Beijing's Bubble Bursts Part 2
February 5, 2024
The Chinese like to gamble. Gaming dens were prevalent in ancient times in China, and the first playing cards, lotto games, and dominoes appeared there around 900 BC. Today, the world’s top gambling hub is Macau, the only place in China where gaming is legal. Elsewhere in China, gambling is strictly forbidden, but speculation, a form of gambling, certainly is not. For a decade, the country has endured a risk-taking binge involving real estate wagered by the middle class, real estate developers, and governments. The result is the highest collective debt levels of any nation-state in the world. China’s real estate bubble is ruinous for millions of citizens, but also for hundreds of local governments that punted in property markets. In addition, there is also Beijing’s Belt and Road Initiative (BRI), launched to enhance its trade and prestige, but which has grown into a mountain of debt. The BRI built billions of dollars’ worth of infrastructure for many countries that now cannot afford to pay for it. The result of all this is that the world’s biggest casino must grind its way through multiple debt crises. As The Wall Street Journal wrote: “China’s Lost Decade for Investors Has Already Happened,”
For years, visitors to China have been wowed by its world-class bridges, roads, buildings, trains, schools, tunnels, and soaring real estate developments. Most were financed by local municipalities that competed aggressively to become China’s “next Manhattan” or “Silicon Valley”. They did so by selling bonds and were allowed to raise staggering amounts of money, in the hopes that their new trophy assets would yield huge tax and economic benefits. But overbuilding, slapdash construction, and corruption rendered many of these infrastructure “investments” worthless. Many cities and towns are stuck with empty real estate and under-utilized infrastructure and now are in default on their bonds. Collectively, their debt load is unimaginable. According to Chinese financial media, Caixin Global, the outstanding obligations owed by local governments in 2022 totalled $10 trillion, equivalent to the national debt of Japan, the world’s third largest economy.
The real estate housing bubble has also decimated China’s middle class. Beijing caused it a few years ago by allowing Chinese people to own more than one home, which unleashed a tsunami of real estate speculation. Cab drivers owned three or four condos and developers built scads of apartment buildings irrespective of demand. The result is hundreds of zombie cities and unused infrastructure which has, in turn, forced local governments to divert tax dollars to service their debts — instead of providing pensions, welfare, and healthcare services. These struggling local governments, and homeowners, also dump land and homes they own, whenever they can, to pay down some debt, further depressing property values for everyone. This cycle has forced Beijing to backstop banks with non-performing loans and unpaid mortgages on depreciated properties.
Fortunately, China’s domestic debt catastrophe is not globally contagious as was America’s “Lehman moment”. America’s real estate bubble was stoked and spread by Wall Street globally, causing a worldwide meltdown in 2008. By contrast, China’s debt and depreciation nightmare is mostly domestic and negative effects will slow its economy for some years to come. One caveat, however, is that if Beijing cannot manage to unwind all this debt — and turmoil occurs — shockwaves will swamp the global economy.
“An overly indebted Chinese economy cannot afford to roll out a massive stimulus, even when confronting the possibility of a full-blown property market crisis. China thus faces a much slower growth trajectory for the foreseeable future,” wrote Stephen Roach, American economist, China expert, and Yale University lecturer. “Barring a successful consumer-led rebalancing, it will be exceedingly difficult for China to recapture its previous growth momentum. Since the 2008 global financial crisis, the economy has grown about 7 percent, on average, accounting for nearly 35 percent of the cumulative increase in world GDP during the same period. If China’s growth rate slows to 3 percent to 4 percent – a distinct possibility – its contribution to global growth will be halved, with obvious knock-on effects for the rest of the world.”
The colossal real estate bubble represents an impediment to consumer spending and confidence. But the foreign debt represents another drag on economic activity. Beijing was not only fostering a casino at home, but gambling abroad with its BRI program. A November report by AidData, a research department at William and Mary College in Virginia, quantifies the size of that mess. “China is owed more than a trillion dollars through its Belt and Road project, making it the biggest debt collector in the world, with an estimated 80 percent of the loans supporting countries in financial distress,” reported AFP in November.
AidData said China financed 21,000 projects across 165 countries and now must provide $80-billion-a-year in support to its low and middle income customers, many of whom are in default. The BRI program has been criticized for being corrupt, incompetent, and environmentally irresponsible as well as for creating a “debt trap” by building projects in poor countries that couldn’t afford to pay for the infrastructure.
High-stakes economic and geopolitical maneuvers will hobble China and its BRI customers for years until debts are unwound, paid, or forgiven. Arguably, Beijing can’t rescue everyone and, like all compulsive gamblers who throw prudence and caution to the wind, it always ends badly. China has bet the bundle, and there’s nothing much left. Its go-for-broke governments and culture fooled everyone for awhile, outgrowing competitors economically. But its meteoric growth was not the result of hard work or discipline and innovation. It was mostly about gambling. And now, as the cashier’s wicket in China’s casino begins to shut on its people and biggest shooters, all bets are off. Colossal speculation has dramatically diminished its stature and outlook. The 21st Century won’t belong to China.
Excellent as usual, thank you. Reading your report reminds me of Jean Drapeau's statement that the Montreal 1976 Olympics would bring economic prosperity. Failure was akin to him getting pregnant. The Olympics brought on significant corruption scandals, significant debt, and so on. Many close to the construction contracts became multi-millionaires while the residents took on massive debt. By comparison, China's situation is on steroids and will take many more years to sort out at the expense of its citizens. Debt rescheduling is on the horizon for the country and its banks. Let's hope this will slow down their desire to take over Taiwan and other countries. It should slow down their military aspirations and investments.
Its striking that its China's prowess in science and technology is absent in its central bank management. Perhaps good ole fashioned communist corruption is at the bottom of it.