A borrowing binge has left China bloated on debt, fuelling fears of a financial collapse.
Gorging on cheap money, the world’s second-largest economy faces its biggest crisis since the country started “opening up” in the 1980s.
Already the stardust is peeling off a heavily mortgaged “China Miracle” entangled in the financial wreckage.
“China’s economy is hitting a great wall,” Robert Z Aliber, the prominent University of Chicago economist, told Fortune magazine earlier this month.
His comments illustrate the depth of the construction industry meltdown, triggered by Evergrande, and the perils of ballooning debt levels that are seeping into the main economy.
By the numbers:
- Property makes up 60%-75% of China’s household wealth.
- Troubled Evergrande has started a fire sale to pay off US$300 billion in debt.
- But the group’s problems are just at the tip of the pyramid.
- Evergrande’s outstanding loans make up less than 1% of China’s total debt.
- As for the property sector, it owes at least $5 trillion.
- Then there is “hidden” local government debt, which is about $8.2 trillion, investment bank Goldman Sachs reported.
- That is more than half of China’s GDP and nearly twice the size of Germany’s economy.
Delve deeper: Data released by the Bank for International Settlements revealed that overall debt in China has increased 13-fold in the past 15 years.
Triple whammy: It is now nearly three times the size of the entire economy. In 2020, outstanding foreign debt hit $2.4 trillion.
High rise: “China’s real estate market has been called the most important sector in the world economy. Valued at about $55 trillion, it is now twice the size of its US equivalent, and four times larger than China’s GDP,” George Magnus, of Oxford University’s China Centre, said.
Building risks: “Taking into account construction and other property-related goods and services, annual housing activity accounts for about 29% of China’s GDP, far above the 10%-20% typical of most developed nations,” Magnus, the author of Red Flags: Why Xi’s China Is in Jeopardy, wrote in a commentary for The Guardian.
Big picture: Economic competence underpins the Communist Party’s right to rule. But juicing up growth numbers with a building boom has resulted in “ghost cities” and an avalanche of debt.
People’s pact: “This was the Faustian bargain, never explicitly stated but understood, that you get zero political representation but we keep the economy ticking along. [But that bargain] is starting to fray around the edges,” Fraser Howie, the co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, told the Quartz business site.
China Factor comment: Rising tension abroad and a financial crisis brewing at home threaten to derail the economy. Yet there is no easy fix for President Xi Jinping and his policy wonks in Beijing.