How China’s economy is quietly collapsing behind the numbers

Okay, we all know China's economy isn't doing well, but just how bad is it? That's the tricky part. Third quarter data is out and one analyst based in Hong Kong took a deep dive into it. What he found were some troubling irregularities, a widening fiscal hole, rising taxes, a silent wave of money printing, fast declining consumption. All right, so first things first, let's talk about the fiscal picture. Um let's talk about CCP's dangerous deficit. By the end of September, fiscal deficit has grown to almost 9 trillion UN against 19 trillion revenue. So China's fiscal deficit ratio has soared to 45%, the highest in history. The right lower corner is the fiscal deficit ratio. As you can see, um the deficit has been growing steadily over the years. It was 37% last year and before COVID in 2019 it was 20%. But here's the catch. The fourth quarter is always the government's peak spending season. All kinds of procurement, infrastructure payments and municipal projects must be completed and paid for before year end. So that means the my annualization uh for the year based on September year today is too optimistic and um the final deficit ratio for the whole year this year 2025 will most certainly reach 50%. So a 50% deficit ratio means Beijing's revenue can cover only twothirds of its expenses and this has pushed Beijing to compensate for its deficit by one raising taxes and two printing money at the same time. So now let me talk about raising taxes. So since the end of last year the pressure to collect more tax has hit every corner of Chinese society. Now the tax squeeze eventually show up in fiscal revenue data. So let's compare tax revenue growth for the first three quarters for both 2024 and 2025. On the left is a column that highlights the five major taxes for the first three quarters of 2024 when compared with the year before 2023. And then on the right is um the first three quarters of 2025 and its growth compared to the year before. So last year's first three quarters saw three of the five main tax categories VAT, corporate income tax and personal income tax were in the red shrinking by more than more than 4.3% right due to economic downturns. But this year something strange happened. By the third quarter only one category showed a decline and that's VAT and consumption tax on imported goods. And this is you can explain this because it's you know people consumers are cutting back and people can no longer afford imported luxury goods and hence the uh VAT and consumption tax on imported goods fell 5.7% year-over-year. Um but the other four tax categories reported an uptick. Is it due to an economic boom in 2025? Absolutely not. Right. The only reason VAT, consumption uh consumption taxes as well as corporate and personal income taxes have turned positive is because of the government's brutal tax collection campaigns, scraping the bottom of the barrel. But this kind of revenue growth is unsustainable. Once the ground is stripped to bare, nothing will grow back. It It's like cutting to the bones and people will scream. Now, these temporary gains will not last. They will likely vanish next year and when they do um China's economy will hit its darkest moment. To fill this massive u fiscal gap the CCP has been printing money. So how much debts has it issued? According to uh China's central depository and clearing company in the first three quarters of 2025, monthly government bond issuance averaged 2.267 267 trillion yuan, up 22.3% from 2024's monthly average of 1.844 trillion. And if you compare with 2019, the year before COVID, Beijing is borrowing three times more on a monthly basis because it was only a little under 700 billion yuan a month in 2019, right? 698. Now it's 2.3 trillion a month. But China's financial system simply can't absorb that much debt. The open market liquidity is far too thin to handle over two trillion yuan in new bonds every month. So the People's Bank of China, the central bank, stepped in, effectively printing money to buy the bonds. The analyst explained how it works. The finance ministry first sells government bonds to major state-owned banks and almost immediately those banks sell the same bonds to the central bank under a deal called an outright res reverse repurchase agreement or outright reverse repo. The central bank pays cash while the banks promise to buy back the bonds in 3 to 6 months. Because these bonds have a repurchase date, they don't appear on the central bank's balance sheet, they exist in a kind of offbook black hole. And since those bonds are never actually repurchased, when the deadline arrives, the central bank simply creates an even larger round of re reverse repos or repurchase agreements to roll them over. So in other words, through this lefthand to right-hand process between the finance ministry, the stateowned banks and the central bank, China has managed to issue massive amounts of new debt and park it all inside the People's Bank of China financed by money printed out of thin air. Although the central banks doesn't record these outright reverse repos on its balance sheet, at least it publishes an announcement every time it issues them, including the amount and the term. So from those public notices, it's easy to estimate how much government debt the central bank has actually bought. This new game started in November last year. People's Bank of China conducted its first outright reverse repo, purchasing 500 billion UN of government bonds. By January this year, that figure had already surged to 2.7 trillion UN, the total at the bottom, the yellow highlighted line. By mid October, the balance of government bonds held through such operations had reached 6.3 bill trillion yuan and that's just in 12 months. Now, keep in mind this refers to the outstanding balance, the total amount of bonds the central bank now effectively holds under this so-called new method. And and the speed of that increase is a textbook case of debt snowballing, expanding violently without a single moment of pause. Now, let's take a look at exports because it's the last standing pillar of China's economy. All right, so let's talk about exports. Um, that's the one area that's still propping up the economy. Official China customs data claim that in the first three quarters, total exports grew 6.2%. And immediately, Chinese nationalists celebrate this as proof that the trade war has no impact on China's exports. Now, these data are not accurate. Uh, but still they can show us something valuable. China saw increased in exports to almost all major trading partners. Export to Asian countries rose 14.8% Africa 28% EU grow 8% Hong Kong 12.4 Latin America 7 India 12.9% Japan even Japan 4.5%. Now, meanwhile, South Korea, Russia, and the United States saw decreases, particularly exports to the United States, it fell almost 17%. Now, exports to the United States are important to China's economy because not only they are the lion's share, um, but they're also the most profitable due to the high margin. So, it it is said that roughly 40% of China's exports go directly or indirectly to the United States. and they generate about 70% of the sector's total profits. So, Asian countries and Latin America are all export reroute hubs for US bond goods. Um, they're not true end markets for China. So this kind of reexport trade isn't sustainable because the United States is tightening its rule of origin and look through inspections and it's punishing both American importers and third party countries that enable these kind of loopholes. So as a result, Asian and Latin governments are now actively banning trans shipments and by the fourth quarter, these restrictions will bite and China's export growth will likely turn negative. So there's another interesting trend. I don't know if you noticed that China's export to Russia has declined in the first three quarters by 11.4%. But exports to Africa jumped 28% and to EU 8.4. in four. So that doesn't mean Africa suddenly got the money to import more more goodies from China. It means Chinese exporters are using Africa and some European states possibly Turkey. I mean Turkey is not part of EU but Hungary is possibly as middleman to continue supplying Russia with critical supplies and equipment. In short, these numbers show that China is still supporting Russia's war effort as both countries economies teeter on collapse. Uh but things will change. I I think this trend would will will not last as trade penalties on China are now being discussed across the US and Europe. All right. Now, let's talk about consumption. This is very interesting. So, the CCP has been trying to boost domestic spending. Uh but the way its program doesn't work. Okay. So several policies have been rolled out this year. It launched a 300 billion UN subsidy program aimed at home appliances, electronics, automobiles, and home renovations. At the same time, it offered interest subsidies on consumer loans. That's up to 1,000 yen for every 100,000 borrowed. That's essentially a 1% in Yeah. 1% incentive on borrowed money. Think about it this way. If you plan to buy a chicken for dinner, the Chinese government gives you a small dish of soy sauce or from Beijing's point of view, they hand you the soy sauce hoping you will go out and buy the chicken. But who's really going to buy a whole chicken just because of a free condiment? It's hardly an incentive. But the problem is people don't just keep buying electronics, cars, or home appliances over and over. Once you've got a fridge and an air conditioner, that's it. So, the effect will not last. All right. So, the retail and then the electronics at least get subsidies, but food and restaurants do not. And it's been hard hit by the strictest government anti-banquet policy in history, uh, banning most of the 80 million civil servants from dining out on official expenses. So the truth is government spending has propped up China's economy. So when you cut government spending the economy will take a hit. As a result the white liquor industry is collapsing. Production in the first three quarters fell 10.7%. Marking the ninth consecutive year of sharp decline since 2017. At this pace, uh it's estimated that total liquor output may barely exceed 3 million tons in 2025. That's just a fraction of the 2016 peak of 13 million tons. Um so if this continues, the white liquor industry could vanish altogether, much like China's once thriving uh wine sector. And then meanwhile, restaurant closures have reached a shocking shocking levels. LA last year uh about 3 million restaurants shut down and in the first half of this year alone another 1.6 million businesses uh or restaurant businesses filed for dregistration and the four years figure again is estimated to go over 3 million. Now that's just the official number. Many restaurants, smaller ones, simply close their doors without even filing any paperwork. And assuming each restaurant employs just 10 people, that means over 30 million workers lost their jobs last year and another 32 million will lose jobs this year uh with little hope of finding new jobs. Now, I didn't discuss real estate because everyone knows China's real estate market is in uh freefall and the bottom has not been seen yet. And then another sector is investments. I gave you an example of how local government collude with banks to create investment targets by turning mud into money in my last live stream on Tuesday. So, you can check it out. It was, you know, that's how how they meet the targets. So as far as real estate and investment markets are concerned, I think they're the engines have died. So now the three pillars that make the economy appear stable, tax hikes, money printing and exports could also fail in the near future. We don't know when, but we know when that happens. Uh it may happen suddenly.