Key Takeaways:
- Expert believe debt-written China is sitting on a ticking debt bomb
- China's banking system is on the verge of collapse
- Real estate developers fail to pay off their bonds, homebuyers refuse to pay for their mortgages
YEREVAN (CoinChapter.com) — It is no secret that China is sitting on a ticking debt bomb. Over the past decade, the Asian economic giant’s debt has increased dramatically. As a result, some experts now believe the country’s banking system is on the verge of collapse. China’s debt crisis threatens its stability and poses a serious risk to the global economy.
As CoinChapter earlier reported, the ongoing crisis in the rural banks of Henan province shows the huge mess the country’s banking sector is in.
According to political scientist and China expert Minxin Pei, about 4,000 small and medium-sized banks in China, with nearly $14 trillion in assets, risk facing a meltdown.
“If a large number of small banks fail together, such an event could produce a chain reaction threatening the stability of the financial sector. Their counterparties and lenders, especially bigger banks, could suffer massive losses,”
Pei argues in a piece for Nikkei Asia.
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In the last quarter of 2020, China’s debt-to-GDP ratio spiked to nearly 290%. While it has since dropped, it remains high, well above 260%.
China’s debt problem goes back to the Global Financial Crisis
China’s rising debt problem goes back to the Global Financial Crisis (GFC) of 2007-2008. With the drop in the global demand for goods caused by the meltdown, Chinese manufacturers suffered.
Exports, which accounted for about one-third of China’s GDP, fell 2.8% yearly to $111.16 billion in December 2008. As a result, many factories shut down, rendering over 20 million people jobless.
Fearing social unrest, the Government intervened to create jobs. It initiated massive development projects, employing millions of people.
However, instead of using available funds as part of fiscal spending, the Chinese Government chose a different route. It financed all these projects through bank loans.
The policy solved the immediate problem at hand. Moreover, by creating jobs, China avoided social unrest and created a strong infrastructural base necessity for future growth.
Meanwhile, the country’s Debt-to-GDP ratio kept climbing following the crisis.
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Slow economic development keeps the debt bomb ticking
As Minxin Pei argues, one of the reasons why China has been able to doge a major debt crisis is its economic growth.
Over the last decade, the country’s economy has grown reasonably high, averaging 6.8%. However, the Covid-19 pandemic, followed by the prolonged lockdown, has pulled the break on its economic stability.
China’s National Bureau of Statistics released the official first quarter GDP numbers in April. The report claimed the Chinese GDP was up 1.3% in the fourth quarter of 2021. It also placed the year-on-year GDP growth at 4.8%.
The country has set a 5.5% GDP growth target for itself in 2022.
Meanwhile, the International Monetary Fund has lowered its GDP growth forecast for China to 4.4% from the 4.8% in January 2022. In October 2021, the IMF had placed the forecast at 5.6%.
Michael Pettis, a nonresident senior fellow at the Carnegie Endowment for International Peace, claims many analysts question whether China can achieve even this growth rate.
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China’s real estate crisis can topple the economy
The real estate market in China is in a deep crisis. Property prices are over the roof while purchasing power of citizens is decreasing. According to China Real Estate Information Corp (CRIC), total sales of China’s top 100 developers had plunged almost 40% as of January 2022.
According to a Bloomberg report, China’s housing sale has fallen yearly for 11 months straight, a new record. In addition, land sales, a major non-tax income for local Governments, are also declining.
The country’s local Governments have sold nearly half as much land in the first half of 2022 as they did in the first half of last year. This is because domestic developers are hit with cash flow problems, rendering them unable to buy more land for development.
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Real estate developers default; citizens fail to pay mortgages
China’s debt crisis is getting worse every day. While developers find paying off their bonds and loans hard, citizens refuse to pay off their mortgages.
According to Dealogic, more than 60 property groups in China will have to pay about $13.3 billion in bond payments before the end of 2022. The Financial Times reported that this is equivalent to 13% of their over $100 billion outstanding obligations to international bondholders.
Evergrande Group, China’s largest real estate developer, has already defaulted on its bonds. The company had borrowed over $300 billion and has since promised a restructuring of the company.
Three weeks back, another Chinese real estate company, Shimao Group, defaulted on a $1 billion bond.
The Chinese economy struggles with $6.8 trillion of outstanding mortgages. However, homebuyers are now boycotting mortgage payments of unfinished properties, putting the banks under a heavy financial burden.
According to Bloomberg, Non-performing loans triggered by refusals to pay mortgages could reach $83 billion.
In addition, the Government has over $1.9 trillion in loans to China’s crisis-hit developers.
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Can China collect money from its global debtors?
Besides facing a crisis at home, China has billions of dollars stuck overseas. Thanks to its ambitious Belt and Road Initiative, the country has provided loans to smaller developing countries across the globe.
The investment program aims at accelerating infrastructure development and economic integration of countries along the erstwhile Silk Road.
However, many countries will fail to service their debts given the global economic crisis. As CoinChapter reported, Sri Lanka, one of the debtors, has already defaulted on its international debt.
“If big Chinese banks themselves face rising nonperforming loans abroad, they will be less able to help bail out insolvent small or medium-sized banks at home,”
Minxin Pei argues.
While China may well avoid an immediate economic meltdown, the long-term implications of its rising debt can prove disastrous. Meanwhile, China is sitting on a ticking debt bomb.
