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The View | China’s debt bubbles and property-sector fatigue are driving risk of economic failure

  • China’s ailing property sector is dependent on surging amounts of debt that are unsustainable
  • With over 40 per cent of local government bonds maturing in the next five years, authorities face a debt squeeze which, even if overcome, will recur without serious reform

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Men work at a construction site of a block of flats in Beijing on July 15, 2022. In the end, the pain from Beijing’s deleveraging campaign to break away from the debt-driven model in the property sector proved too much for China’s economy. Photo: Reuters
As the US Congress debates the federal debt ceiling, the lingering effects of China’s property sector crisis remain in the spotlight. The property sector represents around 25 per cent of China’s total GDP, but this critical pillar of growth also requires surging amounts of debt.
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On January 3, an indebted Chinese local government financing vehicle (LGFV) in southwestern Guizhou province made international news when it announced it would delay repayment on loans worth 15.6 billion yuan (US$2.3 billion) by 20 years, as per an agreed debt restructuring plan with approval from creditor banks.
Chinese LGFVs are widely known to be debt-ridden. The situation is especially dire in poorer provinces and municipalities. China’s LGFV debt is around 60 trillion yuan, although it is difficult to know how much debt is implicit government debt.

Local and regional governments in China have relied on these entities, which are set up and mostly controlled by these governments, to finance large infrastructure development projects and stimulate economic growth, often with land as collateral.

By contrast, off-budget borrowing by local and regional governments primarily came about after the 2009 global financial crisis, but they also contributed to China’s hidden debt.

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More broadly speaking, China’s nonfinancial sector debt rose to about US$52 trillion in 2022, or 295 per cent of GDP. China’s corporate sector borrowing makes up the largest part of China’s total debt, which is equivalent to about 128 per cent of its second-quarter GDP in 2022, excluding LGFV debts.

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