NewsChina's debt crisis deepens as hidden obligations surface

China's debt crisis deepens as hidden obligations surface

Chinese cities are in debt.
Chinese cities are in debt.
Images source: © Getty Images | Kevin Frayer
2:33 PM EDT, March 10, 2024
China is grappling with an enormous debt crisis. Many cities and even whole regions are overwhelmed by financial obligations, pushing local government officials to negotiate debt repayment terms with Beijing. The mounting unpaid debts are putting local economies under strain, potentially stifling national economic growth.
The "Financial Times" attributes the overwhelming debts of Chinese cities primarily to the real estate market crisis and the pandemic's impact. Over the last decade, numerous construction projects were funded through debt, aimed at propelling local development. However, the COVID-19 crisis has left local governments struggling to continue their investments while still being responsible for earlier debts.
Goldman Sachs estimates the debt of major Chinese regions at $13 billion, including public liabilities such as bonds. A failure to meet these repayments could have widespread economic consequences.
Beijing is actively launching support initiatives for regions unable to meet their financial obligations timely. Yet, experts believe the official data doesn't capture the full picture, indicating a plethora of unacknowledged debts within municipal finances. Such hidden debts could potentially catalyze a series of bankruptcies.
### Confronting crisis-induced consequences
China, the world's second-largest economy, is wrestling with a burgeoning debt crisis, posing significant threats to its financial stability and economic growth.
The crisis stems from a combination of a tumultuous real estate sector and the fallout from COVID-19. The residential real estate market's uneven development has led to soaring house prices, enticing many to invest in hopes of rapid returns. This investment boom brought vast capital into construction, often funded through borrowing.
However, the tightening of developer debt regulations and a decline in real estate demand plunged many companies into distress. Notably, Evergrande defaulted, leaving a trail of unfinished projects and a staggering debt exceeding $300 billion.
The series of bankruptcies has heightened investor and consumer anxiety, amplified by the ongoing impacts of COVID-19. The government's "zero tolerance" approach, including strict city lockdowns, disrupted supply chains, diminished industrial output and consumption, and increased unemployment, particularly among youth.
In response, the Chinese government has introduced measures like monetary policy easing and heightened public expenditure. These efforts have yielded some positive outcomes, yet their effectiveness remains hampered by economic uncertainties and subdued domestic demand.
Understanding the depth of China's debt dilemma and its efforts to navigate through it is crucial as it holds significant implications not just for China but for the global economy.
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