Chinese Debt Balloons

Researchers at JPMorgan Chase estimated last month that China's overall debt, encompassing households, companies, and the government, had surged to 282% of the country's annual economic output. This stands in comparison to an average of 256% in developed economies worldwide and 257% in the United States.

  • What sets China apart from most other countries is the astonishing pace at which its debt has accumulated relative to the size of its economy.
  • Over the past 15 years, China's debt has more than doubled, making its management an increasingly challenging task.

The Real Estate Bubble and Government Debt Woes

The inception of this deep debt hole can be traced back to the real estate sector, which has been grappling with issues such as overbuilding, falling property prices, and dwindling demand from potential buyers.

  • In the last two years, numerous real estate developers that had borrowed money from overseas investors defaulted on their debts, and the situation has not improved as two more defaults were recently reported.
  • Besides, many developers are struggling to meet the hefty debts they owe to domestic banks within China.

Another factor compounding the problem is the borrowing spree by local governments. In the last decade, many cities and provinces established lightly regulated special financing units and took on heavy borrowing. These funds were used to cover daily expenses, including interest payments on other loans, and finance infrastructure projects such as roads, bridges, and public parks.

A Web of Interlinked Debt Issues

The real estate market's downturn and the ballooning government debt issues are interconnected. For years, localities relied heavily on revenue from selling long-term leases for state land to private-sector developers. However, as many of these developers ran out of funds to bid for land, this revenue source dwindled.

  • To fill this void, local financing affiliates took on significant debt to purchase land at steep prices, which the developers could no longer afford.
  • As the real estate market continues to weaken, these financing affiliates now find themselves in financial trouble.
  • Fitch Ratings, a prominent credit rating agency, estimates that local governments in China have debts equivalent to around 30% of the country's annual economic output.
  • Additionally, their affiliated financing units carry a debt load equal to an additional 40 to 50% of national output.
  • However, it's worth noting that some double counting may occur as local governments borrow and then transfer the debt to their financing units, as pointed out by Fitch.

China's debt situation has reached a precarious level, posing considerable challenges to policymakers in managing the mounting liabilities and averting a full-blown crisis. The real estate market's instability and the precariousness of local government financing units are just two of the critical aspects contributing to this complex economic landscape.


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Photo by Alejandro Luengo / Unsplash.