommon.  And it is not only companies that do this, countries do too, and even take the lead in doing so (such as the national debt issued by the U.S. government). To understand the above phenomenon, we need to correctly understand the economic meaning of a "bubble."
 
In a situation where there is only one balance sheet in the marketplace, the higher the equity valuation, the bigger the bubble, and the greater the possibility of debt default. But if we leave the textbook and enter the real world, we find that such conditions do not exist.
 
In the real world of competing balance sheets, there is an anti-commonsense phenomenon similar to "Gresham's Law" (bad money drives out good money), which is that a big capital bubble drives out a small capital bubble.
 
Suppose there are two companies, A and B, and both companies have the same ownership equity—let’s say 10.  But the valuation of company A is 10 times equity, while the valuation of company B is only 5 times equity, so the financing obtained by company A will be 100 , while that obtained by enterprise B will be 50. Obviously, enterprise B’s bubble is smaller than that of enterprise A.
 
If enterprise A and enterprise B are competing for the same market, which will be able to undercut the other and drive it out? Obviously, it is Company A with its big bubble, because when the valuation of the two companies reaches 50, the gig is up for company B, which can only close down and write off its balance sheet. At this point, enterprise A will have achieved a monopoly over the entire market, and if it sets its prices high enough, it can not only can recover the losses incurred and repair its balance sheet, but can also expand its ownership equity to 20%, thereby reducing the debt bubble of 100 from 10 times equity to 5 times equity.
 
In the face of competition, the increase in enterprise A’s bubble will inevitably force enterprise B to increase the valuation of its ownership equity. The result of these increasing bubbles is not that the bubbles of both Company A and Company B burst, but that the party that bursts last seizes all the ownership interests of the party that burst first, thereby repairing its own balance sheet. This is why Ponzi financing is not uncommon in the real marketplace.
 
Should we pop the bubble?
 
Ponzi financing, which looks like "drinking poison to quench your thirst” or “draining the lake to catch the fish,” is not the "pure evil" everyone thinks it is, but a natural choice in what companies do with their capital under the law that "bad credit drives out good credit." It makes no sense to burst one’s own bubble in an effort to preserve assets.
 
Having understanding the economic meaning of Ponzi finance, we can answer the question I just posed:  is taking the initiative to burst your own credit bubble a good way to deleverage?  The answer is no!  In a certain sense, bursting the bubble yourself is worse than letting it burst on its own.
 
From a financial point of view, China and the United States are two competing balance sheets. The ultimate winner depends on whose credit can hold out the longest.  Among the three major sources of credit (corporate stocks, local government real estate, and central government treasury bonds), U.S. credit mainly comes from treasury bonds and stock markets, while China's credit mainly comes from real estate.  At the moment when China and the United States are entering the final round of competition, it is very dangerous to take the initiative to burst the real estate bubble and saddle local governments with a huge debt load.
 
If the central government, which is sitting on huge pile of unused national credit, continues to stand by and do nothing, one result to consider that China's balance sheet might collapse before that of the United States.  In 2008, China and the United States both took advantage of globalization to jointly “harvest” other countries throughout the world, and at that point it might have made sense to say that "saving the United States means saving China, too." 
 
However, in the context of strong pressures toward decoupling, if China’s central bank continues to buy U.S. treasury bonds, delaying the explosion of the U.S. balance sheet; and if China’s best companies continue to go public in the United States, increasing the credit for the already overvalued U.S. stock market, then from the perspective of financial warfare, we are not "saving China," but instead "funding the enemy," even if we are unaware of it.
 
It is true that China's real estate bubble is unsustainable, but the U.S. national debt and the stock markets are also struggling because they, too, are reaching their breaking point. Although replacing local debt with national debt cannot bring about a genuine increase in wealth, as long as China's debt crisis does not suddenly explode, there is still hope that China’s economy can recover. "The final victory often comes from the effort required to persist!"[2]
 
Conclusion
 
Now that the pandemic is over, predicting the direction of China's economy in 2023 has become a hot topic throughout the world . One of the biggest uncertainties comes from how we handle the huge debt crisis that is coming due.
 
If we fail to find new ownership interests for these debts, the great recession triggered by the shrinking balance sheets of Chinese local governments could dwarf Japan's "three lost decades."  If, by contrast, through replacing local debt with national debt, the central government can build a balance sheet valued in China’s sovereign currency, then China’s century of growth will eclipse the “American miracle” following the War of Independence.  Compared with public finance, the logic of money games is "anti-common sense."
 
Whether China’s future is one of growth or of recession, the key is the extent to which China’s policymakers can get past "debt aversion."  People's understanding of "debt" may be more or less the same, but as far as China's destiny is concerned, there is a cliff on one side and a mountain on the other.  In 2023, the Chinese economy has entered a state of crisis. In this state, the economy will either experience a major recession or huge growth, and "stability" is the least likely outcome.
 
Notes

[1]赵燕菁, “地方债要不要救？怎么救?” published on the online platform of The Observer/观察者网 on February 22, 2023. 

[2]Translator’s note:  Zhao is quoting Xi Jinping, who is urging the Chinese people to continue to practice his zero-covid policy.  I assume Zhao is being somewhat ironic.