China’s Angry Pensioners Are Symptomatic of Deeper Problems
By Jacky Wong, Feb. 17, 2023, WSJ

Recent protests by retirees in China over reduced healthcare benefits epitomize a thicket of interrelated problems entangling the country: an aging population, strained local government finances, an inadequate social safety net and heavy debt.

The immediate trigger for the flare-up was revisions pushed through by some local governments, including the city of Wuhan, which will cut reimbursements for medical care. Some money from individual accounts contributed under a compulsory savings plan
will be pooled with a public insurance fund. The move would use some of the surplus in these so-called personal accounts to meet increasing public medical needs—but elderly protesters feel like the government has taken away their savings.

With China’s population graying rapidly—the country had its first population decline in decades last year—the government will increasingly need to make tough political and fiscal choices. That’s especially true since China doesn’t have a robust
social safety net—individuals already pay a relatively high proportion of medical fees out of pocket, and many pensions are meager.

Local governments are particularly strapped at the moment because they have been hit by the double-whammy of lower land sales—which fell 23% year-over-year in 2022—and massive spending on pandemic control measures over the past few years. The
southern province of Guangdong, China’s richest, spent 71 billion yuan, the equivalent of $10 billion, last year on measures to keep Covid-19 at bay. China has given up its strict “zero-Covid” strategy and is easing its crackdown on the property
sector. But land sales probably won’t go back to previous levels soon.

Moreover, around 4.5 trillion yuan, the equivalent of $653 billion, of onshore bonds from so-called local government financing vehicles, or LGFVs, will mature or are subject to early redemption this year, according to Moody’s. Such off-balance sheet
entities raise money for local governments—but their finances have always been shaky. Land purchases by LGFVs surged last year, which probably made the situation worse. Average return on assets among LGFV bond issuers dropped to around 0.4% in the
first half of 2022, from 0.75% in 2021—but they have to pay an average of 4.3% interest on their bonds, according to Gavekal Dragonomics. The research house said LGFVs have defaulted on money owed to private creditors around 166 times in the past year,
even though they have never defaulted on public bonds.

More of the same is probably ahead. “We believe a small number of similar debt restructurings could emerge, especially among LGFVs that are associated with financially weaker local governments,” said Laura Li, senior director at S&P Global Ratings.

Beijing has stepped up scrutiny on such hidden debts in recent years, and is trying to impose fiscal discipline. It will want to avoid large-scale bailouts. But the government is also sending strong signals that it wants to pivot back to pro-growth
policies. It will have a hard choice to make if some of these LGFVs implode.

If all this sounds a bit familiar, it should—many of the same dynamics have long been at play in the nation’s housing market.

A crackup on the scale of the housing debt crisis of last year is unlikely. But Beijing will still face some tough trade-offs in 2023. Fiscal discipline is all well and good, but alienating the nation’s growing army of elderly pensioners, on top of
homeowners, isn’t a good look—particularly when both foreign and domestic businesses are banking on a consumption boom and a return to some semblance of normalcy.

https://www.wsj.com/articles/chinas-angry-pensioners-are-symptomatic-of-deeper-problems-7ba0bae8

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