Property developers and municipalities, China’s debt burdens.

Written by associate editor: Brian Harrison

China’s economy has seen massive growth over the last several decades growing from $300 billion USD in 1990 to over $14.7 trillion USD by 2020. This immense growth caused there to be a burgeoning middle class that wanted to own homes and property, which helped increase demand in an already quickly growing property market.

Much of this subsequent property development was funded through debt. Easy access to debt and good political connections allowed companies like Evergrande to be able to borrow vast sums of money to fund property development projects all over the country. After over two decades of operating, Evergrande now has financial obligations of over $300 billion USD. There are several other Chinese property development firms that are also heavily indebted and are struggling such as the Shimao Group. All these companies owe a combined $19.8 billion USD in the first quarter of 2022 to offshore creditors, with another $18.5 billion USD in the second quarter, to say nothing for the remainder of the year. This also does not include payments owed to Chinese creditors either. Evergrande is now working on a Chinese government backed restructuring plan to avoid default and bankruptcy that may have catastrophic ripple effects on the Chinese economy and potential further ripple effects on the world financial markets.

But these companies may not be the only debt-ridden groups to threaten financial stability in the second largest economy; local municipal governments are also struggling. To get around restrictions to stop local governments from directly borrowing money, local governments created finance vehicles to obtain debt. Over the last decade, these debt vehicles have cumulated to an estimated $8 trillion USD, approximately half of China’s GDP. These local government and their financial vehicles have replaced property developers as China’s biggest offshore debt issuers. With $31 billion USD coming due in 2022 to foreign creditors, the amount owed by some cities is almost half their annual budget. Furthermore, with Evergrande and other property developers teetering on the brink of bankruptcy, land sales, which contribute an estimated one-third of these cities’ fiscal revenue on average, are forecasted to drop 20% in 2022. This will shrink these local governments’ capacity to service their bloated debt, further increasing the risks of default.

Both heavily indebted groups pose serious threats to the Chinese economy, its financial stability, and threaten to send rippling effects across world financial markets. This may not be as large an issue as the financial crisis of 2007-2009, but it can still present serious problems to a world struggling to get through this global pandemic. Although, it may be easy to sit here and point out the issues of China and their struggles with debt and corporate greed but given the western world’s low-interest rates for the past three decades and the rapidly growing debt loads, among consumers, companies, and governments, the west may not be that far behind the Chinese in having its own debt issues.

Sources:

World Bank – China GDP data – Jan. 13, 2022, available at https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=CN

Nasdaq – China’s next debt crisis will be municipal – Jan. 9, 2022, available at https://www.nasdaq.com/articles/chinas-next-debt-crisis-will-be-municipal

The Guardian – Evergrande: ‘Everyone bet on inexorably rising Chinses property prices’ – Dec. 31, 2021, available at https://www.theguardian.com/business/2021/dec/31/evergrande-chinese-property-sectors-debt-crisis-to-intensify-in-2022

New York Times – What to Know About China Evergrande, the Troubled Property Giant – Dec. 9, 2021, available at https://www.nytimes.com/article/evergrande-debt-crisis.html

BBC – Evergrande: Real estate giant moves from Shenzhen head office to cut costs – Jan. 12, 2022, available at https://www.bbc.com/news/business-59947088