SU-SOC175 MAR022026

China stuck with their debt strategy even despite things going badly.

Deleveraging

  • Simplest method: kick the bucket down the can—roll over current debt
  • Hard approach: curtail credit in sectors with excess capacity, such as real estate

The second approach became destabilizing, and made local government debt even worse.

Real Estate

Goverment is generally happy to have demand re:

  • public works
  • railway stations
  • railway lines
  • container ports

etc.

BUT! Real estate’s purchasing is market driven unlike public works; thus failure of real-estate firms affects millions of households and businesses.

The Bubble

  • because financial system was walled-off, households cannot access higher interest rates overseas
  • thus households can only invest in housing (because there were much fewer other opportunities)
  • shortage of tax revenue resulted in land finance by local governments

Sector facts

  1. Real estate shares 10% of Chinese GDP unlike the 2ish percent in the US
  2. Home ownership is unusally high in China—housing is thus the largest class of Household assets
  3. large housing price inflation; keeps the GDP growth rates high and people can’t afford to

Three Red Lines

Coming down hard to deleverage. August 2020.

  1. liabilities shouldn’t exceed 70% of assets
  2. debt shouldn’t be greater than 100% equity
  3. money reserves must be at least 100% of short term debt

impacts

  • evengrande: default 2023, bankrupt
  • country garden: default 2024, negotiating
  • china poly: SOE, ok
  • Vanke: Shenzheng government, teetering on default
  • Greenland Holdings: been on default on US Bond, restructuring.

homeowners

China is, however, bailing out the homeowners. This is to ensure performance legitimacy because people protest.

Takeaways

  1. risks in deleverage: how does one cut credit while avoiding collapse?
  2. attempting to ease bubble led to hard landing and backfired w/ three-red lines
  3. real estate collapse cut a major source of revenues, so…
    • land sales way down
    • half-finished buildings
  4. drop in housing values means household may not spend as much

This is all in addition with the aging population.

2023 effort to prop-up local government finances

  1. temporary fix, root cause remains unaddressed
  2. infrastructure building is still the primary way to stimulate the economy (70%-90% is carried by local governments)

Local governments were underfinanced—China’s leaders think its a governance