China's looming crisis: Overwhelming debt threatens economic stability
China is facing another problem: many cities, and even entire regions, are overwhelmed by debt. The financial burdens are so severe that local government representatives have dispatched their emissaries to Beijing to discuss terms for repaying billion-pound loans. Unpaid debts are increasingly burdening local economies, which threatens the growth of the national economy.
Does China have a problem with hidden debt?
As the "Financial Times" reports, the debts overwhelming Chinese cities are primarily the result of the real estate market crisis and the impacts of the pandemic. Over the last decade, numerous construction projects were financed through borrowing. Infrastructure development was supposed to drive local growth, but the crisis triggered by the COVID pandemic has led to local governments losing their ability to continue investing. Meanwhile, they still need to repay their old debts.
Goldman Sachs estimates the debts of major Chinese regions at £10 billion. Part of these obligations are public liabilities - for example, bonds. Failure to repay will, therefore, strike the entire economy.
Beijing has not been inactive and has already announced the first support projects for those regions that will not repay their obligations on time. Experts claim that official data are incomplete, and municipal finances are full of hidden debts that do not officially appear on the balance sheets. These debts could even trigger a wave of bankruptcies.
China is struggling with the consequences of the crisis
China is the world's second-largest economy. The country is facing an escalating debt crisis, which poses a real threat to financial stability and economic growth.
The problem has its roots in both the real estate sector and the effects of the COVID-19 pandemic. A key factor driving the debt crisis in China is the unbalanced development of the residential real estate market. In recent years, there has been a sharp increase in house prices, prompting many Chinese to invest in real estate in hopes of a quick profit. The booming construction sector attracted vast amounts of capital, often financed by credit.
However, as the demand for real estate declined and regulations on developer debt tightened, numerous companies found themselves in trouble. The industry giant - Evergrande, for example, went bankrupt, leaving behind tens of thousands of unfinished apartments and debts of over £230 billion.
The wave of bankruptcies in the real estate market has fuelled concern among investors and consumers. This concern is heightened because China is still dealing with the effects of the COVID-19 pandemic. The "zero tolerance" policy, or unprecedented city lockdowns, have resulted in disruptions to supply chains. These disruptions have led to a decrease in industrial production and consumption, as well as a significant impact on unemployment levels, especially among the young.
The Chinese government has taken widespread stimulative actions, such as loosening monetary policy and increasing public spending. These measures have had some positive effects, but at the same time, they have led to an increase in national debt. The effectiveness of these actions remains limited - primarily because of economic uncertainty and still weak domestic demand.
