China’s debt bogeyman

The title might be overdoing it a bit (mountains of debt) but this NY Times’ piece main point about Chinese cities piling up debt raises serious concern over China’s domestic economic surge. Taking Wuhan, China’s 9th largest city, as the focal point, we learn how the city is planning a massive “$120 billion municipal master plan,” in which an entire subway line of nearly 140 miles is estimated to be completed in the same time New York will build a 2-mile leg to one of its subway lines (I think it’d be worse if a comparison with Toronto’s TTC was made). This isn’t surprising because China has been on an economic ride for the past decade and more, where its exports have kept increasing, its domestic markets such as for cars and mobile phones have become worldleading and economic growth and infrastructural construction have been nonstop. The problem arises when you think about whether this infrastructural construction is really beneficial for most people and profitable. How much need is there for all these airports, luxury homes, highways, high-speed rail trains and highscale malls if nominal GDP-per-capita still remains below US$5,000? When can domestic spending and utilization of all these be adequate to match the initial investments to build all these fancy developments in the first place? In June, there was a shocking report that revealed that the total debt of local Chinese governments had reached US$1.7 trillion.

The NY Times piece gives some worrying stats and facts like that “fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s GDP” and that ” the collateral for many [local government] loans is local land valued at lofty prices that could collapse if China’s real estate bubble burst.” Famed economist and academic Nouriel Roubini has been chirping about this recently, using apt examples of a new high-speed train link and neighboring highway that are largely empty (but I admit that the Shanghai-Hangzhou high-speed train has only been operational for a short time). Then, there’s also some financial creativity involved in the creation of external bodies by local governments such as Wuhan’s that take out loans which results in these loans not showing up on the official books for the governments –“special investment corporations set up by the city — business entities whose debt shows up nowhere on Wuhan’s official financial balance sheet. “

In effect, much of China’s domestic investment is composed of local infrastructural projects, which isn’t that bad if it can be profitable and necessary but the issue is that many are not, and that this investment is being propped up by land sales, which themselves are based on prices which are somewhat speculative, and can produce a dangerous self-propelling cycle that resembles the US housing bubble that popped a few years back. By that, I mean the belief that prices for something (houses in the US, land in China) will only keep rising so it’s alright to keep investing in that something which itself generates more production of that something. Of course, you can’t generate land, but I’m referring to the investments such as housing and infrastructural projects that are being undertaken on the land that keeps being sold by local governments in China. Of course, instead of the American dream of home ownership that was the original driving sentiment (and developed into less wholesome reasons) for the housing boom and subsequent subprime mortgage crisis, it will be the Chinese bureaucratic dream of skyhigh economic growth that threatens to become a monster. In fact, reading something like this- “Wuhan wants to become a manufacturing and transportation hub for the heartland — China’s version of Chicago. But it is a dream built on debt”- makes me think, either it works and China continues to dazzle the world with its unstoppable progress or everything goes up in smoke and instead of people, it’ll be cities and towns and their people across China that suffer.

If China’s middle class can keep growing and it can produce enough new jobs and investment opportunities for the people, sure these projects will be worthwhile. But the question is if this can happen soon enough.

Moving from China’s ninth largest city to India’s largest- Mumbai suffered deadly bomb attacks this week. However, people seemed to have taken this in stride in India, as there doesn’t seem to be any outbreaks of panic or calls for war against Pakistan. But then, is this because of the Mumbai spirit, or simply a combination of stoicism and cynicism borne out of tough circumstances? This New Yorker blog post gives an interesting take on the attitudes of people in Mumbai after the attacks.



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