Many observers commented that, when the real estate sector collapses, China’s economy will follow suit. Why? Unlike other economies, real estate plays an extremely large role in the CCP’s budget revenues, expenditures, and financial security.
Real estate contributes more than one-quarter of the country’s GDP. The problem is, this structure has not changed after decades of China becoming a global manufacturing factory. But the contribution from exports to China’s GDP has decreased significantly. Nomura Holdings Inc. said that exports will only grow 1.6% this year compared to the soaring figure in 2021 of 30%. But claims are that real estate remains the same.
Institutional problems, the power of local authorities with real estate and local banks is huge; It is in fact manipulative power. This is the grave of Chinese real estate. It is worth mentioning that Chinese law supports this grave.
The grave is hidden
The Chinese Communist Party’s 2014 Budget Law contains a provision that allows local governments to issue project-specific local bonds (the specialized term is called structured debt – a type of debt that is usually a safe-haven subprime). Structural debts of local governments do not need to be reported to the Central Government, and do not need to be included in government debt according to international standards.
This “crafty” way of Beijing makes data of public debt / GDP is under control but creates a black hole of local debt that the CCP itself is powerless to control. Observers say that this allows Chinese local governments to fully utilize this power in a way that could work as follows: they issue local bonds, direct local commercial banks buy back and sell land to local real estate companies, and then direct commercial banks lend this loan. These companies, after selling real estate, will pay commercial banks and local authorities. Such a cash cycle actually depends on the ability of the business to sell real estate.
Local debt instruments are so extensive that businesses guaranteed by the local government are allowed to guarantee smaller businesses to borrow money from local commercial banks. Local officials themselves need to constantly sell land, need to continuously increase debt to earn good growth data to report to the CCP.
Accounting for commercial bank bad debt is also a prominent issue. According to Caixin Global and PwC, Chinese commercial banks are allowed to self-classify debt as type 1, 2, 3, 4, 5 according to the valuation of collateral (which is real estate) they are holding; It is the commercial bank that sets the price, so it is difficult to monitor all the cases where the valuation is higher than the market.
This is may be the reason, the bad debt ratio reported by the People’s Bank of China (PBOC) is always in a safe range, while the whole of China has 50 ghost cities, nearly 65 million ghost apartments.
According to observers, this hidden data is believed to be the source of the crisis that China is facing now, and will most likely lead to a stroke of the whole economy.
How big is real estate debt in China?
According to Reuters, data from the PBOC shows that real estate debt in China’s commercial banking system is 25.7%. The total outstanding loans of Chinese commercial banks as of June 30, 2022, is $30.3 billion. Thus, the outstanding real estate debt in the system of Chinese commercial banks is currently: $7.78 billion. According to data from c-bonds, Chinese corporate bonds are about $15 trillion, of which about 40% are real estate bonds. Thus, China’s credit and real estate bonds are about $14 trillion, equivalent to more than 80% of GDP.
But this is just real estate debt from businesses, not counting the debt of local government bonds issued specifically for ghost real estate projects. Local government bonds make up the largest share of China’s bond market, 24% according to a Bloomberg report. According to data from Bloomberg, local government bonds are more than 50% of the economy. The main source of revenue to pay to commercial banks, who hold up to 80% of local government bonds, is selling land and developing local real estate.
Thus, debt relies on revenue from real estate to compensate. The financial situation of real estate is bad in that homebuyers also protest paying their debts on time if the real estate business does not deliver the house on time. This is the next knife aimed at small local commercial banks, money making tools of local government and real estate giants.
This is probably the source of China’s crackdown on withdrawal protesters. The game changing policy that forces people not to withdraw cash is being applied all over China, from small banks to large banks. That is, the problem of the liquidity crisis does not lie with small, local banks.
According to observers, this also helps to explain why “Commonwealth” has become a strong slogan from the central to the local? Because the government has run out of money, it has to take from the rich to fill the financial hole. The government is like a black hole. Anyway, the CCP’s most powerful tool right now is “administrative orders,” just follow orders.