Scores of Chinese cities have amassed trillions of dollars in off-the-books debt for economic development projects.
This opaque financing helped China rise to the envy of the world.
Today, overgrown construction sites, sparsely used highways and abandoned tourist attractions make much of that debt-fueled growth look illusory, and suggest that China’s future is far from assured, says the Wall Street Journal.
Complex state-owned funding vehicles that borrowed money on behalf of local governments pursued development projects that generated few economic returns.
The deterioration of China’s real-estate market in recent years meant local governments could no longer rely on land sales to real-estate developers, which was a significant source of revenue.
Economists estimate the size of such off-the-books debt is between $7 trillion and $11 trillion, about twice the size of China’s central government debt. The total amount isn’t known because of the opaqueness surrounding the financial arrangements that allowed the debt to balloon.
As much as $800 billion of that debt is thought to be at a high risk of default. If the financing vehicles can’t meet their obligations, Beijing could pay for bailouts, which might create a bigger problem by encouraging unsound borrowing. Alternatively, it could allow insolvent funding vehicles to fail, exposing Chinese banks to serious losses and potentially spurring a credit crunch which will further erode economic growth.
This debt contributes to preventing China from doing more to stimulate its economy.
Moody’s Investors Service and Fitch Ratings lowered their outlook on China’s credit rating to negative from stable, largely because of doubts that local governments can properly service their debt.
“The reckoning has arrived,” said Victor Shih, a professor at the University of California, San Diego, who researches China’s politics and financial system.
[Photo: Dāvis Kļaviņš/Flickr – A failed construction project in Tianducheng, Hangzhou, a tiny replica to Paris.]